<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number 0-26176
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0336997
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
90 INVERNESS CIRCLE EAST
ENGLEWOOD, COLORADO 80112
(Address of principal executive offices) (Zip code)
(303) 799-8222
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
AS OF MAY 9, 1997, THE REGISTRANT'S OUTSTANDING VOTING STOCK CONSISTED OF
11,801,999 SHARES OF CLASS A COMMON STOCK, 29,804,401 SHARES OF CLASS B COMMON
STOCK, AND 1,616,681 SHARES OF 8% SERIES A CUMULATIVE PREFERRED STOCK, EACH
$0.01 PAR VALUE.
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<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1996 and March 31, 1997 (Unaudited) . . . . . . . 1
Condensed Consolidated Statements of Operations -
Three months ended March 31, 1996 and 1997 (Unaudited) . . . . . 2
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1996 and 1997 (Unaudited) . . . . . 3
Notes to Condensed Consolidated Financial Statements (Unaudited) . 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . None
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . None
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . None
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . None
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 15
</TABLE>
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
DECEMBER 31, MARCH 31,
1996 1997
------------ ---------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 39,231 $ 30,452
Marketable investment securities. . . . . . . . . . . . . 18,807 3,528
Trade accounts receivable, net of allowance
for uncollectible accounts of $1,494 and $1,642,
respectively . . . . . . . . . . . . . . . . . . . . . 13,516 31,174
Inventories . . . . . . . . . . . . . . . . . . . . . . . 72,767 57,043
Income tax refund receivable. . . . . . . . . . . . . . . 4,830 4,391
Subscriber acquisition costs, net . . . . . . . . . . . . 68,129 81,184
Other current assets. . . . . . . . . . . . . . . . . . . 18,356 16,556
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . 235,636 224,328
Restricted Cash and Marketable Investment Securities:
ESBC Notes escrow . . . . . . . . . . . . . . . . . . . . 47,491 17,907
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 31,800 33,795
Property and equipment, net. . . . . . . . . . . . . . . . . 590,621 677,266
FCC authorizations, net. . . . . . . . . . . . . . . . . . . 72,667 92,100
Deferred tax assets. . . . . . . . . . . . . . . . . . . . . 79,339 79,339
Other noncurrent assets. . . . . . . . . . . . . . . . . . . 83,826 31,255
---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . $1,141,380 $1,155,990
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable. . . . . . . . . . . . . . . . . . $ 40,819 $ 41,290
Deferred revenue - DISH Network-SM- . . . . . . . . . . . 102,366 131,572
Deferred revenue - C-band . . . . . . . . . . . . . . . . 734 682
Accrued expenses and other current liabilities. . . . . . 30,495 38,701
Deferred tax liabilities. . . . . . . . . . . . . . . . . 12,563 12,563
Current portion of long-term debt . . . . . . . . . . . . 11,334 11,834
---------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . 198,311 236,642
Long-term deferred signal carriage revenue . . . . . . . . . 5,949 6,682
Dish Notes . . . . . . . . . . . . . . . . . . . . . . . . . 437,127 451,907
ESBC Notes . . . . . . . . . . . . . . . . . . . . . . . . . 386,165 398,399
Mortgage and other notes payable,
excluding current portion . . . . . . . . . . . . . . . . . 51,428 48,298
Other long-term liabilities. . . . . . . . . . . . . . . . . 1,203 3,586
---------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . . 1,080,183 1,145,514
COMMITMENTS AND CONTINGENCIES (NOTE 6)
Stockholders' Equity:
Preferred Stock, 20,000,000 shares authorized,
1,616,681 shares of 8% Series A Cumulative
Preferred Stock issued and outstanding,
including accrued dividends of
$3,347,000 and $3,648,000, respectively. . . . . . . . 18,399 18,700
Class A Common Stock, $.01 par value, 200,000,000
shares authorized, 11,115,582 and
11,776,406 shares issued and outstanding,
respectively . . . . . . . . . . . . . . . . . . . . . 111 118
Class B Common Stock, $.01 par value, 100,000,000
shares authorized, 29,804,401 shares issued
and outstanding. . . . . . . . . . . . . . . . . . . . 298 298
Class C Common Stock, $.01 par value, 100,000,000
shares authorized, none outstanding. . . . . . . . . . -- --
Common Stock Warrants . . . . . . . . . . . . . . . . . . 16 16
Additional paid-in capital. . . . . . . . . . . . . . . . 158,113 170,252
Unrealized holding gains (losses) on
available-for-sale securities, net of deferred taxes . (11) (12)
Accumulated deficit . . . . . . . . . . . . . . . . . . . (115,729) (178,896)
---------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . 61,197 10,476
---------- ----------
Total liabilities and stockholders' equity . . . . . . $1,141,380 $1,155,990
---------- ----------
---------- ----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1997
-------- --------
<S> <C> <C>
Revenue:
DTH products and technical services . . . . . . . . . . . $ 36,741 $ 11,662
DISH Network-SM- promotions -
subscription television services and products . . . . . -- 32,308
DISH Network-SM- subscription television services . . . . 464 25,399
C-band programming. . . . . . . . . . . . . . . . . . . . 3,449 2,163
Loan origination and participation income . . . . . . . . 813 491
------- -------
Total revenue. . . . . . . . . . . . . . . . . . . . . . . . 41,467 72,023
Expenses:
DTH products and technical services . . . . . . . . . . . 32,750 9,487
DISH Network-SM- programming. . . . . . . . . . . . . . . 105 19,425
C-band programming. . . . . . . . . . . . . . . . . . . . 3,178 1,763
Selling, general and administrative . . . . . . . . . . . 10,733 32,027
Subscriber promotion subsidies. . . . . . . . . . . . . . -- 13,142
Amortization of subscriber acquisition costs. . . . . . . -- 28,102
Depreciation and amortization . . . . . . . . . . . . . . 3,330 12,673
------- -------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . 50,096 116,619
------- -------
Operating loss . . . . . . . . . . . . . . . . . . . . . . . (8,629) (44,596)
Other Income (Expense):
Interest income . . . . . . . . . . . . . . . . . . . . . 2,677 1,772
Interest expense, net of amounts capitalized. . . . . . . (6,043) (19,846)
Minority interest in loss of consolidated joint
venture and other . . . . . . . . . . . . . . . . . . . (17) (177)
------- -------
Total other income (expense) . . . . . . . . . . . . . . . . (3,383) (18,251)
------- -------
Net loss before income taxes . . . . . . . . . . . . . . . . (12,012) (62,847)
Income tax (provision) benefit, net. . . . . . . . . . . . . 4,791 (19)
------- -------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (7,221) $(62,866)
------- -------
------- -------
Net loss attributable to common shares . . . . . . . . . . . $ (7,522) $(63,167)
------- -------
------- -------
Weighted average common shares outstanding . . . . . . . . . 40,376 40,922
------- -------
------- -------
Loss per common and common equivalent share. . . . . . . . . $ (0.19) $ (1.54)
------- -------
------- -------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1997
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . $ (7,221) $(62,866)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization. . . . . . . . . . . . . 3,330 12,673
Amortization of subscriber acquisition costs . . . . . -- 28,102
Deferred income tax benefit. . . . . . . . . . . . . . (1,371) --
Amortization of debt discount and deferred
financing costs. . . . . . . . . . . . . . . . . . . 5,347 18,542
Change in reserve for excess and obsolete inventory. . 227 (2,302)
Change in long-term deferred signal carriage revenue . 3,790 733
Other, net . . . . . . . . . . . . . . . . . . . . . . (138) 2,432
Changes in current assets and current liabilities, net. . 3,794 (2,637)
--------- --------
Net cash flows provided by (used in) operating activities. . 7,758 (5,323)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities . . . . . . (2) --
Sales of marketable investment securities . . . . . . . . 15,479 15,279
Purchases of restricted marketable investment securities. (15,500) (1,995)
Purchases of property and equipment . . . . . . . . . . . (2,715) ( 12,486)
Offering proceeds and investment earnings
placed in escrow. . . . . . . . . . . . . . . . . . . . (178,452) (416)
Funds released from escrow accounts . . . . . . . . . . . 17,785 30,000
Expenditures for satellite systems under construction . . (13,292) (30,084)
Investment in convertible subordinated
debentures from SSET. . . . . . . . . . . . . . . . . . -- (500)
Investment in convertible subordinated debentures
from DBSI . . . . . . . . . . . . . . . . . . . . . . . (3,000) --
Long-term notes receivable from DBSC. . . . . . . . . . . (7,500) --
Expenditures for FCC authorizations . . . . . . . . . . . (13,636) --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . -- (280)
--------- --------
Net cash flows used in investing activities. . . . . . . . . (200,833) (482)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of ESBC Notes. . . . . . . . . 337,043 --
Repayments of mortgage indebtedness and notes payable . . (1,022) (3,130)
Stock options exercised . . . . . . . . . . . . . . . . . 113 156
--------- --------
Net cash flows provided by (used in) financing activities. . 336,134 (2,974)
--------- --------
Net increase (decrease) in cash and cash equivalents . . . . 143,059 (8,779)
Cash and cash equivalents, beginning of period . . . . . . . 21,754 39,231
--------- --------
Cash and cash equivalents, end of period . . . . . . . . . . $ 164,813 $ 30,452
--------- --------
--------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized. . . . $ 354 $ 612
Cash paid for income taxes. . . . . . . . . . . . . . . . -- --
8% Series A Cumulative Preferred Stock dividends. . . . . 301 301
Class A Common Stock issued for DBSC Merger . . . . . . . -- 11,941
Satellite launch payment for EchoStar II
applied to EchoStar I launch. . . . . . . . . . . . . . 15,000 --
Employee incentives funded by issuance of
Class A Common Stock. . . . . . . . . . . . . . . . . . . 7 49
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
EchoStar Communications Corporation ("ECC"), together with its subsidiaries
("EchoStar" or the "Company"), is primarily engaged in the operation of a direct
broadcast satellite ("DBS") subscription television service (the "DISH
Network-SM-"), which commenced operations in March 1996. The DISH Network-SM-
currently provides approximately 120 channels of near laser disc quality digital
video programming and over 30 channels of near CD quality audio programming to
consumers throughout the continental United States. In addition to the DISH
Network-SM-, EchoStar designs, manufactures, distributes and installs satellite
direct-to-home ("DTH") products, distributes DTH programming domestically, and
provides consumer financing of EchoStar's DISH Network-SM- and domestic DTH
products and services. EchoStar's primary business objective is to become one
of the leading providers of subscription television and other satellite-
delivered services in the United States. EchoStar had approximately 479,600
subscribers to DISH Network-SM- services as of March 31, 1997.
