<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEVADA 88-0336997
(State of Registrant's (I.R.S. Employer
Incorporation) Identification
Number)
5064
(Registrant's Standard Industrial Classification
Code Number)
</TABLE>
------------------------
DAVID K. MOSKOWITZ, ESQ.
90 INVERNESS CIRCLE EAST SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
ENGLEWOOD, COLORADO 80112 EchoStar Communications Corporation
(303) 799-8222 90 Inverness Circle East
(Address, Including Zip Code, and Englewood, Colorado 80112
Telephone Number, including Area Code, (303) 799-8222
of Registrant's Principal Executive (Name, Address, Including Zip Code,
Office) and
Telephone Number of Agent for Service)
WITH COPIES TO:
RAYMOND L. FRIEDLOB, ESQ. WILLIAM F. SCHWITTER, ESQ.
HERRICK K. LIDSTONE, JR., ESQ. Paul, Hastings, Janofsky & Walker LLP
Friedlob Sanderson Raskin Paulson & 399 Park Avenue
Tourtillot, LLC
1400 Glenarm Place, #300 New York, New York 10022-4697
Denver, Colorado 80202 (212) 318-6000
(303) 571-1400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED UNIT PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
12 1/8% Series B Senior Redeemable Exchangeable
Preferred Stock due 2004....................... 200,000+ $1,030* $206,000,000 $62,425
Total............................................ 200,000 $1,030* $206,000,000 $62,425
</TABLE>
* Estimated, being the amount of the liquidation preference and unpaid
dividends accrued through January 1, 1998.
+ Also includes shares issuable as dividends thereon and notes which may be
issued in exchange therefor.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM
NUMBER ITEM LOCATION IN PROSPECTUS
- --------- ---------------------------------------------------- ----------------------------------------------------
<S> <C> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of the Registration Statement and Outside
Front Cover of Page of Prospectus................. Facing Page; Cross-Reference Sheet; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Inside Front Cover Page of Prospectus and Outside
Back Cover Page of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information................................. Prospectus Summary; Summary Financial Data; Selected
Financial Data; Risk Factors
4. Terms of the Transaction............................ Prospectus Summary; The Exchange Offer; Description
of the Senior Preferred Stock; Certain Federal
Income Tax Consequences; Plan of Distribution
5. Pro Forma Financial Information..................... Not Applicable
6. Material Contracts with Company Being Acquired...... Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to Be Underwriters..... Not Applicable
8. Interest of Named Experts and Counsel............... Not Applicable
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.................... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants......... Not Applicable
11. Incorporation of Certain Information by Reference... Not Applicable
12. Information with Respect to S-2 or S-3 Registrants.. Not Applicable
13. Incorporation of Certain Information by Reference... Not Applicable
14. Information with Respect to Registrants Other Than
S-3 or S-2 Registrants............................ Available Information; Prospectus Summary; Selected
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Index to
Consolidated Financial Statements
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies........... Not Applicable
16. Information with Respect to S-2 or S-3 Companies.... Not Applicable
17. Information with Respect to Companies Other Than S-2
or S-3 Companies.................................. Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations
are to be Solicited............................... Not Applicable
19. Information if Proxies, Consents or Authorizations
are not to be Solicited in an Exchange Offer...... The Exchange Offer; Certain Relationships and
Related Transactions; Security Ownership of
Certain Beneficial Owners and Management
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION
OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 10, 1997
PROSPECTUS
ECHOSTAR COMMUNICATIONS CORPORATION
OFFER TO EXCHANGE SHARES OF ITS 12 1/8% SERIES B SENIOR REDEEMABLE EXCHANGEABLE
PREFERRED STOCK DUE 2004 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR
SHARES OF ITS 12 1/8% SERIES B SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK
DUE 2004.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., EASTERN TIME, ON , 1998,
UNLESS EXTENDED.
EchoStar Communications Corporation, a Nevada corporation (the "Issuer"),
hereby offers to exchange (the "Exchange Offer") up to $200,000,000 in aggregate
liquidation preference of its new 12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock due 2004 (the "Exchange Shares" or the "Series B
Preferred Stock") for up to $200,000,000 in aggregate liquidation preference of
its outstanding 12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock
due 2004 (the "Old Series B Shares") that were issued and sold in a transaction
exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act"). The Exchange Shares and the Old Series B Shares are
collectively referred to herein as the "Senior Preferred Stock."
The Exchange Shares will be issued pursuant to the same Certificate of
Designation as were the Old Series B Shares and, therefore, the terms of the
Exchange Shares will be identical to the terms of the Old Series B Shares for
which they may be exchanged pursuant to the Exchange Offer, except that the
Exchange Shares: (i) will be freely transferable by holders thereof (except as
provided below); and (ii) will not be entitled to certain registration rights
and certain liquidated damages which are applicable to the Old Series B Shares
under the Registration Rights Agreement (as defined). Consequently, each
Exchange Share will have a liquidation preference of $1,000.00 per share.
Dividends on the Exchange Shares will accrue from the date of original issuance
thereof at a rate of 12 1/8% per annum and will be payable quarterly in arrears,
commencing on January 1, 1998. The Issuer may, at its option, pay dividends in
cash or by issuing additional shares of Senior Preferred Stock having an
aggregate liquidation preference equal to the amount of such dividends.
The Senior Preferred Stock is subject to mandatory redemption on July 1,
2004. Upon the occurrence of a Change of Control (as defined) and subject to
certain other conditions, each holder of Senior Preferred Stock may require the
Issuer to repurchase such holder's Senior Preferred Stock at a purchase price of
101% of the liquidation preference thereof, plus accumulated and unpaid
dividends thereon to the date of repurchase. The Senior Preferred Stock will be
redeemable at the option of the Issuer, in whole or in part, on or after July 1,
2000 at the redemption prices set forth in the Certificate of Designation, plus
accumulated and unpaid dividends to the date of redemption.
The Issuer may, at its option, exchange all, but not less than all, of the
shares of Senior Preferred Stock then outstanding for the Issuer's 12 1/8%
Senior Exchange Notes due 2004 (including any such senior shares issued from
time to time in lieu of cash interest, the "Senior Exchange Notes"). The Senior
Exchange Notes will bear interest at a rate of 12 1/8% per annum, payable
semiannually in arrears on April 1 and October 1 of each year, commencing with
the first such date to occur after the date of exchange. Interest may, at the
option of the Issuer, be paid in cash or by issuing additional Senior Exchange
Notes in an aggregate principal amount equal to the amount of such interest. The
Senior Exchange Notes will be redeemable at the option of the Issuer, in whole
or in part, on or after July 1, 2000 at the redemption prices set forth herein,
plus accrued and unpaid interest to the date of redemption. Upon the occurrence
of a Change of Control and subject to certain other conditions, each holder of
Senior Exchange Notes may require the Issuer to repurchase such holder's Senior
Exchange Notes at a purchase price of 101% of the principal amount thereof, plus
accrued and unpaid interest thereon to the date of repurchase. The Senior
Exchange Notes, if issued, will rank PARI PASSU in right of payment with all
senior indebtedness of the Issuer.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
The Old Series B Shares were originally issued and sold on October 2, 1997
in a transaction not registered under the Securities Act, in reliance upon the
exemption provided in Section 4(2) of the Securities Act, and subsequent resales
were exempt from registration in reliance on Rule 144A promulgated under the
Securities Act (the "Old Series B Shares Offering"). Accordingly, the Old Series
B Shares may not be reoffered, resold or otherwise pledged, hypothecated or
transferred in the United States unless so registered or unless an applicable
exemption from the registration requirements of the Securities Act is available.
Based upon its view of interpretations provided to third parties by the Staff
(the "Staff") of the Securities and Exchange Commission (the "SEC" or the
"Commission"), the Issuer believes that the Exchange Shares issued pursuant to
the Exchange Offer in exchange for the Old Series B Shares may be offered for
resale, resold and otherwise transferred by holders thereof (other than any
holder which is: (i) an "affiliate" of the Issuer within the meaning of Rule 405
under the Securities Act (an "Affiliate"); (ii) a broker-dealer who acquired Old
Series B Shares directly from the Issuer; (iii) a broker-dealer who acquired Old
Series B Shares as a result of market making or other trading activities),
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange Shares are acquired in the
ordinary course of such holders' business and such holders are not engaged in,
and do not intend to engage in, and have no arrangement or understanding with
any person to participate in, a distribution of such Exchange Shares.
In order to participate in the Exchange Offer, each entity must certify to
the Company in the Letter of Transmittal that it is not an Affiliate of the
Issuer, that it is not engaged in, and does not intend to engage in, a
distribution of the Exchange Shares, and that the Exchange Shares are being
acquired in the ordinary course of business. Each broker-dealer that receives
Exchange Shares for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
Exchange Shares. The Letter of Transmittal that is filed as an exhibit to the
Registration Statement of which this Prospectus is a part (the "Letter of
Transmittal") states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. Broker-dealers who acquired Old Series B Shares
as a result of market making or other trading activities may use this
Prospectus, as supplemented or amended, in connection with resales of the
Exchange Shares. The Issuer has agreed that, for a period of 180 days after the
Registration Statement of which this Prospectus is a part is declared effective
by the Commission, it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. Any holder who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Shares and any other holder that cannot rely upon interpretations must
comply with the registration and prospectus requirements of the Securities Act
in connection with a secondary resale transaction.
Old Series B Shares initially purchased by qualified institutional buyers
were initially represented by a Global Note in registered form, deposited with,
or on behalf of, The Depository Trust Company ("DTC"), and registered in the
name of Cede & Co., as nominee of DTC. The Exchange Shares exchanged for Old
Series B Shares represented by the global Note will be represented by one or
more Global Exchange Shares in registered form, registered in the name of the
nominee of the DTC. See "Description of Exchange Shares." Exchange Shares issued
to non-qualified institutional buyers in exchange for Old Series B Shares held
by such investors will be issued only in certificated, fully registered,
definitive form. Except as described herein, Exchange Shares in definitive
certificated form will not be issued in exchange for the Global Note or
interests therein.
The Old Series B Shares and the Exchange Shares constitute new issues of
securities with no established public trading market. If a trading market does
not develop or is not maintained, holders of the Exchange Shares may experience
difficulty in reselling the Exchange Shares or may be unable to sell them at
all. If a market for the Exchange Shares develops, any such market may be
discontinued at any time and the Exchange Shares could trade at prices that may
be lower than the initial market values thereof, depending on many factors,
including prevailing interest rates, the markets for similar services and the
financial performance of the Issuer. Although there is currently no market for
the Exchange Shares, the Initial Purchasers have advised the Issuer that they
will make a market in the Exchange Shares. However, they are not obligated to do
so, and any such market making with respect to the Exchange Shares may be
discontinued at any time without notice. In addition, such market making
activity will be subject to the limits imposed by the Securities Act and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and may be
limited during the Exchange Offer and the pendency of
<PAGE>
any applicable shelf registration statement. Accordingly, there can be no
assurance as to the development or liquidity of any market for the Exchange
Shares. The Issuer does not intend to apply for listing of any of the Exchange
Shares on any securities exchange or for quotation through the Nasdaq National
Market or any other securities quotation service.
Any Old Series B Shares not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that Old Series B Shares are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered and
tendered, but unaccepted, Old Series B Shares are likely to be adversely
affected. Following consummation of the Exchange Offer, the holders of any
remaining Old Series B Shares will continue to be subject to the existing
restrictions on transfer thereof and the Issuer will have no further obligation
to such holders to provide for the registration under the Securities Act of the
Old Series B Shares except under certain very limited circumstances. See
"Description of Exchange Shares--Old Series B Shares' Registration Rights;
Liquidated Damages." No assurance can be given as to the liquidity of the
trading market for either the Old Series B Shares or the Exchange Shares.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Series B Shares being tendered or accepted for exchange. The
Exchange Offer will expire at 5:00 p.m., Eastern time, on , 1998, unless
extended. The date of acceptance for exchange (the "Exchange Date") will be the
first business day following the Expiration Date, upon surrender of the Old
Series B Shares. Old Series B Shares tendered pursuant to the Exchange Offer may
be withdrawn at any time prior to the Expiration Date; otherwise such tenders
are irrevocable.
HOLDERS OF OLD SERIES B SHARES SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH
IN "RISK FACTORS" COMMENCING ON PAGE 15 OF THIS PROSPECTUS PRIOR TO MAKING A
DECISION WITH RESPECT TO THE EXCHANGE OFFER.
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
NOTICE TO INVESTORS
THIS PROSPECTUS (THE "PROSPECTUS") DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SHARES BY ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFERING OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
EchoStar is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. The reports, proxy statements and other
information filed by EchoStar may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W. Washington D.C. 20549, and at the Commission's regional offices
located at 7 World Trade Center, New York, New York 10048, and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. Class A Common Stock is
traded on the Nasdaq National Market and reports and other information herein
and therein concerning EchoStar can also be inspected at the Nasdaq National
Market Exchange, 1735 K Street, N.W., Washington, D.C. 20546. Such material may
also be accessed electronically by means of the Commission's home page on the
Internet at HTTP://WWW.SEC.GOV.
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS
RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY ECHOSTAR OR BY OFFICERS,
DIRECTORS OR EMPLOYEES OF ECHOSTAR ACTING ON ITS BEHALF, THAT ARE NOT STATEMENTS
OF HISTORICAL FACT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT
COULD CAUSE THE ACTUAL RESULTS OF ECHOSTAR TO BE MATERIALLY DIFFERENT FROM
HISTORICAL RESULTS OR FROM ANY FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY ARE THE FOLLOWING: THE UNAVAILABILITY OF SUFFICIENT CAPITAL ON
SATISFACTORY TERMS TO FINANCE ECHOSTAR'S BUSINESS PLAN; INCREASED COMPETITION
FROM CABLE, DIRECT BROADCAST SATELLITE ("DBS"), OTHER SATELLITE SYSTEM OPERATORS
AND OTHER PROVIDERS OF SUBSCRIPTION TELEVISION SERVICES; CONTINUED MARKET
ACCEPTANCE FOR DBS IN ITS CURRENT BROADCASTING FORMAT AND PRICING STRUCTURE, THE
INTRODUCTION OF NEW TECHNOLOGIES AND COMPETITORS INTO THE SUBSCRIPTION
TELEVISION BUSINESS; INCREASED SUBSCRIBER ACQUISITION COSTS AND SUBSCRIBER
PROMOTION SUBSIDIES; THE INABILITY OF ECHOSTAR TO CONTINUE TO HOLD AND TO OBTAIN
ADDITIONAL NECESSARY SHAREHOLDER AND BONDHOLDER APPROVAL OF ANY STRATEGIC
TRANSACTIONS; THE INABILITY OF ECHOSTAR TO OBTAIN AND HOLD NECESSARY
AUTHORIZATIONS FROM THE FEDERAL COMMUNICATION COMMISSION ("FCC"); THE OUTCOME OF
ANY LITIGATION IN WHICH ECHOSTAR MAY BE INVOLVED; GENERAL BUSINESS AND ECONOMIC
CONDITIONS; THOSE FACTORS DESCRIBED HEREIN UNDER THE CAPTION "RISK FACTORS"; AND
OTHER RISK FACTORS DESCRIBED FROM TIME TO TIME IN ECHOSTAR'S REPORTS FILED WITH
THE SEC. IN ADDITION TO STATEMENTS THAT EXPLICITLY DESCRIBE SUCH RISKS AND
UNCERTAINTIES, READERS ARE URGED TO CONSIDER STATEMENTS THAT INCLUDE THE TERMS
"BELIEVES," "BELIEF," "EXPECTS," "PLANS," "ANTICIPATES," "INTENDS" OR THE LIKE
TO BE UNCERTAIN AND FORWARD-LOOKING. ALL CAUTIONARY STATEMENTS MADE HEREIN
SHOULD BE READ AS BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS WHEREVER
THEY APPEAR. IN THIS CONNECTION, INVESTORS SHOULD CONSIDER THE RISKS DESCRIBED
HEREIN.
<PAGE>
TABLE OF CONTENTS
ECHOSTAR COMMUNICATIONS CORPORATION
FORM S-4 REGISTRATION STATEMENT (SERIES B)
INFORMATION CONTAINED IN PROSPECTUS
<TABLE>
<S> <C>
Prospectus Summary.................................................................... 4
The Company......................................................................... 4
Recent Developments................................................................. 6
The Exchange Offer.................................................................. 7
Terms of the Senior Preferred Stock................................................. 8
Summary Financial Data.............................................................. 12
The EchoStar Organization........................................................... 14
Risk Factors.......................................................................... 15
Use of Proceeds....................................................................... 35
The Exchange Offer.................................................................... 35
Purpose of the Exchange Offer....................................................... 35
Terms of the Exchange............................................................... 36
Expiration Date; Extensions; Termination; Amendments................................ 37
How to Tender....................................................................... 37
General Procedures................................................................ 37
Book Entry Transfer............................................................... 38
Guaranteed Delivery Procedures.................................................... 39
Terms and Conditions of the Letter of Transmittal................................... 39
Withdrawal Rights................................................................... 40
Acceptance of Old Series B Shares for Exchange; Delivery of Exchange Shares......... 40
Condition to the Exchange Offer..................................................... 41
Exchange Agent...................................................................... 42
Dissenter and Appraisal Rights...................................................... 42
Federal Income Tax Consequences..................................................... 42
Other............................................................................... 42
Capitalization........................................................................ 44
Selected Financial Data............................................................... 45
Management's Discussion and Analysis of Financial Condition and Results of
Operation........................................................................... 47
Business.............................................................................. 60
Management............................................................................ 95
Certain Relationships and Related Transactions........................................ 100
Security Ownership of Certain Beneficial Owners and Management........................ 101
Description of Certain Indebtedness................................................... 103
Description of Capital Stock.......................................................... 106
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
Description of Senior Preferred Stock................................................. 112
Dividends........................................................................... 112
Ranking............................................................................. 113
Redemption of Senior Preferred Stock................................................ 114
Optional Redemption............................................................... 114
Mandatory Redemption.............................................................. 114
Change of Control................................................................... 115
Liquidation Preference.............................................................. 115
Voting Rights....................................................................... 116
Certain Covenants................................................................... 117
No Personal Liability of Director, Officer, Employees, Incorporators and
Shareholders...................................................................... 125
Legal Defeasance and Covenant Defeasance............................................ 125
Amendment, Supplement and Waiver.................................................... 126
Book-Entry; Delivery and Form....................................................... 126
Certificated Senior Preferred Stock................................................. 127
Certain Definitions................................................................. 128
Exchange............................................................................ 136
Description of Senior Exchange Notes.................................................. 139
General............................................................................. 139
Principal, Maturity and Interest.................................................... 139
Optional Redemption................................................................. 139
Selection and Notice................................................................ 140
Offer to Purchase Upon Change of Control or Orbital Event........................... 140
Significant Transactions............................................................ 141
Certain Covenants................................................................... 142
Events of Default and Remedies...................................................... 144
No Personal Liability of Directors, Officers, Employees, Incorporators and
Stockholders...................................................................... 146
Legal Defeasance and Covenant Defeasance............................................ 147
Amendment, Supplement and Waiver Concerning the Trustee............................. 148
Certain Federal Income Tax Considerations............................................. 150
Distributions on Senior Preferred Stock............................................. 150
Redemption Premium.................................................................. 152
Redemption, Sale, or Exchange of Senior Preferred Stock............................. 153
Interest and OID on the Senior Exchange Notes....................................... 154
Market Discount on Senior Exchange Notes............................................ 157
Acquisition Premium; Amortizable Bond Premiums...................................... 157
Redemption, Sale, or Exchange of Senior Exchange Notes.............................. 157
Applicable High Yield Discount Obligations.......................................... 158
Information Reporting and Backup Withholding........................................ 158
Plan of Distribution.................................................................. 160
Notice to Investors................................................................... 162
Legal Matters......................................................................... 164
Independent Accountants............................................................... 165
Index to Financial Statements......................................................... F-1
</TABLE>
2
<PAGE>
[INTENTIONALLY LEFT BLANK]
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND THE SHARES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS,
UNLESS THE CONTEXT OTHERWISE REQUIRES, "ECHOSTAR," THE "ISSUER" OR THE "COMPANY"
REFERS TO ECHOSTAR COMMUNICATIONS CORPORATION, A NEVADA CORPORATION, THE CLASS A
COMMON STOCK OF WHICH IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"DISH" OR, IF THE CONTEXT REQUIRES, TO ECHOSTAR TOGETHER WITH ITS SUBSIDIARIES.
THE COMPANY
EchoStar is a leading provider of direct broadcast satellite programming
services in the United States. The Company commenced its DISH Network-SM- DBS
service (the "DISH Network") in March 1996, after the successful launch of its
first satellite ("EchoStar I") in December 1995. The Company launched its second
satellite ("EchoStar II") in September 1996, and launched its third satellite
("EchoStar III") in October 1997. Since December 31, 1996, EchoStar has
increased its DISH Network subscriber base from 350,000 to approximately 895,000
subscribers as of October 31, 1997. During the third quarter of 1997, EchoStar
believes that it captured approximately 40% of all new DBS satellite subscribers
in the U.S. Average monthly programming revenue during 1997 has been
approximately $39 per subscriber.
The introduction of DBS receivers is widely regarded as the most successful
introduction of a consumer electronics product in U.S. history, surpassing the
rollout of color televisions, VCRs and compact disc players. As of October 31,
1997, approximately 5.8 million U.S. households subscribed to DBS and other
digital direct-to-home ("DTH") satellite services. Industry sources project that
the DTH market could grow to as many as 19 million subscribers by the year 2002.
EchoStar believes that there is significant unsatisfied demand for
high-quality, reasonably-priced television programming. Of the approximately 96
million television households in the U.S., it is estimated that more than 60
million subscribers pay an average of $34 per month for multichannel programming
services. EchoStar's primary target market for the DISH Network includes cable
subscribers in urban and suburban areas who are dissatisfied with the quality or
price of their cable programming, or who want niche programming services not
available from most cable operators. Other target markets for the DISH Network
include the approximately 7 million households not passed by cable television
systems and the approximately 21 million households currently passed by cable
television systems with relatively limited channel capacity.
EchoStar has rights to more U.S. licensed DBS frequencies than any of its
competitors, and currently controls 90 frequencies, including 21 frequencies at
an orbital slot capable of providing nationwide DBS service. The Company
currently provides approximately 120 channels of digital television programming
and over 30 channels of CD quality audio programming to the entire continental
U.S. DISH Network subscribers can choose from a variety of programming packages
that EchoStar believes have a better price-to-value relationship than packages
currently offered by most pay television providers.
DISH Network programming is available to any subscriber who purchases or
leases an 18-inch satellite dish, an EchoStar digital satellite receiver, a
user-friendly remote control and related components (collectively, an "EchoStar
Receiver System"). EchoStar Receiver Systems are fully compatible with MPEG-2,
the world digital standard for computers and consumer electronics products, and
provide image and sound quality superior to current analog cable or wireless
cable service. EchoStar Receiver Systems are designed and engineered by
EchoStar's wholly-owned subsidiary, Houston Tracker Systems, Inc. ("HTS").
Satellite receivers designed by HTS have won numerous awards from dealers,
retailers and industry trade publications.
4
<PAGE>
The Company's primary objective is to become a leading provider of
subscription television services in the U.S. To achieve this objective, the
Company will seek to:
EXPAND PROGRAMMING OFFERINGS. The Company launched EchoStar III on
October 5, 1997, and expects to launch its fourth satellite ("EchoStar IV")
during the first quarter of 1998. EchoStar III, which will serve the eastern
half of the U.S. from 61.5 DEG. West Longitude ("WL"), and EchoStar IV,
which is expected to serve the western half of the U.S. from 148 DEG. WL,
should enable the Company to retransmit local broadcast signals in 20 of the
largest U.S. television markets (assuming receipt of all required
retransmission consents and copyright licenses and/or congressional or
regulatory actions necessary to extend and clarify the scope of the
statutory compulsory license to cover local satellite retransmission of
network-affiliated station signals) and to provide subscribers with
additional sports, foreign language, cultural, business, educational and
other niche programming. EchoStar III and EchoStar IV will also provide the
Company the capacity to offer subscribers high definition television
("HDTV") and popular Internet and other computer data at high transmission
speeds. By expanding its programming services, EchoStar believes that it may
be able to differentiate itself from other providers of subscription
television services, which may not be able to cost-effectively, or do not
have the capacity to, offer similar services.
CONTINUE TO EXPAND DISTRIBUTION CHANNELS. The Company continues to
strengthen its sales and distribution channels, which include consumer
retail outlets, consumer electronics retailers and direct sales
representatives. For example, the Company recently announced an agreement
with JVC Company of America ("JVC"), under which JVC will purchase EchoStar
Receiver Systems for distribution through existing JVC channels under the
JVC and DISH Network brand names. All consumers who purchase JVC branded
satellite receiver systems will subscribe to DISH Network programming. In
addition, on September 15, 1997, EchoStar announced that Sears, Roebuck and
Co. ("Sears") will begin to carry JVC branded EchoStar Receiver Systems.
Beginning in October 1997, JVC branded EchoStar Receiver Systems are now
available in more than 800 full-line, mall-based Sears stores.
PROVIDE ATTRACTIVELY PRICED PROGRAMMING AND SYSTEMS. The Company's entry
level America's Top 40 programming package is priced at $19.99 per month, as
compared to, on average, over $30 per month for comparable cable service.
Consumers can add six premium movie channels for an additional $10 per
month, the same amount cable subscribers typically pay for one movie
channel. On June 1, 1997, the Company announced a new marketing program,
offering subscribers a standard EchoStar Receiver System for $199 (as
compared to an average retail price in March 1996 of $499), without
requiring an extended subscription commitment or significant up front
programming payments.
EMPHASIZE ONE-STOP SHOPPING. The Company believes that providing
outstanding service, convenience and value are essential to developing
long-term customer relationships. The Company offers consumers a "one-stop
shopping" service which includes programming, installation, maintenance,
reliable customer service and satellite reception equipment. To enhance
responsiveness to its customers, the Company has established a single
telephone number (1-800-333-DISH), which customers can call 24 hours a day,
seven days a week to order EchoStar Receiver Systems, activate programming
services, schedule installation, and obtain technical support. The Company
believes it is the only DBS provider to offer a comprehensive single-point
customer service function.
The principal offices of EchoStar are located at 90 Inverness Circle East,
Englewood, Colorado 80112-5300, and its telephone number is (303) 799-8222.
5
<PAGE>
RECENT DEVELOPMENTS
LAUNCH OF ECHOSTAR III
The Company launched EchoStar III on October 5, 1997, from Cape Canaveral
Air Station, Florida. EchoStar III, which will serve the eastern half of the
U.S. from 61.5 DEG. WL, should enable the Company to retransmit local broadcast
signals in certain U.S. television markets (assuming receipt of all required
retransmission consents and copyright licenses and/or congressional or
regulatory actions necessary to extend and clarify the scope of the statutory
compulsory license to cover local satellite retransmission of network-affiliated
station signals) and to provide subscribers with additional sports, foreign
language, cultural, business, educational and other niche programming. EchoStar
III will also provide the Company the capacity to offer subscribers HDTV and
popular Internet and other computer data at high transmission speeds. Although
all tests to date have been successful, EchoStar III has not yet achieved
geostationary orbit. The ultimate success of the launch of EchoStar III will not
be determinable until up to 60 days after its October 5 launch date.
SEARS TO CARRY DISH NETWORK PRODUCTS
On September 15, 1997, EchoStar announced that Sears will begin to carry JVC
branded EchoStar Receiver Systems. Beginning in October 1997, JVC branded
EchoStar Receiver Systems are now available in more than 800 full-line,
mall-based Sears stores, creating a nationwide retail distribution channel for
such DISH compatible systems. EchoStar believes, but can give no assurance, that
this additional distribution channel will further enhance EchoStar's ability to
attract subscribers to the DISH Network.
SERIES C PREFERRED STOCK AND CLASS A COMMON STOCK OFFERINGS
On November 4, 1997, EchoStar consummated offerings (collectively the
"Offerings") of its 6 3/4% Series C Cumulative Convertible Preferred Stock (the
"Series C Offering") and shares of its Class A Common Stock (the "Class A
Offering"). The Series C Offering consisted of 2,300,000 shares (including the
overallotment option which the underwriters exercised on November 10, 1997) of
6 3/4% Series C Cumulative Convertible Preferred Stock (the "Series C Preferred
Stock") and resulted in net proceeds to the Company of approximately $96.5
million. The Class A Offering consisted of 3,100,000 shares of Class A Common
Stock and resulted in net proceeds to the Company of approximately $57.7
million. The Offerings were consummated in connection with a registration
statement and a public offering of the securities. The Series C Offering was
underwritten by Donaldson Lufkin & Jenrette Securities Corporation and Lehman
Brothers Inc. The Class A Offering was underwritten by a syndicate of
underwriters of whom Donaldson Lufkin & Jenrette Securities Corporation, BT
Alex. Brown Incorporated, and Unterberg Harris were the representatives.
EchoStar presently intends to use the net proceeds of the Series C Offering and
the Class A Offering to fund subscriber acquisition and marketing expenses, and
for other general corporate purposes.
6
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer................ The Issuer is offering to exchange (the "Exchange
Offer") up to $200,000,000 aggregate liquidation value
of Exchange Shares for up to $200,000,000 aggregate
liquidation value of its outstanding Old Series B Shares
that were issued and sold in a transaction exempt from
registration under the Securities Act. The form and
terms of the Exchange Shares will be issued pursuant to
the same Certificate of Designation as the Old Series B
Shares and therefore will contain the same preferences
as the Old Series B Shares for which they may be
exchanged pursuant to the Exchange Offer, except that
the Exchange Shares are freely transferable by holders
thereof except as provided herein (see "The Exchange
Offer--Terms of the Exchange" and "--Terms and
Conditions of the Letter of Transmittal") and are not
entitled to certain registration rights and certain
liquidated damages which are applicable to the Old
Series B Shares under a registration rights agreement
dated as of October 2, 1997 (the "Registration Rights
Agreement") among the Issuer and Donaldson, Lufkin &
Jenrette Securities Corporation and Lehman Brothers
Inc., as initial purchasers (collectively, the "Initial
Purchasers"). See "Description of Exchange Shares."
Exchange Shares issued pursuant to the Exchange Offer in
exchange for the Old Series B Shares may be offered for
resale, resold and otherwise transferred by holders
thereof (other than any holder which is: (i) an
Affiliate of the Issuer; (ii) a broker dealer who
acquired Old Series B Shares directly from the Issuer;
or (iii) a broker-dealer who acquired Old Series B
Shares as a result of market-making or other trading
activities), without compliance with the registration
and prospectus delivery provisions of the Securities
Act, provided that such Exchange Shares are acquired in
the ordinary course of such holders' business and such
holders are not engaged in, do not intend to engage in,
and have no arrangement or understanding with any person
to participate in, a distribution of such Exchange
Shares.
Minimum Condition................. The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Series B Shares being
tendered or accepted for exchange.
Expiration Date................... The Exchange Offer will expire at 5:00 p.m., Eastern
time, on , 1998, unless extended (the
"Expiration Date").
Exchange Date..................... The first date of acceptance for exchange of the Old
Series B Shares will be the first business day following
the Expiration Date.
Conditions to the Exchange
Offer........................... The obligation of the Issuer to consummate the Exchange
Offer is subject to certain conditions. See "The
Exchange Offer." The Issuer reserves the right to
terminate or amend the Exchange Offer at any time prior
to the Expiration Date upon the occurrence of any of
those conditions.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Withdrawal Rights................. Tenders of Old Series B Shares pursuant to the Exchange
Offer may be withdrawn at any time prior to the
Expiration Date. Any Old Series B Shares not accepted
for any reason will be returned without expense to the
tendering holders thereof as promptly as practicable
after the expiration or termination of the Exchange
Offer.
Procedures for Tendering Old
Series B Shares................. See "The Exchange Offer."
Dissenter and Appraisal Rights.... Holders of Old Series B Shares will not have dissenters'
rights or appraisal rights in connection with the
Exchange Offer.
Federal Income Tax Consequences... The exchange of Old Series B Shares for Exchange Shares
by tendering holders will not be a taxable exchange for
federal income tax purposes, and such holders should not
recognize any taxable gain or loss or any interest
income as a result of such exchange. See "Certain
Federal Income Tax Considerations."
Use of Proceeds................... There will be no cash proceeds to the Issuer from the
exchange pursuant to the Exchange Offer.
Effect on Holders of Old Series B
Shares.......................... As a result of the making of this Exchange Offer, and
upon acceptance for exchange of all validly tendered Old
Series B Shares pursuant to the terms of this Exchange
Offer, the Issuer will have fulfilled obligations
contained in the terms of the Old Series B Shares and
the Registration Rights Agreement, and, accordingly, the
holders of the Old Series B Shares will have no further
registration or other rights under the Registration
Rights Agreement, except under certain limited
circumstances. See "Description of Exchange Shares."
Holders of the Old Series B Shares who do not tender
their Old Series B Shares in the Exchange Offer will
continue to hold such Old Series B Shares and will be
entitled to all the rights and limitations applicable
thereto. All untendered, and tendered but unaccepted,
Old Series B Shares will continue to be subject to the
restrictions on transfer provided for on the Old Series
B Shares. To the extent that Old Series B Shares are
tendered and accepted in the Exchange Offer, the trading
market, if any, for the Old Series B Shares not so
tendered is likely to be adversely affected. See "Risk
Factors--Consequences of Failure to Exchange Old Series
B Shares."
TERMS OF THE SENIOR PREFERRED STOCK
Senior Preferred Stock............ The term "Senior Preferred Stock" includes both the Old
Series B Shares and the Exchange Shares.
Dividends......................... Dividends are cumulative at 12 1/8% per annum, and are
payable quarterly in cash or, at the sole discretion of
the Issuer, in additional shares of Senior Preferred
Stock, on each January 1, April 1, July 1 and October 1
of each year, commencing
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
January 1, 1998. Dividends on the Senior Preferred Stock
will be cumulative from the date of issuance thereof.
See "Description of Senior Preferred Stock."
Liquidation Preference............ $1,000 per share, plus accumulated and unpaid dividends.
See "Description of Senior Preferred Stock."
Optional Redemption............... On or after July 1, 2000, the Senior Preferred Stock is
redeemable in cash, at the option of the Issuer, in
whole or in part, at a price equal to the redemption
price (expressed as a percentage of the liquidation
preference thereof) set forth below, together with
accumulated and unpaid dividends thereon to the
applicable redemption date (subject to the Issuer's
right to pay accumulated and unpaid dividends in
additional shares of Senior Preferred Stock under
limited circumstances), if redeemed during the 12-month
period beginning on July 1 of the year indicated below:
</TABLE>
<TABLE>
<CAPTION>
YEAR PERCENTAGE
------------------------------ ------------
<S> <C> <C>
2000.......................... 106.0625%
2001.......................... 104.0417%
2002.......................... 102.0208%
Thereafter.................... 100.0000%
</TABLE>
<TABLE>
<S> <C>
At any time prior to July 1, 2000, the Issuer may redeem
shares of Senior Preferred Stock at a redemption price,
payable in cash, equal to 112.125% of the liquidation
preference thereof, plus an amount equal to a prorated
dividend for the period from the dividend payment date
immediately prior to the redemption date (subject to the
Issuer's right to pay accumulated and unpaid dividends
in additional shares of Senior Preferred Stock under
limited circumstances), with the net proceeds of one
public or private sale of equity interests of the Issuer
or any of its subsidiaries, provided that: (a) Senior
Preferred Stock representing at least two-thirds in
aggregate liquidation preference of all Senior Preferred
Stock originally issued remains outstanding immediately
after the occurrence of such redemption; and (b) such
redemption occurs within 120 days of the date of the
closing of any such sale. See "Description of Senior
Preferred Stock."
Mandatory Redemption.............. The Senior Preferred Stock will be subject to mandatory
redemption in whole on July 1, 2004 at a price, payable
in cash, equal to the liquidation preference thereof,
plus all accumulated and unpaid dividends to the date of
redemption. See "Description of Senior Preferred Stock."
Change of Control................. Upon the occurrence of a Change of Control, the Issuer
will be required to make an offer to each holder of
Senior Preferred Stock to repurchase all or any part of
such holder's Senior Preferred Stock at a cash purchase
price equal to 101% of the liquidation preference
thereof, plus accumulated and unpaid dividends to the
date of repurchase; provided that any obligation to make
such an offer shall not become effective until such time
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
as the 1997 Notes and the1996 Notes (as defined) have
been paid in full or have otherwise matured. See
"Description of Senior Preferred Stock."
Ranking........................... The Senior Preferred Stock will rank: (i) senior to all
common stock of the Issuer and to each series of
preferred stock existing on the date of issues of the
Old Series B Shares, and to each other class of capital
stock or series of preferred stock issued by the Issuer,
which is established after the date of such issuance,
the terms of which do not expressly provide that it
ranks senior to or on a parity with the Senior Preferred
Stock; (ii) subject to certain conditions, on a parity
with any class of capital stock or series of preferred
stock issued by the Issuer, which is established after
the date of issuance of the Old Series B Shares, the
terms of which expressly provide that such class or
series will rank on a parity with the Senior Preferred
Stock; and (iii) subject to certain conditions, junior
to each class of capital stock or series of preferred
stock issued by the Issuer, which is established after
the date of issuance of the Old Series B Shares, the
terms of which expressly provide that such class or
series will rank senior to the Senior Preferred Stock.
See "Description of Senior Preferred Stock."
Voting Rights..................... Holders of the Senior Preferred Stock will have no
voting rights with respect to general corporate matters
except as provided by law or as set forth in the
Certificate of Designation. In the event that dividends
on the Senior Preferred Stock are in arrears and unpaid
for four consecutive quarterly periods or six quarterly
periods (whether or not consecutive) or upon certain
other events, then, in either such case, the number of
directors constituting the Board of Directors will be
adjusted to permit the holders of the majority of the
then outstanding Senior Preferred Stock, voting
separately as a class, to elect two directors, and the
approval of holders of a majority of the outstanding
shares of Senior Preferred Stock, voting as a separate
class, will be required for any merger, consolidation or
sale of substantially all of the assets of the Issuer,
except as permitted pursuant to the covenant entitled
"Merger or Consolidation." See "Description of Senior
Preferred Stock."
Certain Other Covenants........... The Certificate of Designation will, among other things,
restrict the ability of the Issuer and certain of its
subsidiaries to (i) pay dividends with the proceeds from
this Offering, (ii) pay cash dividends on any Junior or
Parity Securities and (iii) incur indebtedness or pledge
the stock of certain subsidiaries as collateral. The
Certificate of Designation will also restrict the
ability of EchoStar DBS Corporation ("DBS Corp") (a
wholly owned subsidiary of the Issuer) and its
subsidiaries to (i) make restricted payments, (ii) incur
certain indebtedness or issue disqualified stock or
preferred equity interests, (iii) create payment
restrictions affecting subsidiaries, (iv) engage in
transactions with affiliates or (v) engage in certain
asset sales. A
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
majority of the covenants contained in the Certificate
of Designation and Exchange Indenture (as defined) are
applicable solely to DBS Corp and its subsidiaries and
do not impose restrictions or limitations on the Issuer
or any of the Issuer's subsidiaries which are not also
subsidiaries of DBS Corp. See "Description of Senior
Preferred Stock" and "Risk Factors-- Applicability of
Certain Covenants; Availability of Certain Remedies."
Transfer Restrictions............. The Old Series B Shares have not been registered under
the Securities Act and is subject to certain
restrictions on transfer. See "Risk Factors--Absence of
Public Market; Restrictions on Transfers."
Book-Entry; Delivery and Form..... Senior Preferred Stock sold in reliance on Rule 144A
will be represented by one or more permanent global
certificates in definitive, fully registered form
deposited with a custodian for, and registered in the
name of a nominee of, the Depository Trust Company
("DTC"). See "Description of Senior Preferred Stock."
</TABLE>
11
<PAGE>
SUMMARY FINANCIAL DATA
The following summary financial data and the selected financial data
presented elsewhere in this Prospectus for the five years ended December 31,
1996 are derived from the Consolidated Financial Statements of EchoStar, audited
by Arthur Andersen LLP, independent public accountants. The following summary
financial data with respect to the six months ended June 30, 1996 and 1997 are
unaudited; however, in the opinion of management, such data reflect all
adjustments (consisting only of normal recurring adjustments) necessary to
fairly present the data for such interim periods. Operating results for interim
periods are not necessarily indicative of the results that may be expected for a
full year. The data set forth in this table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," EchoStar's Consolidated Financial Statements and the Notes thereto,
and other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1992(1) 1993(1) 1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA, RATIOS, SUBSCRIBERS AND SATELLITE
RECEIVERS SOLD)
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................................... $ 165,088 $ 220,941 $ 190,983 $ 163,890 $ 211,411 $ 114,991 $ 172,845
Operating income (loss)......................... 11,286 18,204 13,216 (8,027) (109,345) (22,686) (87,617)
Net income (loss)............................... 7,529 12,272 90 (11,486) (100,986) (29,775) (126,655)
Net income (loss) attributable to common
shares........................................ $ 7,529 $ 12,272 $ (849) $ (12,690) $(102,190) $ (30,377) $(127,257)
Weighted-average common shares outstanding...... 32,221 32,221 32,442 35,562 40,548 40,404 41,265
Net income (loss) per common and common-
equivalent share.............................. $ 0.23 $ 0.38 $ (0.03) $ (0.36) $ (2.52) $ (0.75) $ (3.08)
OTHER DATA:
EBITDA(2)....................................... $ 12,329 $ 19,881 $ 15,459 $ (4,913) $ (65,931) $ (12,930) $ (842)
Ratio of earnings to combined fixed charges and
preferred stock dividends(3).................. 15.0x 18.0x -- -- -- -- --
Deficiency of earnings to combined fixed charges
and preferred stock dividends (3)............. -- -- $ (6,145) $ (44,198) $(188,701) $ (61,657) $(143,845)
DBS subscribers (end of period)................. -- -- -- -- 350,000 70,000 590,000
Satellite receivers sold (in units):
Domestic...................................... 116,000 132,000 114,000 131,000 518,000 155,000 348,000
International................................. 85,000 203,000 289,000 331,000 239,000 126,000 91,000
--------- --------- --------- --------- --------- --------- ---------
Total....................................... 201,000 335,000 403,000 462,000 757,000 281,000 439,000
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997 (UNAUDITED)
---------------------------------------------------------------
AS ADJUSTED AS ADJUSTED
FOR THE FOR THE AS ADJUSTED
CLASS A SERIES C FOR THE
ACTUAL PRO FORMA(4) OFFERING OFFERING(5) OFFERINGS(5)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
investment securities(6)................... $ 187,804 $ 380,804 $ 438,536 $ 477,254 $ 534,986
Total assets................................. 1,534,480 1,727,480 1,785,212 1,823,930 1,881,662
Total long-term obligations (less current
portion)................................... 1,311,902 1,311,902 1,311,902 1,311,902 1,311,902
Senior Preferred Stock(7).................... -- 193,000 193,000 193,000 193,000
Series C Preferred Stock..................... -- -- -- 100,400 100,400
Total stockholders' equity (deficit)......... (52,868) (52,868) 4,864 43,582 101,314
</TABLE>
12
<PAGE>
SUMMARY SATELLITE DATA
<TABLE>
<CAPTION>
ECHOSTAR I ECHOSTAR II ECHOSTAR III ECHOSTAR IV
<S> <C> <C> <C> <C>
Expected launch date....... Launched Launched Launched 1st Quarter 1998
Orbital slot............... 119 DEG. WL 119 DEG. WL 61.5 DEG. WL 148 DEG. WL (8)
Transponders............... 16 @ 24 MHz 16 @ 24 MHz 16/32 @ 24 MHz(9) 16/32 @ 24 MHz(9)
Approximate channel 100 channels 100 channels 100/200 channels 100/200 channels
capacity(10).............
Output power............... 130 Watts 130 Watts 240/120 Watts 240/120 Watts
Expected end of commercial 2011 2011 2012 2013
life(11).................
Coverage area.............. Continental U.S. and certain Eastern and Western and Central U.S.
Regions of Canada and Mexico Central U.S. Alaska and Hawaii
</TABLE>
- ------------------------
(1) Certain of EchoStar's subsidiaries operated under Subchapter S of the
Internal Revenue Code of 1986, as amended (the "Code"), and comparable
provisions of applicable state income tax laws, until December 31, 1993. The
net income for 1992 and 1993 presented above is net of pro forma income
taxes of $3,304 and $7,846, respectively, determined as if EchoStar had been
subject to corporate Federal and state income taxes for those years.
Earnings per share has been calculated and presented on a pro forma basis as
if the shares of EchoStar issued to reflect the December 31, 1993
reorganization were outstanding for the years ended December 31, 1992 and
1993, respectively. See Notes 1 and 7 of Notes to EchoStar's Consolidated
Financial Statements.
(2) EBITDA represents earnings before interest (net), taxes, depreciation and
amortization (including amortization of subscriber acquisition costs of
$16.0 million for the year ended December 31, 1996 and $92,000 and $61.4
million for the six months ended June 30, 1996 and 1997, respectively).
EBITDA is commonly used in the communications industry to analyze companies
on the basis of operating performance, leverage and liquidity. EBITDA is not
intended to represent cash flows for the period, nor has it been presented
as an alternative to operating income as an indicator of operating
performance and should not be considered in isolation or as a substitute for
measures of performance determined in accordance with generally accepted
accounting principles. See EchoStar's Consolidated Financial Statements
contained elsewhere in this Prospectus.