RECENT DEVELOPMENTS
On February 24, 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "Agreement") pursuant to which, among other things,
News agreed to acquire approximately 50% of the outstanding capital stock of
EchoStar. News also agreed to make available for use by EchoStar the DBS
license for 28 frequencies at 110DEG. West Longitude ("WL") awarded to MCI
Communications Corporation ("MCI") during a Federal Communications Commission
("FCC") auction during 1996. Subsequently, the parties discussed, and agreed
upon, potentially mutually agreeable changes to the structure of the
transactions. However, during late April 1997, substantial disagreements arose
between the parties regarding their obligations under the Agreement.
On May 8, 1997 EchoStar filed a Complaint in the United States District
Court for the District of Colorado (the "Court"), Civil Action No. 97-960,
requesting that the Court confirm EchoStar's position, and declare that News
is obligated pursuant to the Agreement to lend $200 million to EchoStar
without interest and upon such other terms as the Court orders. No assurance
can be given that the Court will grant EchoStar's request for expedited
relief. Further, while EchoStar believes that the Court should grant its
request requiring News to loan EchoStar the $200 million, and is very
confident of its position, no assurance can be given that the Court will
grant that request.
On May 9, 1997, as a result of numerous material breaches of the Agreement
by News, EchoStar filed a First Amended Complaint significantly expanding the
scope of the litigation, seeking specific performance of the Agreement, and
damages, including lost profits that were expected as a result of the
transactions contemplated by the Agreement, which could exceed $5 billion.
While EchoStar is confident of its position and believes it will ultimately
prevail in the litigation, there can be no assurance that EchoStar will prevail,
of the amount of damages EchoStar will collect if it prevails, or that timely
relief will be granted.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they 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, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
4
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
SIGNIFICANT RISKS AND UNCERTAINTIES
The commencement of EchoStar's DBS business has dramatically changed
EchoStar's operating results and financial position when compared to its
historical results. Annual interest expense on EchoStar's long-term notes, and
depreciation of satellites and related assets are each of a magnitude that
exceeds historical levels of income before income taxes. Consequently,
beginning in 1995 EchoStar reported significant net losses and expects such net
losses to continue through at least 1999. As of March 31, 1997, EchoStar
expects to invest approximately an additional $305 million to fund contractor
financing obligations with respect to its first four satellites and to complete
the construction phase (including applicable insurance) and launch of additional
satellites ("EchoStar III and EchoStar IV"). EchoStar's plans also include the
financing, construction and launch of two fixed service satellites, additional
DBS satellites, and Ku-band and KuX-band satellites, assuming receipt of all
required FCC licenses and permits. As a result of the factors discussed above,
EchoStar requires additional capital to complete the construction and launch of
EchoStar III and EchoStar IV and fully implement its business plan. There can
be no assurance that necessary funds will be available or, if available, that
they will available on terms acceptable to EchoStar. A further increase in
subscriber acquisition costs, or significant delays or launch failures would
significantly and adversely affect EchoStar's operating results and financial
condition.
EchoStar is currently dependent on one manufacturing source for its
receivers. This manufacturer presently manufactures receivers in sufficient
quantities to meet currently expected demand. If EchoStar's sole manufacturer
is unable for any reason to produce receivers in a quantity sufficient to meet
demand, EchoStar's liquidity and results of operations would be adversely
affected.
As previously described, EchoStar expects that its net losses will continue
as it builds its subscription television business such that negative
stockholders' equity will result during the second quarter of 1997 unless it
receives additional equity financing. Although a negative equity position has
significant implications, including, but not limited to, non-compliance with
Nasdaq National Market listing criteria, EchoStar believes that such event will
not materially affect the implementation and execution of its business strategy.
When EchoStar ceases to satisfy Nasdaq's National Market listing criteria,
EchoStar's Class A Common Stock will be subject to being delisted unless an
exception is granted by the National Association of Securities Dealers. If an
exception is not granted, trading in EchoStar Class A Common Stock would
thereafter be conducted in the over-the-counter market. Consequently, it may be
more difficult to dispose of, or to obtain accurate quotations for, EchoStar
Class A Common Stock. Accordingly, delisting may result in a decline in the
trading market for EchoStar's Class A Common Stock, which, among other things,
could potentially depress EchoStar's stock and bond prices and impair EchoStar's
ability to obtain additional financing.
In accordance with its Agreement with News, as described above, EchoStar
had expected to meet its short- and medium-term capital needs through financial
commitments from News. As a result of the failure by News to honor its
obligations under the Agreement, EchoStar does not currently have adequate
capital to continue its contemplated business plan beyond the second quarter of
1997. EchoStar has had preliminary discussions with a number of investment
banking firms to investigate alternatives to meet its short- and medium-term
needs. EchoStar also intends to speak with major vendors about possible vendor
financing, and with other potential strategic partners who had indicated
interest in transactions with EchoStar prior to execution of the Agreement with
News. While there can be no assurance, EchoStar believes that it can arrange
transactions to meet its short- and medium-term obligations without material
changes to its business plan. No assurance can be given that any such
arrangements will be made, or that if made they will be on terms favorable to
EchoStar. EchoStar intends to seek recovery from News for any costs of
financing in excess of the costs of the financing committed to by News under the
Agreement.
2. SIGNIFICANT ACCOUNTING POLICIES
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.
5
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with original
maturities of 90 days or less to be cash equivalents. Cash equivalents as of
December 31, 1996 and March 31, 1997 principally consisted of money market
funds, corporate notes and commercial paper; such balances are stated at cost
which equates to market value.
INCOME TAXES
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," requires that the tax benefit of net operating losses ("NOLs") for
financial reporting purposes be recorded as an asset and that deferred tax
assets and liabilities are recorded for the estimated future tax effects of
temporary differences between the tax basis of assets and liabilities and
amounts reported in the consolidated balance sheets. To the extent that
management assesses the realization of deferred tax assets to be less than "more
likely than not," a valuation reserve is established. EchoStar has reserved the
first quarter addition to its deferred tax assets.
NET LOSS ATTRIBUTABLE TO COMMON SHARES
Net loss attributable to common shares is calculated based on the weighted-
average number of shares of common stock issued and outstanding for the
respective periods. Common stock equivalents (warrants and employee stock
options) are excluded as they are antidilutive. Net loss attributable to common
shares is also adjusted for cumulative dividends on the 8% Series A Cumulative
Preferred Stock.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
DECEMBER 31, MARCH 31,
1996 1997
------------ ---------
<S> <C> <C>
EchoStar Receiver Systems . . . . . . . . . . . . . . . $32,799 $35,210
Consigned DBS receiver components . . . . . . . . . . . 23,525 11,680
DBS receiver components . . . . . . . . . . . . . . . . 15,736 11,965
Finished goods - C-band . . . . . . . . . . . . . . . . 600 512
Finished goods - International. . . . . . . . . . . . . 3,491 1,924
Spare parts and other . . . . . . . . . . . . . . . . . 2,279 3,717
Reserve for excess and obsolete inventory . . . . . . . (5,663) (7,965)
------- -------
$72,767 $57,043
------- -------
------- -------
</TABLE>
4. OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following (in thousands):
<TABLE>
DECEMBER 31, MARCH 31,
1996 1997
------------ ---------
<S> <C> <C>
Notes receivable from DBSC, including accrued
interest of $3,382 and $0, respectively . . . . . . . $49,382 $ --
Deferred debt issuance costs. . . . . . . . . . . . . . 21,284 21,768
SSET convertible subordinated debentures. . . . . . . . 3,649 4,075
Investment in DBSC. . . . . . . . . . . . . . . . . . . 4,044 --
DBSI convertible subordinated debentures. . . . . . . . 4,640 4,640
Other, net. . . . . . . . . . . . . . . . . . . . . . . 827 772
------- -------
$83,826 $31,255
------- -------
------- -------
</TABLE>
6
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. ACQUISITION OF DIRECT BROADCASTING SATELLITE CORPORATION
In December 1995, EchoStar announced its intention to acquire the remaining
60% of Direct Broadcasting Satellite Corporation, a Delaware corporation
("DBSC"), which it did not previously own. DBSC's principal assets include an
FCC conditional construction permit and specific orbital slot assignments for
certain DBS frequencies. From December 1995 through January 1997, EchoStar
advanced DBSC a total of $46.0 million to enable it to meet commitments under a
satellite construction contract ("EchoStar III"). On January 8, 1997, EchoStar
consummated the merger of DBSC with one of its wholly-owned subsidiaries
("New DBSC"). As of March 31, 1997, EchoStar has issued approximately 644,000
shares of its Class A Common Stock and expects to issue an additional 13,000
shares of its Class A Common Stock to acquire the remaining 60% of DBSC which it
did not previously own. This transaction was accounted for as a purchase and
the excess of the purchase price over the fair value of DBSC's tangible assets
was allocated to DBSC's FCC authorizations. Upon consummation of the DBSC
merger, the notes receivable from DBSC and EchoStar's investment in DBSC were
eliminated on a consolidated basis.
6. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into agreements with various manufacturers to
purchase DBS satellite receivers and related components manufactured based on
EchoStar's supplied specifications and necessary to receive DBS programming
offered by the Company. As of March 31, 1997, remaining commitments total
approximately $133.0 million and the total of all outstanding purchase order
commitments with domestic and foreign suppliers was $136.2 million. All of the
purchases related to these commitments are expected to be made during 1997. The
Company expects to finance these purchases from available cash and cash flows
generated from sales of DISH Network-SM- programming and related DBS inventory.
EchoStar expects that its 1997 purchases of DBS satellite receivers and related
components will significantly exceed its existing contractual commitments.
OTHER RISKS AND CONTINGENCIES
As previously discussed, on February 24, 1997, EchoStar and News announced
the Agreement pursuant to which, among other things, News agreed to acquire
approximately 50% of the outstanding capital stock of EchoStar. News also
agreed to make available for use by EchoStar the DBS license for 28 frequencies
at 110DEG. WL awarded to MCI during an FCC auction during 1996. Subsequently,
the parties discussed, and agreed upon, potentially mutually agreeable changes
to the structure of the transactions. However, during late April 1997,
substantial disagreements arose between the parties regarding their obligations
under the Agreement.
On May 8, 1997 EchoStar filed a Complaint with the Court, Civil Action No.
97-960, requesting that the Court confirm EchoStar's position, and declare that
News is obligated pursuant to the Agreement to lend $200 million to EchoStar
without interest and upon such other terms as the Court orders. No assurance
can be given that the Court will grant EchoStar's request for expedited relief.
Further, while EchoStar believes that the Court should grant its request
requiring News to loan EchoStar the $200 million, and is very confident of its
position, no assurance can be given that the Court will grant that request.
On May 9, 1997, as a result of numerous material breaches of the Agreement
by News, EchoStar filed a First Amended Complaint significantly expanding the
scope of the litigation, seeking specific performance of the Agreement, and
damages, including lost profits that were expected as a result of the
transactions contemplated by the Agreement, which could exceed $5 billion.
While EchoStar is confident of its position and believes it will ultimately
prevail in the litigation, there can be no assurance that EchoStar will prevail,
of the amount of damages EchoStar will collect if it prevails, or that timely
relief will be granted.
On September 26, 1996, EchoStar Satellite Corporation ("ESC") filed suit
against Sagem, S.A., ("Sagem") a French corporation, in connection with a
manufacturing agreement entered into in April 1995. Sagem, Inc., a wholly owned
subsidiary of Sagem, was added as a party to the litigation in a subsequent
amendment. Under the agreements between the parties, Sagem and Sagem, Inc. were
to provide 560,000 digital satellite receivers to ESC throughout 1995 and 1996.
Sagem and Sagem, Inc. failed to deliver any production receivers to ESC. ESC
thereafter terminated the agreements between the parties. ESC brought claims
against Sagem and Sagem, Inc. for breach of contract and
7
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
declaratory relief. ESC sought return of a $10.0 million down payment made to
Sagem, $15.0 million placed in escrow with Bank of America, a $373,000
prepayment made to Sagem, Inc. for finished goods, contractual late fees, lost
profits, interest, attorneys' fees, costs, and expenses. Sagem and Sagem, Inc.
filed counterclaims seeking damages of approximately $25.0 million. On April
25, 1997, ESC and Sagem executed a settlement and release agreement under which
Sagem agreed to return the $10.0 million down payment made to Sagem and agreed
to release the $15.0 million placed in escrow with Bank of America. ESC and
Sagem have released all claims against each other.
The Company is subject to various legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the financial position or results of operations of the Company.
7. SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
The Dish Notes are fully, unconditionally and jointly and severally
guaranteed by all subsidiaries of Dish, Ltd. (collectively, the "Dish Notes
Guarantors"), except certain de minimis domestic and foreign subsidiaries.
Dish, Ltd. is a wholly-owned subsidiary of EchoStar Satellite Broadcasting
Corporation ("ESBC"), a wholly-owned subsidiary of ECC.
The ESBC Notes are initially guaranteed by ECC on a subordinated basis. On
and after the Dish Guarantee Date (as defined in the ESBC Notes Indenture), the
ESBC Notes will be guaranteed by Dish, Ltd., which guarantee will rank PARI
PASSU with all senior unsecured indebtedness of Dish, Ltd. From January 8,
1997, the date which the merger with DBSC was consummated, the ESBC Notes are
guaranteed by New DBSC, which guarantee ranks PARI PASSU with all senior
unsecured indebtedness of New DBSC.
The consolidated net assets of Dish, Ltd., including the non-guarantors,
exceeded the consolidated net assets of the Dish Notes Guarantors by
approximately $166,000 and $103,000 as of December 31, 1996 and March 31, 1997,
respectively. Summarized consolidated financial information for Dish, Ltd.,
including the subsidiary guarantors, is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1997
----------------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue. . . . . . . . . . . . . . . . . . . . . . . $ 41,026 $ 71,462
Expenses . . . . . . . . . . . . . . . . . . . . . . 49,934 114,766
----------------------------
Operating loss . . . . . . . . . . . . . . . . . . . (8,908) (43,304)
Other income (expense) . . . . . . . . . . . . . . . (3,234) (14,925)
----------------------------
Net loss before income taxes . . . . . . . . . . . . (12,142) (58,229)
(Provision for) benefit from income taxes. . . . . . 4,852 (19)
----------------------------
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (7,290) $ (58,248)
----------------------------
----------------------------
DECEMBER 31, MARCH 31,
1996 1997
----------------------------
BALANCE SHEET DATA:
Current assets . . . . . . . . . . . . . . . . . . . $ 198,981 $ 190,105
Property and equipment, net. . . . . . . . . . . . . 499,989 499,039
Other noncurrent assets. . . . . . . . . . . . . . . 131,995 134,685
----------------------------
Total assets . . . . . . . . . . . . . . . . . . . . $ 830,965 $ 823,829
----------------------------
----------------------------
Current liabilities. . . . . . . . . . . . . . . . . $ 197,081 $ 231,338
Long-term liabilities. . . . . . . . . . . . . . . . 630,421 647,277
Stockholder's equity . . . . . . . . . . . . . . . . 3,463 (54,786)
----------------------------
Total liabilities and stockholder's equity . . . . . $ 830,965 $ 823,829
----------------------------
----------------------------
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS
RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY THE COMPANY OR BY OFFICERS,
DIRECTORS OR EMPLOYEES OF THE COMPANY ACTING ON THE COMPANY'S BEHALF, THAT ARE
NOT STATEMENTS OF HISTORICAL FACT, CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS THAT COULD CAUSE THE ACTUAL RESULTS OF THE COMPANY TO BE
MATERIALLY DIFFERENT FROM THE HISTORICAL RESULTS OF OR FROM ANY FUTURE RESULTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE THE FOLLOWING: THE
AVAILABILITY OF SUFFICIENT CAPITAL ON SATISFACTORY TERMS TO FINANCE THE
COMPANY'S BUSINESS PLAN; INCREASED COMPETITION FROM CABLE, DIRECT BROADCAST
SATELLITE ("DBS"), OTHER SATELLITE SYSTEM OPERATORS, AND OTHER PROVIDERS OF
SUBSCRIPTION TELEVISION SERVICES; THE INTRODUCTION OF NEW TECHNOLOGIES AND
COMPETITORS INTO THE SUBSCRIPTION TELEVISION BUSINESS; INCREASED SUBSCRIBER
ACQUISITION COSTS AND SUBSCRIBER PROMOTION SUBSIDIES; THE ABILITY OF THE COMPANY
TO OBTAIN NECESSARY SHAREHOLDER AND BOND-HOLDER APPROVAL OF ANY STRATEGIC
TRANSACTIONS; THE ABILITY OF THE COMPANY TO OBTAIN NECESSARY AUTHORIZATIONS FROM
THE FEDERAL COMMUNICATIONS COMMISSION ("FCC"); GENERAL BUSINESS AND ECONOMIC
CONDITIONS AND OTHER RISK FACTORS DESCRIBED FROM TIME TO TIME IN THE COMPANY'S
REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC"). IN ADDITION
TO STATEMENTS, WHICH EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES, READERS
ARE URGED TO CONSIDER STATEMENTS LABELED WITH THE TERMS "BELIEVES," "BELIEF,"
"EXPECTS," "PLANS," "ANTICIPATES," OR "INTENDS" TO BE UNCERTAIN AND FORWARD-
LOOKING. ALL CAUTIONARY STATEMENTS MADE HEREIN SHOULD BE READ AS BEING
APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR. IN
THIS CONNECTION, INVESTORS SHOULD CONSIDER THE RISKS DESCRIBED HEREIN.