(3) For purposes of computing the ratio of earnings to combined fixed charges
and preferred stock dividends and the deficiency of earnings to combined
fixed charges and preferred stock dividends, earnings consist of earnings
from continuing operations before income taxes, plus fixed charges,
excluding capitalized interest. Fixed charges consist of interest incurred
on all indebtedness and the computed interest components of rental expense
under noncancelable operating leases. Preferred stock dividends consist of
the dividends accrued on the Company's Series A Preferred Stock. For the
years ended December 31, 1994, 1995 and 1996 and the six months ended June
30, 1996 and 1997, earnings were insufficient to cover fixed charges.
(4) Gives effect to the Old Series B Preferred Offering and the application of
the net proceeds thereof.
(5) Excludes approximately $14.6 million to be deposited by purchasers of the
Series C Preferred Stock into a deposit account established pursuant to the
Series C Offering.
(6) Excludes restricted cash and marketable investment securities which totaled
$229.6 million as of June 30, 1997.
(7) Net of estimated discounts and commissions and offering costs of $7.0
million.
(8) EchoStar presently intends to launch EchoStar IV into the 148 DEG. WL
orbital slot during the first quarter of 1998. The Company may, however,
subject in each case to applicable FCC approvals and other conditions in the
1997 Notes Indenture (as defined), determine to launch or move EchoStar IV
into the 61.5 DEG. WL or the 119 DEG. WL orbital slot.
(9) The transponders on each of these satellites can be independently switched
to provide a range from 16 transponders operating at 240 Watts each to 32
transponders operating at 120 Watts each.
(10) EchoStar's DBS permits cover: (i) 11 of the 16 transponders (approximately
65 of 100 channels) on EchoStar I; (ii) 10 of the 16 transponders
(approximately 60 of 100 channels) on EchoStar II; (iii) 11 of the 16
transponders (approximately 65 of 100 channels) on EchoStar III; and (iv) 24
of the 32 transponders (approximately 150 of 200 channels) on EchoStar IV.
(11) The expected end of commercial life of each satellite has been estimated by
EchoStar based on each satellite's actual or expected launch date and the
terms of the construction and launch contracts. The minimum design life is
12 years. The licenses are issued for ten year periods, and would, unless
renewed by the FCC, expire prior to the end of the minimum design life.
13
<PAGE>
THE ECHOSTAR ORGANIZATION
The following chart illustrates the Company's corporate structure:
[LOGO]
14
<PAGE>
RISK FACTORS
HOLDERS OF THE OLD SERIES B SHARES SHOULD CONSIDER CAREFULLY ALL OF THE
INFORMATION CONTAINED IN THIS PROSPECTUS, WHICH MAY BE GENERALLY APPLICABLE TO
THE OLD SERIES B SHARES AS WELL AS TO THE EXCHANGE SHARES. IN PARTICULAR, THE
HOLDERS OF THE OLD SERIES B SHARES SHOULD CONSIDER THE FOLLOWING FACTORS:
RANKING OF SENIOR PREFERRED STOCK AND SENIOR EXCHANGE NOTES. The Senior
Preferred Stock will rank junior in right of payment to all present and future
indebtedness and other liabilities of EchoStar and, with respect to dividend
distributions and distributions upon the liquidation, winding-up or dissolution
of EchoStar, rank (i) subject to certain conditions, on a parity with any class
of capital stock or series of preferred stock issued by EchoStar which is
established after the date of this Prospectus by the Board of Directors, the
terms of which expressly provide that such class or series will rank on a parity
with the Senior Preferred Stock with respect to dividend distributions and
distributions upon the liquidation, winding-up or dissolution of EchoStar; and
(ii) subject to certain conditions, junior to any class of capital stock or
series of preferred stock issued by EchoStar which is established after the date
of this Prospectus by the Board of Directors, the terms of which expressly
provide that such class or series will rank senior to the Senior Preferred Stock
with respect to dividend distributions and distributions upon the liquidation,
winding-up or dissolution of EchoStar ("Senior Securities"). Although the terms
of the Senior Preferred Stock generally prohibit the issuance of additional
securities ranking on a parity with, or senior to, the Senior Preferred Stock,
the Issuer is permitted by the terms of the Senior Preferred Stock to issue
additional parity securities having an aggregate liquidation preference, at any
one time outstanding, not to exceed $125 million and cash dividends may be paid
on such securities whether or not full dividends have been paid on the shares of
Senior Preferred Stock. See "Description of Senior Preferred Stock."
APPLICABILITY OF CERTAIN COVENANTS; AVAILABILITY OF CERTAIN REMEDIES. A
majority of the covenants contained in the terms of the Senior Preferred Stock
and Exchange Indenture are applicable solely to DBS Corp. and its subsidiaries
and do not impose any restrictions or limitations on EchoStar or any of
EchoStar's subsidiaries which are not also subsidiaries of DBS Corp. As a
result, EchoStar and certain of its subsidiaries may be entitled to engage in
certain transactions which, among other things, could have the effect of
transferring funds from the Old Series B Shares Offering to entities which are
not limited or restricted in the types of transactions in which they engage and
of making the holders of the Senior Preferred Stock or Senior Exchange Notes, as
the case may be, structurally subordinate to the claims of creditors of
EchoStar's subsidiaries. See "Holding Company Structure; Structural
Subordination" below. The terms of the Senior Preferred Stock and Senior
Exchange Notes will prohibit EchoStar from using the proceeds of this offering
to pay any dividends or make any distributions on any common stock of EchoStar
or any shares of Series A Preferred Stock and will prohibit, subject to certain
exceptions, EchoStar from incurring any indebtedness and any subsidiary of
EchoStar which owns an equity interest in DBS Corp. from incurring any
indebtedness or issuing certain types of disqualified capital stock or preferred
equity interests. In general, the remainder of the restrictive covenants limit
the ability of DBS Corp. and its subsidiaries to: (i) incur additional
indebtedness; (ii) issue preferred stock; (iii) sell assets; (iv) create
dividend and other payment restrictions with respect to DBS Corp. and its
subsidiaries; (v) merge, consolidate or sell assets; (vi) incur debt; (vii)
enter into transactions with affiliates; and (viii) pay dividends. The 1994,
1996 and 1997 Notes Indentures (as defined) contain restrictive covenants that,
among other things, limit the ability of DBS Corp., EchoStar Satellite
Broadcasting Corporation ("ESBC") and Dish, Ltd. ("Dish") and their subsidiaries
to: (i) incur additional indebtedness; (ii) issue preferred stock; (iii) sell
assets; (iv) create, incur or assume liens; (v) create dividend and other
payment restrictions with respect to DBS Corp.'s subsidiaries; (vi) merge,
consolidate or sell assets; (vii) incur debt; (viii) enter into transactions
with affiliates; and (ix) pay dividends.
Holders of Senior Preferred Stock will be entitled to elect two directors to
EchoStar's Board of Directors as their sole remedy for the breach of any
covenant contained in the Certificate of Designation and will not be entitled to
require early redemption of their Senior Preferred Stock. Moreover,
notwithstanding the foregoing to the contrary or anything to the contrary in the
Exchange Indenture, neither the
15
<PAGE>
trustee under the Indenture nor any holder of Senior Exchange Notes may seek any
remedy against the Issuer (other than to pursue a claim in bankruptcy),
including any acceleration of the maturity thereof, until both the 1997 Notes
and the 1996 Notes have been paid in full or have otherwise matured. See
"Description of Senior Preferred Stock."
In the event of the bankruptcy, liquidation or reorganization of EchoStar,
the assets of EchoStar will be available to pay obligations on the Senior
Preferred Stock only after all of the then outstanding indebtedness and other
liabilities of EchoStar have been paid in full, and there may not be sufficient
assets remaining to pay amounts payable on any or all of the Senior Preferred
Stock then outstanding.
If the Senior Preferred Stock is exchanged for the Senior Exchange Notes,
the Senior Exchange Notes will be effectively subordinated to obligations of
EchoStar's subsidiaries. The Exchange Indenture permits the incurrence by
EchoStar and its subsidiaries of additional indebtedness. See "Holding Company
Structure; Structural Subordination" below.
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION. Since all of
EchoStar's operations are conducted through its subsidiaries, its ability to
make cash dividend payments, redeem the Senior Preferred Stock or service any
debt, is dependent upon the earnings of such subsidiaries and the payment of
funds by such subsidiaries to EchoStar in the form of loans, dividends or other
payments. None of EchoStar's subsidiaries have any current obligations,
contingent or otherwise, to pay any amounts in respect of the Senior Preferred
Stock or Senior Exchange Notes or to make any funds available therefor, whether
by dividends, loans or other payments, other than the possible guarantee of the
Senior Exchange Notes by certain subsidiaries of EchoStar under limited
circumstances. The cash flow generated by subsidiaries of Dish will only be
available if and to the extent that Dish is able to make such cash available to
ESBC in the form of dividends, loans or other payments. In general, Dish may pay
dividends on its equity securities only if: (i) no default exists under the 1994
Notes Indenture; and (ii) after giving effect to such dividends, Dish's ratio of
total indebtedness to cash flow would not exceed 4.0 to 1.0. Moreover, the
aggregate amount of such dividends generally may not exceed the sum of 50% of
Dish's consolidated net income (less 100% of consolidated net losses) from April
1, 1994, plus 100% of the aggregate net proceeds to Dish from the sale and
issuance of certain equity interests of Dish. The 1996 Notes Indenture permits
ESBC to pay dividends and make other distributions to DBS Corp without
restrictions. In general, DBS Corp may pay dividends on its equity securities
only if: (i) no default exists under the 1997 Notes Indenture; (ii) after giving
effect to such dividends, DBS Corp's ratio of total indebtedness to cash flow
would not exceed 6.0 to 1.0. Moreover, the aggregate amount of such dividends
generally may not exceed the sum of (A) the difference of consolidated cash flow
(less 100% of such deficit) minus 150% of consolidated interest expense, in each
case from July 1, 1997, plus (B) 100% of the aggregate net proceeds to DBS Corp
and its subsidiaries from the sale of certain equity interests of DBS Corp or
EchoStar. If the available cash flows from EchoStar's subsidiaries are not
sufficient to redeem the Senior Preferred Stock EchoStar may be required to
obtain funds from other sources, such as sales of equity or debt securities.
There can be no assurance the funds therefrom would be sufficient to enable
EchoStar to redeem the Senior Preferred Stock at maturity or the Senior Exchange
Notes in cash.
Although the Senior Exchange Notes would be titled "Senior": (i) EchoStar
has not issued, and does not have any plans to issue, any indebtedness to which
the Senior Exchange Notes would be senior; and (ii) the Senior Exchange Notes
would be effectively subordinated to all liabilities of the Issuer's
subsidiaries, including liabilities to general creditors (except to the extent
of any guarantee). As of June 30, 1997, the consolidated liabilities of EchoStar
and its subsidiaries aggregated approximately $1.6 billion. The ability of Dish
to make distributions to DBS Corp is severely limited by the terms of the 1994
Notes Indenture (as defined), and the cash flow generated by the assets and
operations of EchoStar's subsidiaries will therefore only be available to
satisfy EchoStar's obligations to the extent that such subsidiaries are able to
make distributions, directly or indirectly, to DBS Corp. As of June 30, 1997,
Dish and its subsidiaries were not able to make distributions to DBS Corp nor
was DBS Corp allowed to make distributions to EchoStar. See "Description of
Certain Indebtedness."
16
<PAGE>
SUBSTANTIAL LEVERAGE. EchoStar is highly leveraged, which makes it very
vulnerable to changes in general economic conditions.
Substantially all of the assets of DBS Corp, ESBC and Dish and their
subsidiaries are pledged as collateral for the 1997 Notes, 1996 Notes and the
1994 Notes. Further, the 1997, 1996 and 1994 Notes Indentures (as defined) and
the Series B Preferred Stock and the Senior Exchange Notes, if any, severely
restrict the ability of EchoStar, DBS Corp, ESBC and Dish to incur additional
debt. Thus it is, and will continue to be, difficult for EchoStar and its
subsidiaries to obtain additional debt if required or desired in order to
implement EchoStar's business strategy. ESBC, Dish and certain of Dish's
subsidiaries are also parties to other agreements (in addition to the 1997, 1996
and 1994 Notes Indenture, the Series B Preferred Stock Certificate of
Designation and the Exchange Indenture, if any), that severely restrict their
ability to obtain additional debt financing for working capital, capital
expenditures and general corporate purposes. As security for the performance of
its obligations under certain of such agreements, certain subsidiaries of
EchoStar have pledged substantial assets as collateral.
As of June 30, 1997, EchoStar had outstanding long-term debt (including both
the current and long-term portion) of approximately $1.3 billion (including the
1997 Notes, 1996 Notes, 1994 Notes, deferred satellite contract payments on
EchoStar I and EchoStar II and mortgage debt). In addition, because interest on
the 1994 Notes currently is not payable in cash but accrues through June 1,
1999, liability with respect to the 1994 Notes will increase by approximately
$156.8 million through that date to $624.0 million. Similarly, because interest
on the 1996 Notes currently is not payable in cash but accrues through March 15,
2000, liability with respect to the 1996 Notes will increase by approximately
$168.7 million through that date to $580.0 million.
The ability of EchoStar, DBS Corp, ESBC and Dish to meet their respective
payment obligations will depend on the success of EchoStar's business strategy,
which is subject to uncertainties and contingencies beyond EchoStar's control.
Under the terms of the 1996 Notes Indenture, EchoStar may pay cash dividends
on its equity securities only if: (i) no default exists under the 1996 Notes
Indenture; (ii) after giving effect to such dividends, EchoStar's ratio of total
indebtedness to cash flow would not exceed 5.0 to 1.0; and (iii) the aggregate
amount of such dividends, along with certain other payments, does not exceed the
sum of 50% of EchoStar's consolidated net income (less 100% of consolidated net
losses) from January 1, 1996 to the end of its most recently completed fiscal
quarter plus 100% of the aggregate net proceeds received by EchoStar or its
subsidiaries from a sale of EchoStar equity securities.
COMPETITION FROM DBS AND OTHER SATELLITE SYSTEM OPERATORS. The subscription
television industry is highly competitive. EchoStar faces competition from
companies offering video, audio, data, programming and entertainment services.
Many of these competitors have substantially greater financial and marketing
resources than EchoStar. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
EchoStar competes with companies offering programming through various
satellite broadcasting systems. One competitor, DirecTv, Inc. ("DirecTv"), has
launched three DBS satellites and has 27 frequencies that are capable of
transmitting to the entire continental U.S. ("full-CONUS"). DirecTv and U.S.
Satellite Broadcasting Corporation ("USSB"), which owns five transponders on one
of DirecTv's satellites, currently offer over 150 channels of combined DBS video
programming. As of October 31, 1997, DirecTv had approximately 3.0 million
subscribers, approximately one-half of which also subscribed to USSB
programming. EchoStar is currently at a competitive disadvantage to DirecTv and
USSB with regard to market entry, programming and, possibly, volume discounts
for programming offerings. In addition, in the event desirable pay-per-view or
other popular programming is obtained by competitors of EchoStar on an exclusive
basis, it will be unavailable to EchoStar's DISH Network. DirecTv currently has
exclusive distribution rights for out-of-market National Football League
telecasts. There may be additional
17
<PAGE>
sports and other programming offered by other pay television providers that will
not be available on the DISH Network. See "Business--Competition--Other DBS and
Home Satellite Operators."
AT&T Corporation ("AT&T") and DirecTv have entered into an exclusive
agreement for AT&T to market and distribute DirecTv's DBS service. As part of
the agreement, AT&T made an initial investment of approximately $137.5 million
to acquire 2.5% of the equity of DirecTv with an option to increase its
investment to up to 30% over a five-year period. This agreement provides a
significant base of potential customers for the DirecTv DBS system and allows
AT&T and DirecTv to offer customers a bundled package of digital entertainment
and communications services. As a result, EchoStar is at a competitive
disadvantage marketing to these customers. Further, affiliates of the National
Rural Telecommunications Cooperative have acquired territories in rural areas of
the U.S. as distributors of DirecTv programming, thereby increasing the
distribution capacity of DirecTv.
On June 11, 1997, TCI Satellite Entertainment, Inc. ("TSAT") announced that
a binding agreement had been signed for the restructuring of PrimeStar Partners,
L.P. ("PrimeStar"), which currently offers medium power Ku-band programming
service to customers using dishes approximately three feet in diameter. In
connection with such restructuring, PrimeStar, which is currently owned by
affiliates of the five largest cable companies in the U.S., has entered into an
agreement to combine its assets with American Sky Broadcasting, L.L.C.
("ASkyB"), a satellite venture formed by News Corporation ("News") and MCI
Telecommunications, Inc. ("MCI"), into a single DBS provider. Each PrimeStar
partner will contribute its PrimeStar customers and partnership interests into
the newly formed entity. ASkyB has announced that it will contribute two
satellites under construction and 28 full-CONUS frequencies at the 110 DEG. WL
orbital location. In addition, Tempo Satellite, Inc. ("Tempo"), a subsidiary of
TSAT, has a license for a satellite using 11 full-CONUS frequencies at the
119 DEG. WL orbital location, and recently launched a satellite to that
location. PrimeStar also has agreed to acquire Tempo's license. As of October
31, 1997, according to published reports, PrimeStar had approximately 1.9
million subscribers.
On July 18, 1997, PrimeStar and TSAT filed an application with the FCC
requesting FCC approval for the assignment of Tempo authorizations to PrimeStar
in connection with the PrimeStar "roll-up" restructuring. On August 15, 1997,
MCI and PrimeStar also filed an FCC application requesting approval for the
assignment of MCI's DBS authorizations to PrimeStar. The parties to the two
transactions have also initiated the antitrust clearance process with the
Department of Justice for each transaction, and EchoStar understands that
clearance has been obtained for one of the two transactions (the PrimeStar
roll-up). The FCC applications have been placed on public notice and have been
opposed by EchoStar and others, but there can be no assurance that any of these
oppositions will be successful. If the requests are approved by the FCC and if
the transactions are consummated by the parties, the resulting entity would
constitute a significantly strengthened competitor with substantial financial
and other resources, including a significantly greater number of full-CONUS
channels than any other DBS provider.
Affiliates of several of the companies that would own interests in a
restructured PrimeStar entity provide programming to cable television operators,
other terrestrial systems and DBS system operators, including EchoStar. These
content providers, including News, Time Warner Inc. (including its Turner
Broadcasting Systems subsidiary) ("Time Warner"), TCI Communications, Inc.
("TCI"), Cox Communications Inc. ("Cox"), Comcast Corporation ("Comcast") and US
WEST, Inc. ("US WEST") would likely provide a significant amount of programming
to the new PrimeStar entity and may decide to provide this programming to
PrimeStar on better terms and at a lower cost than to other cable or DBS
operators. Additionally, those content providers could raise programming prices
to all cable, DBS and other providers (including PrimeStar), thereby increasing
the Company's cost of programming to rates that are effectively higher than
those borne by PrimeStar's owners. Although the current programming access
provisions under the Cable Television Consumer Protection and Competition Act of
1992, as amended (the "Cable Act"), and the FCC's rules generally require cable
company affiliated content providers to make programming available to
competitors on non-discriminatory terms, there are exceptions to these
requirements and certain of these requirements are set to expire in 2002 unless
extended by the FCC. Moreover, any
18
<PAGE>
amendment to, or interpretation of, the Cable Act or the FCC's rules which would
revise or eliminate these provisions could adversely affect EchoStar's ability
to acquire programming on a cost-effective basis.
The FCC has indicated that it may apply to the International
Telecommunication Union ("ITU") for allocation of additional DBS orbital
locations capable of providing service to the U.S. Further, Canada, Mexico, and
other countries have been allocated various DBS and FSS orbital locations which
are capable of providing service to part or all of the continental U.S. In
general, non-U.S. licensed satellites are not presently allowed to provide
domestic DBS or DTH service in the U.S. However, in November 1996, the U.S. and
Mexico signed a Protocol allowing cross-border DBS and DTH service from
Mexican-licensed satellites to the U.S. and vice versa, and Mexico has indicated
that it will auction one or more of its FSS orbital locations later this year,
and that it will auction one or more of its DBS orbital locations during 1998.
Pursuant to the protocol, the FCC already has permitted a company to provide
Direct-to-Home ("DTH") services in the U.S. through a Mexican satellite.
Televisa International, LLC ("Televisa") is currently in the process of
developing DTH television and related services in Mexico, Latin America, North
America and Europe. Televisa received authorization from the FCC to operate 1
million receive-only earth stations in the U.S. which are capable of receiving
DTH television services from Mexico's Solidaridad II satellite. The Solidaridad
II satellite operates at 113 DEG. WL providing full-CONUS coverage, and is
licensed by the Mexican Government.
The FCC authorized Televisa to operate receive dishes that are larger, and
possibly less attractive to consumers, than the dishes made available by
EchoStar. Further, the FCC authorization for Televisa does not provide
Televisa's earth stations with protection from unacceptable radio interference
from nearby satellite networks. Nevertheless, the authorization of Televisa to
provide a service from the 113 DEG. WL orbital slot may produce additional
competition to the full-CONUS service provided by the Company from EchoStar I
and EchoStar II.
In October 1997, the U.S. and Mexico signed a protocol allowing cross-border
FSS service from Mexican-licensed satellites to the U.S. and vice versa. The
U.S. and Mexico have announced their intention to commence discussion on a third
protocol, to address mobile satellite services.
In addition, the U.S. has indicated its willingness to enter into similar
agreements with other countries in North, Central, and South America. If the
U.S. government moves forward with these initiatives, or if other countries
authorize DBS providers to use their orbital slots to serve the U.S., additional
competition could be created, and EchoStar's DBS authorizations could become
less valuable. At this time, EchoStar cannot predict whether these or other
recent developments will ultimately permit other potential competitors to have
access to the U.S. In addition, two additional satellite companies, Continental
Satellite Corporation ("Continental") (a subsidiary of Loral Space &
Communications Ltd. ("Loral")) and Dominion, each has conditional permits for a
comparatively small number of DBS assignments which can be used to provide
service to portions of the U.S.
There are a number of additional methods by which programming can be
delivered via satellite, including low power C-band satellite services, medium
and high power Ka-band, Ku-band and extended Ku-band satellite services. These
satellite frequency bands can be used to provide additional competition to
EchoStar. See "Business--Competition--Other Potential Providers of DBS or
Similar Services."
COMPETITION FROM CABLE TELEVISION AND OTHER TERRESTRIAL SYSTEMS. The DISH
Network also encounters substantial competition in the overall market for pay
television households from cable television and other terrestrial systems. Cable
television operators have a large, established customer base, and many cable
operators have significant investments in, and access to, programming. Cable
television service is currently available to approximately 90% of the
approximately 96 million U.S. television households, and approximately 65% of
total television households currently subscribe to cable. Cable television
operators currently have an advantage relative to EchoStar with regard to the
provision of local programming as well as the
19
<PAGE>
provision of service to multiple television sets within the same household. The
Librarian of Congress has ruled upon a report of the Copyright Arbitration
Royalty Panel recommending royalties for local satellite retransmission of
network affiliated and superstation signals. See "Risk Factors--Impediments to
Retransmit Local Broadcast Signals." In addition, EchoStar's programming will
not be available to households lacking a clear line of sight to EchoStar's
current orbital location, or to households in apartment complexes or other
multiple dwelling units that do not facilitate or allow the installation of
EchoStar Receiver Systems. As a result of these and other factors, there can be
no assurance that EchoStar will be able to establish a substantial subscriber
base or compete effectively against cable television operators. See
"Business--Competition--Cable Television."
There are also a number of other terrestrial systems for delivering multiple
channels of television programming. These include "wireless cable" or "MMDS"
systems, and private cable systems such as satellite master antennae television
("SMATV") as well as new and advanced technologies such as Local Multi-Point
Distribution Services ("LMDS"), which are still in the development stage.
Certain wireless cable companies may become more competitive as a result of
recently announced affiliations with telephone companies. In addition, digital
video compression over existing telephone lines, and fiber optic networks and
open video systems are being implemented and supported by entities such as
regional telephone companies which are likely to have greater resources than
EchoStar. When fully deployed, these new technologies could have a material
adverse effect on the demand for DBS services. Regulatory changes may also make
it easier for local exchange carriers ("LECs") and others, including utility
companies, to provide competitive video services, and to provide video services
directly to subscribers in the LECs' telephone service areas, with certain
exceptions. The Telecommunications Act of 1996 (the "1996 Act") repealed a
statutory telephone/cable cross-ownership restriction, and recognizes several
multiple-entry options for telephone companies to provide competitive video
programming. There can be no assurance that EchoStar will be able to compete
successfully with existing competitors or new entrants in the market for pay
television services. See "Business--Competition--Wireless Cable" and
"--Telephone Companies."
EXPECTED OPERATING LOSSES. Due to the substantial expenditures required to
complete development, construction and deployment of the EchoStar DBS System and
introduction of its DISH Network service to consumers, EchoStar has sustained
significant losses in recent periods. EchoStar's operating losses were $8.0
million, $109.3 million and $87.6 million for the years ended December 31, 1995
and 1996 and the six months ended June 30, 1997, respectively. EchoStar had net
losses of $11.5 million, $101.0 million and $126.7 million during those same
periods. Improvements in EchoStar's results of operations are largely dependent
upon its ability to increase its customer base while maintaining its price
structure, controlling subscriber turnover (i.e., the rate at which subscribers
terminate service), and effectively managing its costs. No assurance can be
given that EchoStar will be effective with regard to these matters. In addition,
EchoStar incurs significant acquisition costs to obtain DISH Network
subscribers. The high cost of obtaining new subscribers magnifies the negative
effects of subscriber turnover. See "--Risk of Inability to Manage Rapidly
Expanding Operations; Subscriber Turnover." EchoStar anticipates that it will
continue to experience operating losses through at least 1999. There can be no
assurance that such operating losses will not continue beyond 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
POTENTIAL NEED FOR ADDITIONAL CAPITAL. EchoStar may require additional
funds to acquire DISH Network subscribers. In addition, EchoStar has conditional
licenses or applications pending with the FCC for a two satellite Ku-band
system, a two satellite Fixed Satellite Service ("FSS") Ka-band system, a two
satellite extended Ku-band system and a six satellite low earth orbit ("LEO")
satellite system. EchoStar will need to raise additional funds for the foregoing
purposes. Further, there are a number of factors, some of which are beyond
EchoStar's control or ability to predict, that could require EchoStar to raise
additional capital. These factors include slower than expected subscriber
acquisition, a defect in or the loss of any satellite or an increase in the cost
of acquiring subscribers due to additional competition, among other
20
<PAGE>
things. There can be no assurance that EchoStar will be able to raise additional
capital at the time necessary or on terms satisfactory to EchoStar. The
inability to raise sufficient capital would have a material adverse effect on
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
RISK THAT ECHOSTAR WILL BE UNABLE TO PURCHASE SECURITIES TENDERED UPON A
CHANGE OF CONTROL. There can be no assurance that EchoStar will have sufficient
funds to repurchase the Senior Preferred Stock upon a Change of Control (as
defined) or to repurchase Senior Exchange Notes tendered upon the occurrence of
an Orbital Event (as defined). If EchoStar does not have sufficient funds to
redeem all Senior Preferred Stock or Senior Exchange Notes tendered for purchase
upon the occurrence of a Change of Control or, in the case of the Senior
Exchange Notes, an Orbital Event, EchoStar would be required to raise additional
capital. No assurance can be given that additional capital would be available on
terms acceptable to EchoStar, or at all.
LACK OF BRAND-NAME RECOGNITION. The absence of brand-name recognition for
the EchoStar DBS System impairs the Company's ability to market its receivers
through consumer electronics stores as effectively as it would like. Some of the
Company's competitors (such as DirecTv) have arrangements with a larger number
of major consumer electronic product manufacturers (such as Sony and RCA), than
does EchoStar, which allow those companies to manufacture and sell DBS receivers
that bear their own trademark, and allow consumers to receive the programming of
the Company's DBS competitors. This type of arrangement between the Company's
DBS competitors and major consumer products companies gives the Company's
competitors a distinct, significant consumer marketing edge.
At this time, EchoStar Receiver Systems are manufactured by one
manufacturer, SCI Systems, Inc. ("SCI"). Unlike DirecTv, the Company does not
currently have manufacturing agreements or arrangements with any large consumer
products manufacturers other than JVC. As a result, EchoStar's receivers (and
consequently its programming services) are less well known to consumers than
those of some of its principal competitors, and EchoStar, due in part to the
lack of product recognition and demand, has not had as much success in having
EchoStar Receiver Systems carried for sale in consumer electronic stores or
outlets as EchoStar would like, or as may be necessary for EchoStar's financial
success.
POTENTIAL FOR DELAY AND COST OVERRUNS. Significant expenditures are
required to complete construction and deployment of the EchoStar DBS System.
Funds, in addition to existing cash balances, will be required in the event of
delays, cost overruns, increased costs associated with certain potential change
orders under the Satellite Contracts (as defined) or the Launch Contracts (as
defined), a change in launch provider, material increases in estimated levels of
operating cash requirements, if increased subsidization of EchoStar Receiver
Systems become necessary to meet competition, or to meet other unanticipated
expenses. There can be no assurance that such financing will be available or
that, if available, it will be available on terms favorable to EchoStar. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
A significant delay in the delivery or launch of any EchoStar satellite
would adversely affect EchoStar's operations and may result in the cancellation
of any of the permits of EchoStar Satellite Corporation ("ESC"), DirectSat
Corporation ("DirectSat"), DBS Corp and DBSC by the FCC. See "--Risk of
Satellite Defect, Loss or Reduced Performance." In addition, any material delay
in the delivery of EchoStar Receiver Systems or related components would
negatively affect EchoStar's financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
EFFECT OF LOSS OF KEY PERSONNEL. EchoStar believes that its future success
will depend to a significant extent upon the performance of certain individuals,
particularly Charles W. Ergen, Chairman, Chief Executive Officer and President
of EchoStar, and James DeFranco, Executive Vice President. The loss of either of
these individuals could have an adverse effect on EchoStar's business. EchoStar
does not
21
<PAGE>
maintain "key man" insurance with respect to any such individuals. While all
executives of the Company have executed agreements limiting their ability to
work for or consult with competitors if they leave the Company, the Company does
not have any employment agreements with any executive officer of the Company.
DEPENDENCE ON THIRD PARTY PROGRAMMERS. EchoStar is dependent on third
parties to provide it with programming services. EchoStar's programming
agreements have remaining terms ranging from one to ten years and contain
various renewal and cancellation provisions. There can be no assurance that any
of these agreements will be renewed or will not be cancelled prior to expiration
of their original term. In the event that any such agreements are not renewed or
are cancelled, there can be no assurance that EchoStar would be able to obtain
or develop substitute programming, or that such substitute programming would be
comparable in quality or cost to EchoStar's existing programming. EchoStar's
competitors currently offer substantially the same programming as EchoStar. The
ability of EchoStar to compete successfully will depend on EchoStar's ability to
continue to obtain desirable programming and attractively package it to its
customers at competitive prices. See "Business--Programming."
Pursuant to the Cable Act and the FCC's rules, programming developed by
vertically integrated cable-affiliated programmers generally must be offered to
all multi-channel video programming distributors on non-discriminatory terms and
conditions. The Cable Act and the FCC's rules also prohibit certain exclusive
programming contracts. EchoStar anticipates purchasing a substantial percentage
of its programming from cable-affiliated programmers. Certain of the
restrictions on cable-affiliated programmers will expire in 2002 unless extended
by the FCC. As a result, any expiration of, amendment to, or interpretation of,
the Cable Act and the FCC's rules that permits the cable industry or programmers
to discriminate in the sale of programming against competing businesses, such as
that of EchoStar, could adversely affect EchoStar's ability to acquire
programming or acquire programming on a cost-effective basis. In addition, laws,
regulations and the need to obtain certain retransmission consents and copyright
licenses may limit the ability of the Company to implement a local programming
strategy in multiple markets. See "Business--Government Regulation--Satellite
Home Viewer Act."
On October 14, 1997, EchoStar filed a complaint with the FCC against Rainbow
Programming Holdings, Inc. and Rainbow Media Holdings, Inc. (collectively
"Rainbow") under the Communications Act's program access rules. Rainbow, a
cable-affiliated programming vendor, manages several regional sports services.
EchoStar's complaint alleges that Rainbow has discriminated against EchoStar in
the terms and conditions (including rates, tiering restrictions and advertising
availability provisions) that it has demanded to make its regional sports
programming available to EchoStar; that Rainbow has effectively refused to deal
with EchoStar through dilatory tactics; and that Rainbow has engaged in various
unfair practices at EchoStar's expense. The complaint requests several forms of
relief. There is no assurance that the complaint will succeed or that the FCC
will grant EchoStar any of the requested forms of relief. If the complaint is
not successful, this may adversely affect EchoStar's ability to offer Rainbow
regional sports programming in its programming packages.
On October 27, 1997, EchoStar filed a program access complaint with the FCC
against Fox/Liberty Networks LLC, Fox Sports Net LLC and Fox Sports Direct
(collectively "Fox Sports"), which controls certain regional sports programming
services currently carried by EchoStar. In that complaint, EchoStar has alleged
that Fox Sports has discriminated against EchoStar in the terms that it offered
EchoStar, compared to the terms available to certain competing cable operators.
There can be no assurance that EchoStar will be successful in its complaint
and/or that EchoStar will attain better terms for its carriage of Fox Sports
programming than the terms currently available to EchoStar. The inability of
EchoStar to secure better terms may adversely affect EchoStar's relationship
with Fox Sports.
RISKS OF INFRINGEMENT OF PATENTS AND PROPRIETARY RIGHTS. The ability of
EchoStar to obtain patents and other intellectual property rights is material to
its business. Many of EchoStar's competitors have obtained, and may be expected
to obtain in the future, patents that cover or affect products or services
directly or
22
<PAGE>
indirectly related to those offered by EchoStar. There can be no assurance that
EchoStar is aware of all patents that may potentially be infringed by its
products. In addition, patent applications in the U.S. are confidential until a
patent is issued and, accordingly, EchoStar cannot evaluate the extent to which
its products may infringe claims contained in pending patent applications. In
general, if it were determined that one or more of EchoStar's products infringe
on patents held by others, EchoStar would be required to cease developing or
marketing those products, to obtain licenses to develop and market those
products from the holders of the patents or to redesign those products in such a
way as to avoid infringing the patent claims. The extent to which EchoStar may
be required in the future to obtain licenses with respect to patents held by
others and the availability and cost of any such licenses is currently unknown.
A number of third parties have contacted EchoStar claiming patent and other
intellectual rights with respect to components within the EchoStar DBS System.
There can be no assurance that EchoStar would be able to obtain such licenses on
commercially reasonable terms or, if it were unable to obtain such licenses,
that it would be able to redesign its products to avoid infringement. See
"Business--Legal Proceedings."
DEPENDENCE ON SATELLITES AND SINGLE DIGITAL BROADCAST CENTER. Prior to the
expiration of the anticipated useful lives of EchoStar satellites, EchoStar will
need to obtain replacement satellites. There can be no assurance that
replacements will be available when required or, if available, that they will be
available at prices, and on other terms, acceptable to EchoStar. Various FCC
approvals would be required with respect to replacement satellites, including
but not limited to renewal of EchoStar's ten year DBS licenses. There can be no
assurance that the FCC will grant the required approvals.
EchoStar also relies upon a single digital broadcast center located in
Cheyenne, Wyoming for key operations such as reception of programming signals,
encryption and compression. If a natural or other disaster damaged the digital
broadcast center, there can be no assurance that EchoStar would be able to
continue to provide programming services to its customers.
IMPEDIMENTS TO RETRANSMIT LOCAL BROADCAST SIGNALS. EchoStar intends to
offer programming telecast by local affiliates of national television networks
to major population centers within the continental U.S. via DBS satellite. In
order to retransmit this programming to any DISH Network subscriber in a
particular local market, EchoStar generally must obtain the retransmission
consent of the local affiliate, except for direct to home retransmissions to
"unserved households", as that term is defined in the Satellite Home Viewer Act
(see below). There can be no assurance that the Company will obtain
retransmission consents from any local affiliate and one of the networks (Fox)
has stated it is not willing to consider EchoStar's request for retransmission
consent at this time. The inability to transmit such programming into the local
markets from which the programming is generated could have an adverse effect on
the Company.
The Satellite Home Viewer Act ("SHVA") establishes a "statutory" (or
compulsory) copyright license that generally allows a DBS operator, for a
statutorily-established fee, to retransmit local affiliate programming to
subscribers for private home viewing so long as that retransmission is limited
to those persons in "unserved households." An "unserved household", with respect
to a particular television network, is defined as one that cannot receive an
over-the-air network signal of "grade B" intensity (a predictive standard of
signal intensity employed by the FCC) of a primary network station affiliated
with that network through the use of a conventional outdoor rooftop antenna and
has not, within the 90 days prior to subscribing to the DBS service, subscribed
to a cable service that provides the signal of an affiliate of that network.
While management believes the SHVA could be read to allow the Company to
retransmit this programming to certain local markets via DBS satellite,
management also believes that the compulsory copyright license under the SHVA
may not be sufficient to permit the Company to implement its strategy to
retransmit such programming in the most efficient and comprehensive manner. On
August 28, 1997, a Copyright Arbitration Royalty Panel ("CARP"), appointed to
recommend royalties for satellite retransmission of network-affiliated
television and superstation signals pursuant to the compulsory license of
Section 119 of the Copyright Act, delivered its Report to the Librarian of
Congress. In the CARP's recommendation, the CARP held it has no jurisdiction to
set royalties for local satellite retransmissions of the signals of
network-affiliated television stations, on the ground that the compulsory
license of the
23
<PAGE>
Copyright Act does not extend to such retransmissions. EchoStar petitioned the
Librarian to modify the CARP report. The CARP also recommended setting at zero
the royalty rate for local retransmissions of superstation signals.
The final ruling of the Librarian of Congress, reviewing the CARP's
recommendation, was published in the Federal Register on October 28, 1997. With
respect to "local-into-local" retransmissions, the Librarian affirmed the zero
rate recommended by the CARP for secondary transmission of a superstation signal
within the station's local market--a recommendation that EchoStar had supported.
The Librarian modified the CARP's recommendation, by also establishing a
zero rate for secondary transmissions of a network station's signal to "unserved
households" within the station's local market. The Librarian of Congress also
reviewed the CARP's recommendation on the meaning of "unserved households"
(i.e., whether the statutory license covers retransmissions to a household in a
network station's local market receiving a signal of Grade B intensity from that
station but not from any other affiliate of the same network and satisfying all
other elements of the "unserved household" definition). The CARP had determined
that the statutory license does not cover such retransmissions and the CARP did
not have jurisdiction to recommend a rate for them. The Librarian decided that
the law is silent on the issue, and accordingly, he cannot unequivocally say
that the CARP's decision is arbitrary or contrary to law. Nonetheless, the
Librarian determined that the Copyright Office retains the authority to conduct
a rule-making proceeding despite the CARP's determination, on the permissibility
of secondary transmissions of a network station's signal to households within
that station's local market that are served by that station but unserved by any
other station affiliated with the same network under the "unserved household"
provisions of the satellite compulsory license.
While modifications to the CARP's recommendations effected by the final
ruling are generally favorable to EchoStar, the ruling is subject to judicial
review, and there can be no assurance that these modifications will not be set
aside. Moreover, there can be no assurance that the rule-making referenced in
the final ruling will be conducted or that it will result in an outcome
favorable to EchoStar. Further, while EchoStar is continuing its effort to
secure passage of legislation that will clarify and extend the scope of the
compulsory license with respect to local network signals, to protect against the
possibility the Copyright Office will not conduct a rule-making proceeding or
that any such rulemaking may not provide a favorable result to EchoStar, there
can be no assurance that EchoStar will be successful in this effort. If a court
or administrative agency were to reject the interpretation of "unserved
household" supported by EchoStar, and legislation does not pass which clarifies
and extends the scope of the compulsory license, EchoStar may have to engage in
the relatively cumbersome process of obtaining copyright licenses from all
individual copyright holders instead. In the absence of the legislation sought
by EchoStar and/or a favorable outcome in the rule-making referenced in the
Librarian's final ruling, and failing successful negotiation of individual
copyright licenses and retransmission consent agreements to the extent
necessary, there can be no assurance that EchoStar would be successful in any
copyright infringement or FCC litigation with copyright owners and/or
broadcasters regarding the legality of certain local-into-local network
retransmissions.
INCREASED COSTS FOR RETRANSMISSION OF DISTANT BROADCAST SIGNALS. In its
August 28, 1997 report, the CARP recommended that the royalty rate for satellite
retransmissions of distant network-affiliated station and distant superstation
signals be set at 27 cents per subscriber per month--a substantial increase
compared to the previously applicable rates, which ranged from 6 to 17.5 cents.
The Satellite Broadcasting & Communications Association, of which EchoStar is a
member, requested modifications to the CARP's report.
The final ruling of the Librarian of Congress, reviewing the CARP's
recommendation, was published in the FEDERAL REGISTER on October 28, 1997. The
Librarian, among other things, affirmed the CARP's recommendation of a 27 cent
per subscriber per month royalty rate for retransmissions of distant
24
<PAGE>
superstation and network station signals, but delayed the effective date for the
increase to January 1, 1998 (instead of making the increase retroactive, as the
CARP had recommended).
EchoStar believes but can provide no assurances that it may be able to pass
through the increases to its customers by separately tiering the channels
involved, so that its operating margins are not substantially affected. However,
the increases may adversely affect the competitiveness of EchoStar vis-a-vis
cable operators, which pay lower rates to copyright holders.
DEPENDENCE ON SINGLE RECEIVER MANUFACTURER. EchoStar Receiver Systems are
currently manufactured exclusively by SCI Technology ("SCI"), a high-volume
contract electronics manufacturer, and only JVC manufactures other consumer
electronics products incorporating EchoStar Receiver Systems. SCI is currently
EchoStar's only source of stand-alone receivers. EchoStar is currently
negotiating with several brand-name consumer electronics manufacturers to
produce receivers for use with the DISH Network. No assurances can be provided
regarding the ultimate success of those negotiations. If SCI is unable for any
reason to produce receivers in a quantity sufficient to meet EchoStar's
requirements, EchoStar's ability to add additional subscribers would be
materially impaired and its results of operations would be adversely affected.
RISK THAT INITIAL EQUIPMENT COSTS WILL LIMIT CONSUMER DEMAND FOR DISH
NETWORK PROGRAMMING. Currently, the suggested retail price of a standard
EchoStar Receiver System is $199. The initial equipment cost required to receive
DISH Network programming may reduce the demand for EchoStar Receiver Systems,
since EchoStar Receiver Systems generally must be purchased, while cable and
certain of EchoStar's satellite competitors lease their equipment to the
consumer with little if any initial hardware payment required.
POLITICAL RISKS PERTAINING TO LAUNCH PROVIDERS AND RESTRICTIONS ON EXPORT OF
TECHNOLOGY. EchoStar has contracted with
Lockheed-Khrunichev-Energia-International, Inc. ("LKE") for the launch of
EchoStar IV during the first quarter of 1998 from the Baikonur Cosmodrome in the
Republic of Kazakhstan (the "LKE Contract"). EchoStar will launch EchoStar IV on
a Proton K/Block DM four stage launch vehicle. Astra 1F, the first commercial
launch on a Proton K/Block DM, was successfully launched on April 9, 1996 and
Inmarsat 3 F2, the second such commercial launch, was successfully launched on
September 6, 1996. LKE now markets commercial Proton launches under a new
organization called International Launch Services ("ILS"), a joint venture
between LKE and Lockheed Services. ILS has contracts providing for the launch of
at least six non-EchoStar western satellites throughout 1997.
The first commercial Proton launch in 1997 was successfully accomplished on
May 24, carrying the Telestar 5 payload. However, two of the launches of the
Proton four stage launch vehicle have failed in the last twelve months. In
February 1996, a Proton Block DM failed during launch when its main engine did
not start properly. Additionally, in November 1996, the main engine of a Proton
Block D-2 failed to properly start a planned second burn during the launch of
the Mars 96 spacecraft.
In order for EchoStar IV to be launched from Kazakhstan, the satellite
contractor will need to obtain a technical data exchange license and a satellite
export license from the U.S. government. There can be no assurance those
licenses can be obtained in a timely manner to avoid a launch delay. Any
political or social instability, such as that recently experienced in the former
Soviet bloc countries, could affect the cost, timing and overall advisability of
utilizing LKE as a launch provider for EchoStar's satellites. See
"Business--Satellite Launches."
NEWS CORPORATION LITIGATION. On February 24, 1997, EchoStar and News
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar the
DBS permit for 28 frequencies at 110 DEG. WL purchased by MCI for over $682
million following a 1996 FCC auction. During late April 1997, substantial
disagreements arose between the parties regarding their obligations under the
News Agreement.
25
<PAGE>
On May 8, 1997, EchoStar filed a Complaint in the U.S. District Court for
the District of Colorado (the "Court"), Civil Action No. 97-960, requesting that
the Court confirm EchoStar's position and declare that News is obligated
pursuant to the News Agreement to lend $200 million to EchoStar without interest
and upon such other terms as the Court orders.