OVERVIEW
EchoStar currently operates four related businesses: (i) operation of
the DISH Network-SM- and the EchoStar DBS System; (ii) design, manufacture,
marketing, installation and distribution of various DTH products worldwide
(including EchoStar Receiver Systems and C-band systems); (iii) domestic
distribution of DTH programming services; and (iv) consumer financing of
EchoStar's domestic products and programming services. During March 1996
EchoStar began broadcasting and selling programming services available from
the DISH Network-SM-. EchoStar expects to derive its future revenue
principally from periodic subscription fees for DISH Network-SM- programming
and, to a lesser extent, from the sale of DBS equipment. The growth of DBS
service and equipment sales has had, and will continue to have, a material
negative impact on EchoStar's domestic sales of C-band DTH products.
However, during the three months ended March 31, 1997, such negative impact
was more than offset by sales of EchoStar Receiver Systems and related
subscription television services. EchoStar expects the decline in its sales
of domestic C-band DTH products to continue at an accelerated rate.
On February 24, 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar
the DBS license for 28 frequencies at 110DEG. West Longitude ("WL") awarded
to MCI Communications Corporation ("MCI") during an FCC auction during 1996.
Subsequently, the parties discussed, and agreed upon, potentially mutually
agreeable changes to the structure of the transactions. However, during late
April 1997, substantial disagreements arose between the parties regarding
their obligations under the Agreement.
On May 8, 1997 EchoStar filed a Complaint in the United States District
Court for the District of Colorado (the "Court"), Civil Action No. 97-960,
requesting that the Court confirm EchoStar's position, and declare that News
is obligated pursuant to the Agreement to lend $200 million to EchoStar
without interest and upon such other terms as the Court orders. No assurance
can be given that the Court will grant EchoStar's request for expedited
relief. Further, while EchoStar believes that the Court should grant its
request requiring News to loan EchoStar the $200 million, and is very
confident of its position, no assurance can be given that the Court will
grant that request.
On May 9, 1997, as a result of numerous material breaches of the
Agreement by News, EchoStar filed a First Amended Complaint significantly
expanding the scope of the litigation, seeking specific performance of the
Agreement, and damages, including lost profits that were expected as a
result of the transactions contemplated by the Agreement, which could exceed
$5 billion. While EchoStar is confident of its position and believes it will
ultimately prevail in the litigation, there can be no assurance that EchoStar
will prevail, of the amount of damages EchoStar will collect if it prevails,
or that timely relief will be granted.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- CONTINUED
In accordance with its Agreement with News, as described above, EchoStar
had expected to meet its short- and medium-term capital needs through
financial commitments from News. As a result of the failure by News to honor
its obligations under the Agreement, EchoStar does not currently have
adequate capital to continue its contemplated business plan beyond the second
quarter of 1997. EchoStar has had preliminary discussions with a number of
investment banking firms to investigate alternatives to meet its short- and
medium-term needs. EchoStar also intends to speak with major vendors about
possible vendor financing, and with other potential strategic partners who
had indicated interest in transactions with EchoStar prior to execution of
the Agreement with News. While there can be no assurance, EchoStar believes
that it can arrange transactions to meet its short- and medium-term
obligations without material changes to its business plan. No assurance can
be given that any such arrangements will be made, or that if made they will
be on terms favorable to EchoStar. EchoStar intends to seek recovery from
News for any costs of financing in excess of the costs of the financing
committed to by News under the Agreement.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1996.
REVENUE. Total revenue for the three months ended March 31, 1997 was
$72.0 million, an increase of $30.5 million, or 74%, as compared to total
revenue for the three months ended March 31, 1996 of $41.5 million. The
increase in total revenue in 1997 was primarily attributable to the
introduction of EchoStar's DISH Network-SM- service during March 1996. In
the future, EchoStar expects to derive its revenue principally from DISH
Network-SM- subscription television services. As of March 31, 1997, EchoStar
had approximately 479,600 DISH Network-SM- subscribers.
The increase in total revenue for the three months ended March 31, 1997
was partially offset by a decrease in international and domestic sales of
C-band satellite receivers and equipment. The domestic and international
demand for C-band DTH products continued to decline during the first quarter
of 1997; this decline is expected to continue for the foreseeable future and
had been expected by EchoStar as described below. Consistent with the
increases in total revenue during the three months ended March 31,1997,
EchoStar experienced a corresponding increase in trade accounts receivable at
March 31, 1997. The Company expects this trend to continue as the number of
DISH Network-SM- subscribers increases, and as EchoStar develops additional
channels of distribution for DISH Network-SM- equipment.
Revenue from domestic sales of DTH products and technical services
decreased $19.2 million, or 80%, to $4.8 million during the three months
ended March 31, 1997. Domestically, EchoStar sold approximately 173,000
satellite receivers during the three months ended March 31, 1997, as compared
to approximately 45,000 receivers sold during the comparable period in 1996.
Of the total number of satellite receivers sold during the three months ended
March 31, 1997, approximately 171,000 were EchoStar Receiver Systems.
Although there was a significant increase in the number of satellite
receivers sold in the first quarter of 1997 as compared to same period in
1996, overall revenue from domestic sales of DTH products decreased as a
result of the revenue recognition policy applied to DBS satellite receivers
sold under EchoStar's promotions, combined with decreasing sales of, and
lower prices charged for, C-band products. Included in the number of DTH
satellite receivers sold during the first quarter of 1996 are sales of a
competitor's DBS receiver manufactured and supplied by a third-party
manufacturer. Such sales, which ceased during the second quarter of 1996
coincident with the launch of DISH Network-SM- service, totaled approximately
18,000 units during the three months ended March 31, 1996. Revenues
generated from the sale of competitor DBS receivers aggregated approximately
$7.7 million during the three months ended March 31, 1996. No revenue has
been or will be generated from the sale of competitor DBS receivers in 1997.
Revenue from international sales of DTH products for the three months
ended March 31, 1997 was $6.9 million, a decrease of $5.8 million, or 46%, as
compared to the same period in 1996. This decrease was directly attributable
to a decrease in the number of analog satellite receivers sold, combined with
decreased prices on products sold. Internationally, EchoStar sold
approximately 53,000 analog satellite receivers in the three months ended
March 31, 1997, a decrease of 30%, compared to approximately 76,000 units
sold in the comparable period in 1996. Overall, EchoStar's international
markets for analog DTH products continued to decline in the first quarter of
1997 as consumer anticipation of new international digital services continued
to increase. This international decline in demand for analog satellite
receivers, which was expected by the Company, is similar to the decline which
has
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- CONTINUED
occurred in the United States. To offset the anticipated decline in demand
for analog satellite receivers, EchoStar has been negotiating with digital
service providers to distribute their proprietary receivers in EchoStar's
international markets. While EchoStar is actively pursuing these
distribution opportunities, no assurance can be given that such negotiations
will be successful.
C-band programming revenue totaled $2.2 million for the three months
ended March 31, 1997, a decrease of $1.3 million, or 37%, compared to the
three months ended March 31, 1996. This decrease was primarily attributable
to the industry-wide decline in demand for domestic C-band programming
services. C-band programming revenue is expected to continue to decrease for
the foreseeable future.
Loan origination and participation income was $491,000 for the three
months ended March 31, 1997, a decrease of $322,000 or 40%, compared to the
same period in 1996. The decrease in loan origination and participation
income during the three months ended March 31, 1997 was primarily due to a
decrease in the number of consumer loans and leases funded. Historically,
EchoStar has maintained agreements with third-party finance companies to make
consumer credit available to EchoStar customers. These financing plans
provide consumers the opportunity to lease or finance their EchoStar Receiver
Systems, including installation costs and certain DISH Network-SM-
programming packages, on competitive terms. Consumer financing provided by
third parties is generally non-recourse to EchoStar. EchoStar currently
maintains one such agreement which expires during 1997. The third-party
finance company with which EchoStar maintains the above mentioned agreement
has notified the Company that it does not intend to renew the agreement.
EchoStar is currently negotiating similar agreements with other third-party
finance companies. There can be no assurance that EchoStar will be
successful in these negotiations, or if successful, that any such new
agreements will commence prior to the termination of the existing agreement.
In the event that EchoStar is unsuccessful in executing a new agreement with
a third-party finance company during 1997, future loan origination income
will be adversely affected and growth of the DISH Network-SM- subscriber base
may be negatively impacted.
DTH AND DISH NETWORK-SM- EXPENSES. DTH and DISH Network-SM- expenses
for the three months ended March 31, 1997 aggregated $43.8 million, an
increase of $7.8 million, or 22% compared to the same period in 1996. This
increase is directly attributable to the introduction of DISH Network-SM-
service in March 1996, partially offset by decreases in other DTH expenses.