On May 9, 1997, EchoStar filed a First Amended Complaint significantly
expanding the scope of the litigation to include breach of contract, failure to
act in good faith, and other causes of action. EchoStar seeks specific
performance of the News Agreement and damages, including lost profits based on,
among other things, a jointly prepared ten-year business plan showing expected
profits for EchoStar in excess of $10 billion based on consummation of the
transactions contemplated by the News Agreement.
On June 9, 1997, News filed an answer and counterclaims seeking unspecified
damages. News' answer denies all of the material allegations in the First
Amended Complaint and asserts twenty defenses, including bad faith, misconduct
and failure to disclose material information on the part of EchoStar and its
Chairman and Chief Executive Officer, Charles W. Ergen. The counterclaims, in
which News is joined by its subsidiary ASkyB assert that EchoStar and Ergen
breached their agreements with News and failed to act and negotiate with News in
good faith. EchoStar has responded to News' answer and denied the allegations in
their counterclaims. EchoStar also has asserted various affirmative defenses.
EchoStar intends to diligently defend against the counterclaims. The parties are
now in discovery. The case has been set for a five week trial commencing June
15, 1998, but that date could be postponed. The litigation process could
continue for many years and there can be no assurance concerning the outcome of
the litigation. An adverse decision could have a material adverse effect on
EchoStar's financial position and results of operations.
RISKS OF ADVERSE EFFECTS OF GOVERNMENT REGULATION. EchoStar is subject to
the regulatory authority of the U.S. Government and the national communications
authorities of the countries in which it operates. The business prospects of
EchoStar could be adversely affected by the adoption of new laws, policies or
regulations, or changes in the interpretation or application of existing laws,
policies and regulations, that modify the present regulatory environment, as
well as its failure to comply with existing laws, policies and regulations.
EchoStar must comply with all applicable Communications Act requirements and FCC
regulations and policies, including, among other things, proceeding with
diligence to construct satellites and commence operations within prescribed
milestones and in accordance with required filings of periodic progress reports.
EchoStar believes that it remains free to set prices and serve customers
according to its business judgment, without rate regulation or the statutory
obligation under Title II of the Communications Act to avoid undue
discrimination among customers. There can be no assurances that the FCC would
not find that EchoStar is subject to the requirements of Title II. If the FCC
made such a finding, EchoStar would be required to comply with the applicable
portions of Title II.
The Communications Act of 1934, as amended, and the FCC's implementing
regulations provide that, where subsidiaries of a holding company hold certain
types of FCC licenses, foreign nationals or their representatives may not own in
excess of 25% of the total equity of the holding company, considered on a
fully-diluted basis, except upon an FCC public interest determination. While the
FCC's International Bureau has ruled that these limitations do not apply to DBS
authorizations, the ruling has been challenged and the question remains open.
Furthermore, the limitations will apply to EchoStar's FSS authorizations if
EchoStar holds itself out as a common carrier or if the FCC decides to treat it
as such a carrier. The FCC has noted that EchoStar proposes to operate some of
its proposed fixed satellite services on a common carrier as well as a
non-common carrier basis.
A recent survey of EchoStar's equity owners discloses that EchoStar's
foreign ownership in May of this year was under 5%, well below these limitations
if they were to apply. However, if the purchase by foreigners or their
representatives of EchoStar's existing or new equity securities or exercise of
any right to convert existing or new securities into equity securities,
including the shares subject to the Offerings, would
26
<PAGE>
cause the foreign ownership limitations to be exceeded, a separate FCC
determination that such ownership was consistent with the public interest would
be required in order to avoid a violation of the Act and/or the FCC's rules.
The Communications Act of 1934, as amended, also requires prior FCC approval
of transfers of control over, or assignments of, Title III licenses. If the
purchase of the securities in the Offerings (or exercise of the right to convert
the Preferred Stock into shares of Common Stock) would result in a transfer of
control over the FCC licenses and permits, such transfer would require the prior
approval of the FCC.
EchoStar believes that, because it is engaged in a subscription programming
service, it is not subject to many of the regulatory obligations imposed upon
broadcast licensees. However, there can be no assurances that the FCC will not
find in the future that EchoStar should be treated as a broadcast licensee with
respect to its current and future operations. If the FCC were to determine that
EchoStar is, in fact, a broadcast licensee, EchoStar could be required to comply
with all regulatory obligations imposed upon broadcast licensees.
The Cable Act requires the FCC to conduct a rulemaking proceeding to impose
public interest requirements for DBS licensees. The FCC's rules must, at a
minimum, mandate reasonable and non-discriminatory access to qualified
candidates for election to public office and require DBS licensees to reserve
between four and seven percent of the DBS licensees' channel capacity
exclusively for noncommercial programming of an educational or informational
nature. Within this set-aside requirement, DBS providers must make capacity
available to "national educational programming suppliers" at below-cost rates.
The FCC is presently conducting a rulemaking proceeding in order to determine
how to implement the 4-7% set-aside requirement. The Company cannot predict at
this time the extent or nature of the public interest programming requirements
that will be imposed by the FCC, or when the FCC will issue these rules. There
can be no assurance that these public interest requirements will not have an
adverse effect on the quantity and mix of programming that EchoStar is able to
offer its subscribers. See "Business--Government Regulation."
Pursuant to the 1996 Act, the FCC has established regulations that prohibit
(with certain exceptions) governmental and non-governmental restrictions, such
as private covenants and homeowners' association rules, that impair a viewer's
ability to receive video programming through devices designed for DBS Service,
MMDS, or over-the-air reception of television broadcast service. These rules
apply to property within the exclusive control of the antenna user where the
user has an ownership interest in the property. In an ongoing proceeding, the
FCC is examining whether the rules should apply to the placement of antennas on
common areas or rental properties where the antenna user does not own or control
the property. While the Company cannot predict the outcome of this proceeding, a
decision not to extend these rules to such properties or other adverse decision
potentially could limit the growth of DBS subscribers. See "Business--Government
Regulation."
While DBS operators like EchoStar currently are not subject to the "must
carry" requirements of the Cable Act, the cable industry has argued that DBS
operators should be subject to these requirements. In the event the "must carry"
requirements of the Cable Act are revised to include DBS operators, or to the
extent that new legislation or regulation of a similar nature is promulgated,
EchoStar's future plans to provide local programming may be adversely affected,
and such must carry requirements could cause the displacement of possibly more
attractive programming.
OPPOSITION TO, AND RISK OF LOSS OF, CERTAIN ECHOSTAR AUTHORIZATIONS. Many
aspects of EchoStar's operations require the retention or renewal of existing
FCC authorizations, or the procurement of additional authorizations. The FCC has
granted EchoStar conditional authority to use C-band frequencies for telemetry,
tracking and control ("TT&C") functions for EchoStar I, stating that the
required coordination process with Canada and Mexico had been completed. In
January 1996, however, the FCC received a communication from an official of the
Ministry of Communications and Transportation of Mexico stating
27
<PAGE>
that EchoStar I's TT&C operations could cause unacceptable interference to
Mexican satellites. There can be no assurance that such objections will not
subsequently require EchoStar to relinquish the use of such C-band frequencies
for TT&C purposes. This could result in the inability to control EchoStar I and
a total loss of the satellite. Further, the FCC has granted EchoStar conditional
authority to use "extended" C-band frequencies for TT&C functions for EchoStar
II, but only until January 1, 1999, at which time the FCC will review the
suitability of those frequencies for TT&C operations. There can be no assurance
that the FCC will extend the authorization to use these C-band frequencies for
TT&C purposes beyond that date. Such failure to extend the authorization could
result in the inability to control EchoStar II and a total loss of the
satellite. Also, there can be no assurance that the rights of EchoStar under the
Dominion Agreement will be given effect in the absence of FCC approval, which
has not yet been received and may not be forthcoming. In addition, certain of
EchoStar's pending and future requests to the FCC for extensions, waivers and
approvals have been, and are expected to continue to be, opposed by third
parties. Among other things, the precise location of ESC's and DirectSat's
licensed EchoStar I and EchoStar II satellites may be outside the parameters set
forth in their licenses. EchoStar has requested temporary authority to operate,
for 180 days, EchoStar I and EchoStar II closer together (at 119.05 DEG. WL and
118.95 DEG. WL instead of at their authorized locations at 119.2 DEG. WL and
118.8 DEG. WL), which would improve signal quality and facilitate better
customer service. The FCC has raised concerns about this request, and the
request has been opposed by Tempo. See "Business--Government Regulation--FCC
Permits and Licenses." Failure of the FCC to grant or renew EchoStar's request
would require EchoStar to take steps to ensure that EchoStar I and EchoStar II
are positioned consistent with present FCC authorizations, or to reposition the
satellites, and could have an adverse effect on the operation of these
satellites. If EchoStar I and EchoStar II were found to have been operated
outside their authorized parameters, the FCC could impose monetary forfeitures
or other penalties on EchoStar. There can be no assurance that EchoStar's
requests will be granted or, if granted, that they will be granted on a timely
basis or on terms favorable to EchoStar. EchoStar will also require further FCC
authorizations to operate EchoStar III and launch and operate EchoStar IV. The
loss of any of EchoStar's FCC authorizations, the failure to obtain requested
extensions or waivers or the imposition of conditions would adversely affect
EchoStar's plan of operations, and its current business plan could not be fully
implemented. See "Business--Other Components of DBS Service" and "--Government
Regulation--FCC Permits and Licenses."
By order released January 11, 1996, the FCC's International Bureau extended
the DBS permit of DirectSat for 11 channels at the 175 DEG. WL orbital slot to
1999, subject to the condition that the FCC may reconsider the extension and
modify or cancel it, in whole or in part, if DirectSat fails to make progress
toward construction and operation of its DBS system substantially in compliance
with its promised timetable, or with any more expedited timetable ordered by the
FCC. In the same order, the FCC's staff denied reconsideration of its earlier
decision to assign channels and orbital locations to DirectSat at 119 DEG. WL
and 175 DEG. WL for its DBS system. PrimeStar has applied for full FCC review of
this order and other parties may seek reconsideration and/or judicial review of
the eventual FCC order. There can be no assurance that the full FCC will affirm
the International Bureau's decision or render a decision favorable to EchoStar.
Failure of the full FCC to affirm the decision would have a substantial adverse
effect upon EchoStar's operations and may result in a loss of authorizations. In
addition, in the event that EchoStar loses the DirectSat frequencies at
119 DEG.WL, EchoStar would be required under certain circumstances to offer to
repurchase all or a portion of the 1994 Notes, the 1996 Notes, the 1997 Notes
and, if issued, the Series B Exchange Notes, under certain conditions. In the
event that a substantial number of holders of the 1994 Notes, the 1996 Notes,
the 1997 Notes, or, if issued, the Series B Exchange Notes, accepted that offer,
EchoStar's plan of operations, including its liquidity, would be adversely
affected and it might not be possible to implement EchoStar's current business
plan without obtaining additional financing. See "Business--Legal Proceedings."
DBSC's authorization to construct and operate two DBS satellites at
61.5 DEG. WL and 175 DEG. WL initially expired on August 15, 1995. Prior to that
date, DBSC applied for an extension of time, based upon a variety of factors.
DBSC indicated that it had signed an amendment to the DBSC Satellite Contract,
by
28
<PAGE>
which DBSC ordered a 32 transponder satellite in lieu of the previously
contracted for 16 transponder satellite. DBSC filed an application for FCC
approval of this minor modification in design. In December 1995, the FCC staff
approved DBSC's request for an extension of time, giving it until 1998 to
complete construction and launch of its satellites subject to continued
compliance with the FCC's due diligence requirements. PrimeStar has sought full
FCC review of this order, and other parties may seek reconsideration and/or
judicial review of the eventual FCC order. There can be no assurance that the
full FCC will affirm the International Bureau's decision or render a decision
favorable to EchoStar. Failure of the full FCC to affirm the decision would have
a substantial adverse effect upon EchoStar's operations, and may result in loss
of the authorization. The FCC has not yet ruled on PrimeStar's petition, and no
assurances can be given that the FCC will sustain the staff's determination.
DBSC's minor modification request was opposed by Tempo. The FCC's staff has
declined to rule on DBSC's request for minor modification of its authorization
pending the submission to the FCC of interference data based on the proposed new
satellite design. DBSC has submitted relevant data; and by order released
September 29, 1997, the FCC's International Bureau conditionally approved the
requested modification application.
EchoStar III was launched on October 5, 1997 pursuant to FCC authority which
was conditionally granted by the September 29, 1997 order of the FCC's
International Bureau. The International Bureau's September 29, 1997 order also
conditionally granted DBSC an STA to test all transponders on EchoStar III for
the earlier of eight weeks after launch or seven days prior to the launch of a
satellite to that orbital location by an authorized entity. The International
Bureau's order is subject to review by the full Commission and ultimately the
Court of Appeals, and there can be no assurance that the order will not be
challenged, or that any such challenges will not be successful. EchoStar also
expects to file applications for authority to operate the satellite as well as
feeder link earth stations and antennas for TT&C communications with EchoStar
III. On October 3, 1997 EchoStar filed an application for authority to operate
one of the earth station antennas that it plans to deploy for TT&C and feeder
link communications with EchoStar III. On October 27, 1997, EchoStar filed a
request for a 180 day STA to operate the satellite after testing, and expects to
file an application for a license to operate the satellite. There can be no
assurance that any of these current or future requests will be granted. Also on
October 3, 1997, EchoStar filed a request for an STA to allow it to begin
testing that antenna immediately upon the launch of EchoStar III. On the same
date, the FCC staff verbally gave EchoStar a 90-day STA to conduct such testing
subject to certain power restrictions.
In the event EchoStar at any time fails to comply with applicable
Communications Act requirements and FCC regulations, including the FCC's
required schedule for construction and launch of any of EchoStar's satellites,
the FCC has the authority to revoke, condition, or decline to extend or renew
the authorizations for that and any subsequent satellites and, in connection
with that action, could exercise its authority to rescind these authorizations.
The FCC has, in fact, indicated it may revoke DBS permits if there are delays in
the satellite construction schedule submitted by the permittee to the FCC or if
the permittee fails to meet other due diligence construction and operation
obligations. The schedule submitted to the FCC by DBSC called for the completion
of construction at 61.5 DEG. WL of EchoStar III by July 31, 1997, and that
milestone was met. DBSC and DirectSat also must have operational satellites at
175 DEG. WL by 1998 and 1999, respectively, and DirectSat must have an
operational satellite at 110 DEG. WL by 1999. Both DBSC and DirectSat must
comply with other intermediate milestones. Any delay in this schedule may cause
total or partial revocation of DBSC's or DirectSat's permits. The FCC also has
declared that it will carefully monitor the semi-annual reports required to be
filed by DBS permittees. Failure of EchoStar to file adequate semi-annual
reports or to demonstrate progress in the construction of its DBS systems may
result in cancellation of its permits. EchoStar has not filed all required
progress reports with the FCC. There is a risk that the FCC may find that
EchoStar has not complied fully with the FCC's due diligence requirements,
including without limitation the filing of semi-annual progress reports and
satisfaction of construction and payment obligations consistent with the FCC's
rules and the semi-annual progress reports filed by EchoStar.
29
<PAGE>
Further, the FCC has not yet completed its review to determine whether
EchoStar's contract for the construction of the western satellite of its system
meets the FCC's requirements and has deferred a decision on whether to extend
EchoStar Satellite Corporation's ("ESC") permit for western assignments.
Therefore, the FCC has not yet assigned to EchoStar frequencies for that
satellite. While it is possible that DBSC, DirectSat and ESC may construct a
satellite for joint use by all three at 175 DEG. WL (provided that ESC is found
to have a firm contract and receives frequency assignments at 175 DEG. WL),
EchoStar will still be required to construct and launch two or more satellites
in addition to EchoStar I, EchoStar II, EchoStar III and EchoStar IV in order to
preserve all of its DBS permits (plus additional satellites for the single
frequencies at each of the 110 DEG. WL and 166 DEG. WL orbital slots in order to
avoid loss of those frequencies). Finally, with respect to the 24 orbital
assignments at the 148 DEG. WL orbital slot, EchoStar must complete contracting
for a satellite by December 20, 1997, must complete construction by December 20,
2000, and must launch and operate a satellite by December 20, 2002. Absent
infusion of additional significant capital, EchoStar will not be able to retain
all of its assigned frequencies and orbital slots. There can be no assurance
that EchoStar will be able to comply with the FCC's due diligence requirements
or that the FCC will determine that EchoStar has complied with such due
diligence requirements.
In addition, ESC recently received from the FCC's International Bureau a
conditional license for two FSS satellites in the Ka-band. That license was
based on an orbital plan agreed upon by applicants in EchoStar's processing
round. Certain of these applicants have now requested changes to that orbital
plan. One company (Norris) has filed a request to stay the plan, and petitions
for reconsideration are also pending against certain of the licenses covered by
the plan. There can be no assurance that review of the recently granted Ka-band
licenses and orbital plan by the International Bureau and the full FCC will not
eliminate the basis for EchoStar's conditional license and result in loss of
that license.
On October 15, 1997, the FCC released service rules applicable to Ka-band
licensees. Among other things, the rules impose various technical requirements
and restrictions, including the obligation to protect or coordinate with certain
types of services and power control requirements. The FCC also imposed
implementation milestones, including commencement of construction within one
year of grant, commencement of construction of second satellite within two years
of grant, launch of first satellite within five years of grant, and launch of
all satellites by the dates required by the ITU--generally six years from filing
of the ITU "Appendix 4" information (which was filed in November 1995), with the
possibility of a three-year extension. The FCC noted that EchoStar proposes to
operate its system on a common carrier basis. Further, the FCC prohibited
trafficking in "bare" Ka-band licenses. The FCC also imposed annual reporting
requirements. There can be no assurance that these new rules will not adversely
affect EchoStar's plans with respect to its licensed Ka-band system.
In November 1996, ESC also received a conditional license for two Ku-band
FSS satellites, subject, among other things, to submitting additional proof of
its financial qualifications. While ESC has submitted such proof, GE Americom
and PrimeStar have challenged it and have requested cancellation of ESC's
license. GE Americom and PrimeStar have also requested reconsideration of ESC's
license and reassignment of one EchoStar satellite to a different orbital slot,
on the ground that the satellite will interfere with the GE Americom satellite
used by PrimeStar for its medium-power Ku-band service. Finally, GE Americom and
PrimeStar have opposed ESC's request to add C-band capabilities to one satellite
of its Ku-band system, and EchoStar Ku-X Corporation's pending application for
an extended Ku-band system has also been opposed. There can be no assurance as
to how the FCC will rule with respect to any of these challenges. Rulings in
favor of these challengers would adversely affect EchoStar's ability to use
these FSS satellites.
EchoStar also must comply with certain construction and launch milestones
imposed or expected to be imposed with respect to its conditionally authorized
operations in the Ku and Ka-bands. Failure to comply with such requirements may
result in termination of the authorizations.
RISK OF INABILITY TO MANAGE RAPIDLY EXPANDING OPERATIONS. EchoStar must
expand its operations rapidly to achieve its business objectives. Several of
EchoStar's key activities, including satellite in-orbit
30
<PAGE>
control, satellite receiver manufacturing, billing and subscriber management are
out-sourced to third party vendors. To manage its growth effectively, EchoStar
must continue to develop its internal and external sales force, installation
capability, customer service operations, and information systems, and maintain
its relationships with third party vendors. EchoStar will also need to continue
to expand, train and manage its employee base, and its management personnel will
be required to assume even greater levels of responsibility. If EchoStar is
unable to manage its growth effectively, EchoStar's business and results of
operations could be materially adversely affected.
SUBSCRIBER TURNOVER. Since commencing operation of the DISH Network in
March 1996, EchoStar's monthly subscriber turnover (which represents the number
of subscriber disconnects during the period divided by the weighted-average
number of subscribers during the period) has averaged less than 1.25%. To date,
a majority of EchoStar's subscribers have purchased annual subscriptions.
EchoStar expects that subscriber turnover may increase as annual subscribers
renew and convert to month-to-month subscriptions, as the number of overall DISH
Network subscribers increases, and as a result of certain other factors. If
EchoStar is unable to control subscriber turnover, its financial condition and
results of operations would be adversely affected.
LIMITED MARKETING EXPERIENCE. EchoStar began marketing the EchoStar DBS
System in March 1996. The Company markets EchoStar Receiver Systems throughout
the U.S. through its own sales and marketing organization using national and
regional broadcast and print advertising, independent distributors and retailers
and consumer electronics stores and outlets. The Company's success will
ultimately depend in large part upon its ability to successfully demonstrate to
consumers the ease of use, reliability and cost-effectiveness of the EchoStar
DBS System, and upon its ability to have EchoStar Receiver Systems distributed
in consumer mass marketing channels, such as consumer electronics stores and
outlets.
EchoStar is presently selling EchoStar Receiver Systems through a limited
number of consumer electronics stores. Some of EchoStar's competitors, including
DirecTv, began selling their products through consumer electronics stores before
EchoStar and, as a result, are carried by a greater number of retailers and have
a competitive advantage in the consumer electronics distribution channel.
Further, some of EchoStar's competitors have maintained this competitive
advantage through extensive monetary support of consumer electronics advertising
campaigns. This is particularly true in the case of those consumer electronics
outlet chains that have chosen, for the time being, to sell only one or a
limited number of DBS receiver products. Consequently, there can be no assurance
that EchoStar will be able to effectively market its EchoStar Receiver Systems.
RISK OF SATELLITE DEFECT, LOSS OR REDUCED PERFORMANCE. Satellites are
subject to significant risks, including satellite defects, launch failure,
destruction and damage that may result in incorrect orbital placement or prevent
proper commercial operation. Approximately 15% of all commercial geosynchronous
satellite launches have resulted in a total or constructive total loss. The
failure rate varies by launch vehicle and manufacturer. While the FCC granted
EchoStar authority in 1995 to construct a satellite to serve as a ground spare
for EchoStar I and EchoStar II, EchoStar has not constructed ground spares for
its DBS system, and therefore may not have satellites immediately available to
use as replacements in the event of a serious in-orbit problem which could cause
a substantial delay in the restoration of EchoStar's DBS service.
In the event of a failure or loss of any of EchoStar I, EchoStar II, or
EchoStar III, and subject to FCC consent, EchoStar may relocate EchoStar IV and
utilize the satellite as a replacement for the failed or lost satellite. Such a
relocation would require prior FCC approval and, among other things, a showing
to the FCC that EchoStar IV would not cause additional interference compared to
EchoStar I, EchoStar II, or EchoStar III. Should EchoStar choose to utilize
EchoStar IV in this manner, there can be no assurance that such use would not
adversely affect EchoStar's ability to meet the construction, launch and
operation deadlines associated with its permits. Failure to meet such deadlines
could result in the loss of such permits and would have an adverse effect on
EchoStar's planned operations.
31
<PAGE>
In the event of an in-orbit failure of EchoStar III, under the 1996 Notes
Indenture EchoStar would be required to use the proceeds from any launch
insurance to purchase satellites or, at ESBC's option, to make an offer to
repurchase the maximum amount of 1996 Notes that can be purchased with those
proceeds. Similarly, in the event of a launch failure of EchoStar IV, under the
1997 Notes Indenture DBS Corp would be required to use the proceeds from any
launch insurance to purchase satellites or, at DBS Corp's option, to make an
offer to repurchase the maximum amount of 1997 Notes that can be purchased with
those proceeds.
EchoStar III was launched on October 5, 1997 on an Atlas IIAS launch
vehicle. Although all tests to date have been successful, EchoStar III has not
yet achieved geostationary orbit. The ultimate success of the launch of EchoStar
III will not be determinable until up to 60 days after its October 5 launch
date.
A number of satellites constructed by Lockheed Martin Corporation ("Lockheed
Martin") over the past three years have experienced defects resulting in total
or partial loss following launch. The type of failures experienced have varied
widely. Lockheed Martin constructed EchoStar I, EchoStar II and EchoStar III and
is constructing EchoStar IV. No assurances can be given that EchoStar I,
EchoStar II, EchoStar III or EchoStar IV will perform according to
specifications.
Launch delays could result from weather conditions or technical problems
with any EchoStar satellite or any launch vehicle utilized by the launch
provider for EchoStar IV, or from other factors beyond EchoStar's control. If
the launch of any of EchoStar's satellites, including EchoStar IV, is delayed,
EchoStar's strategy to provide additional programming to DISH Network
subscribers using transponders on these satellites would be adversely affected.
RISK OF SIGNAL THEFT. The delivery of subscription programming requires the
use of encryption technology. Signal theft or "piracy" in the C-band DTH, cable
television and European DBS industries has been widely reported. There can be no
assurance that the encryption technology used by the EchoStar DBS System will
remain totally effective. If EchoStar's encryption technology is compromised in
a manner which is not promptly corrected, EchoStar's revenue and its ability to
contract for video and audio services provided by programmers would be adversely
affected. Recent published reports indicate that the DirecTv and USSB encryption
systems have been compromised. There can be no assurance that continued theft of
DirecTv programming will not adversely affect EchoStar's operations. A Canadian
court recently ruled that pirating of DirecTv programming is not illegal in
Canada. This ruling may encourage the attempted piracy of EchoStar programming
in Canada, resulting in lost revenue for EchoStar and increased piracy of
DirecTv programming. Piracy of DirecTv programming could result in increased
sales of DirecTv receivers at the expense of loss of potential DISH Network
subscribers.
RISKS OF FAILURE OF COMPLEX TECHNOLOGY. The EchoStar DBS System is highly
complex. New applications and adaptations of existing and new technology
(including compression, conditional access, on screen guides and other matters),
and significant software development, are integral to the EchoStar DBS System.
As a result of the introduction of such new applications and adaptations from
time to time, the EchoStar DBS System may, at times, not function as expected.
Technology in the satellite television industry is in a rapid and continuing
state of change as new technologies develop. Although the digital compression
technology utilized in connection with the EchoStar DBS System is the world
standard, the integration and implementation of that technology is also
undergoing rapid change. There can be no assurance that EchoStar and its
suppliers will be able to keep pace with technological developments. In
addition, delays in the delivery of components or other unforeseen problems in
the EchoStar DBS System may occur that could adversely affect performance, cost
or timely deployment and operation of the EchoStar DBS System and could have an
adverse effect on EchoStar. Further, in the event that a competitive satellite
receiver technology becomes commonly accepted as the standard for satellite
receivers in the U.S., EchoStar would be at a significant technological
disadvantage. See "Business--Programming."
32
<PAGE>
CONTROL OF ECHOSTAR BY PRINCIPAL STOCKHOLDER. Although Charles W. Ergen,
the Chairman, Chief Executive Officer and President of EchoStar, currently owns
73% of the total equity securities of EchoStar (assuming exercise of employee
stock options), he currently possesses approximately 96% of the total voting
power. Thus, Mr. Ergen has the ability to elect a majority of the directors of
EchoStar and to control all other matters requiring the approval of EchoStar's
stockholders. See "Security Ownership of Certain Beneficial Owners and
Management." For Mr. Ergen's total voting power in EchoStar to be reduced to
below 51%, his percentage ownership of the equity securities of EchoStar would
have to be reduced to below 10%. Following consummation of the Common Offering,
Mr. Ergen will own approximately 68% of the total equity securities of EchoStar
and would possess approximately 95% of the total voting power. Assuming
conversion of all of the shares of Preferred Stock and following consummation of
the Common Offering, Mr. Ergen would own approximately 62% of the total equity
securities of EchoStar and would possess approximately 94% of the total voting
power.
LIMITATION OF VOTING RIGHTS. EchoStar's equity securities consist of common
and preferred stock. EchoStar's common stock has been divided into three classes
with different voting rights. Holders of Class A Common Stock and Class C Common
Stock are entitled to one vote per share on all matters submitted to a vote of
stockholders and holders of Class B Common Stock and Series A Preferred Stock
are entitled to ten votes per share. No Class C Common Stock is currently issued
and outstanding. However, upon a Change in Control (as defined) of EchoStar,
each holder, if any, of shares of Class C Common Stock would be entitled to cast
ten votes for each share of Class C Common Stock held by such holder. See
"Description of Capital Stock." Holders of Class A Common Stock, Class B Common
Stock and Class C Common Stock and the Series A Preferred Stock vote together as
a single class on all matters submitted to stockholders, except where separate
class voting is required by law and except as otherwise provided in the
Certificate of Designations, Preferences and Rights for the Series A Preferred
Stock. The Series B Preferred Stock, the Series C Preferred Stock are,
nonvoting. Holders of Class A Common Stock will not be able to meaningfully
participate in the affairs of EchoStar absent a restructuring of the capital
stock of EchoStar, or the conversion into Class A Common Stock of EchoStar's
outstanding shares of Class B Common Stock and Series A Preferred Stock.
LIMITATIONS ON WARRANTIES AND INSURANCE. Pursuant to satellite construction
contracts between Lockheed Martin and EchoStar and certain of its subsidiaries
(collectively, the "Satellite Contracts"), and EchoStar's launch services
contracts (the "Launch Contracts"), EchoStar and certain of its subsidiaries are
the beneficiaries of limited warranties on their satellites and launch vehicles.
However, the limited warranties do not cover a substantial portion of the risk
inherent in satellite launches or satellite operations.
EchoStar is required under the 1994 Notes Indenture to maintain in-orbit
insurance for EchoStar I and EchoStar II. EchoStar is required under the 1996
Notes Indenture to maintain in-orbit insurance for EchoStar III and is required
under the 1997 Notes Indenture to obtain launch and in-orbit insurance for
EchoStar IV. EchoStar has procured the required in-orbit insurance for EchoStar
I, EchoStar II and EchoStar III. The launch insurance policies contain (or are
expected to contain), and the insurance policies with respect to in-orbit
operation contain (or are expected to contain), standard commercial satellite
insurance provisions, including a material change condition, that, if
successfully invoked, will give insurance carriers the ability to increase the
cost of the insurance (potentially to a commercially impracticable level),
require exclusions from coverage that would leave the risk uninsured or rescind
their coverage commitment entirely. The in-orbit insurance policies for EchoStar
I, EchoStar II and EchoStar III also are subject to annual renewal provisions.
There can be no assurance that such renewals will be at rates or on terms
favorable to EchoStar. If renewal is not possible, there can be no assurance
that EchoStar will be able to obtain replacement insurance policies on terms
favorable to EchoStar. For example, if EchoStar I, EchoStar II, EchoStar III or
other similar satellites experience anomalies while in orbit, the cost to renew
in-orbit insurance could increase significantly or coverage exclusions for
similar anomalies could be required. Further, although EchoStar has obtained
binders for the launch insurance required for EchoStar
33
<PAGE>
IV (including in-orbit insurance for 365 days after launch), there can be no
assurance that EchoStar will be able to obtain or maintain insurance for
EchoStar IV. See "Business--Insurance."
If the launch of any EchoStar satellite is a full or partial failure or if,
following launch, any EchoStar satellite does not perform to specifications,
there may be circumstances in which insurance will not fully reimburse EchoStar
for any loss. In addition, insurance will not reimburse EchoStar for business
interruption, loss of business and similar losses that might arise from delay in
the launch of any EchoStar satellite. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
LIMITED LIFE OF SATELLITES. Each EchoStar satellite has a limited useful
life. A number of factors affect the useful lives of the satellites, including
the quality of their construction, the durability of their component parts, the
longevity of their orbits and the launch vehicle used. The minimum design life
of each of EchoStar I, EchoStar II, EchoStar III and EchoStar IV is 12 years.
There can be no assurance, however, as to the useful lives of the satellites.
EchoStar's operating results would be adversely affected if the useful life of
any of these satellites were significantly shorter than 12 years. The Satellite
Contracts contain no warranties in the event of a failure of EchoStar I,
EchoStar II, EchoStar III or EchoStar IV following launch. Additionally, a move
of any of these satellites, either temporarily or permanently, to another
orbital location, would result in a decrease in the orbital life of the
satellite of up to six months per movement.
RISK OF SATELLITE DAMAGE OR LOSS FROM ACTS OF WAR, ELECTROSTATIC STORM AND
SPACE DEBRIS. The loss, damage or destruction of any EchoStar satellites as a
result of military actions or acts of war, anti-satellite devices, electrostatic
storm or collision with space debris would have a material adverse effect on
EchoStar. EchoStar's insurance policies include customary exclusions including:
(i) military or similar actions; (ii) laser, directed energy or nuclear
anti-satellite devices; and (iii) insurrection and similar acts or governmental
action.
STATE TAXES. In addition to being subject to FCC regulation, operators of
satellite broadcast systems in the U.S. may be affected by imposition of state
and/or local sales taxes on satellite-delivered programming. According to the
Satellite Broadcasting and Communications Association, several states, including
Maryland, Missouri, North Dakota, New York and Washington, have either adopted
or proposed such taxes. Other states are in various stages of considering
proposals that would tax providers of satellite-delivered programming and other
communications providers. The adoption of state imposed sales taxes could have
adverse consequences to EchoStar's business.
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFERS. The Senior Preferred
Stock and the Senior Exchange Notes, if issued, constitute new issues of
securities, for which there is no established trading market. If a trading
market does not develop or is not maintained, holders of the Senior Preferred
Stock or Senior Exchange Notes, as the case may be, may experience difficulty in
reselling the securities or may be unable to sell it at all. If a market for the
securities develops, any such market may be discontinued at any time and the
securities could trade at prices that may be lower than the initial market
values thereof, depending on many factors, including prevailing interest rates,
the markets for similar securities and the financial performance of EchoStar.
Although there is currently no market for the securities, the Initial Purchasers
have advised EchoStar that they will make a market in the securities. However,
they are not obligated to do so, and any such market making may be discontinued
at any time without notice. In addition, such market making activity will be
subject to the limits imposed by the Securities Act and the Exchange Act, and
may be limited during certain times. See "Description of Senior Preferred
Stock." Accordingly, there can be no assurance as to the development or
liquidity of any market for the securities. The Issuer does not intend to apply
for listing of any of the Senior Preferred Stock or Senior Exchange Notes, as
the case may be, on any securities exchange or for quotation through the Nasdaq
National Market or any other securities quotation service.
34
<PAGE>
USE OF PROCEEDS
There will be no cash proceeds to the Issuer from the Exchange Offer.
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The sole purpose of the Exchange Offer is to fulfill the obligations of the
Issuer with respect to the registration of the Old Series B Shares.
The Old Series B Shares were originally issued and sold on October 2, 1997
(the "Issue Date"). Such sales were not registered under the Securities Act in
reliance upon the exemption provided in section 4(2) of the Securities Act, and
subsequent resales were permitted in reliance on Rule 144A promulgated under the
Securities Act. In connection with the sale of the Old Series B Shares, the
Issuer agreed to file with the Commission a registration statement relating to
the Exchange Offer (the "Registration Statement"), pursuant to which the
Exchange Shares would be offered in exchange for Old Series B Shares tendered at
the option of the holders thereof.
The Registration Rights Agreements provides that the Issuer file a
registration statement relating to the Exchange Offer with the SEC on or prior
to 45 days after the Issue Date. This Prospectus is a part of the registration
statement which meets the foregoing requirement. The Registration Rights
Agreement further provides that the Issuer will use commercially reasonable
efforts to have the Exchange Offer Registration Statement declared effective by
the SEC on or prior to 150 days after the Issue Date unless the Exchange Offer
would not be permitted by applicable law or SEC policy. The Registration Rights
Agreement further provides that the Issuer commence the Exchange Offer and use
commercially reasonable efforts to issue on or prior to 180 days after the Issue
Date, Exchange Securities in exchange for all Transfer Restricted Securities
tendered prior thereto in the Exchange Offer and if obligated to file a shelf
registration statement, the Issuer will use commercially reasonable efforts to
file the shelf registration statement with the SEC as promptly as practicable
after such filing obligation arises and to cause the shelf registration to be
declared effective by the SEC on or prior to 150 days after the Issue Date. If:
(a) the Issuer fails to file the registration statement to complete the
Exchange Offer on or prior to the 45th day following the Issue Date,
(b) the registration statement to complete the Exchange Offer is not
declared effective on or prior to the 150th day following the Issue Date,
or
(c) the Issuer fails to consummate the Exchange Offer, or a shelf
registration statement is not declared effective, within the specified
time frames after the Issue Date
(each such event referred to in clauses (a) through (c) above a "Registration
Default"), then the Issuer will pay special dividends pursuant to provisions in
the Certificate of Designation to each holder of the Old Series B Shares.
Special dividends will accrue from and including the next day following the
Registration Default at a rate equal to $.05 per week per $1,000 of the
liquidation preference of the securities (determined daily). The amount of the
special dividends will increase by an additional $.05 per week per $1,000 of the
liquidation preference of the securities with respect to each 90-day period
accrual period until all Registration Defaults have been cured, up to a maximum
amount of special interest or special dividends, as applicable, $.40 per week
per $1,000 of the liquidation preference (determined daily). All accrued special
dividends will be paid by the Issuer on each dividend payment date to the
applicable holder by wire transfer of immediately available funds or by federal
funds check or by mailing checks to their registered addresses if no wire
transfer accounts have been specified. Following the cure of all Registration
Defaults, the accrual of special dividends will cease.
In the event that a shelf registration statement is declared effective
pursuant to the terms of the Registration Rights Agreements, if the Issuer fails
to keep such registration statement continuously
35
<PAGE>
effective for the period required by the Registration Rights Agreements, then
from such time as the shelf registration statement is no longer effective until
the earlier of (i) the date of the shelf registration statement is again deemed
effective, (ii) the date that is the third anniversary of the original issuance
of the securities or (iii) the date as of which all of the Transfer Restricted
Securities are sold pursuant to the shelf registration statement, special
dividends pursuant to provisions in the Certificate of Designation, as
applicable, shall accrue at a rate equal to $.05 per week per $1,000 of the
liquidation preference of the securities (determined daily). The Issuer will be
permitted to suspend use of the prospectus that is part of any shelf
registration statement during certain periods of time and in certain
circumstances relating to pending corporate developments and public filings with
SEC and similar events.
Holders of Old Series B Shares will be required to make certain
representations to the Issuer (as described in the Registration Rights
Agreement) in order to participate in the Exchange Offer and will be required to
deliver information to be used in connection with the Shelf Registration
Statement and to provide comments on the Shelf Registration Statement within the
time periods set forth in the Registration Rights Agreement in order to have
their Old Series B Shares included in the Shelf Registration Statement and
benefit form the provisions regarding Liquidated Damages set forth above.
TERMS OF THE EXCHANGE
The Issuer hereby offers to exchange, upon the terms and subject to the
conditions set forth herein and in the Letter of Transmittal accompanying this
Prospectus (the "Letter of Transmittal"), $1,000 in liquidation preference of
Exchange Shares for each $1,000 in liquidation preference of Old Series B
Shares. The terms of the Exchange Shares are substantially identical to the
terms of the Old Series B Shares for which they may be exchanged pursuant to
this Exchange Offer, except that the Exchange Shares will generally be freely
transferable by holders thereof, and the holders of the Exchange Shares (as well
as remaining holders of any Old Series B Shares) are not entitled to certain
registration rights and certain liquidated damages provisions which are
applicable to the Old Series B Shares under the Registration Rights Agreement.
The Exchange Shares will be subject to the same Certificate of Designation as
the Old Series B Shares.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Series B Shares being tendered or accepted for exchange.
Based on its view of interpretations set forth in no-action letters issued
by the Staff to third parties, the Issuer believes that Exchange Shares issued
pursuant to the Exchange Offer in exchange for the Old Series B Shares may be
offered for resale, resold and otherwise transferred by holders thereof (other
than any holder which is (i) an Affiliate of the Issuer, (ii) a broker-dealer
who acquired Old Series B Shares directly from the Issuer or (iii) a
broker-dealer who acquired Old Series B Shares as a result of market making or
other trading activities) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Shares are acquired in the ordinary course of such holders' business,
and such holders are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a distribution
of such Exchange Shares. Any broker-dealer that resells Exchange Shares that
were received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Shares may
be deemed to be an "underwriter" within the meaning of the Securities Act and
any profit on any such resale of Exchange Shares and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. Broker-dealers who acquire Old Series B
Shares as a result of market making or other trading activities may use this
Prospectus, as supplemented or amended, in connection with resales of the
Exchange Shares. The Issuer has agreed that, for a period of 180 days after the
Registration Statement is declared effective, they will make this prospectus
available to any broker-dealer for use in connection with any such resale. Any
holder who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Shares or
36
<PAGE>
any other holder that cannot rely upon such interpretations must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
Tendering holders of Old Series B Shares will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Old Series B
Shares pursuant to the Exchange Offer.
The Exchange Shares will accrue dividends from October 2, 1997 unless
dividends are subsequently paid to holders of the Old Series B Shares. Holders
of Old Series B Shares whose Old Series B Shares are accepted for exchange will
be deemed to have waived the right to have dividends accrue following any
dividend payment date, or to receive any payment in respect of dividends, on the
Old Series B Shares from October 2, 1997 to the date of the issuance of the
Exchange Shares. Dividends on the Exchange Shares are payable quarterly in
arrears on January 1, April 1, July 1, and October 1 of each year, commencing
January 1, 1998; accruing from October 2, 1997 at a rate of 12 1/8% per annum.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer expires on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., Eastern time, on , 1998 unless the Issuer in its
sole discretion extends the period during which the Exchange Offer is open, in
which event the term "Expiration Date" means the latest time and date on which
the Exchange Offer, as so extended by the Issuer, expires. The Issuer reserves
the right to extend the Exchange Offer at any time and from time to time prior
to the Expiration Date by giving written notice to American Securities Transfer
& Trust Co., Inc. (the "Exchange Agent") and by timely public announcement
communicated by no later than 5:00 p.m. on the next business day following the
Expiration Date, unless otherwise required by applicable law or regulation, by
making a release to the Dow Jones News Service. During any extension of the
Exchange Offer, all Old Series B Shares previously tendered pursuant to the
Exchange Offer will remain subject to the Exchange Offer.
The initial Exchange Date will be the first business day following the
Expiration Date. The Issuer expressly reserves the right to (i) terminate the
Exchange Offer and not accept for exchange any Old Series B Shares for any
reason, including if any of the events set forth below under "Conditions to the
Exchange Offer" shall have occurred and shall not have been waived by the Issuer
and (ii) amend the terms of the Exchange Offer in any manner, whether before or
after any tender of the Old Series B Shares. If any such termination or
amendment occurs, the Issuer will notify the Exchange Agent in writing and will
either issue a press release or give written notice to the holder of the Old
Series B Shares as promptly as practicable. Unless the Issuer terminates the
Exchange Offer prior to 5:00 p.m., Eastern time, on the Expiration Date, the
Issuer will exchange the Exchange Shares for Old Series B Shares on the Exchange
Date.
This Prospectus and the related Letter of Transmittal and other relevant
materials will be mailed by the Issuer to record holders of Old Series B Shares
and will be furnished to brokers, banks and similar persons whose names, or the
names of whose nominees, appear on the lists of holders for subsequent
transmittal to beneficial owners of Old Series B Shares.
HOW TO TENDER
The tender to the Issuer of Old Series B Shares by a holder thereof pursuant
to one of the procedures set forth below will constitute an agreement between
such holder and the Issuer in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
GENERAL PROCEDURES A holder of Old Series B Shares may tender the same by
(i) properly completing and signing the Letter of Transmittal or a facsimile
thereof (all references in this Prospectus to the Letter of Transmittal shall be
deemed to include a facsimile thereof) and delivering the same, together with
the certificate or certificates representing the Old Series B Shares being
tendered and any required signature
37
<PAGE>
guarantees (or a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") pursuant to the procedure described below), to the Exchange Agent
at its address set forth on the back cover of this Prospectus on or prior to the
Expiration Date or (ii) complying with the guaranteed delivery procedures
described below.
If tendered Old Series B Shares are registered in the name of the signer of
the Letter of Transmittal and the Exchange Shares to be issued in exchange
therefor are to be issued (and any untendered Old Series B Shares are to be
reissued) in the name of the registered holder, the signature of such signer
need not be guaranteed. In any other case, the tendered Old Series B Shares must
be endorsed or accompanied by written instruments of transfer in form
satisfactory to the Issuer and duly executed by the registered holder and the
signature on the endorsement or instrument of transfer must be guaranteed by a
bank, broker, dealer, credit union, savings association, clearing agency or
other institution (each an "Eligible Institution") that is a member of a
recognized signature guarantee medallion program within the meaning of Rule
17Ad-15 under the Exchange Act. If the Exchange Shares and/or Old Series B
Shares not exchanged are to be delivered to an address other than that of the
registered holder appearing on the note register for the Old Series B Shares,
the signature on the Letter of Transmittal must be guaranteed by an Eligible
Institution.
Any beneficial owner whose Old Series B Shares are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Old Series B Shares should contact such holder promptly and instruct
such holder to tender Old Series B Shares on such beneficial owner's behalf. If
such beneficial owner wishes to tender such Old Series B Shares himself, such
beneficial owner must, prior to completing and executing the Letter of
Transmittal and delivering such Old Series B Shares, either make appropriate
arrangements to register ownership of the Old Series B Shares in such beneficial
owners name or follow the procedures described in the immediately preceding
paragraph. The transfer of record ownership may take considerable time.