DTH products and technical services expense decreased $23.3 million, or 71%,
to $9.5 million during the three months ended March 31, 1997. These expenses
include the costs of C-band systems and the costs of EchoStar Receiver
Systems and related components sold prior to commencement of EchoStar's
promotions. Subscriber promotion subsidies aggregated $13.1 million for the
three months ended March 31, 1997 and represent expenses associated with
EchoStar's various promotions. DISH Network-SM- programming expenses totaled
$19.4 million for the three months ended March 31, 1996. The Company expects
that DISH Network-SM- programming expenses will increase in future periods in
proportion to increases in the number of DISH Network-SM- subscribers. Such
expenses, relative to related revenues, will vary based on the services
subscribed to by DISH Network-SM- customers, the number and types of
Pay-Per-View events purchased by subscribers, and the extent to which
EchoStar is able to realize volume discounts from programming providers.
C-band programming expenses totaled $1.8 million for the three months
ended March 31, 1997, a decrease of $1.4 million, or 45%, as compared to the
same period in 1996. This decrease is consistent with the decrease in C-band
programming revenue. As previously described, domestic demand for C-band DTH
products has continued to decrease as a result of the introduction and
widespread consumer acceptance of DBS products and services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses totaled $32.0 million for the three months
ended March 31, 1996, an increase of $21.3 million as compared to the same
period in 1996. SG&A expenses as a percentage of total revenue increased to
44% for the three months ended March 31, 1997 as compared to 26% for the same
period in 1996. The increase in SG&A expenses was principally attributable
to: (i) increased personnel expenses as a result of introduction of DISH
Network-SM- service in March 1996; (ii) marketing and advertising expenses
associated with the launch and ongoing operation of the DISH Network-SM-; and
(iii) increased expenses associated with operation of DISH Network-SM- call
centers and subscriber management related services. In future periods,
EchoStar expects that SG&A expenses as a percentage of total revenue will
decrease as subscribers are added.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- CONTINUED
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA
(including amortization of subscriber acquisition costs of $28.1 million) for
the three months ended March 31, 1997 was negative $3.8 million, a decrease
of $1.5 million, compared to negative EBITDA of $5.3 million for the same
period in 1996. This decrease in negative EBITDA resulted from the factors
affecting revenue and expenses discussed above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
for the three months ended March 31, 1997, including the amortization of
subscriber acquisition costs, aggregated $40.8 million, an increase of $37.4
million, as compared to the same period 1996. The increase in depreciation
and amortization expenses resulted from depreciation expenses associated with
EchoStar I and EchoStar II (placed in service during the first quarter of
1996, and the fourth quarter of 1996, respectively), and amortization of
subscriber acquisition costs.
OTHER INCOME AND EXPENSE. Other expense, net totaled $18.3 million for
the three months ended March 31, 1997, an increase of $14.9 million, as
compared to the same period 1996. The increase in other expense in the first
quarter of 1997 resulted primarily from an increase in interest expense
associated with the March 1996 issuance of the ESBC Notes.
INCOME TAX BENEFIT. The decrease in the income tax benefit of $4.8
million (from $4.8 million for the three months ended March 31, 1996 to an
income tax provision of $19,000 for the three months ended March 31, 1997)
principally resulted from EchoStar's decision to fully reserve the first
quarter addition to its net deferred tax asset. EchoStar's net deferred tax
assets (approximately $66.8 million at March 31, 1997) relate to temporary
differences for amortization of original issue discount on the Dish and ESBC
Notes, net operating loss carryforwards, and various accrued expenses which
are not deductible until paid. If future operating results differ materially
and adversely from EchoStar's current expectations, its judgment regarding
the magnitude of its reserve may change.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures, including expenditures for satellite systems under
construction, totaled $16.0 million and $42.6 million during the three months
ended March 31, 1996 and 1997, respectively. During the three months ended
March 31, 1997, net cash flows used in operations totaled $5.3 million
compared to $7.8 million provided by operations for the three months ended
March 31, 1996. EchoStar anticipates that its capital expenditure and
working capital requirements, including subscriber acquisition costs, will
increase substantially throughout 1997 as it aggressively builds its DISH
Network-SM- subscriber base, and as it constructs, launches and deploys
additional satellites in connection with its DBS business.
Effective June 1, 1997, EchoStar will allow independent retailers to
offer a standard EchoStar Receiver System to consumers for a suggested retail
price of $199 (the "1997 Promotion"). Unlike the "EchoStar Promotion," which
requires consumers to purchase a prepaid one-year subscription to the DISH
Network's-SM- America's Top 50 CD-SM- programming package for $300, the 1997
Promotion will allow consumers to subscribe to the DISH Network's-SM- various
programming offerings on a month-to-month basis. While there can be no
assurance, EchoStar believes that the 1997 Promotion may significantly
increase consumer demand for DISH Network-SM- services.
The 1997 Promotion will significantly increase EchoStar's working
capital requirements. At commencement of the 1997 Promotion, transaction
proceeds, which will vary dependent on the type of EchoStar Receiver System
purchased and the number of additional outlet receivers purchased, are
expected to approximate $225 to $275 per new subscriber. Transaction costs,
consisting of costs of goods sold and activation fees and bonuses paid to
dealers and distributors, are expected to range from $425 to $500 per new
subscriber upon commencement of the 1997 Promotion. Thus, each subscriber
initially added pursuant to the 1997 Promotion will result in a net use of
cash of approximately $200 to $275. Comparatively, the EchoStar Promotion,
which will continue to be available to consumers, results in approximately
breakeven net cash flows at the time of subscriber activation. EchoStar
expects that transaction costs associated with both the EchoStar and 1997
Promotions will decrease during the remainder of 1997 as additional cost
reductions for EchoStar Receiver Systems are realized.
The excess of transaction costs over related proceeds will be recognized
as subscriber promotion subsidies in the Company's statements of operations.
EBITDA in future periods will be negatively affected to the extent that
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- CONTINUED
a larger portion of future subscriber additions result from the 1997
Promotion rather than from the EchoStar Promotion. This adverse EBITDA
impact will result from the immediate recognition of all transaction costs at
activation under the 1997 Promotion. Comparatively, a portion of EchoStar
Promotion transaction costs are deferred and amortized over the initial
prepaid subscription period.
In addition to the working capital requirements discussed above, during
the remainder of 1997 EchoStar expects to expend: (i) approximately $99.7
million in connection with the launch, insurance and deployment of EchoStar
III and EchoStar IV; (ii) approximately $34.0 million related to the
construction of EchoStar III and EchoStar IV; and (iii) approximately $12.9
million for debt service relating to contractor financing of EchoStar I,
EchoStar II and EchoStar III. Expected capital expenditures may increase in
the event of delays, cost overruns, increased costs associated with certain
potential change orders under the Company's satellite or launch contracts, or
a change in launch providers.
EchoStar's 1997 working capital, capital expenditure and debt service
requirements are expected to be funded from existing cash and marketable
investment securities balances, balances held in the ESBC Notes Escrow, cash
generated from operations, and additional debt, equity or other financing.
The Company anticipates that additional financing (which may be in the form
of interim financing as described below) will be necessary prior to June 30,
1997. There can be no assurance that additional debt, equity or other
financing will be available on terms acceptable to EchoStar, or at all.
Further increases in subscriber acquisition costs, inadequate supplies of DBS
receivers, or significant launch delays or failures would significantly and
adversely affect EchoStar's operating results and financial condition.
In accordance with its Agreement with News, as previously described
above, EchoStar had expected to meet its short- and medium-term capital needs
through financial commitments from News. As a result of the failure by News
to honor its obligations under the Agreement, EchoStar does not currently
have adequate capital to continue its contemplated business plan beyond the
second quarter of 1997. EchoStar has had preliminary discussions with a
number of investment banking firms to investigate alternatives to meet its
short- and medium-term needs. EchoStar also intends to speak with major
vendors about possible vendor financing, and with other potential strategic
partners who had indicated interest in transactions with EchoStar prior to
execution of the Agreement with News. While there can be no assurance,
EchoStar believes that it can arrange transactions to meet its short- and
medium-term obligations without material changes to its business plan. No
assurance can be given that any such arrangements will be made, or that if
made they will be on terms favorable to EchoStar. EchoStar intends to seek
recovery from News for any costs of financing in excess of the costs of the
financing committed to by News under the Agreement.
Beyond 1997, EchoStar will expend approximately $88.6 million to repay
contractor financing of EchoStar I, EchoStar II, EchoStar III and EchoStar
IV. Additionally, EchoStar has committed to expend in 1998 approximately
$69.7 million to construct, launch and support EchoStar IV. EchoStar's
contracts with Lockheed Martin for the construction of EchoStar III and
EchoStar IV provide for the payment by EchoStar of substantial penalties in
the event of termination of such contracts. To meet the aforementioned
requirements and to fully execute its business plan, EchoStar will require
significant additional capital. The Company anticipates that its future
capital requirements will be met from additional debt or equity financings
and from cash generated by operations. There can be no assurance that
additional debt, equity or other financing will be available on terms
acceptable to EchoStar, or at all.
During March 1997, EchoStar's wholly-owned subsidiary, DISH Network-SM-
Credit Corporation ("DNCC"), began offering an internally-financed consumer
lease plan to prospective DISH Network-SM- customers. This plan provides for
a four-year lease term at competitive rates to qualified consumers. EchoStar
will assume all credit risk related to the lease program. Initially,
EchoStar plans to implement DNCC's consumer lease program on a limited basis.
Additional capital will be required for EchoStar to implement the program on
a larger scale. There can be no assurance additional capital will be
available for the lease program on terms acceptable to EchoStar, or at all.