BOOK-ENTRY TRANSFER. The Exchange Agent will make a request to establish an
account with respect to the Old Series B Shares at The Depository Trust Company
(the "Book-Entry Transfer Facility") for purposes of the Exchange Offer within
two business days after receipt of this Prospectus, and any financial
institution that is a participant in the Book-Entry Transfer Facility's systems
may make book-entry delivery of Old Series B Shares by causing the Book-Entry
Transfer Facility to transfer such Old Series B Shares into the Exchange Agent's
account at the Book-Entry Transfer Facility in accordance with the Book-Entry
Transfer Facility's procedures for transfer. However, although delivery of Old
Series B Shares may be effected through book-entry transfer at the Book-Entry
Transfer Facility, the Letter of Transmittal, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address specified on the back cover
of this Prospectus on or prior to the Expiration Date or the guaranteed delivery
procedures described below must be complied with.
THE METHOD OF DELIVERY OF OLD SERIES B SHARES AND ALL OTHER DOCUMENTS IS AT
THE ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE BE
OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE
TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE.
Unless an exemption applies under the applicable law and regulations
concerning "backup withholding" of federal income tax, the Exchange Agent will
be required to withhold, and will withhold 31% of the gross proceeds otherwise
payable to a holder pursuant to the Exchange Offer if the holder does not
provide his, her, or its taxpayer identification number (social security number
or employer identification number, as applicable) and certify that such number
is correct. Each tendering holder should complete and sign the main signature
form and the Substitute Form W-9 included as part of the Letter of Transmittal,
so
38
<PAGE>
as to provide the information and certification necessary to avoid backup
withholding, unless an applicable exemption exists and is proven in a manner
satisfactory to the Issuer and the Exchange Agent.
GUARANTEED DELIVERY PROCEDURES. If a holder desires to accept the Exchange
Offer and time will not permit a Letter of Transmittal or Old Series B Shares to
reach the Exchange Agent before the Expiration Date, a tender may be effected if
the Exchange Agent has received at its office listed on the Letter of
Transmittal on or prior to the Expiration Date a letter, telegram or facsimile
transmission from an Eligible Institution setting forth the name and address of
the tendering holder, the principal amount of the Old Series B Shares being
tendered, the names in which the Old Shares are registered and, if possible, the
certificate numbers of the Old Shares to be tendered, and stating that the
tender is being made thereby and guaranteeing that within three New York Stock
Exchange trading days after the date of execution of such letter, telegram or
facsimile transmission by the Eligible Institution, the Old Series B Shares, in
proper form for transfer, will be delivered by such Eligible Institution
together with a properly completed and duly executed Letter of Transmittal (and
any other required documents). Unless Old Series B Shares being tendered by the
above-described method (or a timely Book-Entry Confirmation) are deposited with
the Exchange Agent within the time period set forth above (accompanied or
preceded by a properly completed Letter of Transmittal and any other required
documents), the Issuer may, at its option, reject the tender. Copies of a Notice
of Guaranteed Delivery which may be used by Eligible Institutions for the
purposes described in this paragraph are available form the Exchange Agent.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Series B Shares (or a timely Book-Entry Confirmation) is
received by the Exchange Agent. Issuances of Exchange Shares in exchange for Old
Series B Shares tendered pursuant to a Notice of Guaranteed Delivery or letter,
telegram or facsimile transmission to similar effect (as provided above) by an
Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Old Series B
Shares (or a timely Book-Entry Confirmation).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Series B Shares will
be determined by the Issuer, whose determination will be final and binding. The
Issuer reserves the absolute right to reject any or all tenders not in proper
form or the acceptances for exchange of which may, in the opinion of counsel to
the Issuer, be unlawful. The Issuer also reserves the absolute right to waive
any of the conditions of the Exchange Offer or any defect or irregularities in
tenders of any particular holder whether or not similar defects or
irregularities are waived in the case of other holder. Neither the Issuer, the
Exchange Agent nor any other person will be under any duty to give notification
of any defects or irregularities in tenders or shall incur any liability for
failure to give any such notification. The Issuer's interpretation of the terms
and conditions of the Exchange Offer (including the Letter of Transmittal and
the instructions thereto) will be final and binding.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer:
The party tendering Old Series B Shares for exchange (the "Transferor")
exchanges, assigns and transfers the Old Series B Shares to the Issuer and
irrevocable constitutes and appoints the Exchange Agent as the Transferor's
agent and attorney-in-fact to cause the Old Series B Shares to be assigned,
transferred and exchanged. The Transferor represents and warrants that it
has full power and authority to tender, exchange, assign and transfer the
Old Series B Shares and to acquire Exchange Shares issuable upon the
exchange of such tendered Old Series B Shares, and that, when the same are
accepted for exchange, the Issuer will acquire good and unencumbered title
to the tendered Old Series B Shares, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claim.
The Transferor also warrants that it will, upon request, execute and deliver
any
39
<PAGE>
additional documents deemed by the Issuer to be necessary or desirable to
complete the exchange, assignment and transfer of tendered Old Shares. The
Transferor further agrees that acceptance of any tendered Old Shares by the
Issuer and the issuance of Exchange Shares in exchange therefor shall
constitute performance in full by the Issuer of its obligations under the
Registration Rights Agreement and that the Issuer shall have no further
obligations or liabilities thereunder (except in certain limited
circumstances). All authority conferred by the Transferor will survive the
death or incapacity of the Transferor and every obligation of the Transferor
shall be binding upon the heirs, legal representatives, successors, assigns,
executors and administrators of such Transferor.
By tendering Old Series B Shares and executing the Letter of Transmittal,
the Transferor certifies that (a) it is not an Affiliate of the Issuer, that
it is not a broker-dealer that owns Old Series B Shares acquired directly
from the Issuer or an Affiliate of the Issuer, that it is acquiring the
Exchange Shares offered hereby in the ordinary course of such Transferor's
business and that such transferor has no arrangement with any person to
participate in the distribution of such Exchange Shares. In order to
participate in the Exchange Offer, each entity must certify to the Company
in the Letter of Transmittal that it is not an Affiliate of the Issuer, that
it is not engaged in, and does not intend to engage in, a distribution of
the Exchange Shares, and that the Exchange Shares are being acquired in the
ordinary course of business.
WITHDRAWAL RIGHTS
Old Series B Shares tendered pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date.
For a withdrawal to be effective, a written or facsimile transmission notice
of withdrawal must be timely received by the Exchange Agent at its address set
forth on the back cover of this Prospectus prior to the Expiration Date. Any
such notice of withdrawal must specify the person named in the Letter of
Transmittal as having tendered Old Series B Shares to be withdrawn, the
certificate numbers of Old Series B Shares to be withdrawn, the liquidation
preference of Old Series B Shares to be withdrawn, a statement that such holder
is withdrawing his election to have such Old Series B Shares exchanged, and the
name of the registered holder of such Old Series B Shares, and must be signed by
the holder in the same manner as the original signature of the Letter of
Transmittal (including any required signature guarantees) or be accompanied by
evidence satisfactory to the Issuer that the person withdrawing the tender has
succeeded to the beneficial ownership of the Old Series B Shares being
withdrawn. The Exchange Agent will return the properly withdrawn Old Series B
Shares promptly following receipt of notice of withdrawal. All questions as to
the validity of notices of withdrawals, including time of receipt, will be
determined by the Issuer, and such determination will be final and binding on
all parties.
ACCEPTANCE OF OLD SERIES B SHARES FOR EXCHANGE; DELIVERY OF EXCHANGE SHARES
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Old Series B Shares validly tendered and not
withdrawn and the issuance of the Exchange Shares will be made on the Exchange
Date.
The Exchange Agent will act as agent for the tendering holders of Old Series
B Shares for the purposes of receiving Exchange Shares from the Issuer and
causing the Old Series B Shares to be assigned, transferred and exchanged. Upon
the terms and subject to conditions of the Exchange Offer, delivery of Exchange
Shares to be issued in exchange for accepted Old Series B Shares will be made by
the Exchange Agent promptly after acceptance of the tendered Old Series B
Shares. Old Series B Shares not accepted for exchange by the Issuer will be
returned without expense to the tendering holders (or in the case of Old Series
B Shares tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the procedures described above,
such non-exchanged Old Series B Shares will be credited to an account maintained
with such Book-Entry Transfer Facility) promptly following the
40
<PAGE>
Expiration Date or, if the Issuer terminates the Exchange Offer prior to the
Expiration Date, promptly after the Exchange Offer is so terminated.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Issuer will not be required to issue Exchange Shares
in respect of any properly tendered Old Series B Shares not previously accepted
and may terminate the Exchange Offer (by oral or written notice to the Exchange
Agent and by timely public announcement communicated no later than 5:00 p.m. on
the next business day following the Expiration Date, unless otherwise required
by applicable law or regulation, by making a release to the Dow Jones News
Service) or, at its option, modify or otherwise amend the Exchange Offer, if:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to
restrain or prohibit the making or consummation of the Exchange Offer or
any other transaction contemplated by the Exchange Offer, (ii) assessing
or seeking any damages as a result thereof or (iii) resulting in a
material delay in the ability of the Issuer to accept for exchange some
or all of the Old Series B Shares pursuant to the Exchange Offer;
(b) any statute, rule, regulation, order or injunction shall be sought,
proposed, introduced, enacted, promulgated or deemed applicable to the
Exchange Offer or any of the transactions contemplated by the Exchange
Offer by any government or governmental authority, domestic or foreign,
or any action shall have been taken, proposed or threatened, by any
government, governmental authority, agency or court, domestic or foreign,
that in the sole judgment of the Issuer, might directly or indirectly
result in any of the consequences referred to in clauses (a)(i) or (ii)
above or, in the sole judgment of the Issuer, might result in the holders
of Exchange Shares having obligations with respect to resales and
transfers of Exchange Shares which are greater than those described in
the interpretations of the Staff referred to on the cover page of this
Prospectus, or would otherwise make it inadvisable to proceed with the
Exchange Offer; or
(c) a material adverse change shall have occurred in the business, condition
(financial or otherwise), operations, or prospects of the Issuer.
The foregoing conditions are for the sole benefit of the Issuer and may be
asserted by it with respect to all or any portion of the Exchange Offer
regardless of the circumstances (including any action or inaction by the Issuer)
giving rise to such condition or may be waived by the Issuer in whole or in part
at any time or from time to time in its sole discretion. The failure by the
Issuer at any time to exercise any of the foregoing rights will not be deemed a
waiver of any such right, and each right will be deemed an ongoing right which
may be asserted at any time or from time to time. In addition, the Issuer has
reserved the right, notwithstanding the satisfaction of each of the foregoing
conditions, to terminate or amend the Exchange Offer.
Any determination by the Issuer concerning the fulfillment or nonfulfillment
of any conditions will be final and binding upon all parties.
In addition, the Issuer will not accept for exchange any Old Series B Shares
tendered, and no Exchange Shares will be issued in exchange for any such Old
Series B Shares, if at such time any stop order shall be threatened or in effect
with respect to the Registration Statement of which this Prospectus constitutes
a part.
41
<PAGE>
EXCHANGE AGENT
American Securities Transfer & Trust, Inc. has been appointed as the
Exchange Agent for the Exchange Offer. Letters of Transmittal must be addressed
to the Exchange Agent at:
American Securities Transfer & Trust,
Inc.
938 Quail Street
Lakewood, CO 80215
Attn: Mr. Greg Tubbs
Telephone: (303) 234-5300; Facsimile:
(303) 234-5340
Delivery to an address other than as set forth herein, or transmission of
instructions via a facsimile or telex number other than the ones set forth
herein, will not constitute a valid delivery.
SOLICITATION OF TENDERS; EXPENSES
The Issuer has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The Issuer
will, however, pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for reasonable out-of-pocket expenses in
connection therewith. The Issuer will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding tenders for their customers. The expenses to be
incurred in connection with the Exchange Offer, including the fees and expenses
of the Exchange Agent and printing, accounting, investment banking and legal
fees, will be paid by the Issuer and are estimated to be approximately $50,000.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Issuer. Neither the delivery
of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Issuer since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Series B Shares in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction. However, the
Issuer may, at its discretion, take such action as it may deem necessary to make
the Exchange Offer in any such jurisdiction and extend the Exchange Offer to
holders of Old Series B Shares in such jurisdiction. In any jurisdiction the
securities laws or blue sky laws of which require the Exchange Offer to be made
by a licensed broker or dealer, the Exchange Offer is being made on behalf of
the Issuer by one or more registered brokers or dealers which are licensed under
the laws of such jurisdiction.
DISSENTER AND APPRAISAL RIGHTS
HOLDERS OF OLD SERIES B SHARES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL
RIGHTS IN CONNECTION WITH THE EXCHANGE OFFER.
FEDERAL INCOME TAX CONSEQUENCES
The exchange of Old Series B Shares for Exchange Shares by tendering holders
will not be a taxable exchange for federal income tax purposes, and such holders
should not recognize any taxable gain or loss or any interest income as a result
of such exchange. See "Certain Federal Income Tax Considerations."
OTHER
Participation in the Exchange Offer is voluntary and holders of Old Series B
Shares should carefully consider whether to accept the terms and conditions
thereof. Holders of the Old Series B Shares are urged
42
<PAGE>
to consult their financial and tax advisors in making their own decisions on
what action to take with respect to the Exchange Offer.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Series B Shares pursuant to the terms of this Exchange
Offer, the Issuer will have fulfilled obligations contained in the terms of the
Old Series B Shares and the Registration Rights Agreement. Holders of the Old
Series B Shares who do not tender their Old Series B Shares in the Exchange
Offer will continue to hold such Old Series B Shares and will be entitled to all
the rights, and limitations applicable thereto under the Certificate of
Designation, except for any such rights under the Registration Rights Agreement
which by their terms terminate or cease to have further effect as a result of
the making of this Exchange Offer. See "Description of Exchange Shares." All
untendered Old Series B Shares will continue to be subject to the restriction on
transfer set forth in the Indenture. To the extent that Old Series B Shares are
tendered and accepted in the Exchange Offer, the trading market, if any, for any
remaining Old Series B Shares could be adversely affected. See "Risk
Factors--Consequences of Failure to Exchange Old Series B Shares."
The Issuer may in the future seek to acquire untendered Old Series B Shares
in open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Issuer has no present plan to acquire any Old Series B
Shares which are not tendered in the Exchange Offer.
43
<PAGE>
CAPITALIZATION
The following table sets forth: (i) the consolidated capitalization of
EchoStar, on a historical basis as of June 30, 1997; (ii) the pro forma
consolidated capitalization of EchoStar as of June 30, 1997, which gives effect
to the Old Series B Preferred Offering; and (iii) as adjusted to give effect to
the Offerings and the application of the net proceeds thereof. The historical
information in this table is derived from the Consolidated Financial Statements
of EchoStar, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997 (UNAUDITED)
------------------------------------------------------------------------------
AS ADJUSTED AS ADJUSTED
FOR THE FOR THE AS ADJUSTED
CLASS A SERIES C FOR THE
ACTUAL PRO FORMA OFFERING OFFERING(1) OFFERINGS(1)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents, and
marketable investment
securities(2)..................... $ 187,804 $ 380,804 $ 438,536 $ 477,254 $ 534,986
--------- -------------- ---------------- ------------------- ------------
--------- -------------- ---------------- ------------------- ------------
Long-term debt (net of current
portion):
Mortgages and notes payable....... 45,379 45,379 45,379 45,379 45,379
1994 Notes........................ 467,210 467,210 467,210 467,210 467,210
1996 Notes........................ 411,256 411,256 411,256 411,256 411,256
1997 Notes........................ 375,000 375,000 375,000 375,000 375,000
--------- -------------- ---------------- ------------------- ------------
Total long-term debt............ 1,298,845 1,298,845 1,298,845 1,298,845 1,298,845
Senior Preferred Stock.............. -- 193,000 193,000 193,000 193,000
Stockholders' Equity (Deficit):
Preferred Stock, $.01 par value,
20,000,000 shares authorized,
the following series issued and
outstanding:
Series A Preferred Stock,
1,616,681 shares issued and
outstanding, including
accrued dividends of
$3,949,000.................. 19,001 19,001 19,001 19,001 19,001
Series C Preferred Stock...... -- -- -- 100,400 100,400
Class A Common Stock, $.01 par
value, 200,000,000 shares
authorized, 11,821,513 shares
issued and outstanding, actual
and pro forma; 14,921,513 shares
issued and outstanding, as
adjusted........................ 118 118 149 118 149
Class B Common Stock, $.01 par
value, 100,000,000 shares
authorized, 29,804,401 shares
issued and outstanding.......... 298 298 298 298 298
Class C Common Stock, $.01 par
value, 100,000,000 shares
authorized, none outstanding.... -- -- -- -- --
Common Stock Warrants............. 11 11 11 11 11
Additional paid-in capital........ 170,701 170,701 228,402 166,751 224,452
Unrealized holding losses on
available-for-sale securities,
net of deferred taxes........... (11) (11) (11) (11) (11)
Accumulated deficit............... (242,986) (242,986) (242,986) (242,986) (242,986)
--------- -------------- ---------------- ------------------- ------------
Total stockholders' equity
(deficit)..................... (52,868) (52,868) 4,864 43,582 101,314
--------- -------------- ---------------- ------------------- ------------
Total capitalization................ $1,245,977 $1,438,977 $1,496,709 $ 1,535,427 $1,593,159
--------- -------------- ---------------- ------------------- ------------
--------- -------------- ---------------- ------------------- ------------
</TABLE>
- ------------------------
(1) Excludes approximately $14.6 million to be deposited by purchasers of the
Series C Preferred Stock into a deposit account established pursuant to the
Series C Offering.
(2) Excludes restricted cash and marketable investment securities which totaled
$229.6 million as of June 30, 1997.
44
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of, and for the five years ended
December 31, 1996, are derived from the consolidated financial statements of
EchoStar, audited by Arthur Andersen LLP, independent public accountants. The
following selected financial data at June 30, 1997 and with respect to the six
months ended June 30, 1996 and 1997 are unaudited; however, in the opinion of
management, such data reflect all adjustments (consisting only of normal
recurring adjustments) necessary to fairly present the data for such interim
periods. Operating results for interim periods are not necessarily indicative of
the results that may be expected for a full year. The data set forth in this
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," EchoStar's Consolidated
Financial Statements and the Notes thereto and the other financial information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1992 (1) 1993 (1) 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA, RATIOS, SUBSCRIBERS AND SATELLITE
RECEIVERS SOLD)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
DTH products and technical services.............. $ 157,473 $ 206,311 $ 172,753 $ 146,910 $ 135,812 $ 97,199 $ 33,649
DISH Network subscription television services.... - - - - 37,898 6,046 57,588
DISH Network promotions--subscription television
services and products (2)...................... - - - - 22,746 - 76,251
C-band programming............................... 6,436 10,770 14,540 15,232 11,921 6,643 4,079
Loan origination and participation income........ 1,179 3,860 3,690 1,748 3,034 5,103 1,278
--------- --------- --------- --------- --------- --------- ---------
Total revenue...................................... 165,088 220,941 190,983 163,890 211,411 114,991 172,845
Expenses:
DTH products and technical services.............. 120,826 161,447 133,635 116,758 123,790 90,278 27,718
Subscriber promotion subsidies (2)............... - - - - 33,591 - 31,013
DISH Network programming......................... - - - - 19,079 1,769 45,259
C-band programming............................... 6,225 9,378 11,670 13,520 10,510 6,058 3,308
Selling, general and administrative.............. 25,708 30,235 30,219 38,525 90,372 29,816 66,389
Amortization of subscriber acquisition costs
(2)............................................ - - - - 15,991 92 61,418
Depreciation and amortization.................... 1,043 1,677 2,243 3,114 27,423 9,664 25,357
--------- --------- --------- --------- --------- --------- ---------
Total expenses..................................... 153,802 202,737 177,767 171,917 320,756 137,677 260,462
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............................ $ 11,286 $ 18,204 $ 13,216 $ (8,027) $(109,345) $ (22,686) $ (87,617)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).................................. $ 7,529 $ 12,272 $ 90 $ (11,486) $(100,986) $ (29,775) $(126,655)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) attributable to common shares.... $ 7,529 $ 12,272 $ (849) $ (12,690) $(102,190) $ (30,377) $(127,257)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted-average common shares outstanding......... 32,221 32,221 32,442 35,562 40,548 40,404 41,265
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per common and common-equivalent
share............................................ $ 0.23 $ 0.38 $ (0.03) $ (0.36) $ (2.52) $ (0.75) $ (3.08)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
OTHER DATA:
EBITDA (3)....................................... $ 12,329 $ 19,881 $ 15,459 $ (4,913) $ (65,931) $ (12,930) $ (842)
Ratio of earnings to combined fixed charges and
preferred stock dividends (4).................. 15.0x 18.0x - - - - -
Deficiency of earnings to combined fixed charges
and preferred stock dividends (4).............. - - $ (6,145) $ (44,198) $(188,701) $ (61,657) $(143,845)
DBS subscribers (end of period).................. 350,000 70,000 590,000
Satellite receivers sold (in units):
Domestic....................................... 116,000 132,000 114,000 131,000 518,000 155,000 348,000
International.................................. 85,000 203,000 289,000 331,000 239,000 126,000 91,000
--------- --------- --------- --------- --------- --------- ---------
Total........................................ 201,000 335,000 403,000 462,000 757,000 281,000 439,000
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1997
----------------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AS ADJUSTED AS ADJUSTED
FOR THE FOR THE
PRO CLASS A SERIES C
1992 1993 1994 1995 1996 ACTUAL FORMA(5) OFFERING OFFERING(6)
--------- --------- --------- --------- --------- --------- --------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEETS DATA:
Cash, cash equivalents and
marketable investment
securities (7)........... $ 22,031 $ 27,232 $ 233,975 $ 37,424 $ 58,038 $ 187,804 $ 380,804 $ 438,536 $ 477,254
Total assets............... 88,529 106,476 472,492 623,091 1,141,380 1,534,480 1,727,480 1,785,212 1,823,930
Long-term obligations (less
current portion):
1994 Notes............... - - 334,206 382,218 437,127 467,210 467,210 467,210 467,210
1996 Notes............... - - - - 386,165 411,256 411,256 411,256 411,256
1997 Notes............... - - - - - 375,000 375,000 375,000 375,000
Notes payable to
stockholder............ 2,274 14,725 - - - - - - --
Other long-term
obligations............ 4,876 4,702 5,393 33,444 58,580 58,436 58,436 58,436 58,436
Senior Preferred Stock (8)... - - - - - - 193,000 193,000 193,000
Series C Preferred Stock..... - - - - - - - -- 100,400
Total stockholders' equity
(deficit).................. 52,328 49,700 103,808 156,686 61,197 (52,868) (52,868) 4,864 43,582
<CAPTION>
<S> <C>
AS ADJUSTED
FOR THE
OFFERINGS(6)
-----------
<S> <C>
BALANCE SHEETS DATA:
Cash, cash equivalents and
marketable investment
securities (7)........... $ 534,986
Total assets............... 1,881,662
Long-term obligations (less
current portion):
1994 Notes............... 467,210
1996 Notes............... 411,256
1997 Notes............... 375,000
Notes payable to
stockholder............ --
Other long-term
obligations............ 58,436
Senior Preferred Stock (8)... 193,000
Series C Preferred Stock..... 100,400
Total stockholders' equity
(deficit).................. 101,314
</TABLE>
- ------------------------
(1) Certain of EchoStar's subsidiaries operated under Subchapter S of the
Internal Revenue Code of 1986, as amended (the "Code"), and comparable
provisions of applicable state income tax laws, until December 31, 1993. The
net income for 1992 and 1993 presented above is net of pro forma income
taxes of $3,304 and $7,846, respectively, determined as if EchoStar had been
subject to corporate Federal and state income taxes for those years.
Earnings per share has been calculated and presented on a pro forma basis as
if the shares of EchoStar issued to reflect the December 31, 1993
reorganization were outstanding for the years ended December 31, 1992 and
1993, respectively. See Notes 1 and 7 of Notes to EchoStar's Consolidated
Financial Statements.
(2) For accounting and financial purposes, the excess of EchoStar's aggregate
costs over related transaction proceeds associated with the 1996 Promotion
are expensed upon shipment of the equipment and reflected in the Company's
consolidated statements of operations as subscriber promotion subsidies.
Remaining transaction costs (excluding programming) are capitalized as
subscriber acquisition costs and amortized over the initial prepaid
subscription period. Programming costs are accrued and expensed as the
service is provided. Excluding expected incremental revenues from premium
and pay-per-view programming, the accounting treatment described above
results in revenue recognition over the initial period of service equal to
the sum of programming costs and amortization costs. The excess of
transaction costs over related proceeds associated with the 1997 Promotion
(which commenced June 1, 1997) will be recognized as subscriber promotion
subsidies in the Company's statements of operations. EBITDA in future
periods will be negatively affected to the extent that a larger portion of
future subscriber additions result from the 1997 Promotion rather than from
the 1996 Promotion. This adverse EBITDA impact will result from the
immediate recognition of all transaction costs at activation under the 1997
Promotion.
(3) EBITDA represents earnings before interest (net), taxes, depreciation and
amortization (including amortization of subscriber acquisition costs of
$16.0 million for the year ended December 31, 1996 and $92,000 and $61.4
million for the six months ended June 30, 1996 and 1997, respectively).
EBITDA is commonly used in the communications industry to analyze companies
on the basis of operating performance, leverage and liquidity. EBITDA is not
intended to represent cash flows for the period, nor has it been presented
as an alternative to operating income as an indicator of operating
performance and should not be considered in isolation or as a substitute for
measures of performance determined in accordance with generally accepted
accounting principles. See EchoStar's Consolidated Financial Statements
contained elsewhere in this Prospectus.
(4) For purposes of computing the ratio of earnings to combined fixed charges
and preferred stock dividends and the deficiency of earnings to combined
fixed charges and preferred stock dividends, earnings consist of earnings
from continuing operations before income taxes, plus fixed charges,
excluding capitalized interest. Fixed charges consist of interest incurred
on all indebtedness and the computed interest components of rental expense
under noncancelable operating leases. Preferred stock dividends consist of
the dividends accrued on the Company's Series A Preferred Stock. For the
years ended December 31, 1994, 1995 and 1996 and the six months ended June
30, 1996 and 1997, earnings were insufficient to cover fixed charges.
(5) Gives effect to the Old Series B Preferred Stock Offering and the
application of the net proceeds thereof.
(6) Excludes approximately $14.6 million to be deposited by purchasers of the
Series C Preferred Stock into a deposit account established pursuant to the
Series C Offering.
(7) Excludes restricted cash and marketable investment securities which totaled
$229.6 million as of June 30, 1997.
(8) Net of estimated discounts and commissions and offering costs of $7.0
million.
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS
RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY ECHOSTAR OR BY OFFICERS,
DIRECTORS OR EMPLOYEES OF ECHOSTAR ACTING ON ITS BEHALF, THAT ARE NOT STATEMENTS
OF HISTORICAL FACT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT
COULD CAUSE THE ACTUAL RESULTS OF ECHOSTAR TO BE MATERIALLY DIFFERENT FROM
HISTORICAL RESULTS OR FROM ANY FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY ARE THE FOLLOWING: THE UNAVAILABILITY OF SUFFICIENT CAPITAL ON
SATISFACTORY TERMS TO FINANCE ECHOSTAR'S BUSINESS PLAN; INCREASED COMPETITION
FROM CABLE, DBS, OTHER SATELLITE SYSTEM OPERATORS AND OTHER PROVIDERS OF
SUBSCRIPTION TELEVISION SERVICES; CONTINUED MARKET ACCEPTANCE FOR DBS IN ITS
CURRENT BROADCASTING FORMAT AND PRICING STRUCTURE, THE INTRODUCTION OF NEW
TECHNOLOGIES AND COMPETITORS INTO THE SUBSCRIPTION TELEVISION BUSINESS;
INCREASED SUBSCRIBER ACQUISITION COSTS AND SUBSCRIBER PROMOTION SUBSIDIES; THE
INABILITY OF ECHOSTAR TO CONTINUE TO HOLD AND TO OBTAIN ADDITIONAL NECESSARY
SHAREHOLDER AND BONDHOLDER APPROVAL OF ANY STRATEGIC TRANSACTIONS; THE INABILITY
OF ECHOSTAR TO OBTAIN AND HOLD NECESSARY AUTHORIZATIONS FROM THE FEDERAL
COMMUNICATION COMMISSION ("FCC"); THE OUTCOME OF ANY LITIGATION IN WHICH
ECHOSTAR MAY BE INVOLVED; GENERAL BUSINESS AND ECONOMIC CONDITIONS; THOSE
FACTORS DESCRIBED UNDER THE CAPTION "RISK FACTORS"; AND OTHER RISK FACTORS
DESCRIBED FROM TIME TO TIME IN ECHOSTAR'S REPORTS FILED WITH THE COMMISSION. IN
ADDITION TO STATEMENTS THAT EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES,
READERS ARE URGED TO CONSIDER STATEMENTS THAT INCLUDE THE TERMS "BELIEVES,"
"BELIEF," "EXPECTS," "PLANS," "ANTICIPATES," "INTENDS" OR THE LIKE TO BE
UNCERTAIN AND FORWARD-LOOKING. ALL CAUTIONARY STATEMENTS MADE HEREIN SHOULD BE
READ AS BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR.
IN THIS CONNECTION, INVESTORS SHOULD CONSIDER THE RISKS DESCRIBED HEREIN.
OVERVIEW
EchoStar currently operates four related businesses: (i) operation of the
DISH Network and the EchoStar DBS System; (ii) design, manufacture, marketing,
installation and distribution of various DTH products worldwide (including
EchoStar Receiver Systems and C-band systems); (iii) domestic distribution of
DTH programming services; and (iv) consumer financing of EchoStar's domestic
products and programming services. During March 1996, EchoStar began
broadcasting and selling programming packages available from the DISH Network.
EchoStar expects to derive its future revenue principally from periodic
subscription fees for DISH Network programming and, to a lesser extent, from the
sale of DBS equipment. The growth of DBS service and equipment sales has had,
and will continue to have, a material negative impact on EchoStar's domestic
sales of C-band DTH products. However, during the year ended December 31, 1996,
that negative impact was more than offset by sales of EchoStar Receiver Systems.
EchoStar expects the decline in its sales of domestic C-band DTH products to
continue at an accelerated rate.
ECHOSTAR MARKETING PROMOTIONS. Since August 1996, EchoStar has introduced
several marketing promotions, the most significant of which is the 1996
Promotion, which allows independent retailers to offer a standard EchoStar
Receiver System to consumers for a suggested retail price of $199 (as compared
to the original average retail price in March 1996 of approximately $499),
conditioned upon the consumer's prepaid one-year subscription to the DISH
Network's America's Top 50 CD programming package for approximately $300. Total
transaction proceeds to EchoStar are less than its aggregate costs (equipment,
programming and other) for the initial prepaid subscription period for DISH
Network service.
NEW MARKETING PROMOTION. Beginning June 1, 1997, EchoStar implemented a new
marketing program in which independent retailers are permitted to offer standard
EchoStar Receiver Systems to consumers for a suggested retail price of $199 (the
"1997 Promotion"). Previously, consumers could purchase EchoStar Receiver
Systems for approximately $199, but were also required to purchase a prepaid
one-year subscription to the DISH Network's America's Top 50 CD programming
package for $300. The 1997 Promotion allows consumers to subscribe to the DISH
Network's various programming offerings on a
47
<PAGE>
month-to-month basis without an extended subscription commitment. While there
can be no assurance, EchoStar believes that by reducing the "up front" cost to
the consumer significantly and eliminating extended subscription commitments,
the 1997 Promotion may significantly increase consumer demand for DISH Network
services.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
1996.
REVENUE. Total revenue for the six months ended June 30, 1997 was $172.8
million, an increase of $57.8 million, or 50%, as compared to total revenue for
the six months ended June 30, 1996 of $115.0 million. The increase in total
revenue in 1997 was primarily attributable to the introduction of EchoStar's
DISH Network service during March 1996, combined with significant DISH Network
subscriber growth since the launch of service. As of June 30, 1997, EchoStar had
approximately 590,000 DISH Network subscribers compared to approximately 70,000
at June 30, 1996 and 350,000 at December 31, 1996.
The increase in total revenue for the six months ended June 30, 1997 was
partially offset by a decrease in international and domestic sales of C-band
satellite receivers and equipment. The domestic and international demand for
C-band DTH products continued to decline during the first half of 1997.
Revenue from domestic sales of DTH products and technical services decreased
$66.2 million, or 88%, to $8.7 million for the six months ended June 30, 1997.
Domestically, EchoStar sold approximately 348,000 satellite receivers during the
six months ended June 30, 1997, as compared to approximately 155,000 receivers
sold during the comparable period of 1996. Of the total number of satellite
receivers sold during the six months ended June 30, 1997, approximately 345,000
were EchoStar Receiver Systems. Although there was a significant increase in the
number of satellite receivers sold during the six months ended June 30, 1997 as
compared to same period in 1996, overall revenue from domestic sales of DTH
products decreased as a result of decreased prices charged for DBS satellite
receivers combined with the revenue recognition policy applied to DBS satellite
receivers sold under EchoStar's promotions.
Revenue from international sales of analog DTH products for the six months
ended June 30, 1997 totaled $13.0 million, a decrease of $9.2 million, or 42%,
as compared to the same period in 1996. This decrease was directly attributable
to a decrease in the number of analog satellite receivers sold, combined with
decreased prices on products sold. Internationally, EchoStar sold approximately
91,000 analog satellite receivers during the six months ended June 30, 1997, a
decrease of 28%, compared to approximately 126,000 units sold in the comparable
period in 1996. As more fully described below, EchoStar expects to focus its
future international efforts on the sale of digital set-top boxes and the
provision of consulting services to other DBS operators. As a result, during the
remainder of 1997, EchoStar expects to streamline its international operations,
including selected personnel reductions and the eventual elimination of all
sales of analog DTH products.
To expand its presence in international digital and DBS markets, EchoStar
has entered into distribution and consulting agreements with international
digital service providers. In January 1997, EchoStar entered into an agreement
(the "ExpressVu Agreement") with ExpressVu, Inc. ("ExpressVu") a majority owned
subsidiary of BCE, Inc. ("Bell Canada"). The first phase of this agreement
includes an initial order for 62,000 satellite receivers, and primary uplink
integration payments, which combined are expected to exceed $40.0 million.
Pursuant to the ExpressVu Agreement, EchoStar is assisting ExpressVu with the
construction of a digital broadcast center for use in conjunction with
ExpressVu's DTH service, which commenced operations in September 1997, and will
act as a distributor of satellite receivers and related equipment for
ExpressVu's Canadian DTH service. Among other things, EchoStar has agreed not to
provide DTH service in Canada and ExpressVu has agreed not to provide DTH
service, including DBS service, in the U.S. EchoStar recognized revenues of
approximately $11.9 million related to the ExpressVu Agreement during the six
months ended June 30, 1997 (included within the "DTH products and technical
services" caption in the Company's statements of operations).
48
<PAGE>
Additionally, in June 1997, Distribuidora de Television Digital S.A.
("Telefonica"), a DBS joint venture in Spain, selected EchoStar to supply
digital set-top boxes for its satellite television service which commenced
operations in September 1997. Revenues from Telefonica's initial order of
100,000 digital set-top boxes are expected to approximate $40.0 million.
EchoStar began delivery of set-top boxes to Telefonica and expects to fulfill
approximately one-half of the contract during the remainder of 1997. EchoStar
expects to fulfill the remainder of the contract during early 1998 and while
there can be no assurance, hopes to receive further orders during 1998.
While EchoStar continues to actively pursue other similar distribution
opportunities, no assurance can be given that any such additional negotiations
will be successful. Further, EchoStar's future revenue from the sale of DBS
equipment and receivers in international markets depends largely on the success
of the DBS operator in that country, which, in turn, depends on other factors,
such as the level of consumer acceptance of DBS products and the intensity of
competition for international subscription television subscribers. No assurance
can be given regarding the level of expected future revenues which could be
generated from EchoStar's alliances with these, and potentially other, foreign
DBS operators.
C-band programming revenue totaled $4.1 million for the six months ended
June 30, 1997, a decrease of $2.6 million, or 39%, compared to the six months
ended June 30, 1996. This decrease was primarily attributable to the
industry-wide decline in demand for domestic C-band programming services.
DTH AND DISH NETWORK EXPENSES. DTH and DISH Network expenses for the six
months ended June 30, 1997 aggregated $107.3 million, an increase of $9.2
million, or 9% compared to the same period in 1996. DTH products and technical
services expense decreased $62.6 million, or 69%, to $27.7 million during the
six months ended June 30, 1997. These expenses include the costs of C-band
systems and the costs of EchoStar Receiver Systems and related components sold
prior to commencement of EchoStar's promotions. Subscriber promotion subsidies
aggregated $31.0 million for the six months ended June 30, 1997. DISH Network
programming expenses totaled $45.3 million for the six months ended June 30,
1997 as compared to $1.8 million for the comparable period in 1996. The increase
is directly attributable to the increase in DISH Network subscribers at June 30,
1997 compared to June 30, 1996.
C-band programming expenses totaled $3.3 million for the six months ended
June 30, 1997, a decrease of $2.8 million, or 45%, as compared to the same
period in 1996. This decrease is consistent with the decrease in C-band
programming revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative ("SG&A") expenses totaled $66.4 million for the six months ended
June 30, 1997, an increase of $36.6 million as compared to the same period in
1996. SG&A expenses as a percentage of total revenue increased to 38% for the
six months ended June 30, 1997 as compared to 26% for the same period in 1996.
The increase in SG&A expenses was principally attributable to increased
personnel expenses to support the growth of DISH Network service and increased
expenses associated with the operation of the EchoStar DBS System. In future
periods, EchoStar expects that SG&A expenses as a percentage of total revenue
will decrease as subscribers are added.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. Earnings
before interest, taxes, depreciation and amortization (including amortization of
subscriber acquisition costs) ("EBITDA") was negative $842,000 for the six
months ended June 30, 1997, an improvement of $12.1 million, compared to
negative EBITDA of $12.9 million for the same period in 1996. This improvement
in negative EBITDA resulted from the factors affecting revenue and expenses
discussed above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for
the six months ended June 30, 1997 (including amortization of subscriber
acquisition costs of $92,000 and $61.4 million for the six months ended June 30,
1996 and June 30, 1997, respectively) aggregated $86.8 million, an increase of
$77.0 million, as compared to the same period 1996. The increase in depreciation
and amortization expenses primarily was attributable to amortization of
subscriber acquisition costs and depreciation
49
<PAGE>
expense associated with its second DBS satellite ("EchoStar II") (placed in
service during the fourth quarter of 1996).
OTHER INCOME AND EXPENSE. Other expense, net totaled $39.0 million for the
six months ended June 30, 1997, an increase of $15.1 million, as compared to the
same period 1996. The increase in other expense in the first half of 1997
resulted primarily from an increase in interest expense associated with the
March 1996 issuance of the 1996 Notes combined with the continued accretion of
the 1994 Notes. Additionally, interest income decreased approximately $6.0
million as a result of a decrease in invested balances. EchoStar capitalized
$16.6 million and $14.4 million of interest in the six months ended June 30,
1997 and 1996, respectively.
INCOME TAX BENEFIT. The decrease in the income tax benefit of $16.9 million
(from $16.8 million for the six months ended June 30, 1996 to an income tax
provision of $44,000 for the six months ended June 30, 1997) principally
resulted from EchoStar's decision to fully reserve the 1997 additions to its net
deferred tax asset.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
REVENUE. Total revenue for 1996 was $211.4 million, an increase of $47.5
million, or 29%, as compared to total revenue for 1995 of $163.9 million. The
increase in total revenue in 1996 was primarily attributable to the introduction
of EchoStar's DISH Network service during March 1996. In the future, EchoStar
expects to derive its revenue principally from DISH Network subscription
television services. As of December 31, 1996, EchoStar had approximately 350,000
DISH Network subscribers.
The increase in total revenue in 1996 was partially offset by a decrease in
international and domestic sales of C-band satellite receivers and equipment.
The domestic and international markets for C-band DTH products continued to
decline during 1996. Consistent with the increases in total revenue during 1996,
EchoStar experienced a corresponding increase in trade accounts receivable at
December 31, 1996.
Revenue from domestic sales of DTH products and technical services increased
$4.7 million, or 5%, to $98.3 million during 1996. Domestically, EchoStar sold
approximately 518,000 satellite receivers in 1996, an increase of 295% as
compared to approximately 131,000 receivers sold in 1995. Of the total number of
satellite receivers sold during 1996, approximately 474,000 were EchoStar
Receiver Systems. Although there was a significant increase in the number of
satellite receivers sold in 1996 as compared to 1995, overall revenue did not
increase proportionately as a result of the revenue recognition policy applied
to DBS satellite receivers sold under the 1996 Promotion, combined with
decreasing sales of, and lower prices charged for, C-band products. Included in
the number of DTH satellite receivers sold are sales of a competitor's DBS
receiver manufactured and supplied by a third-party manufacturer. Such sales,
which ceased during the second quarter of 1996 coincident with the launch of the
DISH Network service, totaled approximately 19,000 units during 1996, as
compared to 67,000 units sold in 1995. Revenues generated from the sale of
competitor DBS receivers aggregated $8.0 million during 1996, compared to $34.0
million in 1995. No revenue will be generated from the sale of competitor DBS
receivers in 1997.
Revenue from international sales of DTH products for the year ended December
31, 1996 was $37.5 million, a decrease of $15.8 million, or 30%, as compared to
1995. This decrease was directly attributable to a decrease in the number of
analog satellite receivers sold, combined with decreased prices on products
sold. Internationally, EchoStar sold approximately 239,000 analog satellite
receivers in 1996, a decrease of 28%, compared to approximately 331,000 units
sold in 1995.
C-band programming service revenue totaled $11.9 million in 1996, a decrease
of $3.3 million, or 22%, compared to 1995. This decrease was primarily
attributable to the industry-wide decline in demand for domestic C-band
programming services. C-band programming revenue is expected to continue to
decrease for the foreseeable future.
50
<PAGE>
Loan origination and participation income in 1996 was $3.0 million, an
increase of $1.3 million or 74%, as compared to 1995. The increase in loan
origination and participation income during 1996 was primarily due to an
increase in the number of consumer loans and leases funded.
DTH AND DISH NETWORK EXPENSES. DTH and DISH Network expenses in 1996
aggregated $187.0 million, an increase of $56.7 million, or 44%, as compared to
1995. This increase is directly attributable to the introduction of DISH Network
service in March 1996, partially offset by decreases in other DTH expenses. DTH
products and technical services expense increased $7.0 million, or 6%, to $123.8
million during 1996. These expenses include the costs of EchoStar Receiver
Systems and related components sold prior to commencement of the 1996 Promotion.
Subscriber promotion subsidies aggregated $33.6 million during 1996 and
represent expenses associated with the 1996 Promotion. DISH Network programming
expenses totaled $19.1 million for the year ended December 31, 1996.
C-band programming expenses totaled $10.5 million during the year ended
December 31, 1996, a decrease of $3.0 million, or 22%, as compared to 1995. This
decrease is consistent with the decrease in C-band programming revenue. Gross
margins realized on C-band programming sales remained relatively constant.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses totaled $90.4
million in 1996, an increase of $51.8 million or 135%, as compared to 1995. Such
expenses as a percentage of total revenue increased to 43% in 1996 as compared
to 24% in 1995. The increase in SG&A expenses was principally attributable to:
(i) increased personnel expenses as a result of introduction of DISH Network
service in March 1996 (EchoStar's number of employees doubled during 1996 as
compared to 1995); (ii) marketing and advertising expenses associated with the
launch and ongoing operation of the DISH Network; (iii) increased expenses
related to the Digital Broadcast Center, which commenced operations in the third
quarter of 1995; and (iv) increased expenses associated with operation of DISH
Network call centers and subscription management related services.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA
(including amortization of subscriber acquisition costs of $16.0 million for the
year ended December 31, 1996) for 1996 was a negative $65.9 million, an decrease
of $61.0 million compared to 1995. This decrease resulted from the factors
affecting revenue and expenses described above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the year ended December 31, 1996, including the amortization of subscriber
acquisition costs, aggregated $43.4 million, an increase of $40.3 million, as
compared to 1995. The increase in depreciation and amortization expenses
resulted from depreciation expenses associated with the Digital Broadcast
Center, EchoStar I and EchoStar II (placed in service during the fourth quarter
of 1995, the first quarter of 1996, and the fourth quarter of 1996,
respectively), and amortization of subscriber acquisition costs.
OTHER INCOME AND EXPENSE. Other expense, net totaled $46.3 million in 1996,
an increase of $37.1 million, as compared to 1995. The increase in other expense
in 1996 resulted primarily from an increase in interest expense associated with
the issuance of the 1996 Notes. This increase in interest expense was partially
offset by an increase in interest income attributable to increases in invested
balances as a result of the investment of proceeds received from the issuance of
the 1996 Notes. Interest capitalized relating to development of the EchoStar DBS
System during 1996 was $31.8 million (compared to $27.1 million during 1995).
INCOME TAX BENEFIT. The increase in the income tax benefit of $48.9 million
(from $5.7 million in 1995 to $54.7 million in 1996) principally resulted from
the increase in EchoStar's loss before income taxes. EchoStar's net deferred tax
assets (approximately $66.8 million at December 31, 1996) relate to temporary
differences for amortization of original issue discount on the 1994 and 1996
Notes, net operating loss carryforwards, and various accrued expenses which are
not deductible until paid. No valuation allowance
51
<PAGE>
was provided because EchoStar believed it was more likely than not that these
deferred tax assets would ultimately be realized.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994.