EchoStar expects that its net losses will continue as it builds its
subscription television business such that negative stockholders' equity will
result during the second quarter of 1997 unless it receives additional equity
financing. Although a negative equity position has significant implications,
including, but not limited to, non-compliance with Nasdaq National Market
listing criteria, EchoStar believes that such event will not materially
affect
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- CONTINUED
the implementation and execution of its business strategy. When EchoStar
ceases to satisfy Nasdaq's National Market listing criteria, EchoStar's Class
A Common Stock will be subject to being delisted unless an exception is
granted by the National Association of Securities Dealers. If an exception
is not granted, trading in EchoStar Class A Common Stock would thereafter be
conducted in the over-the-counter market. Consequently, it may be more
difficult to dispose of, or to obtain accurate quotations for, EchoStar Class
A Common Stock. Accordingly, delisting may result in a decline in the
trading market for EchoStar's Class A Common Stock, which could, among other
things, potentially depress EchoStar's stock and bond prices and impair
EchoStar's ability to obtain additional financing.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 128), which supersedes Accounting Principles Board Opinion No. 15,
"Earnings Per Share" ("APB No. 15"). SFAS No. 128 simplifies the requirements
for reporting earnings per share ("EPS") by requiring companies only to
report "basic" and "diluted" EPS. SFAS No. 128 is effective for both interim
and annual periods ending after December 15, 1997 but requires retroactive
restatement upon adoption. EchoStar will adopt SFAS No. 128 in the fourth
quarter of 1997. EchoStar does not believe such adoption will have a
material effect on either its previously reported or future results of
operations.
In March 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure" (SFAS
No. 129), which continues the existing requirements of APB No. 15 but expands
the number of companies subject to portions of its requirements.
Specifically, SFAS No. 129 requires that entities previously exempt from the
requirements of APB No. 15 disclose the pertinent rights and privileges of
all securities other than ordinary common stock. SFAS No. 129 is effective
for periods ending after December 15, 1997. EchoStar was not exempt from APB
No. 15; accordingly, the adoption of SFAS No. 129 will not have any effect
on EchoStar.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
On February 24, 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar
the DBS license for 28 frequencies at 110DEG. West Longitude awarded to MCI
Communications Corporation during a Federal Communications Commission auction
during 1996. Subsequently, the parties discussed, and agreed upon,
potentially mutually agreeable changes to the structure of the transactions.
However, during late April 1997, substantial disagreements arose between the
parties regarding their obligations under the Agreement.
On May 8, 1997 EchoStar filed a Complaint in the United States District
Court for the District of Colorado (the "Court"), Civil Action No. 97-960,
requesting that the Court confirm EchoStar's position, and declare that News
is obligated pursuant to the Agreement to lend $200 million to EchoStar
without interest and upon such other terms as the Court orders. No assurance
can be given that the Court will grant EchoStar's request for expedited
relief. Further, while EchoStar believes that the Court should grant its
request requiring News to loan EchoStar the $200 million, and is very
confident of its position, no assurance can be given that the Court will
grant that request.
On May 9, 1997, as a result of numerous material breaches of the
Agreement by News, EchoStar filed a First Amended Complaint significantly
expanding the scope of the litigation, seeking specific performance of the
Agreement, and damages, including lost profits that were expected as a
result of the transactions contemplated by the Agreement, which could exceed
$5 billion. While EchoStar is confident of its position and believes it will
ultimately prevail in the litigation, there can be no assurance that EchoStar
will prevail, of the amount of damages EchoStar will collect if it prevails,
or that timely relief will be granted.
On September 26, 1996, EchoStar Satellite Corporation ("ESC") filed suit
against Sagem, S.A., ("Sagem") a French corporation, in connection with a
manufacturing agreement entered into in April 1995. Sagem, Inc., a wholly
owned subsidiary of Sagem, was added as a party to the litigation in a
subsequent amendment. Under the agreements between the parties, Sagem and
Sagem, Inc. were to provide 560,000 digital satellite receivers to ESC
throughout 1995 and 1996. Sagem and Sagem, Inc. failed to deliver any
production receivers to ESC. ESC thereafter terminated the agreements
between the parties. ESC brought claims against Sagem and Sagem, Inc. for
breach of contract and declaratory relief. ESC sought return of a $10.0
million down payment made to Sagem, $15.0 million placed in escrow with Bank
of America, a $373,000 prepayment made to Sagem, Inc. for finished goods,
contractual late fees, lost profits, interest, attorneys' fees, costs, and
expenses. Sagem and Sagem, Inc. filed counterclaims seeking damages of
approximately $25.0 million. On April 25, 1997, ESC and Sagem executed a
settlement and release agreement under which Sagem agreed to return the $10.0
million down payment made to Sagem and agreed to release the $15.0 million
placed in escrow with Bank of America. ESC and Sagem have released all claims
against each other.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Binding Letter Agreement dated February 19, 1997 between The News
Corporation Limited and EchoStar Communications Corporation.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule.
(b) Reports on Form 8-K
(i) A Report on Form 8-K dated February 20, 1997 was filed to
report under Item 5, Other Events, the execution of a binding
Letter Agreement between EchoStar Communications Corporation
and The News Corporation Limited.
15
<PAGE>
(ii) A Report on Form 8-K dated April 28, 1997 was filed to report
under Item 5, Other Events, the delay of regulatory filings
in connection with a binding Letter Agreement between EchoStar
Communications Corporation and The News Corporation Limited.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ STEVEN B. SCHAVER
---------------------------------------------------
Steven B. Schaver
Chief Operating Officer and Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER)
By: /s/ JOHN R. HAGER
---------------------------------------------------
John R. Hager
Controller
(PRINCIPAL ACCOUNTING OFFICER)
Date: May 12, 1997
<PAGE>
EXHIBIT 2.1
PAGE 1 OF 9
THE NEWS CORPORATION LIMITED
1211 Avenue of the Americas
New York, New York 10036
February 19, 1997
EchoStar Communications Corporation
90 Inverness Circle East
Englewood, Colorado 80112
Ladies and Gentlemen:
This letter agreement ("Agreement") confirms the conditions upon which The
News Corporation Limited or an affiliate ("News") will acquire shares of capital
stock of EchoStar Communications Corporation ("ECC").
1. THE TRANSACTION. News and ECC hereby agree to enter into a definitive
agreements (the "Definitive Agreements") containing the terms set forth on
the attached Term Sheet, and such other terms as the parties may otherwise
agree to.
2. DEFINITIVE AGREEMENTS. As soon as practicable after the date hereof, our
respective legal counsel will promptly and diligently negotiate in good
faith and use their respective best efforts to agree on the Definitive
Agreements, which will contain mutually agreeable representations and
warranties (including, with respect to ECC, Organization and
Qualifications, Capitalization, Authority, No Conflicts, Required Filings
and Consents, SEC Reports and Financial Statements (including Absence of
Certain Changes or Events from the date of the Financial Statements through
March 7, 1997), and with respect to News, Organization and Qualifications,
Authority, No Conflicts, Required Filings and Consents), mutually agreeable
provisions for indemnification and shareholder arrangements and other
appropriate terms and conditions. News and ECC shall cooperate with each
other to the fullest extent in the preparation of the Definitive Agreements
and all related documents, in the obtaining of all necessary consents and
in complying with all regulatory requirements. News and ECC shall in good
faith proceed to promptly negotiate and execute the Definitive Agreements
and all related documents with respect to this transaction. Although the
parties intend to diligently negotiate and promptly enter into the
Definitive Agreements, the parties acknowledge and agree that this
Agreement contains all of the essential terms of the transactions
contemplated hereby and, in the event that the parties do not enter into
Definitive Agreements, that this Agreement is a binding Agreement and shall
form the basis for consummation of the transactions contemplated hereby.
3. PURCHASER'S INVESTIGATION: CONFIDENTIALITY. ECC and News will permit each
other and their respective accounting and legal representatives to conduct
an investigation and evaluation of ECC and ASkyB, will provide such
assistance as is reasonably requested and will give access at reasonable
times to information related to the assets and operations of ECC and ASkyB.
Except to the extent that information provided by ECC and ASkyB is in the
public domain or is or becomes ascertainable from public sources, such
information concerning ECC and ASkyB shall be kept in strict confidence.
4. CONDUCT OF BUSINESS. During the period from the date hereof to the
execution of the Definitive Agreements, (a) the businesses of ECC and ASkyB
will be carried on in accordance with past custom and practice, (b) ECC and
ASkyB will not enter into any contract, agreement or transaction other than
in the ordinary course of business and in accordance with past custom and
practice, and (c) ECC will not remove any of its assets by way of dividend,
distribution, withdrawal or any other means without the prior written
consent of News. Following execution of the Definitive Agreements the
businesses of ECC and ASkyB will be conducted in consultation with each of
News and ECC.
5. CLOSING CONDITIONS. The closing of the transactions contemplated hereby is
conditional upon:
(a) the obtaining of all necessary governmental, shareholder, bondholder
and other third-party consents and approvals, including Hart-Scott-
Rodino and board of director approvals of ECC and News; and
<PAGE>
EXHIBIT 2.1
PAGE 2 OF 9
(b) News being satisfied that its due diligence investigation has not
revealed (i) that ECC's public disclosure documents contain any untrue
statement of a material fact or omit to state a material fact, or (ii)
any ECC obligation or agreement (other than the Indentures) that would
prevent the consummation of the proposed transaction; provided that
News must exercise its right to terminate this Agreement pursuant to
this paragraph 5(b) on or before March 7, 1997.