REVENUE. Total revenue for 1995 was $163.9 million, a decrease of $27.1
million, or 14%, as compared to total revenue for 1994 of $191.0 million.
Revenue from domestic sales of DTH products for 1995 was $93.6 million, a
decrease of $25.4 million, or 21%, as compared to 1994. This decrease in
domestic revenues was primarily due to an expected decline of $26.9 million, or
23%, in revenue from sales of satellite receivers and related accessories,
during 1995, as compared to 1994. The decrease in domestic revenues for 1995 was
partially offset by $12.5 million in sales of non-proprietary descrambler
modules compared to $11.0 million in 1994. The domestic market for C-band DTH
products continued to decline during 1995. EchoStar also decreased its emphasis
on relatively high cost, low margin descrambler modules beginning in the second
quarter of 1994.
Domestically, EchoStar sold approximately 131,000 satellite receivers in
1995, an increase of 15% as compared to approximately 114,000 receivers sold in
1994. Although there was an increase in the number of satellite receivers sold
in 1995 as compared to 1994, overall revenues declined as a result of a change
in product mix resulting from the introduction of lower priced DBS receivers and
related accessories, and an approximate 23% reduction in the average selling
price of C-band receivers. Included in the number of satellite receivers sold
are those sold for a competitor's DBS system ("Competitor DBS Receivers")
manufactured and supplied by a third party manufacturer ("Competing DBS
Manufacturer") which totaled approximately 67,000 for 1995, as compared to
21,000 for 1994. Competitor DBS Receiver revenues were $34.0 million for 1995,
as compared to $15.0 million for 1994. Competitor DBS Receiver revenues were 21%
of total revenues for 1995.
Revenue from international sales of DTH products for 1995 was $53.3 million,
a decrease of approximately $500,000, or 1%, as compared to 1994. The decrease
for 1995 resulted principally from reduced sales to the Middle East where
EchoStar's largest international DTH customer is based. This decline was
partially offset by increased sales in Africa. Revenue from sales of DTH
products in the Middle East suffered beginning in August 1995 as a result of
restrictions implemented against imports. Historic sales levels may not be
reached because of new digital service planned for the Middle East beginning in
the first quarter of 1996. Internationally, EchoStar sold approximately 331,000
satellite receivers in 1995, an increase of 15%, compared to approximately
289,000 units sold during 1994. The increase was primarily due to a continued
emphasis by EchoStar on lower priced products in 1995 to meet marketplace
demands. For 1995, the effects of volume increases were offset by a 17% decrease
in the average selling price as compared to 1994.
In the second half of 1994 and throughout 1995, an increasing percentage of
domestic DTH satellite retailers relied on attractive financing packages to
generate sales. During most of 1994, certain of EchoStar's competitors offered
consumer financing that retailers considered more attractive than financing
offered by EchoStar. This competitive financing advantage resulted in retailers
selling competing products rather than EchoStar products and was partially
responsible for the decline in C-band DTH unit sales and revenue.
Commencing in 1995, EchoStar stopped receiving monthly participation
payments from Household Retail Services, Inc. ("HRSI") on its loan portfolio,
contributing to a decrease in loan origination and participation income from
1994. Loan origination and participation income for 1995 was $1.7 million, a
decrease of $1.9 million, or 53%, compared to 1994.
EchoStar aggressively marketed its C-band DTH products by offering
competitive pricing and financing in order to minimize the decline in domestic
C-band DTH sales resulting from the increased popularity of "small dish"
equipment. Additionally, EchoStar sold competitor DBS Receivers for reception
52
<PAGE>
of programming offered by other service providers. Competitor DBS Receiver sales
partially offset the decline in domestic C-band sales in 1995.
Programming revenue for 1995 was $15.2 million, an increase of $692,000, or
5%, as compared to 1994. The increase was primarily due to additional sales of
programming packages through retailers and, to a lesser extent, the renewal and
retention of existing customers as a result of more attractive pricing and more
effective marketing.
DTH EXPENSES. Costs of DTH products sold were $116.8 million for 1995, a
decrease of $16.9 million, or 13%, as compared to 1994. The decrease in DTH
operating expenses for 1995 resulted primarily from the decrease in sales of DTH
products. DTH product expenses as a percentage of DTH product revenue were 79%
for 1995, as compared to 77% for 1994. The increase was principally the result
of declining sales prices of C-band DTH products as described above, during 1995
as compared to 1994.
C-band programming expenses were $13.5 million for 1995, an increase of $1.9
million, or 16%, as compared to 1994. Programming expenses as a percentage of
programming revenue were 89% for 1995 as compared to 80% for 1994. Programming
expenses increased at a greater rate than revenues from programming principally
because the prior periods included the flow through of certain volume discounts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses totaled $38.5
million for 1995, an increase of $8.3 million, or 27%, as compared to 1994. Such
expenses as a percentage of total revenue increased to 24% for 1995 as compared
to 16% for 1994. The change was principally the result of the reduction of
revenues from domestic sales of DTH products and increased costs to support,
among other things, expansion of the EchoStar DTH product installation network
and administrative costs associated with development of the DISH Network. In
addition, $1.1 million of compensation expense was recorded with regard to
55,000 shares of Class A Common Stock contributed by EchoStar to EchoStar's
401(k) plan.
Research and development costs totaled $5.0 million during 1995 as compared
to $5.9 million during 1994. The decrease was principally due to the reduction
in research necessary to provide C-band receivers to domestic and international
markets. EchoStar expenses such costs as incurred and includes such costs in
selling, general and administration expenses.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA for
1995 was a negative $4.9 million, a decrease of $20.4 million, or 132%, as
compared to 1994. The decrease resulted from the factors affecting revenue and
expenses discussed above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
totaled $3.1 million during 1995, an increase of $871,000, or 39%, as compared
to 1994. The overall increase primarily resulted from depreciation on assets
placed in service during the third and fourth quarters of 1995.
OTHER INCOME AND EXPENSE. Other expense for 1995 was $9.2 million, a
decrease of $3.5 million, or 28%, as compared to 1994. The difference in other
income and expense for 1995 compared to 1994 resulted primarily from the
amortization of original issue discount and deferred debt issuance costs of
$23.5 million in 1995, and $20.7 million in 1994, net of capitalized interest,
on the 1994 Notes, which were issued on June 7, 1994. Other expense was reduced
by investment income on monies deposited in an escrow account of $8.8 million
for 1995, and $6.5 million for 1994. Interest capitalized relating to
development of the EchoStar DBS System for 1995 totaled $27.1 million as
compared to $5.7 million for 1994.
53
<PAGE>
BENEFIT FROM/PROVISION FOR INCOME TAXES. An income tax benefit of $5.7
million was recognized during 1995 as compared to the income tax provision for
1994 of $399,000. This change was principally the result of changes in
components of income and expenses discussed above during 1995 and 1994,
respectively. EchoStar's deferred tax assets (approximately $13.9 million at
December 31, 1995) relate principally to temporary differences for amortization
of original issue discount on the 1994 Notes and various accrued expenses which
are not deductible until paid. No valuation allowance was provided because
EchoStar believed it was more likely than not that these assets would be
realized.
LIQUIDITY AND CAPITAL RESOURCES
EchoStar's working capital and capital expenditure requirements were
substantial during the three-year period ended December 31, 1996. Those
expenditures principally resulted from the construction of EchoStar's DBS system
during 1994, 1995 and 1996, and the commercial launch of DISH Network service in
March 1996. Capital expenditures, including expenditures for satellite systems
under construction, totaled $119.3 million, $133.6 million and $221.9 million
during the years ended December 31, 1994, 1995 and 1996, respectively, and $81.5
million and $67.1 million during the six-month periods ended June 30, 1996 and
1997, respectively. Additionally, during 1996, EchoStar expended $55.4 million
for DBS authorizations obtained from the FCC, principally relating to its
acquisition of 24 DBS frequencies at the 148 DEG. WL orbital slot. Those
frequencies were acquired at the FCC's January 1996 auction of certain DBS
frequencies.
During 1994, 1995 and 1996 and the six months ended June 30, 1997,
EchoStar's capital expenditure and working capital requirements principally were
funded from proceeds of the 1994 Notes offering, the 1995 initial public
offering of EchoStar's Class A Common Stock (the "IPO"), and the 1996 Notes
offering. In June 1994, EchoStar issued 624,000 units consisting of $624.0
million principal amount at stated maturity of the 1994 Notes and 3,744,000
Warrants (representing 2,808,000 shares of EchoStar Class A Common Stock) for
aggregate net proceeds to the Company of approximately $323.3 million. In June
1995, EchoStar completed the IPO of 4.0 million shares of its Class A Common
Stock, resulting in net proceeds to EchoStar of approximately $62.9 million. In
March 1996, ESBC consummated the 1996 Notes Offering. In connection therewith,
ESBC issued $580.0 million principal amount at stated maturity of 1996 Notes,
resulting in aggregate net proceeds to the Company of approximately $337.0
million. As of June 30, 1997, substantially all of the Warrants issued in
connection with the 1994 Notes Offering had been exercised. In June 1997, DBS
Corp consummated the 1997 Notes offering resulting in net proceeds of
approximately $362.5 million, including approximately $109.0 million restricted
to fund interest payments on the 1997 Notes through January 1, 2000 (the
"Interest Escrow"). In October 1997, EchoStar consummated the Series B Preferred
Stock Offering resulting in net proceeds of approximately $193.0 million.
During the years ended December 31, 1995 and 1996, net cash flows used in
operations totaled $20.3 million and $27.4 million, respectively. Net cash flows
used in operations totaled $9.2 million for the six months ended June 30, 1997,
compared to $20.1 million used by operations for the six months ended June 30,
1996. EchoStar anticipates that its capital expenditure and working capital
requirements, including subscriber acquisition costs, will increase
substantially throughout 1997 as it aggressively builds its DISH Network
subscriber base. Such working capital requirements could vary if any of the
following, among other factors, occur: (i) subscriptions to DISH Network
programming differ from anticipated levels; (ii) actual expenses differ from
present estimates; or (iii) the investment in subscriber acquisition costs
increases from planned levels. EchoStar had anticipated meeting its 1997 capital
requirements with $200.0 million of interim financing which was to be provided
by News pursuant to the News Agreement (the "News Funding"). As a result of the
litigation between News and EchoStar, EchoStar's receipt of all or any portion
of the News Funding, and the timing thereof, is subject to significant
uncertainty at this time. Accordingly, EchoStar consummated the 1997 Notes
Offering, the Series B Preferred Stock Offering and plans to consummate the
Offerings to fund its capital requirements.
54
<PAGE>
EFFECTS OF CAMPAIGNS TO ACQUIRE SUBSCRIBERS
The 1997 Promotion will significantly increase EchoStar's working capital
requirements. Transaction proceeds associated with the 1997 Promotion, which
commenced in June, vary dependent on the type of EchoStar Receiver System and
the number of additional outlet receivers purchased, but are expected to
approximate $225 to $275 per new subscriber. Transaction costs, consisting of
costs of goods sold, activation fees paid to dealers and distributors, and other
promotional costs, are expected to range from $425 to $500 per new subscriber.
Thus, each subscriber initially added pursuant to the 1997 Promotion will result
in a net use of cash of approximately $200 to $275. Comparatively, EchoStar's
prior promotion (which requires an annual prepaid DISH Network subscription)
(the "1996 Promotion"), which will continue to be available to consumers,
results in approximately breakeven net cash flows at the time of subscriber
activation. EchoStar expects that transaction costs associated with both the
1996 and 1997 Promotions will decrease during the remainder of 1997 as
additional manufacturing cost reductions for EchoStar Receiver Systems are
realized, thereby reducing the initial net cash outflow per new subscriber. From
time to time, EchoStar offers other promotions and incentives to attract
additional DISH Network subscribers. Costs associated with these additional
promotions and incentives are expensed as incurred (reported as a component of
subscriber promotion subsidies). After giving effect to these other promotions
and incentives, EchoStar expects that its aggregate net use of cash (i.e.,
subscriber acquisition costs) will approximate $300 per activation.
The excess of transaction costs over related proceeds from the 1996
Promotion and net transaction costs resulting from the 1997 Promotion are
recognized as subscriber promotion subsidies in EchoStar's statements of
operations. EBITDA in future periods will be negatively affected to the extent
that a larger portion of future subscriber additions result from the 1997
Promotion rather than from the 1996 Promotion. Since the 1997 Promotion was not
commenced until June 1997, the majority of EchoStar's second quarter subscriber
additions resulted from consumers who purchased EchoStar Receiver Systems
pursuant to the 1996 Promotion rather than the 1997 Promotion. EchoStar expects
that a significant percentage of its future subscriber additions will result
from the 1997 Promotion. The adverse EBITDA impact of the 1997 Promotion
(relative to the 1996 Promotion) results from the immediate recognition of all
transaction costs at the time of subscriber activation. Comparatively, a portion
of 1996 Promotion transaction costs are deferred and amortized over the initial
prepaid subscription period.
On August 1, 1997, EchoStar began offering an internally-financed lease
program to consumers. The lease provides for an 18 month lease term at
competitive rates to qualified consumers. At the end of the lease term, the
consumer has the option of purchasing the equipment. Each subscriber activation
under the lease program is expected to result in a net use of cash to EchoStar
of approximately $400 to $600 (depending on the number of outlets). Accordingly,
the lease program will result in a greater investment per customer than either
the 1997 Promotion or the 1996 Promotion. While there can be no assurance,
EchoStar believes that its investment per lease customer will significantly
improve at the end of the lease term when the subscriber either continues on a
month-to-month basis, purchases the equipment from EchoStar or returns the
equipment to the retailer. EchoStar believes the lease program will be
attractive to consumers who would otherwise subscribe to a DBS service but for
the initial "up front" costs associated with DBS service. The lease program
allows the consumer (for less than $100) to receive an upgraded EchoStar
Receiver System, including a professional installation. Upon activation of
service, the consumer is charged a low monthly equipment rental fee in addition
to charges associated with programming services purchased.
Historically, EchoStar has maintained agreements with third-party finance
companies to make consumer credit available to EchoStar customers. These
financing plans provide consumers the opportunity to lease or finance EchoStar
Receiver Systems, including installation costs and certain DISH Network
programming packages, on competitive terms. Consumer financing provided by third
parties is generally non-recourse to EchoStar. EchoStar currently maintains one
such agreement which expires in the near future. The third-party finance company
with which EchoStar maintains the above mentioned agreement
55
<PAGE>
has notified the Company that it does not intend to renew the agreement.
EchoStar is currently negotiating similar agreements with other third-party
finance companies and expects to consummate at least one such agreement prior to
the expiration of its existing consumer financing agreement. There can be no
assurance that EchoStar will be successful in these negotiations, or if
successful, that any such new agreements will commence prior to the termination
of the existing agreement. If EchoStar is unsuccessful in executing a new
agreement with a third-party finance company during 1997, growth of the DISH
Network subscriber base may be negatively impacted.
1997 CAPITAL REQUIREMENTS
As of June 30, 1997, in addition to the working capital requirements
discussed above, during the remainder of 1997 EchoStar expects to expend
approximately $128.1 million in connection with the construction launch,
insurance and deployment of EchoStar III ($83.6 million) and EchoStar IV ($44.5
million). Additionally, EchoStar will expend approximately $1.3 million per
month to meet debt service requirements relative to deferred satellite
construction payments for EchoStar I and EchoStar II. EchoStar's debt service
requirements on the deferred satellite construction payments will increase to
approximately $1.6 million per month during the fourth quarter of 1997 as a
result of the launch of EchoStar III on October 5, 1997. Capital expenditures
related to EchoStar IV may increase in the event of delays, cost overruns,
increased costs associated with certain potential change orders under the
Company's satellite or launch contracts, or a change in launch provider.
EchoStar's 1997 working capital, capital expenditure and debt service
requirements are expected to be funded from existing unrestricted cash and
investment balances, the satellite escrow established in connection with the
1997 Notes offering (the "Satellite Escrow"), cash generated from operations,
and the proceeds from the Series B Preferred Stock Offering, and the Offerings.
Increases in subscriber acquisition costs, inadequate supplies of DBS receivers,
or significant launch delays or failures would significantly and adversely
affect EchoStar's operating results and financial condition.
FUTURE CAPITAL REQUIREMENTS
During 1998, EchoStar will expend approximately $64.5 million to construct,
launch and support EchoStar IV, which is scheduled to be launched during the
first quarter of 1998. These expenditures will be funded from the Satellite
Escrow. EchoStar's debt service requirements relative to the deferred satellite
construction payments will increase to approximately $1.9 million per month upon
the successful launch of EchoStar IV (currently scheduled for launch in the
first quarter of 1998). Additionally, beginning in January 1998, EchoStar will
be required to make semi-annual interest payments of $23.4 million on the 1997
Notes. The first five such semi-annual interest payments will be funded from the
Interest Escrow.
EchoStar may require additional funds to acquire DISH Network subscribers.
In addition, EchoStar has applications pending with the FCC for a two satellite
Ku-band system, a two satellite FSS Ka-band system, a two satellite extended
Ku-band system and a six satellite low earth orbit ("LEO") satellite system.
EchoStar will need to raise additional funds for the foregoing purposes.
Further, there are a number of factors, some of which are beyond EchoStar's
control or ability to predict, that could require EchoStar to raise additional
capital. These factors include unexpected increases in operating costs and
expenses, a defect in or the loss of any satellite, or an increase in the cost
of acquiring subscribers due to additional competition, among other things.
There can be no assurance that additional debt, equity or other financing will
be available on terms acceptable to EchoStar, or at all.
As of June 30, 1997, EchoStar had approximately $1.3 billion of outstanding
long-term debt (including the 1994 Notes, the 1996 Notes, the 1997 Notes,
Deferred Payments on EchoStar I and EchoStar II, and mortgage notes payable).
Interest on the 1994 Notes and the 1996 Notes accrues, but currently is not
payable in cash. Semi-annual cash interest payments of approximately $40.2
million on the 1994 Notes commence December 1, 1999. The 1994 Notes Indenture
requires principal reductions of $156.0 million on
56
<PAGE>
each of June 1, 2002 and 2003. These principal reductions will result in
decreases in semi-annual cash interest payments to $30.1 million and $20.1
million, effective December 1, 2002 and December 1, 2003, respectively.
Semi-annual cash interest payments of $38.1 million on the 1996 Notes commence
on September 15, 2000. Semi-annual cash interest payments of $23.4 million on
the 1997 Notes commence January 1, 1998. The first five such semi-annual
interest payments will be funded from the Interest Escrow Account. Gross
Deferred Payments totaled $64.0 million for EchoStar I and EchoStar II. As of
June 30, 1997, approximately $52.2 million of such Deferred Payments was
outstanding. The Deferred Payments bear interest at 8.25% and are payable in
equal monthly installments over five years following launch of the respective
satellites. Deferred Payments of $15.0 million will be used for each of EchoStar
III and EchoStar IV. The terms of such Deferred Payments for EchoStar III and
EchoStar IV will be similar to the terms associated with EchoStar I and EchoStar
II.
AVAILABILITY OF OPERATING CASH FLOW TO ECHOSTAR
Since all of EchoStar's, DBS Corp's, ESBC's and Dish's operations are
conducted through subsidiaries, the cash flow of EchoStar, DBS Corp, ESBC and
Dish and their ability to service debt, including the 1994 Notes, the 1996 Notes
and the 1997 Notes are dependent upon the earnings of their respective
subsidiaries and, in general, the payment of funds by such subsidiaries to Dish,
by the payment of funds by Dish to ESBC, by the payment of funds by ESBC to DBS
Corp and by the payment of funds by DBS Corp to EchoStar in the form of loans,
dividends or other payments.
The cash flow generated by subsidiaries of Dish will only be available if
and to the extent that Dish is able to make such cash available to ESBC in the
form of dividends, loans or other payments. The indentures related to the 1994
Notes, 1996 Notes and the 1997 Notes impose various restrictions on the transfer
of funds among EchoStar and its subsidiaries. The 1994 Notes Indenture contains
restrictive covenants that, among other things, impose limitations on Dish and
its subsidiaries with respect to their ability to: (i) incur additional
indebtedness; (ii) issue preferred stock; (iii) sell assets; (iv) create, incur
or assume liens; (v) create dividend and other payment restrictions with respect
to Dish's subsidiaries; (vi) merge, consolidate or sell substantially all of its
assets; and (vii) enter into transactions with affiliates. In addition, Dish,
may pay dividends on its equity securities only if (1) no default exists under
the 1994 Notes Indenture; and (2) after giving effect to such dividends, Dish's
ratio of total indebtedness to cash flow (calculated in accordance with the 1994
Notes Indenture) would not exceed 4.0 to 1.0. Moreover, the aggregate amount of
such dividends generally may not exceed the sum of 50% of Dish's consolidated
net income (less 100% of consolidated net losses) from April 1, 1994, plus 100%
of the aggregate net proceeds to Dish from the sale and issuance of certain
equity interests of Dish (including common stock).
The 1996 Notes Indenture contains restrictive covenants that, among other
things, impose limitations on ESBC with respect to its ability to: (i) incur
additional indebtedness; (ii) issue preferred stock; (iii) sell assets; (iv)
create, incur or assume liens; (v) create dividend and other payment
restrictions with respect to ESBC's subsidiaries; (vi) merge, consolidate or
sell substantially all of its assets; and (vii) enter into transactions with
affiliates. The 1996 Notes Indenture permits ESBC to pay dividends and make
other distributions to DBS Corp without restrictions.
The 1997 Notes Indenture and the Certificate of Designation for the Series B
Preferred contain restrictive covenants that, among other things, impose
limitations on DBS Corp with respect to its ability to: (i) incur additional
indebtedness; (ii) issue preferred stock; (iii) sell assets; (iv) create, incur
or assume liens; (v) create dividend and other payment restrictions with respect
to EchoStar's subsidiaries; (vi) merge, consolidate or sell substantially all of
its assets; (vii) enter into transactions with affiliates; and (viii) pay
dividends. In general, DBS Corp may pay dividends on its equity securities only
if: (i) no default exists under the 1997 Notes Indenture; and (ii) after giving
effect to such dividends, DBS Corp's ratio of total indebtedness to cash flow
would not exceed 6.0 to 1.0. Moreover, the aggregate amount of such dividends
generally may not exceed the sum of (A) the difference of consolidated cash flow
(less 100% of such deficit) minus 150% of consolidated interest expense, in each
case from July 1, 1997, plus (B) 100% of
57
<PAGE>
the aggregate net proceeds to DBS Corp and its subsidiaries from the sale of
certain equity interests of DBS Corp or EchoStar.
The Exchange Indenture for the Senior Exchange Notes issuable upon the
exchange of the Senior Preferred Stock contains restrictive covenants that,
among other things, restricts the ability of EchoStar and certain of its
subsidiaries to (i) pay dividends with the proceeds from the Senior Preferred
Offering, (ii) pay cash dividends on any junior or parity securities and (iii)
incur indebtedness or pledge the stock of certain subsidiaries as collateral.
The certificate of designation associated with the Senior Preferred Stock also
restricts the ability of DBS Corp and its subsidiaries to (i) make restricted
payments, (ii) incur certain indebtedness or issue disqualified stock or
preferred equity interests, (iii) create payment restrictions affecting
subsidiaries, (iv) engage in transactions with affiliates or (v) engage in
certain asset sales. A majority of the covenants contained in the certificate of
designation associated with the Series B Preferred Stock and the indenture
related to the Senior Exchange Notes are applicable solely to DBS Corp and its
subsidiaries and do not impose restrictions or limitations on EchoStar or any of
EchoStar's subsidiaries which are not also subsidiaries of DBS Corp.
If cash generated from operation of the DISH Network is not sufficient to
meet the debt service requirements of the 1994 Notes, the 1996 Notes and the
1997 Notes, EchoStar would be required to obtain cash from other financing
sources. There can be no assurance that such financing would be available on
terms acceptable to EchoStar, or if available, that the proceeds of such
financing would be sufficient to enable EchoStar to meet all of its obligations.
See "Description of Certain Indebtedness--1994 Notes," "--1996 Notes" and
"--1997 Notes" for other restrictions associated with the 1994 Notes, the 1996
Notes and the 1997 Notes. See "Description of Capital Stock."
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128), which supersedes Accounting Principles Board Opinion No. 15, "Earnings
Per Share" ("APB No. 15"). SFAS No. 128 simplifies the requirements for
reporting earnings per share ("EPS") by requiring companies only to report
"basic" and "diluted" EPS. SFAS No. 128 is effective for both interim and annual
periods ending after December 15, 1997 but requires retroactive restatement upon
adoption. EchoStar will adopt SFAS No. 128 in the fourth quarter of 1997.
EchoStar does not believe such adoption will have a material effect on either
its previously reported or future EPS.
In March 1997, the FASB issued Statement of Financial Accounting Standards
No. 129, "Disclosure of Information about Capital Structure" (SFAS No. 129),
which continues the existing requirements of APB No. 15 but expands the number
of companies subject to portions of its requirements. Specifically, SFAS No. 129
requires that entities previously exempt from the requirements of APB No. 15
disclose the pertinent rights and privileges of all securities other than
ordinary common stock. SFAS No. 129 is effective for periods ending after
December 15, 1997. EchoStar was not exempt from APB No. 15; accordingly, the
adoption of SFAS No. 129 will not have any effect on EchoStar.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," ("SFAS No. 130"), which establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS No. 130 does not require a specific format
for that financial statement but requires that the enterprise display an amount
representing total comprehensive income for the period in that financial
statement. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 130 will require additional disclosure in
EchoStar's financial statements.
58
<PAGE>
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information,"
("SFAS No. 131"), which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 supersedes Statement of
Financial Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report information about
major customers. SFAS No. 131 requires that a public business enterprise report
financial and descriptive information about its reportable operating statements.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. The adoption of SFAS
No. 131 will require additional disclosure in EchoStar's financial statements.
INFLATION
Inflation has not materially affected EchoStar's operations during the past
three years. EchoStar believes that its ability to increase charges for its
products and services in future periods will depend primarily on competitive
pressures. EchoStar does not have any material backlog of its products.
59
<PAGE>
BUSINESS
GENERAL
EchoStar is a leading provider of DBS programming services in the United
States. The Company commenced its DISH Network in March 1996, after the
successful launch of EchoStar I in December 1995. The Company launched EchoStar
II in September 1996 and EchoStar III in October 1997. Since December 31, 1996,
EchoStar has increased its DISH Network subscriber base from 350,000 to
approximately 895,000 subscribers on October 31, 1997. During the third quarter
of 1997, EchoStar believes that it captured approximately 40% of all new DBS
satellite subscribers in the U.S. Average monthly programming revenue during
1997 has been approximately $39 per subscriber.
The introduction of DBS receivers is widely regarded as the most successful
introduction of a consumer electronics product in U.S. history, surpassing the
rollout of color televisions, VCRs and compact disc players. As of October 31,
1997, approximately 5.8 million U.S. households subscribed to DBS and other
digital DTH satellite service. Industry sources project that the market could
grow to as many as 19 million subscribers by the year 2002.
EchoStar believes that there is significant unsatisfied demand for
high-quality, reasonably-priced television programming. Of the approximately 96
million television households in the U.S., it is estimated that more than 60
million subscribers pay an average of $34 per month for multichannel programming
services. EchoStar's primary target market for the DISH Network includes cable
subscribers in urban and suburban areas who are dissatisfied with the quality or
price of their cable programming, or who want niche programming services not
available from most cable operators. Other target markets for the DISH Network
include the approximately 7 million households not passed by cable television
systems and the approximately 21 million households currently passed by cable
television systems with relatively limited channel capacity.
EchoStar has rights to more U.S. licensed DBS frequencies than any of its
competitors, and currently controls 90 frequencies, including 21 frequencies at
an orbital slot capable of providing nationwide DBS service. The Company
currently provides approximately 120 channels of digital television programming
and over 30 channels of CD quality audio programming to the entire continental
U.S. DISH Network subscribers can choose from a variety of programming packages
that EchoStar believes have a better price-to-value relationship than packages
currently offered by most pay television providers.
DISH Network programming is available to any subscriber who purchases or
leases an EchoStar Receiver System. EchoStar Receiver Systems are fully
compatible with MPEG-2, the world digital standard for computers and consumer
electronics products, and provide image and sound quality superior to current
analog cable or wireless cable service. EchoStar Receiver Systems are designed
and engineered by the Company's wholly-owned subsidiary, HTS. Satellite
receivers designed by HTS have won numerous awards from dealers, retailers and
industry trade publications.
The Company's primary objective is to become the leading provider of
subscription television services in the U.S. To achieve this objective, the
Company will seek to:
EXPAND PROGRAMMING OFFERINGS. The Company launched EchoStar III on
October 5, 1997, and expects to launch EchoStar IV in the first quarter of
1998. EchoStar III, which will serve the eastern half of the U.S. from
61.5 DEG. WL and EchoStar IV, which is expected to serve the western half of
the U.S. from 148 DEG. WL, should enable EchoStar to retransmit local
broadcast signals in 20 of the largest U.S. television markets (assuming
receipt of all required retransmission consents and copyright licenses
and/or congressional or regulatory actions necessary to extend and clarify
the scope of the statutory compulsory license to cover local
satellite-retransmission of network-affiliated station signals) and to
provide subscribers with additional sports, foreign language, cultural,
business, educational and other niche programming. EchoStar III and EchoStar
IV will also enable EchoStar to offer subscribers HDTV and popular Internet
and other computer data at high transmission speeds. By
60
<PAGE>
expanding its programming services EchoStar believes it may be able to
differentiate itself from other providers of subscription television
services, which may not be able to cost-effectively, or do not have the
capacity to, offer similar services.
CONTINUE TO EXPAND DISTRIBUTION CHANNELS. The Company continues to
strengthen its sales and distribution channels, which include consumer
retail outlets, consumer electronics retailers and direct sales
representatives. For example, the Company recently announced an agreement
with JVC, under which JVC will purchase EchoStar Receiver Systems for
distribution through existing JVC channels under the JVC and DISH Network
brand names. All consumers who purchase JVC branded satellite receiver
systems will subscribe to DISH Network programming. In addition, on
September 15, 1997, EchoStar announced that Sears will begin to carry JVC
branded EchoStar Receiver Systems. Beginning in October, 1997 JVC branded
EchoStar Receiver Systems are available in more than 800 full-line,
mall-based Sears stores.
PROVIDE ATTRACTIVELY PRICED PROGRAMMING AND SYSTEMS. EchoStar's entry
level America's Top 40 programming package is priced at $19.99 per month, as
compared to, on average, over $30 per month for comparable cable service.
Consumers can add six premium movie channels for an additional $10 per
month, the same amount cable subscribers typically pay for one movie
channel. On June 1, 1997, the Company announced a new marketing program,
offering subscribers a standard EchoStar Receiver System for $199 (as
compared to an average retail price in March 1996 of $499), without
requiring an extended subscription commitment or significant up front
programming payments.
EMPHASIZE ONE-STOP SHOPPING. The Company believes that providing
outstanding service, convenience and value are essential to developing
long-term customer relationships. The Company offers consumers a "one-stop
shopping" service which includes programming, installation, maintenance,
reliable customer service and satellite reception equipment. To enhance the
Company's responsiveness to its customers, the Company has established a
single telephone number (1-800-333-DISH), which customers can call 24 hours
a day, seven days a week, to order EchoStar Receiver Systems, activate
programming services, schedule installation and obtain technical support.
The Company believes it is the only DBS provider to offer a comprehensive
single-point customer service function.
DBS INDUSTRY OVERVIEW
DBS, as used in this Prospectus, describes a high power satellite broadcast
service in the Ku frequency band that, by international agreement, contemplates
unique wide orbital spacing among satellites, permitting higher powered
transmissions that can be received on an 18-inch satellite dish. Other DTH
services include FSS, which describes low power (C-band) and medium power
(Ku-band) satellite services. Small dish size generally increases consumer
acceptance and provides a substantial competitive advantage over other DTH
services.
Although the concept of DBS was introduced in 1982, it did not become
commercially viable until the last several years because available satellite
technology did not allow for the power required to transmit to small dishes and
digital compression technology had not been adequately developed. Today, DBS
provides the most cost efficient national point to multi-point transport of
video, audio and data services.
DBS satellites operate in geosynchronous orbit above the equator, from
orbital positions or "slots." Orbital slots are designated by their longitude
and comprise both a physical location and an assignment of broadcast spectrum in
the applicable frequency band, divided into 32 frequency channels, each with a
useable bandwidth of 24 MHz. With digital compression technology, each frequency
channel can be converted on average into six or more digital channels of
programming. The ITU has allotted to the U.S. eight DBS orbital slots, each with
32 frequency channels, for use by U.S. licensed DBS providers. The FCC has
indicated its belief that only the 101 DEG. WL, 110 DEG. WL and 119 DEG. WL
slots provide full-CONUS coverage and, therefore, these three slots are
considered the most strategic. With respect to a fourth orbital position,
61.5 DEG. WL, coverage of a majority of the continental U.S. is commercially
possible.
61
<PAGE>
The FCC has issued or, EchoStar believes, may issue licenses or construction
permits for DBS orbital locations as follows:
<TABLE>
<CAPTION>
FREQUENCY ASSIGNMENTS FOR U.S. DBS ORBITAL SLOTS
--------------------------------------------------------------------------------
TOTAL
FREQUENCIES 61.5 DEG. 101 DEG. 110 DEG. 119 DEG. 148 DEG.
<S> <C> <C> <C> <C> <C> <C>
EchoStar (1)............................. 90 11 1 21 24
DirecTv.................................. 54 27
MCI/News Corp. (2)....................... 28 28
Continental (3).......................... 22 11
Tempo (2)................................ 22 11
Dominion................................. 16 8
USSB..................................... 16 5 3 8
Unassigned............................... 8 2
-- -- -- -- --
---
Totals................................... 256 32 32 32 32 32
-- -- -- -- --
-- -- -- -- --
---
---
<CAPTION>
157 DEG. 166 DEG. 175 DEG.
<S> <C> <C> <C>
EchoStar (1)............................. 1 32
DirecTv.................................. 27
MCI/News Corp. (2).......................
Continental (3).......................... 11
Tempo (2)................................ 11
Dominion................................. 8
USSB.....................................
Unassigned............................... 5 1
-- -- --
Totals................................... 32 32 32
-- -- --
-- -- --
</TABLE>
- ------------------------
(1) Includes 10 frequencies at 175 DEG. WL and one frequency at 166 DEG. WL that
EchoStar may be assigned if the FCC finds that EchoStar has a firm satellite
construction contract. There can be no assurance in this regard. EchoStar
has not yet developed a business plan for the 175 DEG. WL orbital slot,
which has limited utility for service to the continental U.S.
(2) Does not take into account the recently announced proposed combination of
the MCI and the Tempo licenses under PrimeStar. See "Risk
Factors--Competition from DBS and Other Satellite System Operators."
(3) On May 14, 1997, the FCC granted its consent to the transfer of
Continental's permit (the "Permit") for 11 frequencies at each of 61.5 DEG.
WL and 166 DEG. WL to R/L DBS Company L.L.C. (a subsidiary of Loral) ("R/L")
subject to certain conditions.
The operator of a digital satellite television service typically enters into
agreements with programmers, who deliver their programming content to the
digital satellite service operator via commercial satellite, fiber optics or
microwave transmissions. The digital satellite service operator generally
monitors such signals for quality, and may add promotional messages, public
service programming or other system-specific content. The signals are then
digitized, compressed, encrypted and combined with other programming sharing a
given transponder and other necessary data streams (such as conditional access
information). Each transponder's signal is then uplinked, or transmitted, to the
transponder owned or leased by the service operator on the service's satellite,
which receives and transmits the signal to consumers.
In order to receive the programming, a subscriber requires: (i) a dish, a
low noise block converter and related equipment; (ii) an integrated
receiver/decoder ("IRD," sometimes referred to herein as the "satellite
receiver" or "set-top box"), which receives the data stream from each
broadcasting transponder, separates it into separate digital programming
signals, decrypts and decompresses those signals that the subscriber is
authorized to receive and converts such digital signals into analog radio
frequency signals; and (iii) a television set, to view and listen to the
programming contained in such analog signals. A subscriber's IRD is generally
connected to the digital satellite service operator's authorization center by
telephone to report the purchase of premium and pay-per-view channels.
The Cable Act and the FCC's rules, subject to certain exceptions, require
programmers affiliated with cable companies to offer programming to all
multi-channel video programming distributors on non-discriminatory terms and
conditions. The Cable Act and the FCC rules also prohibit certain exclusive
programming contracts. EchoStar anticipates purchasing a substantial percentage
of its programming from cable-affiliated programmers. Certain of the
restrictions on cable-affiliated programmers will expire in 2002 unless extended
by the FCC. As a result, any expiration of, amendment to, or interpretation of,
the
62
<PAGE>
Cable Act or the FCC's rules that permits the cable industry or programmers to
discriminate in the sale of programming against competing businesses, such as
that of EchoStar, could adversely affect EchoStar's ability to acquire
programming or to acquire programming on a cost-effective basis. Additionally,
although not required by law, in EchoStar's experience substantially all
unaffiliated programmers have made their programming available on fair and
reasonable terms. Pay-per-view programming has also generally been made
available to DBS providers on substantially the same terms and conditions as are
available to cable operators. On October 14, 1997, EchoStar filed a complaint
with the FCC against Rainbow Programming Holdings, Inc. and Rainbow Media
Holdings, Inc. (collectively "Rainbow") under the Communications Act's program
access rules. Rainbow, a cable-affiliated programming vendor, manages several
regional sports services. EchoStar's complaint alleges that Rainbow has
discriminated against EchoStar in the terms and conditions (including rates,
tiering restrictions and advertising availability provisions) that it has
demanded to make its regional sports programming available to EchoStar; that
Rainbow has effectively refused to deal with EchoStar through dilatory tactics;
and that Rainbow has engaged in various unfair practices at EchoStar's expense.
The complaint requests several forms of relief. There is no assurance that the
complaint will succeed or that the FCC will grant EchoStar any of the requested
forms of relief. If the complaint is not successful, this may adversely affect
EchoStar's ability to offer Rainbow regional sports programming in its
programming packages. See "Risk Factors--Risks of Adverse Effects of Government
Regulation."
On October 27, 1997, EchoStar filed a program access complaint with the FCC
against Fox/Liberty Networks LLC, Fox Sports Net LLC and Fox Sports Direct
(collectively "Fox Sports"), which controls certain regional sports programming
services currently carried by EchoStar. In that complaint, EchoStar has alleged
that Fox Sports has discriminated against EchoStar in the terms that it offered
EchoStar, compared to the terms available to certain competing cable operators.
There can be no assurance that EchoStar will be successful in its complaint
and/or that EchoStar will attain better terms for its carriage of Fox Sports
programming than the terms currently available to EchoStar. The inability of
EchoStar to secure better terms may adversely affect EchoStar's relationship
with Fox Sports.
MARKET FOR DIGITAL SATELLITE SERVICES
DBS SERVICES. Digital satellite television has been one of the fastest
selling consumer electronics products in U.S. history. As of October 31, 1997,
approximately 5.8 million U.S. households subscribed to DBS and other digital
DTH satellite services. This installed base represents a greater than 100%
increase from the approximately 2.2 million DBS subscribers as of the end of
1995 and more than ten times the approximately 500,000 DBS subscribers as of the
end of 1994. The Company believes that the market for digital satellite products
and services is growing and that there is significant unsatisfied demand for
high quality, reasonably priced television programming. Of the approximately 96
million television households in the U.S., it is estimated that more than 60
million subscribers pay an average of $34 per month for multichannel programming
services. The Company believes, therefore, that the potential market in the U.S.
for video, audio and data programming services consists of: (i) existing cable
subscribers who desire a greater variety of programming, improved video and
audio quality, better customer service and fewer transmission interruptions;
(ii) the approximately 7 million households not passed by cable and the
approximately 21 million households currently underserved by cable; (iii) the
approximately 8 million households headed by persons of foreign nationality
living in the U.S. who demand international, cultural and niche programming
typically not provided by cable television; (iv) the U.S. households which are
seeking an alternative provider of high-speed Internet and other data services;
(v) the mobile, commercial and institutional markets; (vi) businesses; and (vii)
the approximately 2.2 million C-band subscribers who may desire to migrate to
digital services. The large base of potential subscribers enhances the Company's
opportunity to significantly increase its DISH Network subscriber base.
HOUSEHOLDS PASSED BY CABLE. EchoStar has specifically targeted the
approximately 85 million households that are passed by cable television.
Management believes that over 60% of the Company's DISH Network subscriber base
consists of households that are passed by cable. Although programming offerings
63
<PAGE>
of cable systems in major metropolitan areas are significant, most cable systems
have a typical analog capacity of 30 to 80 channels. In order to expand their
service offering to one comparable to that offered by the DISH Network, the
Company believes that cable systems would have to upgrade their analog networks
to fiber-based digital service. Fiber upgrade implementation is in progress in a
few cable systems in select metropolitan markets, with a resultant increase of
channel capacity anticipated to be available in five to ten years. Due to the
substantial capital investment required for widescale deployment of fiber-based
services, several cable companies have delayed originally-announced deployment
schedules. The Company believes that the cost of such upgrades, when undertaken,
will ultimately be passed on to the consumer, which may further enhance the
attractiveness of the service offerings of the DISH Network to the consumer. The
Company believes that consumers will continue to demand the improved audio and
video quality, and expanded programming offerings, that are currently available
with DBS technology, but not available from over-the-air VHF and UHF
broadcasters or from cable. The Company believes that the quality and variety of
its DISH Network service offerings relative to even the most advanced cable
television systems makes it an attractive alternative to traditional cable.
HOUSEHOLDS UNSERVED OR UNDERSERVED BY CABLE. The Company is also targeting
the approximately 7 million households which are not passed by cable and the
approximately 21 million households that are in areas served by cable systems
with fewer than 40 channels. Even the largest cable systems with sufficient
channel capacity (generally 54 or more channels) and good quality cable plant
will require costly upgrades to add bandwidth or incur significant maintenance
costs in order to offer digital programming services. The Company believes
however, that based on current compression technology, the number of channels
that a cable system would have to remove from its existing service offerings in
order to use them for digital services may, in the case of cable systems with
limited channel capacity, result in the value of their analog programming
offering being degraded and their subscribers alienated. Accordingly, pending
the availability of advanced digital compression technology now under
development, such smaller cable systems will be required to incur substantial
costs to upgrade their plant and distribution systems to expand their channel
capacity before they can introduce digital services. Due to the limited number
of subscribers across which any plant upgrades would be spread, the smaller
cable systems may find that the cost of such upgrades cannot be justified
economically. The Company believes areas served by cable systems which have not
been fully upgraded currently provide a prime market for digital satellite
services.
INTERNATIONAL, CULTURAL AND NICHE MARKETS. The Company believes that there
are approximately 8 million households headed by persons of foreign nationality
living in the U.S, encompassing approximately 23 million foreign-born persons
living in the U.S. who demand international, cultural and other niche
programming typically not provided by cable television, and who represent a
prime market for its DISH Network service offerings. Generally, it is not cost
effective for traditional broadcast television or cable companies to provide
targeted programming to these households due to the relatively low number of
such niche customers in any particular local market. These customers, along with
other customers interested in receiving international and other cultural
programming, are an important target market for the Company. The Company's
incremental cost to provide multicultural and niche programming is relatively
insignificant given the ability of digital DBS service to utilize a national
delivery system for all programming offerings. The Company believes that, by
directly marketing international programming to these potential customers, it
will also sell more of its most popular programming.
HIGH-SPEED INTERNET AND OTHER DATA SERVICES. The Company currently intends
to make space available on EchoStar III to begin test-marketing its high-speed
Internet and other related data services. The Company believes that there is
significant unsatisfied demand for alternative providers of such services and
believes that if it can provide a comparable product at a reasonable price, many
of its current DISH Network subscribers would also subscribe to the Company's
Internet and data services, thus leading to an increase in the average recurring
revenue per subscriber. Further, the Company believes that by offering Internet
and other high-speed data services, it may be able to attract additional
subscribers to the DISH Network who would otherwise not have subscribed.
64
<PAGE>
MOBILE, COMMERCIAL AND INSTITUTIONAL MARKETS. Other target markets for DBS
services include mobile, commercial and institutional markets. Historically,
many owners of recreational vehicles own C-band satellite dishes. Management
believes that the lower equipment prices and the smaller dish size will attract
many more recreational vehicle owners to DBS service. The Company also believes
that digital satellite services are well suited for hotels, motels, bars,
multiple-dwelling units ("MDUs"), schools and other organizations within the
commercial markets. In addition to the wide variety of entertainment, sports,
news and other general programming desired by such commercial organizations, the
Company expects that some commercial organizations will in the future provide a
market for educational, foreign language, and other niche video and audio
programming.
BUSINESS COMMUNICATION NETWORKS. The Company has had success in providing
its programming services to business and commercial subscribers, such as
multi-level marketing organizations and legal, medical and real estate
professionals. A number of large corporations are using the Company's DBS
business communication services, and over 1,000 EchoStar Receiver Systems are in
use for these services. The Company is in advanced discussions with numerous
business and trade organizations regarding its business communications services
and intends to continue the aggressive marketing of its services to business
users.
C-BAND SUBSCRIBERS. The Company believes that the lower equipment prices
combined with the higher-quality digital video and audio output provided by DBS
and the smaller dish size will attract many more current C-band subscribers to
DBS. The Company believes that its historical presence in the C-band satellite
industry has enhanced its ability to persuade current C-band subscribers to
migrate to DISH Network service.
ECHOSTAR'S EXPERIENCE IN THE DBS MARKET
The Company commenced commercial operations of the DISH Network in March
1996 and since that time has experienced rapid subscriber growth. As of October
31, 1997, the Company had approximately 895,000 subscribers to its DISH Network
programming services. During the third quarter of 1997, the Company believes
that it captured approximately 40% of all new DBS subscribers in the U.S. The
Company also has had a significant amount of success in marketing its services
to its primary target market--existing cable television subscribers. Management
believes that more than 60% of current DISH Network subscribers have come from
homes that are passed by cable. The DISH Network has been marketed to consumers
as an alternative to traditional cable services and the Company has had much
success in differentiating itself from cable providers based on its superior
quality video and audio programming relative to cable, combined with a better
price-to-value relationship of its programming offerings. For example, the
Company's America's Top 50 CD programming package is priced at $26.99 per month.
Comparatively, on a national average, a similar package of cable programming
costs the consumer approximately $42 per month. Additionally, according to
industry estimates, more than 75% of subscribers are satisfied with the DBS
picture quality. Further, approximately 94% of those same consumers said they
would recommend satellite television to their friends. This high-level of
consumer satisfaction has been evident in the Company's low level of subscriber
turnover, which has averaged less than 1.25% per month. EchoStar's first year of
operations in the DBS industry also resulted in higher average revenue per
subscriber than initial expectations. This is due largely in part to the
popularity of the Company's multichannel premium service offerings, which have
proven to be very popular among subscribers.
DBS AND RELATED SERVICES
PROGRAMMING. EchoStar now provides approximately 120 channels of digital
television programming and over 30 channels of CD-quality audio programming to
the entire continental United States. EchoStar's America's Top 40 package is
priced at $19.99 per month and America's Top 50 CD is priced at $26.99 per
month. Multichannel premium services are also available for separate purchase,
at prices currently ranging from $10 to $25 per month, depending upon the number
of services purchased. EchoStar's DISH Network service currently offers ten
channels of pay-per-view programming. EchoStar's future plans include, among
other things, increasing the number of pay-per-view channels offered to
subscribers.
65
<PAGE>
EchoStar's primary programming packages include:
<TABLE>
<CAPTION>
AMERICA'S TOP 40 AMERICA'S TOP 50 CD PREMIUM SERVICES (1)
<S> <C> <C> <C>
A&E Home & Garden Television All of America's Top 40 Multichannel Cinemax (3)
Cartoon Network Home Shopping Network PLUS: FLIX
CNBC The Learning Channel Animal Planet Multichannel HBO (6)
CNN Lifetime BET The Movie Channel (2)
Court TV MTV CNN-fn Multichannel Showtime (3)
Comedy Central NET--Political NewsTalk CNN International Sundance Channel
C-SPAN Network Game Show Network
C-SPAN 2 Nickelodeon KTLA-Los Angeles
Country Music Television Nick at Nite Classic TV MTV2
The Discovery Channel QVC Turner Classic Movies
Disney (2) The Sci-Fi Channel WGN-Chicago
E! The Travel Channel WPIX-New York
ESPN TBS WSBK--Boston
ESPN 2 TBN One Regional Sports Network
ESPNews TNN
EWTN TNT
The Family Channel TV Land
Food Network USA
Headline News VH-1
The History Channel The Weather Channel
</TABLE>
- ------------------------
(1) Premium Services are available on an a-la-carte basis. Numbers in
parentheses represent the number of channels available through each Premium
Service.
EchoStar intends to offer programming telecast by local affiliates of
national television networks to certain population centers within the
continental U.S. via DBS satellite. In order to retransmit this programming to
any DISH Network subscriber in a particular local market, EchoStar must obtain
the retransmission consent from the local affiliate, except for direct to home
retransmissions to "unserved households," as this term is defined in the SHVA
(see below). Furthermore, the compulsory license provided in the SHVA may not
extend to EchoStar's retransmission of local network station signals, and any
use of the compulsory license is subject to the restrictions of the SHVA as
described below. There can be no assurance that the Company will obtain
retransmission consents of any local affiliate and one of the networks (Fox) has
stated it is not willing to consider EchoStar's request for retransmission
consent at this time. The inability to transmit such programming into the local
markets from which the programming is generated could have an adverse effect on
the Company.
The SHVA establishes a "statutory" (or compulsory) copyright license that
generally allows a DBS operator, for a statutorily-established fee, to
retransmit local affiliate programming to subscribers for private home viewing
so long as that retransmission is limited to those persons in "unserved
households." An "unserved household", with respect to a particular television
network, is defined as one that cannot receive an over-the-air network signal of
"grade B" intensity (a predictive standard of signal intensity employed by the
FCC) of a primary network station affiliated with that network through the use
of a conventional outdoor rooftop antenna and has not, within the 90 days prior
to subscribing to the DBS service, subscribed to a cable service that provides
the signal of an affiliate of that network. While management believes the SHVA
could be read to allow the Company to retransmit this programming to certain
local markets via DBS satellite, management also believes that the compulsory
copyright license under the SHVA may not be sufficient to permit the Company to
implement its strategy to retransmit such programming in the most efficient and
comprehensive manner. On August 28, 1997, a Copyright Arbitration Royalty Panel
("CARP"), appointed to recommend royalties for satellite retransmission of
network-affiliated television and superstation signals pursuant to the
compulsory license of Section 119 of the Copyright Act, delivered its Report to
the Librarian of Congress. In the CARP's recommendation, the CARP held it has no
jurisdiction to set royalties for local satellite retransmissions of the signals
of network-affiliated television stations, on the ground that the compulsory
license of the Copyright Act does not extend to such retransmissions. EchoStar
petitioned the Librarian to modify the CARP report. The CARP also recommended
setting at zero the royalty rate for local retransmissions of superstation
signals.
66
<PAGE>
The final ruling of the Librarian of Congress, reviewing the CARP's
recommendation, was published in the Federal Register on October 28, 1997. With
respect to "local-into-local" retransmissions, the Librarian affirmed the zero
rate recommended by the CARP for secondary transmission of a superstation signal
within the station's local market--a recommendation that EchoStar had supported.
The Librarian modified the CARP's recommendation, by also establishing a
zero rate for secondary transmissions of a network station's signal to "unserved
households" within the station's local market. The Librarian of Congress also
reviewed the CARP's recommendation on the meaning of "unserved households"
(i.e., whether the statutory license covers retransmissions to a household in a
network station's local market receiving a signal of Grade B intensity from that
station but not from any other affiliate of the same network and satisfying all
other elements of the "unserved household" definition). The CARP had determined
that the statutory license does not cover such retransmissions and the CARP did
not have jurisdiction to recommend a rate for them. The Librarian decided that
the law is silent on the issue, and accordingly, he cannot unequivocally say
that the CARP's decision is arbitrary or contrary to law. Nonetheless, the
Librarian determined that the Copyright Office retains the authority to conduct
a rule-making proceeding despite the CARP's determination, on the permissibility
of secondary transmissions of a network station's signal to households within
that station's local market that are served by that station but unserved by any
other station affiliated with the same network under the "unserved household"
provisions of the satellite compulsory license.
While the modifications to the CARP's recommendations effected by the final
ruling are generally favorable to EchoStar, the ruling is subject to judicial
review, and there can be no assurance that these modifications will not be set
aside. Moreover, there can be no assurance that the rule-making referenced in
the final ruling will be conducted or that it will result in an outcome
favorable to EchoStar. Further, while EchoStar is continuing its effort to
secure passage of legislation that will clarify and extend the scope of the
compulsory license with respect to local network signals, to protect against the
possibility the Copyright Office will not conduct a rule-making proceeding or
that any such rule-making may not provide a favorable result to EchoStar, there
can be no assurance that EchoStar will be successful in this effort. If a court
or administrative agency were to reject the interpretation of "unserved
household" supported by EchoStar, and legislation does not pass which clarifies
and extends the scope of the compulsory license, EchoStar may have to engage in
the relatively cumbersome process of obtaining copyright licenses from all
individual copyright holders instead. In the absence of the legislation sought
by EchoStar and/or a favorable outcome in the rule-making referenced in the
Librarian's final ruling, and failing successful negotiation of individual
copyright licenses and retransmission consent agreements to the extent
necessary, there can be no assurance that EchoStar would be successful in any
copyright infringement or FCC litigation with copyright owners and/or
broadcasters regarding the legality of certain local-into-local network
retransmissions.
DBS SALES AND MARKETING
EchoStar primarily utilizes its existing nationwide network of over 7,000
independent distribution and retail stores and outlets to market and distribute
DISH Network systems and programming services to its target markets. EchoStar
intends to enhance consumer awareness of its product relative to other providers
of DTH services by forming alliances with nationally recognized distributors of
other consumer electronics products. As discussed previously, in May 1997
EchoStar entered into a strategic alliance with JVC, pursuant to which JVC will
distribute DISH Network satellite receiver systems under a private label through
its JVC national retail network. EchoStar also has expanded its marketing
efforts into direct sales. To enhance the Company's responsiveness to its
customers, the Company has established a single telephone number
(1-800-333-DISH) which customers can call 24 hours a day, seven days a week to
order EchoStar Receiver Systems, activate programming services, schedule
installation and obtain technical support. The Company believes it is the only
DBS provider to offer a comprehensive single-point customer service function.
EchoStar also is expanding into other less-traditional means of distribution
such as alliances with electric and other utilities, multi-level marketing firms
and other non-consumer electronic
67
<PAGE>
retail businesses. Based on its knowledge of these distribution channels from
its marketing of C-band DTH products and services domestically over the last 15
years and its marketing of DBS products in Europe and the U.S., EchoStar
believes it will be able to optimize the marketing of its DBS products and
services to distinguish itself from other DBS suppliers.
EchoStar's marketing strategy includes national and regional broadcast and
print advertising, promoting the benefits of the DISH Network. EchoStar has
comprehensive dealer guides describing all aspects of the DISH Network and its
integrated product lines (programming, hardware, financing and installation).
These dealer guides are provided to distributors during nationwide educational
seminars. EchoStar expects to continue to offer a high level of retail support
and to provide comprehensive point of sale literature, product displays,
demonstration kiosks and signage for retail outlets. EchoStar also provides a
promotional channel as well as a programming subscription for in-store viewing.
EchoStar's mobile sales and marketing team visits retail outlets on a regular
basis to reinforce training and ensure point-of-sale needs are quickly
fulfilled. A DISH Network merchandise catalogue is also available for
distributors to add to their promotional materials. Additionally, one channel of
programming on the DISH Network provides information about additional services
and promotions offered by the DISH Network. That channel is geared towards
educating retailers, satellite dealers and current and potential subscribers.
EchoStar offers a commission program that it believes is competitive with
that offered by other DBS operators. The program pays qualified distributors and
retailers a percentage of programming revenues generated by subscribers to whom
they sell DISH Network systems. Commissions are earned by distributors and
retailers over an extended period.
EchoStar's marketing programs and pricing strategies, such as the 1996
Promotion and the 1997 Promotion, have significantly increased the affordability
of EchoStar Receiver Systems for consumers. The primary purposes of the 1996
Promotion and the 1997 Promotion are to rapidly build a subscriber base, to
expand retail distribution of EchoStar's products, and to build consumer
awareness of the DISH Network brand. These promotions are consistent with, and
emphasize, EchoStar's long-term business strategy which focuses on generating
the majority of its future revenue through the sale of DISH Network programming
to a large subscriber base. The 1996 and 1997 Promotions have resulted in, and
will continue to result in, EchoStar incurring significant costs to acquire
subscribers. EchoStar believes such costs will be fully recouped from future
programming revenues expected to be generated from customers obtained as a
result of these promotions. DISH Network reception equipment cannot be utilized
with competitors' systems. Consequently, subscribers cannot seamlessly migrate
to alternative DBS providers. Further, based on high DBS industry consumer
satisfaction ratings, initial feedback from consumers and dealers, and low DISH
Network subscriber turnover rates (to date less than 1.25% per month), EchoStar
anticipates high service renewal rates leading to an expected average minimum
subscriber life of at least three years. Furthermore, a majority of DISH Network
subscribers have purchased premium and pay-per-view programming for incremental
amounts above the prepaid minimum subscription required by the 1996 Promotion.
Such incremental revenues reduce the length of time necessary to recoup the
average cost of acquiring new subscribers.
EchoStar's present marketing strategy is based on current competitive
conditions, which may change; any such changes could be adverse to EchoStar.
Future changes in marketing strategy may include additional promotions,
including promotions geared toward further increasing the affordability to
consumers of EchoStar Receiver Systems and related accessories which, among
other things, could increase EchoStar's cost of acquiring new subscribers.
ECHOSTAR RECEIVER SYSTEMS
DISH Network programming is available to consumers in the continental U.S.
who purchase or lease an EchoStar Receiver System. A typical EchoStar Receiver
System includes an 18-inch satellite dish, an EchoStar digital satellite
receiver (which processes and descrambles signals for television viewing), a
user-
68
<PAGE>
friendly remote control, and related components. EchoStar Receiver Systems are
available in a variety of models. Subscribers can receive local broadcast
signals, either through a standard television antenna (a traditional rooftop or
set-top antenna) or by subscribing to basic cable. The standard EchoStar
Receiver System incorporates infrared remote control technology, an on-screen
program guide and the ability to switch between DISH Network and local
programming signals using the remote control. In addition to the on-screen
program guide and local programming access features of the basic model, the
mid-level model features UHF remote control technology (which allows subscribers
to control their EchoStar Receiver System from up to 150 feet away through
walls), and a high-speed data port. EchoStar's premium receiver system includes
UHF remote control technology, a high-speed data port, enhanced on-screen
program guide capabilities (including local program information and seamless
integration of local and satellite channels), and on-screen caller
identification capability.
The EchoStar DBS System integrates digital video and audio compression.
Authorization information for subscription programming is stored on microchips
placed on a credit card-sized access, or smart card. The smart card, which can
easily be updated or replaced periodically at low cost, provides a simple and
effective method to adjust a subscriber's level of programming services. If the
receiver's smart card is authorized for a particular channel, the data is
decrypted and passed on for video and audio decompression.
While EchoStar Receiver Systems are internally designed and engineered,
EchoStar does not manufacture EchoStar Receiver Systems directly. Rather,
EchoStar has contracted for the manufacture of EchoStar Receiver Systems with a
high-volume contract electronics manufacturer. SCI is currently EchoStar's only
source of MPEG-2 DBS receivers. JVC also manufactures limited quantities of
other consumer electronics products, which incorporate EchoStar Receiver
Systems. EchoStar has managed its inventory levels based on its goal of reaching
one million subscribers by the end of 1997. There can be no assurance that
EchoStar will be successful in achieving this goal. To the extent that EchoStar
exceeds this goal, it may experience shortages of certain models of EchoStar
Receiver Systems. As previously described, EchoStar is negotiating with several
brand-name consumer electronics manufacturers to produce receivers for use with
the DISH Network. No assurances can be provided regarding the ultimate success
of such negotiations.
FINANCING
Historically, EchoStar has maintained agreements with third-party finance
companies to make consumer credit available to its customers. These financing
plans provide consumers the opportunity to lease or finance their EchoStar
Receiver Systems, including installation costs and certain DISH Network
programming packages, on competitive terms. The third-party finance company that
provides the program currently utilized by EchoStar has notified EchoStar that
it does not intend to renew the agreement, which expires during October 1997. On
August 1, 1997, EchoStar began offering an internally-financed consumer lease
plan to prospective DISH Network customers. This plan provides for an 18 month
lease term at competitive rates to qualified consumers.
INSTALLATION
Currently, a majority of EchoStar Receiver System installations are
performed either by third-parties or are self-installed by consumers. A
subsidiary of EchoStar also offers installation services. EchoStar anticipates
that demand for its installation services may increase as demand for its DISH
Network service grows.
OTHER COMPONENTS OF DBS SERVICE
SUBSCRIBER MANAGEMENT. EchoStar outsources its subscriber management,
billing and remittance services for DISH Network subscribers. Under the terms of
the outsourcing agreement, EchoStar is
69
<PAGE>
provided with access to a subscriber management system maintained by the service
provider. The provider facilitates the authorization of programming to the
subscriber and coordinates billing and renewal functions.
CUSTOMER CARE CALL CENTER. EchoStar currently maintains call centers in
Thornton, Colorado and Harrisburg, Pennsylvania. Potential and existing
subscribers can call a single phone number to receive assistance for hardware,
programming, installation or service. The call center in Thornton, Colorado is
owned by the Company. The Pennsylvania facility is operated by a third party.
DIGITAL BROADCAST CENTER. The first step in the delivery of satellite
programming to the customer is the uplink of that programming to the satellite.
Uplink is the process by which signals are received from either the programming
originator or distributor and transmitted to a satellite. EchoStar's Digital
Broadcast Center is located in Cheyenne, Wyoming. The Digital Broadcast Center
contains fiber optic lines and downlink antennas to receive programming and
other data at the center, as well as a number of large uplink antennas and other
equipment necessary to modulate and demodulate the programming and data signals.
The compression and encryption of the programming signals is also performed at
EchoStar's Digital Broadcast Center.
CONDITIONAL ACCESS SYSTEM. EchoStar has contracted with Nagra Plus, SA for
the provision of access control systems, including smart cards used with each
EchoStar Receiver System. The smart cards contain the authorization codes
necessary to receive DISH Network programming. The access control system is
central to the security network that prevents unauthorized viewing of
programming. Access control systems of other DBS providers have been
commercially pirated. To date, the Company is unaware of any compromises of its
access control system. While there can be no assurance that breaches of
EchoStar's access control system will not occur in the future, the Company
believes its access control system will adequately prevent commercially viable
unauthorized access to programming. Further, the smart cards have been designed
with the flexibility to completely change the access control system in the event
of a security breach. In the event that such systems or products fail to operate
as intended, EchoStar's business would be adversely affected if the vendor could
not rapidly implement corrective measures.
COMPRESSION SYSTEM. EchoStar has entered into an agreement with a third
party to provide the necessary equipment to digitize, compress and encrypt the
analog signals transmitted by programmers to EchoStar's digital broadcast
center. Digitized signals are then multiplexed and modulated into an MPEG-2
transport stream for transmission to EchoStar's satellites. Once a customer has
ordered programming from EchoStar, an authorization code is transmitted to the
customer's satellite receiver, allowing the customer to receive the programming
within minutes after placing the order.
TRACKING, TELEMETRY AND CONTROL OF SATELLITES AFTER LAUNCH. Once a
satellite is placed at its orbital location, ground stations control it until
the end of its in-orbit lifetime. EchoStar has contracted for TT&C services with
respect to EchoStar I, EchoStar II and EchoStar III, including orbital analysis
and oversight of the construction phase-related to the satellite. The agreement
limits the liability of the contractor if it negligently performs its services
under the agreement or otherwise terminates the agreement prior to the
expiration of its term. It is expected that such risks will be covered by
in-orbit insurance; however, no assurances can be given that such insurance can
continue to be obtained on commercially reasonable terms. While TT&C services
have not yet been procured for EchoStar IV, EchoStar believes that these
services can be timely obtained from a number of providers.
The FCC has granted EchoStar conditional authority to use C-band frequencies
for TT&C for EchoStar I, stating that the required coordination process with
Canada and Mexico had been completed. In January 1996, however, the FCC received
a communication from an official of the Ministry of Communications and
Transportation of Mexico stating that EchoStar I's TT&C operations could cause
unacceptable interference to Mexican satellites. Although the Company believes
it is unlikely, there can be no assurance that such objections will not
subsequently require EchoStar to relinquish use of such C-band
70
<PAGE>
frequencies for TT&C purposes. This could result in the inability to control
EchoStar I, and a total loss of the satellite. Further, the FCC has granted
EchoStar conditional authority to use "extended" C-band frequencies for TT&C
function for EchoStar II, but only until January 1, 1999, at which time the FCC
will review the suitability of those frequencies for TT&C operations. There can
be no assurance that the FCC will extend the authorization to use these C-band
frequencies for TT&C purposes beyond that date. Such failure to extend the
authorization could result in the inability to control EchoStar II and a total
loss of the satellite.
DBS AND OTHER PERMITS
EchoStar's subsidiaries have been assigned 21 DBS frequencies at 119 DEG.
WL, a U.S. licensed orbital slot that provides full-CONUS coverage. Of these
frequencies, 11 are held by ESC and ten are held by DirectSat. Eleven of the 16
transponders on EchoStar I and ten of the 16 transponders on EchoStar II are
being utilized to operate those frequencies.
In addition to its frequencies at 119 DEG. WL, DirectSat has been assigned
11 frequencies at 175 DEG. WL and one frequency at 110 DEG. WL. DBSC holds a
conditional satellite construction permit and specific orbital slot assignments
for 11 DBS frequencies at each of 61.5 DEG. WL and 175 DEG. WL. ESC has a permit
for 11 unassigned western frequencies. While a firm business plan has not yet
been completed, DirectSat's, DBSC's and ESC's frequencies at 175 DEG. WL could
be used to provide a high power DBS service to the western continental U.S.,
Hawaii and Alaska. These frequencies also could provide a satellite programming
link between the U.S. and the Pacific Rim, if FCC and ITU coordination can be
arranged and authorizations in the receiving countries obtained.
The FCC has granted Dominion a conditional construction permit and related
rights to eight frequencies at 61.5 DEG. WL, the same orbital location where
EchoStar III will be located. Dominion and certain EchoStar subsidiaries are
parties to the Dominion Agreement pursuant to which Dominion, subject to
appropriate FCC approvals, has the right to use eight transponders on EchoStar
III to exploit the Dominion frequencies. Additionally, the Dominion Agreement
provides that until EchoStar III is operational, Dominion can use an entire
transponder on an EchoStar satellite located at 119 DEG. WL by paying EchoStar
$1 million per month. From December 1996 through April 1997, in consideration of
the use of such transponder for a period of five months, Dominion issued five $1
million promissory notes to EchoStar, each due May 10, 1997. When Dominion did
not repay these notes, EchoStar exercised its right under the Dominion
Agreement, subject to obtaining any necessary FCC approvals, to use and program,
for the expected life of the satellite, six of the eight transponders on
EchoStar III that Dominion has the right to use and that would operate on
frequency channels assigned to Dominion. Dominion has pending FCC applications
to modify its permit to rely on the Dominion Agreement to satisfy its due
diligence and to extend its permit. These applications have not yet been
approved. The Dominion Agreement may also require further FCC approval. Assuming
the necessary FCC approvals are obtained and any further required approvals
(including any required transfer of control approvals) are obtained, EchoStar
would have the right to use a total of up to 17 transponders on EchoStar III.
However, EchoStar's ability to use a total of up to 17 transponders depends on
obtaining all necessary FCC approvals, and there can be no assurance that these
approvals will be obtained.
Applications to modify the permit for EchoStar III and for a launch
authorization for the satellite, which was launched on October 5, 1997, were
conditionally granted by International Bureau of the FCC. See "--Government
Regulation--FCC Permits and Licenses."
ESC's, DirectSat's, DBSC's and DBS Corp's permits are subject to continuing
due diligence requirements imposed by the FCC. See "--Government Regulation--FCC
Permits and Licenses" and "--Government Regulation--DBS Rules." Each company's
applications to extend their DBS permits have been conditionally approved by the
FCC and are subject to further FCC and appellate review (or, in the case of
ESC's western assignments, are still pending), but there can be no assurance
that the FCC will determine
71
<PAGE>
in the future that ESC, DirectSat or DBSC have complied with the due diligence
requirements. Failure to comply with due diligence requirements could result in
the revocation of EchoStar's DBS permits.
During January 1996, the FCC held an auction for 24 frequencies at the
148 DEG. WL orbital slot. EchoStar acquired a DBS construction permit for the
use of the 24 frequencies at the 148 DEG. WL orbital slot for $52.3 million.
EchoStar will be required to complete contracting for the construction of the
satellite by December 20, 1997, to complete construction of that satellite by
December 20, 2000, and the satellite must be in operation by December 2002.
EchoStar's DBS system also requires feeder link earth stations, for which
EchoStar holds authorizations from the FCC. To EchoStar's knowledge, its earth
station authorizations are not subject to any pending regulatory challenges.
EchoStar has been granted a license for a two satellite FSS Ku-band system,
which is conditioned on EchoStar making an additional financial showing.
EchoStar has also been granted a license for a two-satellite FSS Ka-band system
and has an application pending for a two-satellite extended Ku-band satellite
system. EchoStar also requested a modification of its proposed Ku-band system to
add C-band capabilities to one satellite. GE Americom and PrimeStar have filed
petitions for reconsideration or cancellation and petitions to deny against
EchoStar's Ku-band conditional license, the additional financial showing made by
EchoStar, and EchoStar's C-band modification application. There can be no
assurance that the FCC will consider EchoStar's additional showing to be
adequate or that it will deny GE Americom's or PrimeStar's petitions. Moreover,
EchoStar's Ka-band license was based on an orbital plan agreed upon by
applicants in EchoStar's processing round. That plan is subject to several
modification requests and a request for a stay. If the pending applications are
granted, and EchoStar successfully constructs and launches Ku-band, extended
Ku-band, and Ka-band satellites, those satellites might be used to complement
the Company's DISH Network business, or for a variety of other uses. It is
possible that the unique FSS Ku-band and Ka-band orbital locations requested by
EchoStar and others could permit construction of satellites with sufficient
power to allow reception of satellite signals by relatively small dishes. All of
these projects are in an early stage of development, and there can be no
assurance that EchoStar's applications will be granted by the FCC or that, if
granted, EchoStar will be able to successfully capitalize on any resulting
business opportunities. All of these applications are currently being challenged
by several companies with interests adverse to those of EchoStar.
On October 15, 1997, the FCC released service rules applicable to Ka-band
licensees. Among other things, the rules impose various technical requirements
and restrictions, including the obligation to protect or coordinate with certain
types of services and power control requirements. The FCC also imposed
implementation milestones, including commencement of construction within one
year of grant, commencement of construction of second satellite within two years
of grant, launch of first satellite within five years of grant, and launch of
all satellites by the dates required by the ITU--generally six years from filing
of the ITU "Appendix 4" information (which was filed in November 1995), with the
possibility of a three-year extension. The FCC noted that EchoStar proposes to
operate its system on a common carrier basis. Further, the FCC prohibited
trafficking in "bare" Ka-band licenses. The FCC also imposed annual reporting
requirements. There can be no assurance that these new rules will not adversely
affect EchoStar's plans with respect to its licensed Ka-band system.
An 80% owned subsidiary of EchoStar, E-Sat, has applied for authority to
construct, launch and operate a six-satellite, Little LEO system, and its
application has been opposed. While primary applications for the Little LEO
system are unrelated to DBS, it is possible that the system could serve as a
path for wireless communication with EchoStar's DBS customers, particularly for
periodic polling of units for pay-per-view purchases and relatively rapid
feedback on viewer pay-per-view buy rates and preferences. This project is in an
early stage of development and there can be no assurance that EchoStar's
application will be granted by the FCC or that, if granted, EchoStar will be
able to successfully capitalize on any resulting business opportunity. In
exchange for certain payments to EchoStar, EchoStar and DBSI (the
72
<PAGE>
holder of the remaining 20% interest in this subsidiary) have entered into an
agreement that contemplates the grant of an option to DBSI to hold an 80.1%
interest in the subsidiary, with EchoStar's holding reduced to a carried
interest equivalent to approximately 19.9%. The agreement also contemplates an
EchoStar right to use approximately 20% of the capacity of the subsidiary's
system. Exercise of such an option would be subject to FCC approval.
The FCC has adopted rules and policies to govern the licensing and operation
of Little LEO satellite systems in the second processing round, including the
system for which E-Sat has requested approval. The FCC has adopted a spectrum
sharing plan which will allow licensing of all the systems proposed in that
processing round subject to certain modifications to these systems. Significant
coordination and technical accommodations are required by the spectrum plan. The
rules prohibit Little LEO licensees from entering into exclusive service
agreements with foreign countries, and provide that Little LEO licensees seeking
to provide global service must first secure authorization or approval from the
country to which service is proposed to be provided. The FCC indicated that it
will examine transfers or assignments of Little LEO licenses to ensure that they
are consistent with the public interest. The rules require all second processing
round applicants, including EchoStar's subsidiary, to amend their applications
by October 30, 1997 to bring them into conformance with the new rules. The FCC
will then evaluate the qualifications of those applicants whose applications
have been amended. Any amendments which are deemed by the FCC to be "major,"
including changes in beneficial ownership or control, will result in the
application being deemed "newly-filed" and deferred for processing until a
future time. While E-Sat has filed an amendment to its application within the
window contemplated by the rules, there can be no assurance that the FCC will
accept the application for filing, will find E-Sat qualified to hold a license
and will grant E-Sat a license. There can be no assurance that the restrictions
imposed in the rules will not adversely affect E-Sat's plans. The FCC's rules
may adversely affect the ability of DBSI to exercise the option contemplated by
the agreement between DBSI and EchoStar which is discussed above.
SATELLITES
EchoStar I and EchoStar II are each Lockheed Martin Series 7000 satellites
equipped with 16 Ku-band transponders. Each transponder is equipped with 130
Watts of power, approximately eight times the power of typical C-band
transponders. EchoStar III is, and EchoStar IV will be, Lockheed Martin Series
2100AX satellites equipped with 32 transponders that will operate at
approximately 120 watts per channel (switchable to 16 transponders operating at
over 200 watts per channel). Each transponder will be capable of transmitting
multiple digital video, audio and data channels. EchoStar's satellites have a
minimum design life of 12 years. The majority of the purchase price for the
satellites is required to be paid in progress payments, with the remainder
payable in the form of Deferred Payments. The Deferred Payments bear interest at
rates ranging from 7.75% to 8.25% and are due in equal monthly installments over
five years following the launch of the respective satellite. The loss, damage or
destruction of any EchoStar satellite as a result of military actions or acts of
war, anti-satellite devices, electrostatic storm or collision with space debris
would have a material adverse effect on EchoStar.
Lockheed Martin owns each satellite (and the components thereof) it
constructs for EchoStar until the launch of the satellite. Lockheed Martin also
is required to pay penalties to EchoStar if it fails to deliver EchoStar IV on
time.
Satellites are subject to significant risks, including satellite defects,
launch failure, destruction and damage that may result in incorrect orbital
placement or prevent proper commercial operation. Approximately 15% of all
commercial geosynchronous satellite launches have resulted in a total or
constructive total loss. The failure rate varies by launch vehicle and
manufacturer. A number of satellites constructed by Lockheed Martin over the
past three years have experienced defects resulting in total or partial loss
following launch. The type of failures experienced have varied widely. Lockheed
Martin constructed EchoStar I, EchoStar II and EchoStar III, and is constructing
EchoStar IV. Although EchoStar has been informed by Lockheed Martin that it has
made changes in its satellites to rectify the defects responsible for past
failures, no assurances can be given that EchoStar I, EchoStar II, EchoStar III
or EchoStar IV will perform according to specifications.
73
<PAGE>
Launch delays could result from weather conditions or technical problems
with any EchoStar satellite or any launch vehicle utilized by the launch
provider for EchoStar IV or from other factors beyond EchoStar's control. If the
launch of EchoStar IV is delayed, the Company's strategy to provide additional
programming to DISH Network subscribers using transponders on these satellites
would be adversely affected.
SATELLITE LAUNCHES
EchoStar has contracted with LKE for the launch of EchoStar IV during the
first quarter of 1998 from the Baikonur Cosmodrome in the Republic of
Kazakhstan. EchoStar will launch EchoStar IV on a Proton K/Block DM four stage
launch vehicle. Astra 1F, the first commercial launch on a Proton K/Block DM,
was successfully launched on April 9, 1996 and Inmarsat 3 F2, the second such
commercial launch was successfully launched on September 6, 1996. LKE now
markets commercial Proton launches through ILS, a joint venture between LKE and
Lockheed Services. ILS has contracts providing for the launch of at least six
non-EchoStar western satellites throughout 1997.
The first commercial Proton launch in 1997 was successfully launched on May
24, carrying the Telestar 5 payload. ILS has a current commercial backlog of 18
satellites to be launched by the end of 1999 on Proton. However, two of the
launches of the Proton four stage launch vehicle have failed in the last twelve
months. In February 1996, a Proton Block DM failed during launch when its main
engine did not start properly. Based on representations made by ILS, the Company
believes that corrective actions have been taken that should prevent a
recurrence of that failure. In November 1996, the main engine of a Proton Block
D-Z failed to properly start a planned second burn during the launch of the Mars
96 spacecraft. According to ILS, an analysis of the November launch failure
indicates that the improper start was most likely due to faulty guidance and
control system commands from the Mars 96 spacecraft. The Proton Block DM, which
will carry EchoStar IV, carries its own fully integrated and system level
guidance and control system, unlike the Proton Block D-2 used in the November
launch. Based on representations made by ILS, the Company believes that the
differences between the Proton Block D-2 and the Proton Block DM make a
recurrence of the causes of the Mars 96 launch failure unlikely during the
launch of EchoStar IV.
In order for EchoStar IV to be launched from Kazakhstan, the satellite
contractor will need to obtain a technical data exchange license and a satellite
export license from the U.S. government. There can be no assurance those
licenses can be obtained in a timely manner to avoid a launch delay. Any
political or social instability, such as that recently experienced in the former
Soviet bloc countries could affect the cost, timing and overall advisability of
utilizing LKE as a launch provider for EchoStar's satellites.
Either party may request a delay in the launch period, subject to the
payment of penalties based on the length of the delay and the proximity of the
request to the launch date. EchoStar has the right, in its sole discretion, to
terminate the LKE Contract at any time, subject to the forfeiture of certain
amounts paid to LKE. In addition, EchoStar has the right to terminate the LKE
Contract and receive a full refund of all amounts paid to LKE in certain
circumstances, including: (i) a launch delay caused by LKE which exceeds nine
months from the last day of the original launch period; (ii) an increase in the
price or change in payment or other terms necessitated by compliance with, or
implementation of, a trade agreement between the U.S. and Russia; (iii)
EchoStar's inability to obtain necessary export licenses; (iv) the failure of
Proton launch vehicles; and (v) EchoStar's inability to procure launch insurance
on commercially reasonable terms. In the event termination of the LKE Contract
is caused by the failure of Proton launch vehicles, however, LKE would be
entitled to retain up to $15.0 million, depending on the number and proximity of
Proton failures to EchoStar's scheduled launch.
INSURANCE
Under the terms of the satellite contract for EchoStar IV, Lockheed Martin
bears the risk of loss during the construction phase up to launch. At launch,
title and risk of loss pass to EchoStar, at which time launch insurance becomes
operative; EchoStar contracted for launch insurance coverage for EchoStar II in
74
<PAGE>
the amount of approximately $220 million and, together with the cash segregated
and reserved on its balance sheet, satisfied its insurance obligations under the
1994 Notes Indenture.
The launch insurance policy for EchoStar I and EchoStar II covered the
period from launch through completion of testing and commencement of commercial
operations. The policy also provided for in-orbit insurance for EchoStar II
through September 9, 1997. The policy protected against losses resulting from
the failure of the satellite to perform in accordance with its operational
performance parameters. The 1994 Notes Indenture also requires in-orbit
insurance to be kept in force for EchoStar I and EchoStar II in specified
amounts. EchoStar has procured the required in-orbit insurance for EchoStar I
through June 25, 1998 and for EchoStar II through September 9, 1998. The
in-orbit insurance policies for EchoStar I and EchoStar II include standard
commercial satellite insurance provisions, including a material change
condition, that, if successfully invoked, will give insurance carriers the
ability to increase the cost of the insurance (potentially to a commercially
impracticable level), require exclusions from coverage that would leave the risk
uninsured or rescind their coverage commitment entirely. The in-orbit insurance
policies for EchoStar I and EchoStar II also are subject to annual renewal
provisions. While the Company expects it will be able to renew such policies as
they expire, there can be no assurance that such renewals will be at rates or on
terms favorable to the Company. If renewal is not possible, there can be no
assurance that EchoStar will be able to obtain replacement insurance policies on
terms favorable to EchoStar. For example, if EchoStar I, EchoStar II or other
similar satellites experience anomalies while in orbit, the cost to renew
in-orbit insurance could increase significantly or coverage exclusions for
similar anomalies could be required. Further, although EchoStar has obtained
binders for the launch insurances required for EchoStar III and EchoStar IV
(including in-orbit insurance for 365 days after launch), there can be no
assurance that EchoStar will be able to obtain or maintain insurance for
EchoStar III and EchoStar IV.
The launch insurance policies for EchoStar III and EchoStar IV contain
standard commercial satellite insurance provisions, including a material change
condition, that would result in the cancellation of insurance or alter the
effective rate, depending upon customary exclusions, including: (i) military or
similar actions; (ii) laser, directed energy, or nuclear anti-satellite devices;
(iii) insurrection and similar acts; (iv) governmental confiscation; (v) nuclear
reaction or radiation contamination; and (vi) willful or intentional acts of
EchoStar or its contractors. The policies also contain provisions limiting
insurance for incidental and consequential damages and third-party claims
against EchoStar.
If the launch of any EchoStar satellite is a full or partial failure or if,
following launch, any EchoStar satellite does not perform to specifications,
there may be circumstances in which insurance will not fully reimburse EchoStar
for any loss. In addition, insurance will not reimburse EchoStar for business
interruption, loss of business and similar losses that might arise from delay in
the launch of any EchoStar satellite.
The 1996 Notes Indenture requires EchoStar to obtain in-orbit insurance for
EchoStar III in an amount equal to the cost to construct, launch and insure
EchoStar III (in the case of in-orbit insurance with a deductible no greater
than 20%). The 1997 Notes Indenture requires the Company to obtain in-orbit
insurance for EchoStar IV in an amount equal to the cost to construct, launch
and insure EchoStar IV (in the case of in-orbit insurance with a deductible no
greater than 20%). EchoStar has bound approximately $220 million of insurance
for the launch of each of EchoStar III and EchoStar IV including in-orbit
insurance until 365 days after the launch.
OTHER PRODUCTS AND RELATED SERVICES
EchoStar currently offers a broad range of products, from approximately $250
DTH systems in Europe that can receive signals from only one or two co-located
satellites, to approximately $3,000 systems at retail that are capable of
receiving signals from 20 or more satellites. Principal product lines include
EchoStar-Registered Trademark-, HTS Premier-TM- and HTS Tracker-TM- name brands,
with good, better and best options typically available for each line and each
geographic reception area. EchoStar sold approximately 264,000 C-band satellite
receivers worldwide in 1996. EchoStar's sales of DTH products are somewhat
seasonal, with
75
<PAGE>
higher domestic sales normally occurring in the late summer and fall months in
advance of increased consumer programming demand during the fall and winter
months.
DOMESTIC. Satellite retailers have historically sold large C-band satellite
receiver systems to consumers in rural areas through store fronts or small
home-based businesses. The decline in the number of conventional satellite
retailers in the U.S., which form the core of EchoStar's distribution system,
was significant during 1995 and continued during 1996 as a result of competition
from the sale of DBS systems through consumer electronic outlets. Those
satellite retailers who do not market DBS systems or cannot adopt to a
high-volume, low-margin market, may be particularly vulnerable. However, new
satellite retailers continue to enter the market, which partially offsets the
aforementioned decline in the number of satellite retailers.
INTERNATIONAL. EchoStar's international product line includes a broad range
of DTH and commercial satellite equipment and accessories, including satellite
receivers, integrated receiver decoders, antennas, actuators, feeds and LNBs.
During 1996, the equipment was distributed, primarily with the
EchoStar-Registered Trademark- brand name, through EchoStar's distribution
centers. EchoStar's products are tailored to each country's standard television
formats. In addition, on-screen instructions and pre-programmed channels are
available in a variety of languages. EchoStar's international receivers can
process C-band and Ku-band signals with both 110- and 240-volt power sources and
have been designed to withstand the fluctuating power sources often found in
developing countries. Prospectively, EchoStar expects to focus its international
efforts on the sale of digital set-top boxes and the provision of consulting
services to other DBS operators. As a result, during the remainder of 1997,
EchoStar expects to streamline its international operations, including selected
personnel reductions.
EchoStar Receiver Systems are designed and engineered by HTS, the Company's
wholly-owned subsidiary. HTS has entered into an agreement to sell satellite
receivers to ExpressVu, Inc. ("ExpressVu") a majority-owned affiliate of BEC,
Inc. (Bell Canada). The first phase of this agreement includes an initial order
for 62,000 satellite receivers, and primary uplink integration payments, which
combined exceed $40 million. Pursuant to this agreement, EchoStar is assisting
ExpressVu with the construction of a digital broadcast center for use in
conjunction with ExpressVu's DTH service, which commenced operations in
September 1997, and will act as a distributor of satellite receivers and related
equipment for ExpressVu's planned DTH service in Canada. Among other things,
EchoStar has agreed not to provide DTH service in Canada and ExpressVu has
agreed not to provide DTH service, including DBS service, in the U.S. EchoStar
recognized revenues of approximately $11.9 million related to the ExpressVu
Agreement during the six months ended June 30, 1997.
On June 2, 1997, the Company announced that Telefonica has selected EchoStar
to supply digital set top boxes for its satellite television service in Spain,
which commenced operations in September 1997. In addition, EchoStar will license
its proprietary electronic programming guide for use in connection with the
digital receivers for Telefonica. Revenues from Telefonica's initial order of
100,000 digital set-top boxes are expected to approximate $40 million. EchoStar
expects to fulfill approximately one-half of the contract during the remainder
of 1997 and the remainder of the contract during early 1998.
In addition to the orders described above, EchoStar has subsequently
received additional purchase orders from ExpressVu and Telefonica totaling $50
million. These orders are for first quarter 1998 delivery of digital set-top
boxes.
Information regarding EchoStar's operations in different geographic areas as
of December 31, 1994, 1995 and 1996, and for the years then ended, is presented
in Note 13 to EchoStar's consolidated financial statements.
PROGRAMMING. Since 1986, EchoStar has acquired DTH programming directly
from programming providers, and packaged and distributed that programming
throughout the U.S. to C-band system users through EchoStar's independent
retailer network. EchoStar has non-exclusive affiliation agreements for the
distribution of many of the most popular programming services available from
domestic satellites,
76
<PAGE>
including A&E-Registered Trademark-, CNN-Registered Trademark-, The Discovery
Channel-Registered Trademark-, The Disney Channel-Registered Trademark-,
ESPN-Registered Trademark-, HBO-Registered Trademark-,
MTV-Registered Trademark-, Showtime-Registered Trademark-, TBS-TM-, TNT-TM-,
USA-Registered Trademark-, national networks, broadcast superstations, and other
"best of cable" programming.
RESEARCH AND DEVELOPMENT AND MANUFACTURING
Satellite receivers designed by EchoStar's research and development group
have won numerous awards from dealers, retailers and industry trade
publications. EchoStar's research and development personnel focus on shaping the
EchoStar and HTS product lines to meet specific consumer needs and to compete
effectively against products designed and manufactured by larger consumer
electronics companies. EchoStar's quality assurance standards require all
EchoStar product models to undergo extensive testing. EchoStar also sets and
enforces product design and quality assurance requirements at non-EchoStar
manufacturing facilities in the U.S., Taiwan, Hong Kong, Korea, China, Malaysia,
India and the Philippines.
COMPETITION
Each of the businesses in which EchoStar operates is highly competitive.
EchoStar's existing and potential competitors include a wide range of companies
offering video, audio, data, programming and entertainment services. EchoStar
also faces competition from companies offering products and services that
perform similar functions, including companies that offer hardwire cable
television products and services, wireless cable products and services, DTH
products and services, as well as DBS and other satellite programming, and
companies developing new technologies. Many of EchoStar's competitors have
substantially greater financial and marketing resources than EchoStar. EchoStar
expects that quality and variety of programming, quality of picture and service,
and cost will be the key bases of competition.
Advances in communications technology, as well as changes in the marketplace
and the regulatory and legislative environment, are constantly occurring. The
Company cannot predict the effect that ongoing or future developments might have
on the video programming distribution industry generally or the Company
specifically.
CABLE TELEVISION. Cable television service is currently available to the
vast majority of U.S. television households. The U.S. cable television industry
currently serves over 60 million subscribers, representing approximately 65% of
U.S. television households. As an established provider of subscription
television services, cable television is a formidable competitor in the overall
market for television households. Cable television systems generally offer 30 to
80 analog channels of video programming. Cable television operators currently
have an advantage relative to EchoStar with regard to the provision of local
programming as well as the provision of service to multiple television sets
within the same household. Many cable television operators have either announced
their intention to, or are in the process of, upgrading their distribution
systems to expand their existing channel capacity for purposes of providing
digital product offerings similar to those offered by DBS providers. In
addition, such expanded capacity may be used to provide interactive and other
new services.
Many of the largest cable systems in the U.S. have announced plans to offer
access to telephony services through their existing cable equipment, and have
entered into agreements with major telephony providers to further these efforts.
In some cases, certain cable systems have actually commenced trial offerings of
such services. If such trials are successful, many consumers may find cable
service to be more attractive than DBS for the reception of programming.
Since reception of DBS signals requires line of sight to the satellite, it
may not be possible for some households served by cable to receive DBS signals.