(c) ECC being satisfied that its due diligence investigation has not
revealed (i) a material deviation from the ASkyB DBS Capital Budget
Summary set forth on Schedule I, or (ii) any ASkyB obligation or
agreement that would prevent the consummation of the proposed
transaction; provided that ECC must exercise its right to terminate
this Agreement pursuant to this paragraph 5(c) on or before March 7,
1997.
6. PUBLIC DISCLOSURE. Pending execution of the Definitive Agreements and,
except as required by law, no public disclosure or publicity concerning the
subject matter hereof or the transactions contemplated hereby will be made
without the joint approval of ECC and News.
7. EXPENSES. ECC and News will each pay their respective expenses (including
fees and expenses of legal counsel, investment bankers, brokers or other
representatives or consultants) in connection with the transactions
contemplated hereby (whether consummated or not).
8. REPRESENTATIONS AND WARRANTIES. Each party hereto hereby represents and
warrants that (i) it is duly organized, validly existing and in good
standing under the jurisdiction in which it was formed, (ii) it has the
full right, power and authority to consummate the transactions contemplated
herein and (iii) the execution, delivery and performance hereof will not
conflict with nor result in any breach of provisions of, or constitute a
default under, any agreement, charter, bylaw or other instrument to which
it is a party or by which it is bound.
9. FURTHER ASSURANCES. Each party hereto shall execute and deliver all
reasonably required documents and do all other acts which may be reasonably
requested by the other parties hereto to implement and carry out the terms
and conditions of the transactions contemplated herein. None of News, ECC
or Charles Ergen shall take any action or fail to take any action which
would reasonably be expected to frustrate the intent and purposes of this
Agreement.
10. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telescoped
(receipt of which is confirmed by the person to whom sent) or mailed by
registered or certified mail (return receipt requested) to the parties at
the following addresses (or at such other address for a party as shall be
specified by like notice):
(a) If to ECC, to:
EchoStar Communications Corporation
90 Inverness Circle East
Englewood, Colorado 80112
Attention: David K. Moskowitz
Senior Vice President and General Counsel
(b) If to News, to:
The News Corporation Limited
1211 Avenue of the Americas
New York, New York 10036
Attention: Arthur M. Siskind
Senior Executive Vice President
and Group General Counsel
<PAGE>
EXHIBIT 2.1
PAGE 3 OF 9
11. GOVERNING LAW. This Agreement shall be governed by the laws of the State
of New York.
If the foregoing accurately reflects our agreement, please sign the
enclosed duplicate of this Agreement in the space provided below and return the
same to the undersigned.
Very truly yours,
The News Corporation Limited
By: /s/ K. RUPERT MURDOCH
--------------------------------
Name:
Title:
Accepted and agreed to
this 20th day of February 1997:
EchoStar Communications Corporation
By: /s/ CHARLES W. ERGEN
------------------------------
Name: Charles W. Ergen
Title: CEO of EchoStar Communications
Corporation
<PAGE>
EXHIBIT 2.1
PAGE 4 OF 9
TERM SHEET
The News Corporation Limited or its designated subsidiary ("News") will
enter into an arrangement with EchoStar Communications Corporation ("ECC") to be
evidenced by a definitive agreement (the "Definitive Agreement"), as follows:
1. ECC will spin off to separate entities (a) all of its business operations,
assets and liabilities related to its international manufacturing
businesses and (b) its licenses for orbital slot frequencies. News will
cause the manufacturing business to be licensed to manufacture digital
boxes on a non-exclusive, worldwide most favored nation basis.
2. News will contribute to ECC (or in a substitute mutually agreed upon
transaction) the following assets (as of the closing of the transaction):
a) 4 satellites, uplink facility, local access distribution system,
operations center and call center, subject to existing agreements, and
free and clear of all liens and encumbrances; plus
b) $1 billion in cash less the value of the assets contributed in (a)
above which value shall be equal to the cost of such assets (excluding
G & A and other overhead) actually paid by News and excluding
capitalized interest.
c) Commencing March 10, 1997, the News DBS operation will be conducted in
consultation with and under the direction of Ergen as the Chief
Executive Officer of ECC and shall be for the account of the combined
business. News shall advance the costs of News DBS business and the
amounts paid by News shall be credited against the News cash
obligation as set forth in 2(b) above.
3. Upon the completion of the proposed transaction:
a) Charles Ergen ("Ergen") and James DeFranco will convert all shares of
Preferred Stock owned by them into Class A Common Stock and shall
receive accrued dividends; and
b) News shall receive
(i) such number of shares of Class A Common Stock and Class B Common
Stock of ECC as shall represent 50% of the outstanding shares of
each class as of March 7, 1997; and
(ii) options to purchase shares of Class A Common Stock in amounts
and at exercise prices as to give News the right to maintain its
50% position as and when employee stock options outstanding as
of March 7, 1997 are exercised; and
c) The ECC Certificate of Incorporation shall be amended to provide that
upon any sales (not including assignments to Ergen family members or
similar assignments to accomplish estate planning purposes or to
affiliates of News (not less than 51% owned)) of Class B Common Stock
by Ergen or News such shares shall convert to Class A Common Stock.
4. News and the entity to which ECC shall spin off its licenses for orbital
slot frequencies shall each lease the use of their respective DBS orbital
slot frequencies to ECC for the conduct of the ECC direct broadcast
business. Each shall receive an equal payment from ECC for the use of the
frequencies in an amount to be agreed to.
5. News and Ergen will enter into a Shareholders Agreement pursuant to which
they will agree (as to shares owned or thereafter acquired):
a) Each shall have the right to nominate an equal number of directors to
the ECC Board (including independent directors) and each shall agree to
vote for the other's nominees;
b) an Executive Committee of the Board will be established with each of
News and Ergen appointing an equal number of members;
<PAGE>
EXHIBIT 2.1
PAGE 5 OF 9
c) all significant corporate actions (as defined on Exhibit A hereto) to
be submitted to the Board shall require the vote of all members of the
Executive Committee;
d) neither News nor Ergen shall present their shares for a quorum or vote
their shares as shareholders on significant matters unless both are in
agreement;
e) Rupert Murdoch shall serve as Chairman of ECC and Ergen shall serve as
President and Chief Executive Officer of ECC; News shall have the right
to designate the CFO of ECC; all other appointments of senior officers
of ECC shall be subject to mutual agreement;
f) In the event News and Ergen do not agree on a significant corporate
action of the type set forth on Exhibit A as a Deadlock Event, then
either News or Ergen can cause the purchase and sale of each others
shares in ECC in the manner provided for in Exhibit A;
g) Subject to deminimus amounts, each of the Shareholders will have
rights of first refusal (based on market prices) and tag-a-long rights
in customary form; and
h) In the event Ergen shall sell 8 million or more shares of ECC
securities or News shall sell 10 million or more shares of any class
of ECC securities owned (other than as described above) then, (i) at
the option of the other Shareholder, the corporate governance
provisions set forth in this section 5 will thereupon terminate, and
(ii) the selling Shareholder shall cause its or his director nominees
(other than the independent director nominee) to resign and shall
continue to vote for the other Shareholders' director nominees and in
such manner as such other Shareholder shall direct on all other
matters presented for the vote of Shareholders so long as such other
Shareholders shall not have sold 8 million or more shares in the case
of Ergen or 10 million or more shares in the case of News.
6. ECC shall have the right to require News to buy from ECC, and News shall
have the right to require ECC to sell to News, at a price of $23 a share up
to $200 million of ECC Class A Common Stock, such rights to commence on May
1, 1997 and to terminate on April 30, 1998. To the extent that News has
purchased shares under this section 6 then the amount paid by News shall be
credited against the News' cash obligation as set forth in paragraph 2(b)
above and the number of shares of ECC stock to be received by News as set
forth in paragraph 3(b) above shall be appropriately adjusted. To the
extent that necessary regulatory approvals are not obtained at such time as
ECC shall require funds for operations, News will lend up to $200 million
on a non-interest bearing basis and such other terms as agreed to.
7. In the event that the proposed transaction is not approved by any
regulatory authorities from which approval is sought, News, ECC and Ergen
shall take such necessary and appropriate steps to alter the proposed
transaction in such manner as required to (i) obtain the necessary
approvals and, (ii) insure to News, ECC and Ergen as nearly as possible the
same economic results as if the proposed transaction occurred.
8. News, ECC and Ergen shall proceed diligently to accomplish the following:
a) negotiate the Definitive Agreement and Shareholders Agreement and
conduct necessary due diligence, the due diligence to be completed by
News and ECC on or before March 7, 1997;
b) Obtain all necessary regulatory approvals to the proposed transaction;
c) Obtain all necessary ECC shareholder and bondholder consents;
d) Obtain all necessary contract and other approvals; and
e) Obtain all necessary board of director approvals; and
f) Prepare agreed upon budget and five year business plan and technology
agreement for conduct of ECC business including agreements regarding
compression, conditional access, smart card and subscriber management
systems. ECC shall use the technology and systems of the News'
companies provided that such technology and systems are as secure and
capable, shall require no material expenditures to render the
<PAGE>
EXHIBIT 2.1
PAGE 6 OF 9
installed base of consumer satellite receivers compatible, and shall
require no material increased expenditures when compared to the
current technology and systems utilized by ECC.