In addition, the DISH Network is not available to households in apartment
complexes or other multiple dwelling units that do not facilitate or allow the
installation of EchoStar Receiver Systems. Additionally, the initial cost
required to receive DISH Network programming may reduce the demand for EchoStar
Receiver Systems, since EchoStar Receiver Systems must be purchased, while cable
and certain of EchoStar's satellite competitors lease their equipment to the
77
<PAGE>
consumer with little if any initial hardware payment required. The compulsory
copyright license granted to satellite providers by the Satellite Home Viewer
Act is narrower in scope than the compulsory license granted to cable operators,
thus creating another competitive advantage for cable operators.
In addition, TSAT has announced that it currently intends to provide digital
programming to TSAT and other cable subscribers from Tempo's DBS satellite
launched in March 1997. Tempo's DBS satellite would allow TSAT to provide at
least 65 digital video channels to cable subscribers. These subscribers could
maintain current cable programming service, including local programming. Through
the use of a digital set-top receiver system, a household subscribing to cable
programming and Tempo's DBS digital programming could simultaneously view
digital video programming on one television and different cable programming on
any number of other televisions. Currently, DISH Network subscribers must
purchase multiple EchoStar Receiver Systems in order to view different
programming on different televisions simultaneously. TSAT's complementary DBS
service could make cable a stronger competitor to the DISH Network. As indicated
below, the 11 full-CONUS frequencies assigned to Tempo are the subject of an
application for FCC consent to assignment to PrimeStar.
OTHER DBS AND HOME SATELLITE OPERATORS. In addition to EchoStar, several
other companies have DBS authorizations and are positioned to compete with
EchoStar for home satellite subscribers.
DirecTv has channel assignments at a full-CONUS orbital slot. USSB owns and
operates five transponders on DirecTv's first satellite and offers a programming
service separate from, and complimentary to, DirecTv's service. DirecTv and USSB
together offer over 150 channels of combined DBS video programming. EchoStar
currently offers approximately 120 channels of digital video programming.
DirecTv currently has exclusive distribution rights for out-of-market National
Football League telecasts. While EchoStar intends to offer similar services in
the future, its current inability to provide such programming places it at a
competitive disadvantage. As of October 31, DirecTv had approximately 3.0
million subscribers, approximately one-half of whom subscribe to USSB
programming. DirecTv recently filed an application with the FCC to construct,
launch and operate six additional DBS satellites. DirecTv requested three
orbital slots for these satellites--96.5 DEG. WL, 101 DEG. WL, and 105.5 DEG.
WL. These satellites would operate on frequencies that are not currently
allocated domestically for this use, and DirecTv has also requested an FCC
rulemaking to secure such allocations.
AT&T and DirecTv have entered into an exclusive agreement for AT&T to market
and distribute DirecTv's DBS service. As part of the agreement, AT&T made an
initial investment of approximately $137.5 million to acquire 2.5% of the equity
of DirecTv with an option to increase its investment to up to 30% over a
five-year period. This agreement provides a significant base of potential
customers for the DirecTv DBS system and allows AT&T and DirecTv to offer
customers a bundled package of digital entertainment and communications
services. As a result, EchoStar is at a competitive disadvantage marketing to
these customers. The AT&T and DirecTv agreement has increased the competition
EchoStar encounters in the overall market for pay television customers.
Affiliates of the National Rural Telecommunications Cooperative have acquired
territories in rural areas of the U.S. as distributors of DirecTv programming,
thereby increasing the distribution capacity of DirecTv.
PrimeStar currently offers medium power Ku-band programming service to
customers using dishes approximately three feet in diameter. PrimeStar is owned
by a group of multiple-system cable operators and provides nationwide service.
As a result of the successful launch and operation of a new satellite in early
1997, PrimeStar increased its medium-power programming services to approximately
150 channels. This new satellite will potentially enable PrimeStar to reduce its
dishes to approximately 29 inches for most subscribers within the continental
U.S. In addition, PrimeStar is expected to have access to significant DBS
capacity via Tempo's DBS satellite, which is capable of providing full-CONUS
service. PrimeStar has announced plans to use Tempo's DBS satellite to provide a
mix of sports, multichannel movie services, pay-per-view services, and popular
cable networks to traditional broadcast television, basic cable and other analog
programming customers. As of October 31, 1997, PrimeStar had approximately 1.9
million subscribers.
78
<PAGE>
On June 11, 1997, TSAT announced that a binding letter of intent had been
signed for the restructuring of PrimeStar. PrimeStar, which is currently owned
by a group of multiple-system cable operators including TCI, has entered into an
agreement to combine its assets with ASkyB, a satellite venture formed by News
and MCI, into a single DBS provider. Each PrimeStar partner will contribute its
PrimeStar customers and partnership interests into the newly formed entity.
ASkyB has announced that it will contribute two satellites under construction
and 28 full-CONUS frequencies at the 110 DEG. WL orbital location. In addition,
Tempo Satellite, Inc., a subsidiary of TSAT, has a license for a satellite using
11 full-CONUS frequencies at the 119 DEG. WL orbital location, and recently
launched a satellite to that location. PrimeStar also has agreed to acquire
Tempo's license.
On July 18, 1997, PrimeStar and TSAT filed an application with the FCC
requesting FCC approval for the assignment of Tempo's authorizations to
PrimeStar in connection with the PrimeStar "roll-up" restructuring. On August
15, 1997, MCI and PrimeStar also filed an FCC application requesting approval
for the assignment of MCI's DBS authorizations to PrimeStar. The parties to the
two transactions have also initiated the antitrust clearance process with the
Department of Justice for each transaction, and EchoStar understands that
clearance has been obtained for one of the two transactions (the PrimeStar roll-
up). The FCC applications have been placed on public notice and have been
opposed by EchoStar and others, but there can be no assurance that any of these
oppositions will be successful.
The proposed restructuring of PrimeStar, if approved and consummated, would
create a significant additional competitor with substantial financial and other
resources, including a significantly greater number of channels capable of
serving the entire continental U.S., than any other DBS provider. Several of the
companies that would own interests in a restructured PrimeStar entity provide
programming to cable television operators, other terrestrial systems and DBS
system operators, including EchoStar. These content providers, including News,
Turner, Time Warner, TCI, Cox, Comcast and US WEST would likely provide a
significant amount of programming to the new PrimeStar entity and may decide to
provide this programming to PrimeStar on better terms and at a lower cost than
to other cable or DBS operators. Additionally, those content providers could
raise programming prices to all cable, DBS and other providers (including
PrimeStar), thereby increasing the Company's cost of programming to rates that
are effectively higher than those borne by PrimeStar's owners. Although the
current programming access provisions under the Cable Act and the FCC's rules
require cable-affiliated content providers to make programming available to
multi-channel video programming distributors on non-discriminatory terms, there
are exceptions to these requirements and they are currently set to expire in
2002. Any amendment to, or interpretation of, the Cable Act or the FCC's rules
which would revise or eliminate these provisions could adversely affect
EchoStar's ability to acquire programming on a cost-effective basis.
The FCC has allocated certain additional U.S. licensed DBS frequencies to
DirecTv, USSB and other parties. These frequencies could provide additional
capacity for existing DBS operators thereby enhancing their competitive position
relative to the Company. Further, such presently unused frequencies could enable
new competitors to enter the DBS market.
DirecTv, USSB and PrimeStar have instituted aggressive promotional campaigns
marketing their respective DBS and Ku-band services. Their marketing efforts
have focused on the breadth of popular programming and cost of service. In the
case of DirecTv and USSB, their marketing efforts have been joined by AT&T, RCA,
Sony Electronics, Inc., and other manufacturers which market DBS receivers and
related components. Several other manufacturers have begun manufacturing such
equipment, including Uniden America Corp., Toshiba America Consumer Products,
Inc., and Hughes Network Systems, Inc.
Due to their substantially greater resources, earlier market entry, greater
number of channels, manufacturing alliances with low-cost, high-volume
manufacturers with established retail distribution, possible volume discounts
for programming offerings, and, in the case of PrimeStar, relationship with
cable programmers, EchoStar is currently at a competitive disadvantage to
DirecTv, USSB and PrimeStar.
79
<PAGE>
OTHER POTENTIAL PROVIDERS OF DBS OR SIMILAR SERVICES. In addition to MCI,
DirectSat, USSB and Tempo/PrimeStar, two other companies have been granted
conditional permits by the FCC for DBS but are not yet operational.
Continental currently has an assignment of 11 frequencies at the 61.5 DEG.
WL orbital slot covering the eastern and central U.S. and 11 frequencies at the
166 DEG. WL orbital slot covering the western U.S. On November 21, 1995, the FCC
granted Continental an extension of its permit until August 15, 1999. On May 14,
1997 the FCC granted its consent to the assignment of Continental's permit to
R/L. The FCC has granted Dominion a conditional construction permit and related
rights to eight frequencies at 61.5 DEG. WL, the same orbital location where
EchoStar III will be located. Dominion and certain EchoStar subsidiaries are
parties to the Dominion Agreement pursuant to which Dominion, subject to
appropriate FCC approvals, has the right to use eight transponders on EchoStar
III to exploit the Dominion frequencies. Additionally, the Dominion Agreement
provides that until EchoStar III is operational, Dominion can use an entire
transponder on an EchoStar satellite located at 119 DEG. WL by paying EchoStar
$1 million per month. From December 1996 through April 1997, in consideration of
the use of such transponder for a period of five months, Dominion issued five $1
million promissory notes to EchoStar, each due May 10, 1997. When Dominion did
not repay the notes, EchoStar exercised its right under the Dominion Agreement,
subject to obtaining any necessary FCC approvals, to use and program, for the
expected life of the satellite, six of the eight transponders on EchoStar III
that Dominion has the right to use and that would operate on frequency channels
assigned to Dominion. Dominion has pending FCC applications to modify its permit
to rely on the Dominion Agreement to satisfy its due diligence and to extend its
permit. These applications have not yet been approved. The Dominion Agreement
may also require further FCC approval. Assuming the necessary FCC approvals are
obtained and any further required approvals (including any required transfer of
control approvals) are obtained, EchoStar would have the right to use a total of
up to 17 transponders on EchoStar III. However, EchoStar's ability to use a
total of up to 17 transponders depends on obtaining all necessary FCC approvals,
and there can be no assurance that those approvals will be obtained. Dominion
also has an assignment of 8 frequencies at the 166 DEG. WL orbital slot covering
the western and central U.S.
During March 1996, AlphaStar Television Network, which is owned by Tee-Comm
Electronics, Inc., a Canadian company, began offering DTH programming in the
U.S. on a limited basis. The service uses MPEG-2/DVB digital compression
technology to receive medium power Ku-band signals via 24 to 36 inch dishes. On
May 27, 1997, AlphaStar filed for bankruptcy protection under Chapter 11.
Foreign satellite systems also are potential providers of DBS within the
U.S. In May 1996, in its DISCO II proceeding, the FCC proposed permitting
non-U.S. satellite systems to serve the U.S. if the home country of the
foreign-licensed satellite offers open "effective competitive opportunities"
("ECO") in the same satellite service to U.S. licensed satellites. In the
February 1997 World Trade Organization Agreement, the U.S. offer contained an
exemption from market opening commitments for, among other things, DBS and DTH
services. The FCC initiated a proceeding in July 1997 proposing to maintain the
ECO test with respect to foreign-licensed satellites seeking to provide DBS and
DTH service in the United States.
The FCC has indicated that it may apply to the ITU for allocation of
additional DBS orbital locations capable of providing service to the U.S.
Further, Canada, Mexico, and other countries have been allocated various DBS
orbital locations which are capable of providing service to part or all of the
continental U.S. In general, non-U.S. licensed satellites are not allowed to
provide domestic DBS or DTH service in the U.S. However, in November 1996, the
U.S. and Mexico signed a Protocol for cross-border DBS and DTH service, and
Mexico has indicated that it will auction one or more of its DBS orbital
locations.
Pursuant to the protocol, the FCC already has permitted a company to provide
DTH services in the U.S. through a Mexican satellite. Televisa International,
LLC ("Televisa") is currently in the process of developing DTH television and
related services in Mexico, Latin America, North America, and Europe. Televisa
received authorization from the FCC to operate one million receive-only earth
stations in the U.S.
80
<PAGE>
which are capable of receiving DTH television services from Mexico's Solidaridad
II satellite. The Solidaridad II satellite operates at 113 DEG. WL providing
full-CONUS coverage, and is licensed by the Mexican Government.
The FCC authorized Televisa to operate receive dishes that are larger, and
possibly less attractive to consumers, than the dishes made available by
EchoStar. Further, the FCC authorization for Televisa does not provide
Televisa's earth stations with protection from unacceptable radio interference
from nearby satellite networks. Nevertheless, the authorization of Televisa to
provide service from the 113 DEG. WL orbital slot may produce additional
competition to the full-CONUS service by EchoStar from EchoStar I and EchoStar
II. In October 1997, the U.S. and Mexico signed a protocol allowing cross-border
FSS service from Mexican-licensed satellites to the U.S. and vice versa. The
U.S. and Mexico have announced their intention to commence discussion on a third
protocol, to address mobile satellite services.
In addition, the U.S. has indicated its willingness to enter into similar
agreements with other countries in North, Central, and South America. If the
U.S. government moves forward with these initiatives, or if other countries
authorize DBS providers to use their orbital slots to serve the U.S., additional
competition could be created, and EchoStar's DBS authorizations could become
less valuable. At this time, EchoStar cannot predict whether these or other
recent developments will ultimately result in any additional service to the U.S.
In addition, it may be possible to utilize extended Ku-band spectrum and
mid- and high-power FSS spectrum to serve the U.S. DTH market. A significant
amount of available full-CONUS spectrum exists in these bands. Further, it may
be possible to utilize Ka-band spectrum for DTH satellite applications,
particularly for spot-beam applications. Finally, other potential competitors
may provide television programming at any time by leasing transponders from an
existing satellite operator.
WIRELESS CABLE. Multichannel, multipoint distribution ("wireless cable")
systems typically offer 20 to 40 channels of programming, which may include
local programming (a potential advantage over most digital satellite systems).
Developments in high compression digital statistical multiplexing technology are
expected to increase significantly the number of channels and video and audio
quality of wireless cable systems. Wireless cable operators currently provide an
analog signal, with limited capacity and inferior image and sound quality
compared to DBS. In order to upgrade their systems to implement digital
transmission of high-quality video and audio signals, wireless cable operators
will be required to install digital decoders in each customer's home at a cost
comparable to the cost of an EchoStar Receiver System and make certain
modifications to their transmission facilities. The cost of such digital
upgrades will be significant and will have to be amortized over a smaller base
of potential customers. Wireless cable also requires direct line of sight from
the receiver to the transmission tower, which creates the potential for
substantial interference from terrain, buildings and foliage in the line of
sight. Wireless cable served approximately 1 million subscribers at the end of
1996.
TELEPHONE COMPANIES. Certain telecommunications carriers, including
regional bell operating companies and long distance telephone companies, could
become significant competitors in the future, as they have expressed an interest
in becoming subscription television and information providers. The 1996 Act,
which was enacted in February 1996, permits telephone companies to provide a
variety of competitive video services, including owning cable systems, with
certain regulatory safeguards. It is also possible for telephone companies to
provide high-power DBS service, although any telephone company desiring to
become a high-power DBS broadcaster must still obtain an FCC license for an
available orbital location. The 1996 Act removes barriers to entry which
previously inhibited telephone companies from competing in the provision of
video programming and information services. Several large telephone companies
have announced plans to acquire or merge with existing cable and wireless cable
systems. As more telephone companies begin to provide cable programming and
other information and communications services to their customers, additional
significant competition for subscribers will develop. Among other things,
telephone companies have an existing relationship with virtually every household
in their service area, substantial economic resources, and an existing
infrastructure and may be able to subsidize the delivery of programming through
their position as the sole source of telephone service to the home.
81
<PAGE>
VHF/UHF BROADCASTERS. Most areas of the U.S. are covered by traditional
terrestrial VHF/UHF television broadcasts that typically include three to ten
channels. These broadcasters are often low to medium power operators with a
limited coverage area and provide local, network and syndicated programming. The
local content nature of the programming may be important to the consumer, and
VHF/ UHF programming is typically free of charge. The FCC has allocated
additional digital spectrum to licensed broadcasters. During a transition period
ending in 2006, each existing television station will be able to transmit
programming on a digital channel that may permit multiple programming services
per channel.
PRIVATE CABLE. Private cable is a multi-channel subscription television
service where the programming is received by a satellite receiver and then
transmitted via coaxial cable throughout private property, often MDUs, without
crossing public rights of way. Private cable generally operates under an
agreement with a private landowner to service a specific MDU, commercial
establishment or hotel. These agreements are often exclusive arrangements with
lengthy (E.G., ten-year) terms, and private cable systems generally are not
subject to substantial federal, state or local regulations. The FCC recently
amended its rules to allow the provision of point-to-point delivery of video
programming by private cable operators and other video delivery systems in the
18 GHz bandwidth. Private cable operators compete with EchoStar for customers
within the general market of consumers of subscription television services.
LOCAL MULTI-POINT DISTRIBUTION SERVICE. In March 1997, the FCC announced
its intention to offer two LMDS licenses, one for 1150 MHz and the other for 150
MHz, in each of 493 Basic Trading Areas ("BTAs") pursuant to an auction in the
case of mutually exclusive applications. Incumbent local exchange carriers and
cable operators will not be allowed to obtain in-region licenses for the larger
spectrum block for three years. The LMDS auction is scheduled to occur in
December 1997. The broadband 28 GHz LMDS spectrum allocation may enable LMDS
providers to offer subscribers a wide variety of audio, video and interactive
service options.
UTILITIES. The 1996 Act also authorizes registered utility holding
companies and their subsidiaries to provide video programming services,
notwithstanding the Public Utility Holding Company Act. Utilities must establish
separate subsidiaries and must apply to the FCC for operating authority. Several
such utilities have been granted broad authority by the FCC to engage in
activities which could include the provision of video programming.
DTH PRODUCTS. EchoStar faces competition in the sale of satellite receivers
in North America from other manufacturers and distributors. EchoStar, General
Instrument Corporation and Uniden America Corporation comprise the three largest
competitors in the North American DTH products market (exclusive of DBS
products).
Most major manufacturers of satellite receivers in North America offer a
variety of models, from relatively low-priced units to more expensive receivers
with a greater number of features. There are few patented components in DTH
systems. Competition in the sale of DTH products occurs primarily on the basis
of quality, price, service, marketing and features. EchoStar believes that it
generally competes effectively in all of these areas. In recent years, EchoStar
has consistently been highly rated in most of these categories by polls
conducted by industry trade publications.
EchoStar also faces competition in the distribution of DTH systems from
approximately 30 distributors in North America. The large number of distributors
creates intense competition, primarily with respect to price, marketing and
service. EchoStar responds to that competition by offering 24-hour turnaround
time on repairs, same day order fulfillment, and what it believes to be one of
the top satellite retailer incentive programs in the industry.
In addition, EchoStar competes against DBS technology and medium power
Ku-band DTH systems. As a result of the smaller dish size, DBS and medium power
Ku-band systems are more widely accepted than C-band systems, particularly in
urban areas. DBS and medium power Ku-band competition have
82
<PAGE>
negatively affected, and will continue to negatively affect, C-band sales.
However, EchoStar believes that many consumers may continue to choose to
purchase C-band systems for the next several years because of the remaining
orbital life of existing C-band satellites, the amount and quality of
programming available, and the continuing marketing efforts by programmers and
others designed to attract and retain C-band subscribers, among other factors.
Internationally, EchoStar competes against a variety of manufacturers and
distributors in different countries. In certain regions, EchoStar has a small
market share, while in others, such as Africa, EchoStar believes that it has a
larger market share than any of its competitors. In some markets, EchoStar
cannot effectively compete due to local restrictions on foreign companies and
due to the necessity of using proprietary products for which EchoStar does not
hold licenses.
DTH PROGRAMMING. EchoStar competes with many large DTH programming
packages, some of which are affiliated with well-known, large program
originators, and some of which are affiliated with cable operators. EchoStar
competes by offering promotional programming packages in conjunction with its
sales of DTH systems. Since a significant portion of EchoStar's programming
sales are generated through DTH retailers, EchoStar also competes for retailer
relationships on the basis of commission rates and quality of service offered to
the retailer and its customers. In addition, the programming market faces
competition from cable television as well as emerging technologies such as DBS
services, wireless cable systems, and others. The largest competitors of
EchoStar in programming distribution include NetLink Satellite USA, owned by
TCI, SuperStar Satellite Entertainment, National Programming Service, Turner
Home Satellite, Inc., HBO Direct, Inc. and Showtime Satellite Networks. These
competitors have substantially greater financial resources than EchoStar, have
substantially more subscribers, and are therefore able to obtain more favorable
pricing from programmers than EchoStar.
GOVERNMENT REGULATION
THE FOLLOWING SUMMARY OF REGULATORY DEVELOPMENTS AND LEGISLATION DOES NOT
PURPORT TO DESCRIBE ALL PRESENT AND PROPOSED GOVERNMENT REGULATION AND
LEGISLATION AFFECTING THE VIDEO PROGRAMMING DISTRIBUTION INDUSTRY. OTHER
EXISTING GOVERNMENT REGULATIONS ARE CURRENTLY THE SUBJECT OF JUDICIAL
PROCEEDINGS, LEGISLATIVE HEARINGS OR ADMINISTRATIVE PROPOSALS THAT COULD CHANGE,
IN VARYING DEGREES, THE MANNER IN WHICH THIS INDUSTRY OPERATES. NEITHER THE
OUTCOME OF THESE PROCEEDINGS NOR THEIR IMPACT UPON THE INDUSTRY OR THE COMPANY
CAN BE PREDICTED AT THIS TIME. THIS SECTION SETS FORTH A BRIEF DESCRIPTION OF
REGULATORY ISSUES PERTAINING TO OPERATIONS OF THE COMPANY.
Authorizations and permits issued by the FCC and foreign regulatory agencies
performing similar functions are required for the construction, launch and
operation of satellites and other components of the EchoStar DBS System, and the
sale of satellite receivers and other EchoStar products in certain countries. In
addition, as the operator of a privately owned U.S. satellite system, EchoStar
is subject to the regulatory authority of the FCC and the Radio Regulations
promulgated by the ITU. As a distributor of television programming, EchoStar is
also affected by numerous laws and regulations, including the Communications
Act. EchoStar believes that it remains free to set prices and serve customers
according to its business judgment, without rate regulation or the statutory
obligation under Title II of the Communications Act to avoid undue
discrimination among customers. Even if, under a future interpretation of the
1996 Act, EchoStar were to be classified as a telecommunications carrier subject
to Title II, EchoStar believes that such reclassification would not likely
increase substantially the regulatory burdens imposed on EchoStar or have an
adverse impact on EchoStar's DBS operations, although there can be no assurance
in this regard. EchoStar believes that, because it is engaged in a subscription
programming service, it is not subject to many of the regulatory obligations
imposed upon broadcast licensees. However, there can be no assurances that the
FCC will not find in the future that EchoStar should be treated as a broadcast
licensee with respect to its current and future operations. If the FCC were to
determine that EchoStar is, in fact, a broadcast licensee, EchoStar could be
required to comply with all regulatory obligations imposed upon broadcast
licensees. EchoStar also requires import and general destination export licenses
issued by the
83
<PAGE>
U.S. Department of Commerce for the delivery of its manufactured products to
overseas destinations. Finally, because EchoStar has engaged a Russian launch
provider for EchoStar IV, U.S. export regulations apply to the delivery of the
satellite and to providing related technical information to the launch provider.
FCC PERMITS AND LICENSES. As the operator of a DBS system, EchoStar is
subject to FCC jurisdiction and review primarily for: (i) assignment of
frequencies and orbital slots; (ii) compliance with the terms and conditions of
such assignments and authorizations, including required timetables for
construction and operation of satellites; (iii) authorization of individual
satellites (I.E., meeting minimum financial, legal and technical standards) and
earth stations; (iv) avoiding interference with other radio frequency emitters;
(v) compliance with rules the FCC has established specifically for holders of
U.S. DBS satellite and earth station authorizations, including construction
milestones and due diligence requirements; and (vi) compliance with applicable
provisions of the Communications Act. The FCC has granted ESC a license to cover
11 specified frequencies for EchoStar I at 119 DEG. WL. ESC also has a
conditional construction permit for 11 unspecified western frequencies.
EchoStar's subsidiary DirectSat has a license to cover ten additional
frequencies at the 119 DEG. WL orbital location. The FCC also has issued
DirectSat a conditional permit for one frequency at 110 DEG. WL and 11
frequencies at 175 DEG. WL. DBSC holds a conditional construction permit and
specific orbital slot assignments for 11 DBS frequencies at each of 61.5 DEG. WL
and 175 DEG. WL.
During January 1996, the FCC held an auction for 24 frequencies at the
148 DEG. WL orbital slot. EchoStar acquired a DBS construction permit for the
use of the 24 frequencies at the 148 DEG. WL orbital slot for $52.3 million.
EchoStar will be required to complete contracting for the construction of the
satellite by December 20, 1997, to complete construction of that satellite by
December 20, 2000, and the satellite must be in operation by December 20, 2002.
EchoStar's FCC permits are conditioned on satisfaction of ongoing due
diligence, construction, reporting and related obligations. There can be no
assurance that EchoStar will be able to comply with the FCC's due diligence
obligations or that the FCC will determine that it has complied with such due
diligence obligations. EchoStar's permits and extension requests have been and
may continue to be contested in FCC proceedings and in court by several
companies with interests adverse to EchoStar's, including Dominion, PrimeStar,
Advanced, Tempo, DirecTv and others.
By an Order released January 11, 1996 in File No. 129-SAT-EXT-95, the
International Bureau of the FCC granted an extension of ESC's permit to August
15, 1996 with respect to the 119 DEG. WL orbital location. It deferred decision
on ESC's request for an extension of time with respect to ESC's permit for
western assignments pending the FCC's analysis of EchoStar's 1992 due diligence
showing for these assignments. By separate Order released January 11, 1996, File
No. DBS-88-1, the FCC's International Bureau conditionally granted ESC launch
and positioning authority for EchoStar I. ESC and DirectSat have licenses to
cover their satellites at 119.2 DEG. WL and 118.8 DEG. WL. The precise location
of ESC's and DirectSat's licensed EchoStar I and EchoStar II satellites may be
outside the parameters set forth in their licenses. Therefore, ESC and DirectSat
have filed a joint request for an STA to enable them to operate, for 180 days,
EchoStar I at 119.05 DEG. WL and EchoStar II at 118.95 DEG. WL, which also would
improve signal quality and facilitate better customer service. That application
was not timely opposed. The FCC has not yet ruled on ESC's and DirectSat's
request. The 180 day STA, if granted, would commence contemporaneous with an FCC
ruling in ESC's and DirectSat's favor. On February 26, 1997, the FCC staff
notified EchoStar of its concern that the requested STA might cause interference
to the Tempo satellite at 118.8 DEG. WL. The FCC required EchoStar to submit a
technical analysis in support of the request. EchoStar has submitted such
analysis, and Tempo has submitted its own technical analysis supporting a
contrary position. There can be no assurance that the FCC will grant or, if
granted, renew EchoStar's request. Failure of the FCC to grant EchoStar's
request would require EchoStar to take steps to ensure that EchoStar I and
EchoStar II are positioned consistent with present FCC authorizations, or to
reposition the satellites, and could have an adverse effect on the operation of
these satellites. If EchoStar I and EchoStar II were found to have been operated
outside their authorized parameters, the FCC could impose monetary forfeitures
or other
84
<PAGE>
penalties on EchoStar. If the FCC denied the STA, EchoStar believes that this
event would not have a material impact on the Company.
The FCC has granted EchoStar conditional authority to use C-band frequencies
for TT&C functions for EchoStar I, stating that the required coordination
process with Canada and Mexico has been completed. In January 1996, the FCC
received a communication from an official of the Ministry of Communications and
Transportation of Mexico stating that EchoStar I's TT&C operations could cause
unacceptable interference to Mexican satellites. While EchoStar believes that it
is unlikely that the FCC will subsequently require EchoStar to relinquish the
use of such C-band frequencies for TT&C purposes, such relinquishment could
result in the inability to control EchoStar I and the total loss of the
satellite.
Among other regulatory requirements, all of EchoStar's DBS systems are
required to conform to the ITU Region 2 Plan for Broadcast Satellite Service
("BSS Plan"). Any operations that are not consistent with the BSS Plan
(including, among other things, the EchoStar system's digital transmissions) can
only be authorized on a non-interference basis pending successful modification
of the BSS Plan or the agreement of all affected administrations to the
non-conforming operations. Accordingly, unless and until the BSS Plan is
modified to include the technical parameters of a DBS applicant's operations,
non-standard satellites must not cause harmful electrical interference to, and
are not entitled to any protection from, interference caused by other
assignments that are in conformance with the BSS Plan. The ITU has requested
certain technical information in order to process the requested modification of
the BSS plan for EchoStar I and EchoStar II, and EchoStar has cooperated, and
continues to cooperate, with the FCC in the preparation of its responses to any
ITU requests. The Company cannot predict when the ITU will act upon this request
for modification or if it will be granted.
By an Order released January 11, 1996 in File No. 131-SAT-EXT-95, the
International Bureau extended the construction permit of DirectSat to August 15,
1999. This grant was subject to the condition that DirectSat make significant
progress toward construction and operation of its DBS system substantially in
compliance with the timetable submitted pursuant to Amendment No. 7 of its
satellite construction contract, dated June 17, 1995, or with a more expedited
timetable. The International Bureau also urged DirectSat to expedite
construction and launch of additional satellites for its DBS system. PrimeStar
has filed an application for review requesting that the FCC reverse the
International Bureau's decision to extend DirectSat's construction permit. By
Order released on September 9, 1996, in File No. DBS-88-02/94-01M, the
International Bureau granted DirectSat's request for authority to launch the
EchoStar II satellite to 118.8 DEG. WL and for approval of certain modifications
made to the design of that satellite. In a separate order issued on the same
date in File No. 53-SAT-ML-95, the International Bureau granted DirectSat
conditional authority to use extended C-band frequencies to perform TT&C
functions for the EchoStar II satellite until January 1, 1999, subject to the
condition that it cause no harmful interference to other satellites, at which
time the FCC will review the suitability of those frequencies for TT&C
operations. There can be no assurance that the FCC will extend the authorization
to use these C-band frequencies for TT&C purposes. The FCC's refusal to extend
such authorization could result in the inability to control EchoStar II and a
total loss of the satellite unless the satellite could be moved to another
orbital slot with FCC approval.
By an Order released December 8, 1995, DA 95-2439, in File No.
129-SAT-EXT-95, the FCC has also conditionally granted the request of DBSC for
an extension of its permit to November 30, 1998 subject to the condition that
the FCC may reconsider the extension and modify or cancel it if DBSC fails to
progress towards construction and operation of its system in accordance with the
timetable DBSC has submitted to the FCC. PrimeStar has filed an application for
review requesting that the FCC reverse the International Bureau's decision to
extend DBSC's construction permit. By Order released August 30, 1996,
DA-96-1482, in File Nos. DBS 87-01, 55-SAT-AL-96, the FCC consented to the
assignment of DBSC's permit to a subsidiary of EchoStar. ESC has a pending
application for assignment of western frequencies and an orbital position, which
has been opposed. In 1992, the FCC held that ESC had not completed contracting
for its western assignments, which is a prerequisite to the grant of specific
assignments. The FCC asked
85
<PAGE>
ESC to submit amended contract documentation. While EchoStar has submitted such
documentation, the FCC has not yet ruled on whether ESC has completed
contracting for that satellite. There are no assurances that the FCC will rule
favorably on this issue to enable ESC to receive western assignments. The FCC
has also deferred action on whether to extend ESC's permit for the western
assignments pending a ruling on completion of contracting. The FCC also has
declared that it will carefully monitor the semi-annual reports required to be
filed by DBS permittees. Failure of EchoStar to file adequate semi-annual
reports or to demonstrate timely progress in the construction of its DBS systems
may result in cancellation of its permits. EchoStar has not filed all required
progress reports with the FCC, and there is a risk that the filed reports may be
found by the FCC not to comply fully with its due diligence requirements.
EchoStar III was launched on October 5, 1997 pursuant to FCC authority which
was conditionally granted by the September 29, 1997 order of the FCC's
International Bureau. The International Bureau's September 29, 1997 order also
conditionally granted DBSC an STA to test all transponders on EchoStar III for
the earlier of eight weeks after launch or seven days prior to the launch of a
satellite to that orbital location by an authorized entity. The International
Bureau's order is subject to review by the full Commission and ultimately the
Court of Appeals, and there can be no assurance that the order will not be
challenged, or that any such challenges will not be successful. EchoStar also
expects to file applications for authority to operate the satellite as well as
feeder link earth stations and antennas for TT&C communications with EchoStar
III. On October 3, 1997 EchoStar filed an application for authority to operate
one of the earth station antennas that it plans to deploy for TT&C and feeder
link communications with EchoStar III. On October 27, 1997, EchoStar filed a
request for a 180 day STA to operate the satellite after testing, and expects to
file an application for a license to operate the satellite. There can be no
assurance that any of these current or future requests will be granted. On that
same date, EchoStar filed a request for an STA to allow it to begin testing that
antenna immediately upon the launch of EchoStar III. On the same date, the FCC
staff verbally gave EchoStar a 90-day STA to conduct such testing subject to
certain power restrictions.
In the event of a failure or loss of any of EchoStar I, EchoStar II, or
EchoStar III, and subject to FCC consent, EchoStar may relocate EchoStar IV and
utilize the satellite as a replacement for the failed or lost satellite. Such a
relocation would require prior FCC approval and, among other things, a showing
to the FCC that EchoStar IV would not cause additional interference compared to
EchoStar I, EchoStar II, or EchoStar III. Should EchoStar choose to utilize
EchoStar IV in this manner, there can be no assurances that such use would not
adversely affect EchoStar's ability to meet the construction, launch and
operation deadlines associated with its permits. Failure to meet such deadlines
could result in the loss of such permits and would have an adverse effect on
EchoStar's planned operations.
The licenses which the FCC issues for an operational DBS system to use
frequencies at a specified orbital location are for a term of ten years. At the
expiration of the initial license term, the FCC may renew the satellite
operator's license or authorize the operator to operate for a period of time on
special authority, but there can be no assurance that the FCC will take such
actions. In the event the FCC declines to renew the operator's license, the
operator would be required to cease operations and the frequencies would revert
to the FCC. EchoStar also requires FCC authority to operate earth stations,
including the earth stations necessary to uplink programming to its satellites.
On July 18, 1997, EchoStar filed a request for an STA to use the 11 channels
assigned to Tempo at the 119 DEG. WL orbital location, on the ground that Tempo,
while it launched a satellite to that location on March 8, 1997, has not yet
started providing service. Tempo has opposed this request on several grounds,
including that it is currently testing its satellite. There can be no assurance
that the FCC will grant EchoStar's request.
On November 21, 1996, EchoStar was granted conditional authorization for
two-Ku-band FSS satellites to be located at 83 WL and 121 WL, subject, among
other things, to submitting additional proof of its financial qualifications
(the "ESC License"). While ESC has submitted such proof, PrimeStar and
86
<PAGE>
GE Americom have challenged it, and on March 10, 1997 and March 12, 1997,
respectively, have separately filed petitions to cancel the ESC License on the
ground that the supplemental financial information, filed by ESC in response to
the condition set forth in the ESC License, is not adequate. If the FCC granted
these petitions, ESC would lose the ESC License. On December 23, 1996, PrimeStar
and GE Americom separately filed petitions for reconsideration of the ESC
License and the reassignment of one EchoStar satellite to a different orbital
slot on the ground that the satellite in dispute will interfere with the GE
Americom satellite used by PrimeStar for its medium-power Ku-band service. If
the FCC granted these petitions, the satellite in dispute may be reassigned to
another orbital location or it may become subject to significant limitation on
its power. Finally, PrimeStar and GE Americom have opposed ESC's request for
authorization to add C-band capabilities to one satellite of its Ku-band system
(the "C-band Capabilities") by separately filing petitions to deny ESC's
application to add the C-band Capabilities (on March 10, 1997) on similar
grounds set forth in their petitions outlined above. If the FCC granted these
petitions, ESC will not get the requested authorization to add the C-band
Capabilities. There can be no assurances as to how the FCC will rule with
respect to any of these challenges. While EchoStar has not finalized a business
plan which incorporates use of this spectrum and is not relying on this spectrum
for the generation of future revenues, if the FCC were to rule against EchoStar,
a potential future business opportunity would be lost.
On October 15, 1997, the Commission released service rules applicable to
Ka-band licensees. Among other things, the rules impose various technical
requirements and restrictions, including the obligation to protect or coordinate
with certain types of services and power control requirements. The Commission
also imposed implementation milestones, including commencement of construction
within one year of grant, commencement of construction of second satellite
within two years of grant, launch of first satellite within five years of grant,
and launch of all satellites by the dates required by the ITU--generally six
years from filing of the ITU "Appendix 4" information (which was filed in
November 1995), with the possibility of a three-year extension. The Commission
noted that EchoStar proposes to operate its system on a common carrier basis.
Further, the Commission prohibited trafficking in "bare" Ka-band licenses. The
Commission also imposed annual reporting requirements. There can be no assurance
that these new rules will not adversely affect EchoStar's plans with respect to
its licensed Ka-band system.
EchoStar has also been granted a conditional license for a two-satellite FSS
Ka-band system. That license was based on an orbital plan agreed upon by
applicants in EchoStar's processing round. Certain of these applicants have now
requested changes to that orbital plan. One company (Norris) has requested a
stay of the plan, and petitions for reconsideration are pending against certain
of the licenses covered by the plan. There can be no assurance that review of
the recently granted Ka-band licenses and orbital plan by the International
Bureau and the full FCC will not eliminate the basis for EchoStar's conditional
license and result in loss of that license.
EchoStar also has an application pending with the FCC for two extended
Ku-band FSS satellites to be located at 85 DEG. WL and 91 DEG. WL. EchoStar also
has requested FCC authorization to modify its proposed Ku-band system to add
C-band capabilities to one satellite. These applications and requests for
modification have been opposed by various parties. There can be no assurance
that the FCC will grant any of these applications or requests for modifications.
Any such initial applications that are granted would have a ten-year license
term and the same renewal obligations as pertain to DBS licenses.
On August 20, 1997, GE Americom filed an application requesting modification
of its license for a C-band/Ku-band satellite currently located at 89 DEG. WL,
to allow relocation of that satellite to 83 DEG. WL. In support of that request,
GE has argued that the license for that satellite is set to expire before
EchoStar's FSS satellite is expected to be launched to that location. EchoStar
has opposed the modification application, but has stated that it would not
oppose a request for temporary relocation of GE's satellite to that slot on an
STA basis.
87
<PAGE>
DBS RULES. Once the FCC grants a conditional construction permit, the
permittee must proceed with due diligence in constructing the system. The FCC
has adopted specific milestones that must be met in order to retain the permit,
unless the FCC determines that an extension or waiver is appropriate, and
permittees must file semi-annual reports on the status of their due diligence
efforts. The due diligence milestones require holders of conditional permits to
complete contracting for construction of their systems within one year of grant
of the permit (with no unresolved contingencies that could preclude substantial
construction of the satellites), and to place all satellite stations comprising
the system in operation within six years of grant of the permit. In addition,
holders of permits received after January 19, 1996 must complete construction of
the first satellite in their system within four years of grant of the permit.
The FCC also may impose other conditions on the grant of the permit. The holders
of new DBS authorizations issued on or after January 19, 1996 must also provide
DBS service to Alaska and Hawaii where the service is technically feasible from
the acquired orbital locations, which includes 148 DEG. WL. Those holding DBS
permits as of January 1996 must either provide DBS service to Hawaii or Alaska
from at least one of their orbital locations or relinquish their western
assignments. Subject to applicable regulations governing non-DBS operations, a
licensee may make unrestricted use of its assigned frequencies for non-DBS
purposes during the first five years of the ten-year license term. After the
first five years, the licensee may continue to provide non-DBS service so long
as at least half of its total capacity at a given orbital location is used each
day to provide DBS service.
Failure to comply with applicable Communications Act requirements and FCC
rules, regulations, policies, and orders may result in the FCC's revoking,
conditioning, or declining to review or extend an authorization.
FOREIGN OWNERSHIP LIMITATIONS. The Communications Act of 1934, as amended,
and the FCC's implementing regulations provide that, where subsidiaries of a
holding company hold certain types of FCC licenses, foreign nationals or their
representatives may not own in excess of 25% of the total equity of the holding
company, considered on a fully-diluted basis, except upon an FCC public interest
determination. While the FCC's International Bureau has ruled that these
limitations do not apply to DBS authorizations, the ruling has been challenged
and the question remains open. Furthermore, the limitations will apply to
EchoStar's FSS authorizations if EchoStar holds itself out as a common carrier
or if the FCC decides to treat it as such a carrier. The FCC has noted that
EchoStar proposes to operate some of its proposed fixed satellite services on a
common carrier as well as a non-common carrier basis.
A recent survey of EchoStar's equity owners discloses that EchoStar's
foreign ownership in May of this year was under 5%, well below these
limitations, if they were to apply. However, if the purchase by foreigners or
their representatives of EchoStar's existing or new equity securities or
exercise of any right to convert existing or new securities, including the
securities issued in the Offerings, would cause the foreign ownership
limitations to be exceeded, a separate FCC determination that such ownership was
consistent with the public interest would be required in order to avoid a
violation of the Act and/or the FCC's rules.
LIMITATIONS ON TRANSFER OF CONTROL AND ASSIGNMENT OF LICENSES. The
Communications Act of 1934, as amended, requires prior FCC approval of transfers
of control over, or assignment of Title III licenses. If the purchase of the
securities subject to the Offerings (or exercise of the right to convert the
Preferred Stock) would result in a transfer of control over the FCC licenses and
permits, such transfer would require prior approval of the FCC.
THE 1996 ACT. The 1996 Act clarifies that the FCC has exclusive
jurisdiction over DTH satellite services and that criminal penalties may be
imposed for piracy of DTH satellite services. The 1996 Act also offers DBS
operators relief from private and local government-imposed restrictions on the
placement of receiving antennae. In some instances, DBS operators have been
unable to serve areas due to laws, zoning ordinances, homeowner association
rules, or restrictive property covenants banning the installation of antennae on
or near homes. The FCC recently promulgated rules designed to implement
Congress' intent by prohibiting any restriction, including zoning, land use or
building regulation, or any private covenant, homeowners' association rule, or
similar restriction on property within the exclusive use or control of the
88
<PAGE>
antenna user where the user has a direct or indirect ownership interest in the
property, to the extent it impairs the installation, maintenance or use of a DBS
receiving antenna that is one meter or less in diameter or diagonal measurement,
except where such restriction is necessary to accomplish a clearly defined
safety objective or to preserve a recognized historic district. Local
governments and associations may apply to the FCC for a waiver of this rule
based on local concerns of a highly specialized or unusual nature. The FCC also
issued a further notice of proposed rulemaking seeking comment on whether the
1996 Act applies to restrictions on property not within the exclusive use or
control of the viewer and in which the viewer has no direct or indirect property
interest. The 1996 Act also preempted local (but not state) governments from
imposing taxes or fees on DTH services, including DBS. Finally, the 1996 Act
required that multichannel video programming distributors such as DBS operators
fully scramble or block channels providing indecent or sexually explicit adult
programming. If a multi-channel video programming distributor cannot fully
scramble or block such programming, it must restrict transmission to those hours
of the day when children are unlikely to view the programming (as determined by
the FCC). On March 24, 1997, the U.S. Supreme Court let stand a lower court
ruling that allows enforcement of this provision pending a constitutional
challenge. In response to this ruling, the FCC declared that its rules
implementing the scrambling provision would become effective on May 18, 1997.
THE CABLE ACT. In addition to regulating pricing practices and competition
within the franchise cable television industry, the Cable Act was intended to
establish and support existing and new multi-channel video services, such as
wireless cable and DBS, to provide subscription television services. EchoStar
has benefited from the programming access provisions of the Cable Act and
implementing rules, in that it has been able to gain access to previously
unavailable programming services and, in some circumstances, has obtained
certain programming services at reduced cost. Any amendment to, or
interpretation of, the Cable Act or the FCC's rules that would permit cable
companies or entities affiliated with cable companies to discriminate against
competitors such as EchoStar in making programming available (or to discriminate
in the terms and conditions of such availability) could adversely affect
EchoStar's ability to acquire programming on a cost-effective basis. Certain of
the restrictions on cable-affiliated programmers will expire in 2002 unless the
FCC extends such restrictions.
On October 14, 1997, EchoStar filed a complaint with the FCC against Rainbow
Programming Holdings, Inc. and Rainbow Media Holdings, Inc. (collectively
"Rainbow") under the Communications Act's program access rules. Rainbow, a
cable-affiliated programming vendor, manages several regional sports services.
EchoStar's complaint alleges that Rainbow has discriminated against EchoStar in
the terms and conditions (including rates, tiering restrictions and advertising
availability provisions) that it has demanded to make its regional sports
programming available to EchoStar; that Rainbow has effectively refused to deal
with EchoStar through dilatory tactics; and that Rainbow has engaged in various
unfair practices at EchoStar's expense. The complaint requests several forms of
relief. There is no assurance that the complaint will succeed or that the
Commission will grant EchoStar any of the requested forms of relief. If the
complaint is not successful, this may adversely affect EchoStar's ability to
offer Rainbow regional sports programming in its programming packages.