<PAGE>
EXHIBIT 2.1
PAGE 7 OF 9
EXHIBIT A
1. "SIGNIFICANT CORPORATE ACTION" means any one of the following:
a. amending or modifying the purposes of the Company from those specified
in its Certificate of Incorporation or otherwise amending or modifying
the Certificate of Incorporation;
b. entering into any merger or consolidation in which the Company is
constituent corporation, acquiring all or substantially all of the
assets or capital stock of another Person (or a division or other
business unit of another Person), consummating any other business
combination or dissolving and winding up the Company (other than in
accordance with the terms of this Agreement), in each case whether in
a single transaction or a series of related transactions in which the
value of the transaction is in excess of $10,000,000;
c. adopting or modifying or amending in any material respect any Budget
or the Business Plan, provided that to the extent a Budget is not
agreed to for any Fiscal Year (a "Budget Deadlock") the prior year's
Budget (with cost increases not to exceed 10%) shall be the effective
Budget for such Fiscal Year;
d. selling, leasing, exchanging or otherwise disposing of any property,
asset or business with a value in excess of $10,000,000;
e. except as contemplated by the Business Plan, the then-effective Budget
or this Agreement, increasing or decreasing the Company's authorized
capital or increasing or decreasing the Company's issued and stated
capital other than pursuant to the Company's existing employee stock
option plan, Employee Referral Program or 401(K) plan;
f. changing the Fiscal Year;
g. except as contemplated by the Business Plan, the then-effective Budget
or this Agreement, entering into any transaction, agreement or
understanding with any other Person with a value in excess of
10,000,000;
h. incurring any indebtedness for borrowed money which would result in
the total outstanding Indebtedness of the Company for borrowed money
(excluding indebtedness incurred by the Company pursuant to the
Business Plan, the then-effective Budget or any Shareholder Loans
approved by the Shareholders in accordance with this Agreement)
increasing by more than $10,000,000;
i. except as contemplated by the Business Plan or the then-effective
Budget, entering into, amending, granting any waiver with respect to,
terminating or extending any agreement outside of the ordinary course
of business, which agreement provides for (or, pursuant to its terms,
could reasonably be expected to result in) the payment or receipt by
the Company of more than an aggregate amount of $10,000,000 during the
term of such agreement;
j. except as contemplated by the Business Plan or the then-effective
Budget, entering into any agreement or transaction which has a term in
excess of one (1) year and either (i) requires the payment of more
than $1 million per year, or (ii) involves programming commitments
(unless such programming commitments are immaterial);
k. except as contemplated by the Business Plan or the then-effective
Budget, entering into, amending, granting any waiver with respect to,
terminating or extending any employment or consulting agreement (or
series of related employment or consulting agreements with the same
Person) with, or hiring any officer or employee for, a term of more
than one year or which agreement or arrangement provides for (or,
pursuant to its terms, could reasonably be expected to result in)
payments to the employee or consultant, or otherwise hiring any
employee or consultant, at a rate in excess of $200,000 per annum, or
the adoption of any amendment of material compensation policies;
l. except as contemplated by the Business plan or the then-effective
Budget, entering into any transaction or agreement with a Shareholder
or any Affiliate of a Shareholder other than this Agreement or any
other agreement or transaction entered into in the ordinary course of
business on arms-length terms;
<PAGE>
EXHIBIT 2.1
PAGE 8 OF 9
m. electing or removing any of the Company's Chairman, President, Chief
Executive Officer, Chief Operating Officer or Chief Financial Officer
(except as otherwise agreed in the Term Sheet);
n. appointing or changing the Company's independent certified public
accountants (it being agreed that the Company's initial independent
certified public accountants shall be Arthur Andersen LLP);
o. except as required by GAAP or applicable law, adopting or changing any
of the Company's material accounting principles;
p. commencing or settling any litigation, arbitration or governmental
proceeding which relates to more than $1,000,000 or is reasonably
likely to have a material impact on the Company or its business;
q. except as contemplated by the Business Plan or the then-effective
Budget, or except as permitted by the Company's 401(K) plan, making
any loans, investments or advances to, or guaranteeing the obligations
of, any Person in excess of $100,000;
r. incorporating, forming or otherwise organizing a Subsidiary or any
other Person;
s. except as contemplated by the Business Plan or the then-effective
Budget, declaring any dividend or making any other distribution to the
Shareholders;
t. filing a voluntary petition in bankruptcy or for reorganization or for
the adoption of any plan or arrangement with creditors or an admission
seeking the relief therein provided under any existing or future law
of any jurisdiction relating to bankruptcy, insolvency, reorganization
or relief of debtors; or
u. entering into any options, contingent agreements or other arrangements
which if exercised or consummated in accordance with their terms would
result in an action constituting a Significant Corporate Action as set
forth in clauses (a-t) above.
2. BUY-SELL UPON DEADLOCK EVENT.
a. Upon the occurrence of a Deadlock Event, the Shareholders shall first
use their good faith efforts during a period of forty-five (45) days
(the "Referral Period") to resolve the dispute which resulted in the
Deadlock Event in a mutually satisfactory manner. A "Deadlock Event"
shall be deemed to have occurred in the event that (i)(A) with respect
to any proposed Significant Corporate Action contained in paragraphs
(b), (d), (e), (g), (h), (i), (t) or (u) as it applies to any of the
previously listed paragraphs in the definition thereof, the Board of
Directors is unable to authorize the taking or rejection of such
Significant Corporate Action contained by a Majority Vote, PROVIDED
that, for a Deadlock Event to occur under clauses (b), (d), (g),
(h), and (i), the dollar level shall be $50,000,000 or (B) a Budget
Deadlock has occurred and continued uninterrupted for two (2)
consecutive Fiscal Years;
b. If a Deadlock Event occurs, then while such Deadlock Event shall
continue beyond the Referral Period, either Shareholder (the
"Initiating Shareholder"), by written notice (the "Notice") to the
other may initiate a buy-sell transaction as follows:
(i) Notice shall specify a price per share (for each Class of ECC
stock) which the Initiating Shareholder is willing to pay for
the shares held by the other Shareholder (the "Determining
Shareholder").
(ii) Within 20 days after receipt of the Notice from the Initiating
Shareholder, the Determining Shareholder shall by written notice
(the "Response") to the Initiating Shareholder decide whether to
buy all of the Initiating Shareholder's shares at the price set
forth in the Notice or to sell all of the Determining
Shareholder's shares to the Initiating Shareholder at the price
set forth in the Notice. The failure of the Determining
Shareholder to deliver a Response within the said 20-day period
shall be deemed to constitute the Determining Shareholder's
election to sell.
(iii) The Initiating Shareholder and Determining Shareholder shall
thereupon act promptly to accomplish the buy-sell arrangement set
forth herein; PROVIDED that the closing of such transaction shall
take place on not less than 5 days' written notice from buyer to
seller not later than 180 days following the receipt of the
<PAGE>
EXHIBIT 2.1
PAGE 9 OF 9
Response by the Initiating Shareholder. In the event the closing
does not take place within such 180-day period on account of the
inability of the buying Shareholder to buy, then the Shareholder
that would have otherwise been the seller shall have the right,
exercisable by written notice to the other Shareholder within 20
days after the end of such 180-day period, to elect to buy the
other Shareholder's shares. In such event, the closing will take
place on not less than 5 days' written notice from buyer to
seller not later than 180 days following such election.
<PAGE>
EXHIBIT 23
PAGE 1 OF 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report incorporated by reference in this Form 10-Q, into the Company's
previously filed Registration Statement File Nos. 33-95292, 33-80527,
333-05575, 333-11597 and 333-22971.
ARTHUR ANDERSEN LLP
Denver, Colorado,
May 12, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOPANYING CONSOLIDATED BALANCE SHEET OF ECHOSTAR COMMUNICATIONS CORPORATION
AND SUBSIDIARIES AS OF MARCH 31, 1997 AND THE RELATED CONSOLIDATED STATEMENTS
OF OPERATIONS AND CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THOSE FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 30,452
<SECURITIES> 3,528
<RECEIVABLES> 32,816
<ALLOWANCES> (1,642)
<INVENTORY> 57,043
<CURRENT-ASSETS> 224,328
<PP&E> 724,873
<DEPRECIATION> (47,607)
<TOTAL-ASSETS> 1,155,990
<CURRENT-LIABILITIES> 236,642
<BONDS> 898,604
18,700
0
<COMMON> 416
<OTHER-SE> (8,640)
<TOTAL-LIABILITY-AND-EQUITY> 1,155,990
<SALES> 71,532<F1>
<TOTAL-REVENUES> 72,023
<CGS> 30,675<F2>
<TOTAL-COSTS> 116,619
<OTHER-EXPENSES> 18,251
<LOSS-PROVISION> 814
<INTEREST-EXPENSE> 19,846<F3>
<INCOME-PRETAX> (62,847)
<INCOME-TAX> (19)
<INCOME-CONTINUING> (62,866)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (62,866)
<EPS-PRIMARY> (1.54)
<EPS-DILUTED> (1.54)
<FN>
<F1>INCLUDES SALES OF PROGRAMMING.
<F2>INCLUDES THE COST OF PROVIDING PROGRAMMING.
<F3>NET OF AMOUNTS CAPITALIZED.
</FN>
</TABLE>