On October 27, 1997, EchoStar filed a program access complaint with the FCC
against Fox/Liberty Networks LLC, Fox Sports Net LLC and Fox Sports Direct
(collectively "Fox Sports"), which controls certain regional sports programming
services currently carried by EchoStar. In that complaint, EchoStar has alleged
that Fox Sports has discriminated against EchoStar in the terms that it offered
EchoStar, compared to the terms available to certain competing cable operators.
There can be no assurance that EchoStar will be successful in its complaint
and/or that EchoStar will attain better terms for its carriage of Fox Sports
programming than the terms currently available to EchoStar. The inability of
EchoStar to secure better terms may adversely affect EchoStar's relationship
with Fox Sports.
89
<PAGE>
The Cable Act also requires the FCC to conduct a rulemaking that will impose
public interest requirements for providing video programming by DBS licensees,
including, at a minimum, reasonable and non-discriminatory access by qualified
candidates for election to public office and the obligation to set aside four to
seven percent of the licensee's channel capacity for non-commercial programming
of an educational or informational nature. Within this set-aside requirement,
DBS providers must make capacity available to "national educational programming
suppliers" at below-cost rates. The FCC is conducting a rulemaking to implement
this statutory provision.
While DBS operators like EchoStar currently are not subject to the "must
carry" requirements of the Cable Act, the cable industry has argued that DBS
operators should be subject to these requirements. In the event the "must carry"
requirements of the Cable Act are revised to include DBS operators, or to the
extent that new legislation of a similar nature is enacted, EchoStar's future
plans to provide local programming will be adversely affected, and such
must-carry requirements could cause the displacement of possibly more attractive
programming.
SATELLITE HOME VIEWER ACT. The SHVA establishes a "statutory" (or
compulsory) copyright license that generally allows a DBS operator, for a
statutorily-established fee, to retransmit local affiliate programming to
subscribers for private home viewing so long as that retransmission is limited
to those persons in "unserved households." An "unserved household", with respect
to a particular television network, is defined as one that cannot receive an
over-the-air network signal of "grade B" intensity (a predictive standard of
signal intensity employed by the FCC) of a primary network station affiliated
with that network through the use of a conventional outdoor rooftop antenna and
has not, within the 90 days prior to subscribing to the DBS service, subscribed
to a cable service that provides the signal of an affiliate of that network.
While management believes the SHVA could be read to allow the Company to
retransmit this programming to certain local markets via DBS satellite,
management also believes that the compulsory copyright license under the SHVA
may not be sufficient to permit the Company to implement its strategy to
retransmit such programming in the most efficient and comprehensive manner. On
August 28, 1997, a Copyright Arbitration Royalty Panel ("CARP"), appointed to
recommend royalties for satellite retransmission of network-affiliated
television and superstation signals pursuant to the compulsory license of
Section 119 of the Copyright Act, delivered its Report to the Librarian of
Congress. In the CARP's recommendation, the CARP held it has no jurisdiction to
set royalties for local satellite retransmissions of the signals of
network-affiliated television stations, on the ground that the compulsory
license of the Copyright Act does not extend to such retransmissions. EchoStar
petitioned the Librarian to modify the CARP report. The CARP also recommended
setting at zero the royalty rate for local retransmissions of superstation
signals.
The final ruling of the Librarian of Congress, reviewing the Panel's
recommendation, was published in the Federal Register on October 28, 1997. With
respect to "local-into-local" retransmissions, the Librarian affirmed the zero
rate recommended by the Panel for secondary transmission of a superstation
signal within the station's local market--a recommendation that EchoStar had
supported.
The Librarian modified the Panel's recommendation, by also establishing a
zero rate for secondary transmissions of a network station's signal to "unserved
households" within the station's local market. The Librarian of Congress also
reviewed the Panel's recommendation on the meaning of "unserved households"
(i.e., whether the statutory license covers retransmissions to a household in a
network station's local market receiving a signal of Grade B intensity from that
station but not from any other affiliate of the same network and satisfying all
other elements of the "unserved household" definition). The Panel had determined
that the statutory license does not cover such retransmissions and the Panel did
not have jurisdiction to recommend a rate for them. The Librarian decided that
the law is silent on the issue, and accordingly, he cannot unequivocally say
that the Panel's decision is arbitrary or contrary to law. Nonetheless, the
Librarian determined that the Copyright Office retains the authority to conduct
a rule-making proceeding despite the Panel's determination, on the
permissibility of secondary transmissions of a network station's signal to
households within that station's local market that are served by that station
but
90
<PAGE>
unserved by any other station affiliated with the same network under the
"unserved household" provisions of the satellite compulsory license.
While modifications to the Panel's recommendations effected by the final
ruling are generally favorable to EchoStar, the ruling is subject to judicial
review, and there can be no assurance that these modifications will not be set
aside. Moreover, there can be no assurance that the rulemaking referenced in the
final ruling will be conducted or that it will result in an outcome favorable to
EchoStar. Further, while EchoStar is continuing its effort to secure passage of
legislation that will clarify and extend the scope of the compulsory license
with respect to local network signals, to protect against the possibility the
Copyright Office will not conduct a rulemaking proceeding or that any such
rulemaking may not provide a favorable result to EchoStar, there can be no
assurance that EchoStar will be successful in this effort. If a court or
administrative agency were to reject the interpretation of "unserved household"
supported by EchoStar, and legislation does not pass which clarifies and extends
the scope of the compulsory license, EchoStar may have to engage in the
relatively cumbersome process of obtaining copyright licenses from all
individual copyright holders instead. In the absence of the legislation sought
by EchoStar and/or a favorable outcome in the rulemaking referenced in the
Librarian's final ruling, and failing successful negotiation of individual
copyright licenses and retransmission consent agreements to the extent
necessary, there can be no assurance that EchoStar would be successful in any
copyright infringement or FCC litigation with copyright owners and/or
broadcasters regarding the legality of certain local-into-local network
retransmissions.
Subject to the foregoing considerations, EchoStar intends to offer local
programming, including local network programming, to certain population centers
within the continental U.S. In order to retransmit local programming into a
market, EchoStar generally must obtain the retransmission consent of the local
stations, except for direct to home retransmissions to "unserved households", as
this term is defined in the SHVA (see above), in addition to any requisite
copyright licenses. There can be no assurance that EchoStar will obtain the
retransmission consents of any local affiliate, and one of the networks (Fox)
has stated it is not willing to consider EchoStar's request for retransmission
consent at this time. EchoStar's ability to transmit local programming via
satellite into the markets from which the programming is generated may attract
incremental subscribers who would not otherwise be willing to purchase satellite
systems.
In addition, in its August 28, 1997 report, the CARP recommended that the
royalty rate for satellite retransmissions of distant network-affiliated station
and distant superstation signals be set at 27 cents per subscriber per month--a
substantial increase compared to the previously applicable rates, which ranged
from 6 to 17.5 cents. The Satellite Broadcasting & Communications Association,
of which EchoStar is a member, requested modifications to the CARP report.
The final ruling of the Librarian of Congress, reviewing the Panel's
recommendation, was published in the FEDERAL REGISTER on October 28, 1997. The
Librarian, among other things, affirmed the Panel's recommendation of a 27 cent
per subscriber per month royalty rate for retransmissions of distant
superstation and network station signals, but delayed the effective date for the
increase to January 1, 1998 (instead of making the increase retroactive, as the
Panel had recommended).
EchoStar believes that it may be able to pass through the increases to its
customers by separately tiering the channels involved, so that its operating
margins are not substantially affected. However, the increases may adversely
affect the competitiveness of EchoStar vis-a-vis cable operators, which pay
lower rates to copyright holders.
EXPORT REGULATION. From time to time, EchoStar requires import licenses and
general destination export licenses to receive and deliver components of DTH
systems. EchoStar has contracted with LKE for the launch of EchoStar IV from the
Republic of Kazakhstan. Export licenses will be required to be obtained from the
Department of Commerce for the transport of any satellites to the Republic of
Kazakhstan. Lockheed Martin will be required to obtain technical data exchange
licenses from the
91
<PAGE>
Department of Commerce permitting the exchange between Lockheed Martin and LKE
of certain information necessary to prepare the satellites for launch. No
assurances can be given that the data exchange or export licenses will be
granted, or that implementation of a trade agreement between the U.S. and Russia
will not negatively affect EchoStar's ability to launch EchoStar IV. LKE has
advised EchoStar, however, that, while no assurances can be given, it believes
the necessary technical data and hardware export licenses can be obtained in
time for the scheduled launch of EchoStar IV. There can be no assurance those
licenses will be obtained in a timely manner to avoid a launch delay.
PATENTS AND TRADEMARKS
EchoStar uses a number of trademarks for its products and services,
including "EchoStar-Registered Trademark-," "DISH Network-TM-," "DISH Network,"
"America's Top 40," "America's Top 50 CD," and others. Certain of these
trademarks are registered by EchoStar, and those trademarks that are not
registered are generally protected by common law and state unfair competition
laws. Although EchoStar believes that these trademarks are not essential to
EchoStar's business, EchoStar has taken affirmative legal steps to protect its
trademarks in the past and intends to actively protect these trademarks in the
future.
EchoStar is the assignee of certain patents for products and product
components manufactured and sold by EchoStar, none of which EchoStar considers
to be significant to its continuing operations. In addition, EchoStar has
obtained and, although no assurances can be given, expects to obtain, licenses
for certain patents necessary to the manufacture and sale by EchoStar and others
of DBS receivers and related components. EchoStar has been notified that certain
features of the EchoStar Receiver System allegedly infringe on patents held by
others, and that royalties are therefore required to be paid. EchoStar is
investigating allegations of infringement and, if appropriate, intends to
vigorously defend against any suit filed by the parties. There can be no
assurance that the Company will be able to successfully defend any suit, if
brought, or that the Company will be able to obtain a license for any patent
that might be required. See "Business--Legal Proceedings."
EMPLOYEES
EchoStar had approximately 1,650 employees at September 30, 1997, of which
approximately 1,575 worked in EchoStar's domestic operations and approximately
75 of which worked in EchoStar's international operations. EchoStar is not a
party to any collective bargaining agreement and considers its relations with
its employees to be good. EchoStar intends to hire additional personnel as
required.
92
<PAGE>
PROPERTIES
EchoStar owns its corporate headquarters, its future corporate headquarters,
its Digital Broadcast Center in Cheyenne, Wyoming, its customer call center in
Thornton, Colorado, and office/warehouse facilities in three additional
locations. The following table sets forth certain information concerning
EchoStar's properties.
<TABLE>
<CAPTION>
APPROXIMATE OWNED
DESCRIPTION/USE LOCATION SQUARE FOOTAGE OR LEASED
<S> <C> <C> <C>
Future Corporate Headquarters........................... Littleton, Colorado 156,000 Owned
Corporate Headquarters and Warehouse Distribution Englewood, Colorado
Center................................................ 155,000 Owned
Office and Distribution Center.......................... Sacramento, California 78,500 Owned
Digital Broadcast Center................................ Cheyenne, Wyoming 55,000 Owned
Customer Call Center.................................... Thornton, Colorado 55,000 Owned
European Headquarters and Warehouse..................... Almelo, The Netherlands 53,800 Owned
Warehouse Facility...................................... Denver, Colorado 40,000 Owned
Office and Distribution Center.......................... Bensenville, Illinois 19,000 Leased
Office and Distribution Center.......................... Miami, Florida 16,500 Leased
Office and Distribution Center.......................... Norcross, Georgia 16,000 Leased
Office and Distribution Center.......................... Columbia, Maryland 17,600 Leased
Office and Distribution Center.......................... Dallas, Texas 11,200 Leased
Office and Distribution Center.......................... Phoenix, Arizona 10,000 Leased
Asian Distribution Center............................... Singapore 7,000 Leased
Office.................................................. Madrid, Spain 2,100 Leased
Asian Headquarters...................................... Singapore 1,900 Leased
Office.................................................. Bombay, India 1,200 Leased
Office.................................................. Beijing, China 1,000 Leased
Office.................................................. Bangalore, India 1,200 Leased
</TABLE>
LEGAL PROCEEDINGS
On July 29, 1996, EAC, DNCC, ESC and Echosphere Corporation (collectively,
"EchoStar Credit"), filed a civil action against Associates which is currently
pending in the U.S. District Court in the District of Colorado. EchoStar Credit
alleges that Associates, among other things, breached its contract with EchoStar
Credit pursuant to which Associates agreed to finance the purchase of EchoStar
Receiver Systems by consumers. EchoStar Credit alleges that Associates' refusal
to finance certain prospective consumers has resulted in the loss of prospective
customers to EchoStar's competitors. In addition, EchoStar Credit alleges that
the loss of sales due to Associate's action forced EchoStar to lower the price
on its products. Associates filed counterclaims against EAC for fraud and breach
of contract. Associates seeks approximately $10.0 million by way of its
counterclaims. EAC intends to vigorously defend against such counterclaims. A
trial date has not yet been set. It is too early in the litigation to make an
assessment of the probable outcome.
On April 25, 1997, ESC and Sagem, S.A., ("Sagem"), a French corporation,
signed a settlement and release agreement under which Sagem agreed to return a
$10.0 million down payment made to Sagem and agreed to release the $15.0 million
placed in escrow with a bank in connection with a manufacturing agreement
entered into in April 1995. ESC and Sagem have released all claims against each
other.
Certain purchasers of C-band and DISH Network systems have filed actions in
various state courts in Alabama naming EchoStar, EAC or Echosphere Corporation
as a defendant and seeking actual and punitive damages. At least ten actions
have been filed. EchoStar believes additional actions may be filed. Plaintiffs'
attorneys also may attempt to certify a class and/or add additional plaintiffs
to the existing
93
<PAGE>
actions and seek greater damages. A trial date (March 2, 1998) has been
established for only one of the aforementioned actions. The actions filed to
date also name as defendants the dealer and its employees who sold the equipment
and the EAC financing source, which owns the consumer loans, made to the
purchasers. Four of the actions involve EAC and HRSI and six claims involve EAC
and Bank One Dayton, N.A. EchoStar denies liability and intends to vigorously
defend against the claims, which include allegations of fraud and lending law
violations. While the actual damages claimed are not material, EchoStar is aware
that juries in Alabama have recently issued a number of verdicts awarding
substantial punitive damages on actual damage claims of less than $10,000.
EAC and HRSI entered into a Merchandise Financing Agreement in 1989 (the
"Merchant Agreement") pursuant to which HRSI acted as a consumer financing
source for the purchase of, among other things, satellite systems distributed by
Echosphere Corporation, a subsidiary of EchoStar, to consumers through EAC
dealers. HRSI terminated the Merchant Agreement as of December 31, 1994. During
February 1995, EAC and Echosphere (the "EAC Parties") filed suit against HRSI.
The case is pending in U.S. District Court in Colorado (the "HRSI Litigation").
The EAC Parties have alleged, among other things, breach of contract, breach of
fiduciary duty, fraud and wanton and willful conduct by HRSI in connection with
termination of the Merchant Agreement and related matters. The EAC parties are
seeking damages in excess of $10.0 million. HRSI's counterclaims have been
dismissed with prejudice. Summary judgment motions have been pending on all
remaining issues since May 1996. A trial date has not been set.
On February 24, 1997, EchoStar and News announced the News Agreement
pursuant to which, among other things, News agreed to acquire approximately 50%
of the outstanding capital stock of EchoStar. News also agreed to make available
for use by EchoStar the DBS permit for 28 frequencies at 110 DEG. WL purchased
by MCI for over $682 million following a 1996 FCC auction. During late April
1997, substantial disagreements arose between the parties regarding their
obligations under the News Agreement.
On May 8, 1997, EchoStar filed a Complaint in the Court, Civil Action No.
97-960, requesting that the Court confirm EchoStar's position and declare that
News is obligated pursuant to the News Agreement to lend $200 million to
EchoStar without interest and upon such other terms as the Court orders.
On May 9, 1997, EchoStar filed a First Amended Complaint significantly
expanding the scope of the litigation, to include breach of contract, failure to
act in good faith, and other causes of action. EchoStar seeks specific
performance of the News Agreement and damages, including lost profits based on,
among other things, a jointly prepared ten-year business plan showing expected
profits for EchoStar in excess of $10 billion based on consummation of the
transactions contemplated by the News Agreement.
On June 9, 1997, News filed an answer and counterclaims seeking unspecified
damages. News' answer denies all of the material allegations in the First
Amended Complaint and asserts numerous defenses, including bad faith, misconduct
and failure to disclose material information on the part of EchoStar and its
Chairman and Chief Executive Officer, Charles W. Ergen. The counterclaims, in
which News is joined by its subsidiary American Sky Broadcasting, L.L.C., assert
that EchoStar and Ergen breached their agreements with News and failed to act
and negotiate with News in good faith. EchoStar has responded to News' answer
and denied the allegations in their counterclaims. EchoStar also has asserted
various affirmative defenses. EchoStar intends to diligently defend against the
counterclaims. The parties are now in discovery. The case has been set for a
five week trial commencing June 1998, but that date could be postponed.
While EchoStar is confident of its position and believes it will ultimately
prevail, the litigation process could continue for many years and there can be
no assurance concerning the outcome of the litigation.
EchoStar is a party to certain other legal proceedings arising in the
ordinary course of its business. EchoStar does not believe that any of these
proceedings will have a material adverse affect on EchoStar's financial position
or results of operations.
94
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth information concerning certain officers and
directors of EchoStar:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Charles W. Ergen............................. 44 Chairman, Chief Executive Officer, President and Director
Alan M. Angelich............................. 53 Director
Raymond L. Friedlob.......................... 52 Director
James DeFranco............................... 44 Executive Vice President and Director
R. Scott Zimmer.............................. 41 Vice Chairman and Vice President
David K. Moskowitz........................... 39 Senior Vice President, General Counsel and Secretary
Michael T. Dugan............................. 48 Senior Vice President, Consumer Products Division
Steven B. Schaver............................ 43 Chief Financial and Chief Operating Officer
John R. Hager................................ 35 Treasurer and Controller
</TABLE>
CHARLES W. ERGEN. Mr. Ergen has been Chairman of the Board of Directors,
Chief Executive Officer and President of EchoStar since its formation and,
during the past five years, has held various positions with EchoStar's
subsidiaries, including President and Chief Executive Officer of Echosphere,
Echonet Business Network, Inc. ("EBN") and ESC, and Director of Echosphere, HTS,
EchoStar International Corporation ("EIC"), ESC and EBN. Mr. Ergen, along with
his spouse and James DeFranco, was a co-founder of EchoStar in 1980. Commencing
in March 1995, Mr. Ergen also became a director of SSET, a company principally
engaged in the manufacture and sale of satellite telecommunications equipment.
ALAN M. ANGELICH. Mr. Angelich has been a director of EchoStar and a member
of its Audit and Executive Compensation Committees since October 1995. Mr.
Angelich is presently a principal with Janco Partners, Inc., an investment
banking firm specializing in the telecommunications industry. From May 1982 to
October 1993, Mr. Angelich served in various executive capacities with Jones
Intercable, Inc., including Vice Chairman of its Board of Directors from
December 1988 to October 1993. From August 1990 to October 1993, Mr. Angelich
was also the Chief Executive Officer of Jones Capital Markets, Inc.
RAYMOND L. FRIEDLOB. Mr. Friedlob has been a director of EchoStar and a
member of its Audit and Executive Compensation Committees since October 1995.
Mr. Friedlob is presently a member of the law firm of Friedlob Sanderson Raskin
Paulson & Tourtillott, LLC. Prior to 1995, Mr. Friedlob was a partner of Raskin
& Friedlob, where he had practiced since 1970. Mr. Friedlob specializes in
federal securities law, corporate law, leveraged acquisitions, mergers and
taxation.
JAMES DEFRANCO. Mr. DeFranco, currently the Executive Vice President of
EchoStar, has been a Vice President and a Director of EchoStar since its
formation and, during the past five years, has held various positions with
EchoStar's subsidiaries, including President of HTS, EAC and HT Ventures, Inc.
("HTV"), Executive Vice President of ESC, Senior Vice President of Echosphere
and EBN, and Director of SSI, Echosphere, HTS, EAC, EBN and HTV. Mr. DeFranco,
along with Mr. Ergen and Mr. Ergen's spouse, was a co-founder of EchoStar in
1980.
R. SCOTT ZIMMER. Mr. Zimmer has been a Vice President and a Director of
EchoStar since its formation. For the past five years, Mr. Zimmer has managed
the international operations of EchoStar and its subsidiaries.
DAVID K. MOSKOWITZ. Mr. Moskowitz is the Senior Vice President, Secretary
and General Counsel of EchoStar. Mr. Moskowitz joined EchoStar in March 1990.
Mr. Moskowitz is responsible for all legal and certain of the business affairs
of EchoStar and its subsidiaries. From June 1986 to March 1990,
95
<PAGE>
Mr. Moskowitz was corporate counsel for M.D.C. Holdings, Inc., a publicly-held
home builder and mortgage finance company.
MICHAEL T. DUGAN. Mr. Dugan is the Senior Vice President of the Consumer
Products Division of EchoStar. In that capacity, Mr. Dugan is responsible for
all engineering and manufacturing operations at EchoStar. Mr. Dugan has been
with EchoStar since 1990.
STEVEN B. SCHAVER. Mr. Schaver was named the Chief Financial Officer of
EchoStar in February 1996. In November 1996, Mr. Schaver also was named Chief
Operating Officer. From November 1993 to February 1996, Mr. Schaver was the Vice
President of EchoStar's European and African operations. From July 1992 to
November 1993, Mr. Schaver was the Director of Sales and Marketing for
EchoStar's largest Spanish customer, Internacional de Telecomunicaciones, S.A.
in Madrid, Spain. Prior to July 1992 and since joining EchoStar in 1984, he has
held various positions with subsidiaries of EchoStar, including Vice President
of European operations. Prior to joining EchoStar Mr. Schaver was a Banking
Officer with Continental Illinois National Bank.
JOHN R. HAGER. Mr. Hager has been Treasurer and Controller of EchoStar
since February 1997. From August 1993 to February 1997, Mr. Hager was Controller
of American Telecasting, Inc., a national operator of multiple wireless cable
systems. Previously, Mr. Hager was with the Denver office of Ernst & Young from
May 1984 until August 1993, most recently as Audit Senior Manager.
The Board of Directors of EchoStar currently has an Audit Committee and an
Executive Compensation Committee, both of which were established in October
1995. The present members of the Audit and Executive Compensation Committees are
Messrs. Angelich and Friedlob. The principal functions of the Audit Committee
are: (i) to recommend to the Board of Directors the selection of independent
public accountants; (ii) review management's plan for engaging EchoStar's
independent public accountants during the year to perform non-audit services and
consider what effect these services will have on the independence of the
accountants; (iii) review the annual financial statements and other financial
reports which require approval by the Board of Directors; (iv) review the
adequacy of EchoStar's system of internal accounting controls; and (v) review
the scope of the independent public accountants' audit plans and the results of
the audit. The principal function of the Executive Compensation Committee is to
award grants under and administer EchoStar's Stock Incentive Plan.
96
<PAGE>
EXECUTIVE COMPENSATION
Executive Officers are compensated by certain subsidiaries of EchoStar. The
following table sets forth the cash and non-cash compensation for the fiscal
years ended December 31, 1996, 1995 and 1994 for the Named Executive Officers.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------
LONG TERM
COMPENSATION
AWARDS/
OTHER ANNUAL SECURITIES
COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) OPTIONS COMPENSATION (2)
<S> <C> <C> <C> <C> <C> <C>
Charles W. Ergen............................ 1996 $ 190,000 $ -- $ -- 17,030 $ 140,680
Chairman and 1995 190,000 -- -- 14,705 15,158
Chief Executive Officer 1994 177,578 -- -- 53,568 888
Carl E. Vogel (3)........................... 1996 166,923 -- -- -- 12,798
President 1995 150,000 -- -- 21,641 11,346
1994 107,300 -- -- 375,776 500
R. Scott Zimmer............................. 1996 160,000 -- 36,265 -- 22,461
Vice Chairman and 1995 160,000 -- 88,229 14,705 32,390
Vice President 1994 148,006 -- 74,396 42,855 18,990
James DeFranco.............................. 1996 160,000 -- -- -- 48,990
Executive Vice President and Director 1995 156,923 -- -- 11,764 15,158
1994 154,461 -- -- 42,855 1,000
Steven B. Schaver........................... 1996 142,498 11,787 14,340 -- 12,516
Chief Operating Officer and Chief 1995 116,755 21,012 4,777 23,240 10,597
Financial Officer 1994 85,602 -- -- 10,713 --
David K. Moskowitz.......................... 1996 142,692 10,000 -- 7,495 12,994
Senior Vice President and General 1995 130,000 10,000 -- 28,048 13,270
Counsel 1994 125,384 -- -- 53,568 1,000
</TABLE>
- ------------------------
(1) With respect to Mr. Zimmer and Mr. Schaver, "Other Annual Compensation"
includes housing and car allowances related to their overseas assignments.
While each Named Executive Officer enjoys certain other perquisites, such
perquisites do not exceed the lesser of $50,000 or 10% of each Officer's
salary and bonus.
(2) "All Other Compensation" includes amounts contributed to the EchoStar's
401(k) plan and health insurance premiums paid on behalf of the Named
Executive Officers. With respect to Mr. Ergen, Mr. DeFranco and Mr. Zimmer,
"All Other Compensation" also includes payments made in connection with a
tax indemnification agreement between the Corporation and such individuals.
With respect to Mr. Zimmer, "All Other Compensation" also includes home
leave and education allowances related to his overseas assignment.
(3) Mr. Vogel tendered his resignation in March 1997.
97
<PAGE>
The following table provides information concerning grants of options to
purchase shares of Class A Common Stock of EchoStar made in 1996 to the named
executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEE IN PRICE PER GRANT DATE
NAME GRANTED 1996 SHARE EXPIRATION DATE PRESENT VALUE
<S> <C> <C> <C> <C> <C>
Charles W. Ergen......................... 17,030(1) 12.3% $ 29.36 August 1, 2006 $ 280,804(2)
David K. Moskowitz....................... 7,495(1) 5.4% 26.69 August 1, 2006 127,601(2)
</TABLE>
- ------------------------
(1) In August 1996, the Company granted options to the Named Executive Officers,
among other key employees, to purchase shares of Class A Common Stock. The
options vest 20% on August 1, 1997, and 20% thereafter on August 1, 1998,
1999, 2000 and 2001. See "--Stock Incentive Plan." The options expire five
years from the date on which each portion of the option first becomes
exercisable, subject to early termination in certain circumstances.
(2) Option values reflect Black-Scholes model output for options. The
assumptions used in the model were expected volatility of 62%, risk free
rate of return of 6.8%, dividend yield of 0%, and time to exercise of six
years.
The following table provides information as of December 31, 1996, concerning
unexercised options to purchase Class A Common Stock:
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1996 DECEMBER 31, 1996(1)
ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Charles W. Ergen........................ -- $ -- 24,367 60,936 $ 268,108 $ 465,963
R. Scott Zimmer......................... 17,000 300,589 3,082 37,478 16,499 384,532
Carl E. Vogel........................... 322,208 8,566,272 25,753 49,456 286,619 468,031
James DeFranco.......................... -- -- 19,494 35,125 228,898 372,767
Steven B. Schaver....................... -- -- 8,931 25,022 76,524 170,486
David K. Moskowitz...................... -- -- 27,034 62,077 289,817 480,824
</TABLE>
- ------------------------
(1) The dollar value of each exercisable and unexercisable option was calculated
by multiplying the number of shares of Class A Common Stock underlying the
option by the difference between the exercise price of the option and the
closing price (as quoted in the Nasdaq National Market) of a share of Class
A Common Stock on December 31, 1996.
EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Prior
to October 1995, the Company did not have an Executive Compensation Committee,
and its Board of Directors determined all matters concerning executive
compensation.
DIRECTOR COMPENSATION. Directors of the Company who are not also Executive
Officers of the Company receive $500 for each meeting of the Board of Directors
attended and are reimbursed for reasonable travel expenses related to attendance
at Board meetings. Directors of the Company are elected annually by the
stockholders of the Company. Directors of the Company are not compensated for
their services as Directors. Directors who are not also employees of the Company
are granted shares of options
98
<PAGE>
under the 1995 Nonemployee Director Stock Option Plan (the "Director Plan") to
acquire 1,000 shares of Class A Common Stock of the Company upon election to the
Board. Each of Messrs. Angelich and Friedlob was granted options to acquire
1,000 shares of Class A Common Stock of the Company on December 22, 1995
pursuant to the Director Plan. These options were 100% vested upon issuance and
have an exercise price of $20.25 per share and a term of five years.
Additionally, in February 1997, each of Messrs. Angelich and Friedlob was
granted options to acquire 5,000 shares of Class A Common Stock of the Company.
These options were 100% vested upon issuance and have an exercise price of
$17.00 and a term of five years.
STOCK INCENTIVE PLAN. The Company adopted the Incentive Plan to provide
incentives to attract and retain Executive Officers and other key employees. The
Company's Executive Compensation Committee administers the Incentive Plan. Key
employees are eligible to receive awards under the Incentive Plan, in the
Committee's discretion.
Awards available under the Incentive Plan include: (i) common stock purchase
options; (ii) stock appreciation rights; (iii) restricted stock and restricted
stock units; (iv) performance awards; (v) dividend equivalents; and (vi) other
stock-based awards. The Company has reserved up to 10.0 million shares of Class
A Common Stock for granting awards under the Incentive Plan. Under the terms of
the Incentive Plan, the Executive Compensation Committee retains discretion,
subject to plan limits, to modify the terms of outstanding awards and to reprice
awards.
Pursuant to the Incentive Plan, the Company has granted options to its
Executive Officers and other key employees for the purchase of a total of
1,303,147 shares of Class A Common Stock. These options generally vest at the
rate of 20% per year, commencing one year from the date of grant and 20%
thereafter on each anniversary of the date of grant. The exercise prices of
these options range between $9.33 and $29.36 per share of Class A Common Stock.
Effective July 1, 1997, the Executive Compensation Committee of the Board of
Directors (the "Executive Compensation Committee") voted to reprice all
outstanding options with an exercise price greater than $17.00 per share of
Class A Common Stock to $17.00 per share of Class A Common Stock. The price to
which the options were repriced exceeded the fair market value of EchoStar's
Class A Common Stock as of the date of the repricing. Options to purchase
approximately 288,000 shares of Class A Common Stock were affected by this
repricing.
LAUNCH BONUS PLAN. Effective September 9, 1996 EchoStar granted a
performance award of ten shares of Class A Common Stock to all full-time
employees with more than 90 days of service. The total number of shares granted
relative to the September performance award approximated 7,390 shares. EchoStar
granted a performance award of ten shares of its Class A Common Stock to all
full-time employees with more than 90 days of service in connection with the
launch of EchoStar III, which occurred on October 5, 1997. The total number of
shares granted relative to the October performance award approximated 12,250.
401(K) PLAN. In 1983 EchoStar adopted a defined-contribution tax-qualified
401(k) plan. EchoStar's employees become eligible for participation in the
401(k) plan upon completing six months of service with the Corporation and
reaching age 21. 401(k) plan participants may contribute an amount equal to not
less than 1% and not more than 15% of their compensation in each contribution
period. EchoStar may make a 50% matching contribution up to a maximum of $1,000
per participant per calendar year. EchoStar may also make an annual
discretionary profit sharing or employer stock contribution to the 401(k) plan
with the approval of the Board of Directors.
401(k) plan participants are immediately vested in their voluntary
contributions, plus actual earnings thereon. The balance of the vesting in
401(k) plan participants' accounts is based on years of service. A participant
becomes 10% vested after one year of service, 20% vested after two years of
service, 30% vested after three years of service, 40% vested after four years of
service, 60% vested after five years of service, 80% vested after six years of
service, and 100% vested after seven years of service.
99
<PAGE>
In March 1997, EchoStar contributed an additional 55,000 shares of Class A
Common Stock to the 401(k) plan as a discretionary employer stock contribution.
A total of 60,000 shares of Class A Common Stock (including 5,000 shares of
Class A Common Stock which were contributed for plan year 1995 but not
allocated) were allocated to individual participant 401(k) accounts in
proportion to their 1996 eligible compensation. These shares are subject to the
seven-year vesting schedule previously described. Shares of Class A Common Stock
allocated to the 401(k) accounts of the Named Executive Officers pursuant to the
1996 discretionary employer stock contribution were as follows: (i) Charles W.
Ergen, 677 shares; (ii) Carl E. Vogel, 677 shares; (iii) R. Scott Zimmer, 677
shares; (iv) James DeFranco, 677 shares; (v) Steven B. Schaver, 676 shares; (vi)
David K. Moskowitz, 677 shares; and (vii) all Officers and Directors as a group,
4,736 shares.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain subsidiaries of EchoStar have agreed to indemnify Charles W. Ergen,
Chairman and Chief Executive Officer of EchoStar, James DeFranco, Executive Vice
President of EchoStar, R. Scott Zimmer, Vice Chairman and Vice President of
EchoStar, and Cantey M. Ergen, a former Director of HTS and the spouse of
Charles W. Ergen, for any adjustments to such individuals' federal, state or
local income taxes resulting from adjustments to EchoStar's subsidiaries'
taxable income or loss, tax credits or tax credit recapture for years during
which such individuals were shareholders of such subsidiaries and such
subsidiaries elected to be taxed as Subchapter S corporations. This indemnity
agreement also covers interest, penalties and additions to tax, as well as fees
and expenses, including attorneys' and accountants' fees, if any.
As of December 31, 1996 and June 30, 1997, accrued dividends on the Series A
Preferred Stock payable to Messrs. Ergen and DeFranco aggregated $3.18 million
and $3.75 million, and $167,000 and $198,000, respectively.
Since March 1995, Mr. Ergen has served on the Board of Directors of SSET. In
1994, EchoStar purchased $8.75 million of SSET's seven-year, 6.5% subordinated
convertible debentures. In December 1994, DirectSat Corporation, a subsidiary of
SSET, was merged with a wholly-owned subsidiary of EchoStar. As a result of this
merger, SSET acquired 800,780 shares of Class A Common Stock of EchoStar. On
September 6, 1996, SSET repurchased $3.5 million of the outstanding convertible
debentures and paid all outstanding accrued interest through that date. As of
December 31, 1996, the SSET debentures, if converted, would have represented
approximately 5% of SSET's outstanding common stock. The total amount owed by
SSET to EchoStar as of December 31, 1996 and June 30, 1997 related to the
convertible debentures was approximately $3.6 million and $4.1 million,
respectively.
100
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, to the best knowledge of the EchoStar, the
beneficial ownership of the EchoStar's equity securities as of August 31, 1997
by: (i) each person known by EchoStar to be the beneficial owner of more than
five percent of any class of EchoStar's capital stock; (ii) each Director of
EchoStar; (iii) each person acting as an executive officer of EchoStar; and (iv)
all Directors and Executive Officers as a group. Unless otherwise indicated,
each person listed in the following table (alone or with family members) has
sole voting and dispositive power over the shares listed opposite such person's
name.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NAME(1) SHARES CLASS
<S> <C> <C>
SERIES A PREFERRED STOCK:
Charles W. Ergen(2)................................................................. 1,535,847 95.0%
James DeFranco...................................................................... 80,834 5.0%
All Directors and Executive Officers as a Group (nine persons)...................... 1,616,681 100.0%
CLASS A COMMON STOCK:
Charles W. Ergen(3),(4),(5)......................................................... 31,387,620 72.0%
James DeFranco(6),(4)............................................................... 1,525,320 3.5%
FMR Corp.(7)........................................................................ 1,186,459 2.7%
R. Scott Zimmer(8),(4).............................................................. 819,836 1.9%
SSE Telecom, Inc.(9)................................................................ 709,780 1.6%
Chancellor LGT Asset Management, Inc.(10)........................................... 609,200 1.4%
David K. Moskowitz(11),(4).......................................................... 49,521 *
Steven B. Schaver(12),(4)........................................................... 12,781 *
All Directors and Executive Officers as a Group (nine persons)(4),(14).............. 33,831,528 77.6%
CLASS B COMMON STOCK:
Charles W. Ergen.................................................................... 29,804,401 100.0%
All Directors and Executive Officers as a Group (nine persons)...................... 29,804,401 100.0%
</TABLE>
- ------------------------
* Less than 1%.
(1) Except as otherwise noted, the address of each such person is 90 Inverness
Circle East, Englewood, Colorado 80112-5300.
(2) Includes 1,125,000 Series A Preferred Stock held in trust for the benefit of
Mr. Ergen's minor children and other members of his family. Mr. Ergen's
spouse is the trustee for that trust.
(3) Includes: (i) the right to acquire 41,428 shares of Class A Common Stock
within 60 days upon the exercise of employee stock options; (ii) 29,804,401
shares of Class A Common Stock issuable upon conversion of Mr. Ergen's
shares of Class B Common Stock; (iii) 410,847 shares of Class A Common Stock
issuable upon conversion of Mr. Ergen's Series A Preferred Stock; and (iv)
1,125,000 shares of Class A Common Stock issuable upon conversion of Series
A Preferred Stock held in trust for the benefit of Mr. Ergen's minor
children and other members of his family.
(4) Beneficial ownership percentage was calculated assuming exercise or
conversion of all shares of Class B Common Stock, Series A Preferred Stock,
Warrants and employee stock options exercisable within 60 days
(collectively, the "Derivative Securities") into shares of Class A Common
Stock by all holders of such Derivative Securities. Assuming exercise or
conversion of Derivative Securities by such person, and only by such person,
the beneficial ownership of shares of Class A Common Stock would be as
follows: Mr. Ergen, 72.6%; Mr. DeFranco, 12.8%; Mr. Zimmer, 6.9%; Mr.
Moskowitz and Mr. Schaver, less than one percent, and all Officers and
Directors as a group, 77.9%.
(5) The percentage of total voting power held by Mr. Ergen is 95.8% after giving
effect to the exercise of the Warrants and employee stock options.
101
<PAGE>
(6) Includes: (i) the right to acquire 30,417 shares of Class A Common Stock
within 60 days upon the exercise of employee stock options; (ii) 80,834
shares of Class A Common Stock issuable upon conversion of Mr. DeFranco's
Series A Preferred Stock; (iii) 751 shares of Class A Common Stock held as
custodian for his minor children; and (iv) 375,000 shares of Class A Common
Stock controlled by Mr. DeFranco as general partner of a partnership.
(7) Based on information available to the Company, FMR Corp. owned 10.0% of the
shares of Class A Common Stock. The address of FMR Corp. is 82 Devonshire
Street, Boston, Massachusetts 02109.
(8) Includes: (i) the right to acquire 14,593 shares of Class A Common Stock
within 60 days upon the exercise of employee stock options; (ii) 700 shares
of Class A Common Stock owned jointly with members of his family; and (iii)
100,000 shares of Class A Common Stock held in trust for the benefit of Mr.
Zimmer's children and other members of his family. Mr. Zimmer's spouse is
the trustee for that trust.
(9) Based on information available to the Company, SSET owns 6.0% of the shares
of Class A Common Stock. The address of SSET is 8230 Leesburg Pike, Suite
710, Vienna, Virginia 22182.
(10) Based on information available to the Company, Chancellor LGT Asset
Management, Inc. owned 5.1% of the shares of Class A Common Stock. The
address of Chancellor LGT Asset Management, Inc. is 1166 Avenue of the
Americas, New York, New York 10036.
(11) Includes (i) the right to acquire 41,893 shares of Class A Common Stock
within 60 days upon the exercise of employee stock options; (ii) 166 shares
of Class A Common Stock held as custodian for his minor children; (iii)
1,023 shares of Class A Common Stock held as trustee for Mr. Ergen's
children; and (iv) 3,000 shares of Class A Common Stock owned jointly with
Mr. Moskowitz's spouse.
(12) Includes the right to acquire 12,761 shares of Class A Common Stock within
60 days upon the exercise of employee stock options.
(13) Includes: (i) the right to acquire 177,274 shares of Class A Common Stock
within 60 days upon the exercise of employee stock options; (ii) 375,000
shares of Class A Common Stock held in a partnership; (iii) 1,616,681 shares
of Class A Common Stock issuable upon conversion of Series A Preferred
Stock; (iv) 29,804,401 shares of Class A Common Stock issuable upon
conversion of shares of Class B Common Stock; (v) 102,041 shares of Class A
Common Stock held in the name of, or in trust for, minor children and other
family members; and (vi) 3,700 shares of Class A Common Stock owned by or
jointly with family members.
102
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
Set forth below is a summary of certain indebtedness to which Dish, ESBC and
DBS Corp are subject. This summary does not purport to be complete and is
qualified in its entirety by reference to the applicable agreements, copies of
which may be obtained from EchoStar.
1994 NOTES
On June 7, 1994, Dish issued 624,000 units, consisting of the 12 7/8% Senior
Secured Discount Notes due 2004 (the "1994 Notes"), and 3,744,000 Class A Common
Stock Purchase Warrants (the "Warrants"). Issuance of the 1994 Notes resulted in
net proceeds to Dish of approximately $323.3 million (including amounts
attributable to issuance of the Warrants and after payment of underwriting
discount and other issuance costs aggregating approximately $12.6 million). The
1994 Notes bear interest at a rate of 12 7/8%, computed on a semi-annual bond
equivalent basis. Interest on the 1994 Notes will not be payable in cash prior
to June 1, 1999, with the 1994 Notes accreting to a principal amount at stated
maturity of $624.0 million by that date. Commencing December 1, 1999, interest
on the 1994 Notes will be payable in cash on December 1 and June 1 of each year.
The 1994 Notes mature on June 1, 2004.
The 1994 Notes rank senior in right of payment to all subordinated
indebtedness of Dish and PARI PASSU in right of payment with all other senior
indebtedness of Dish, subject to the terms of an Intercreditor Agreement between
Dish, certain of its principal subsidiaries, and certain creditors thereof. The
1994 Notes are secured by liens on certain assets of Dish and its subsidiaries,
including EchoStar I and EchoStar II and all other components of the EchoStar
DBS System owned by Dish and its subsidiaries. The 1994 Notes are further
guaranteed by each material direct subsidiary of Dish. Although the 1994 Notes
are titled "Senior": (i) Dish has not issued, and does not have any current
arrangements to issue, any significant indebtedness to which the 1994 Notes
would be senior and (ii) the 1994 Notes are subordinated to certain obligations
of Dish's subsidiaries with respect to deferred payments on EchoStar I and
EchoStar II. The 13 1/8% Senior Secured Discount Notes due 2004 (the "1996
Notes") and the 12 1/2% Senior Secured Notes due 2004 (the "1997 Notes") are
effectively subordinated to the 1994 Notes and all other liabilities of Dish and
its subsidiaries.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1994 Notes are not redeemable at Dish's option
prior to June 1, 1999. Thereafter, the 1994 Notes will be subject to redemption,
at the option of Dish, in whole or in part, at redemption prices ranging from
104.828% during the year commencing June 1, 1999 to 100% of principal amount at
stated maturity on or after June 1, 2002, together with accrued and unpaid
interest thereon to the redemption date. On each of June 1, 2002 and June 1,
2003, Dish will be required to redeem 25% of the original aggregate principal
amount of 1994 Notes at a redemption price equal to 100% of principal value at
stated maturity thereof, together with accrued and unpaid interest thereon to
the redemption date. The remaining principal of the 1994 Notes matures on June
1, 2004.
In the event of a change of control and upon the occurrence of certain other
events, as described in the indenture relating to the 1994 Notes (the "1994
Notes Indenture"), Dish will be required to make an offer to each holder of 1994
Notes to repurchase all or any part of such holder's 1994 Notes at a purchase
price equal to 101% of the accreted value thereof on the date of purchase, if
prior to June 1, 1999, or 101% of the aggregate principal amount at stated
maturity thereof, together with accrued and unpaid interest thereon to the date
of purchase, if on or after June 1, 1999.
The 1994 Notes Indenture contains restrictive covenants that, among other
things, impose limitations on Dish and its subsidiaries with respect to their
ability to: (i) incur additional indebtedness (including the guarantee of
indebtedness); (ii) issue preferred stock; (iii) sell assets; (iv) create, incur
or assume liens; (v) create dividend and other payment restrictions with respect
to Dish's subsidiaries; (vi) merge, consolidate or sell substantially all of
their assets; and (vii) enter into transactions with affiliates. In addition,
Dish, may pay dividends on its equity securities only if (1) no default exists
under the 1994 Notes
103
<PAGE>
Indenture; and (2) after giving effect to such dividends, Dish's ratio of total
indebtedness to cash flow (calculated in accordance with the 1994 Notes
Indenture) would not exceed 4.0 to 1.0. Moreover, the aggregate amount of such
dividends generally may not exceed the sum of 50% of Dish's consolidated net
income (less 100% of consolidated net losses) (calculated in accordance with the
1994 Notes Indenture) from April 1, 1994, plus 100% of the aggregate net
proceeds received by Dish from the sale and issuance of certain equity interests
of Dish (including common stock). As of the date of this Prospectus, Dish does
not meet the above specified ratios and is therefore unable to pay dividends or
make other distributions to EchoStar.
The Warrants became separately transferable and exercisable on December 1,
1994. Each Warrant entitles the registered holder thereof to purchase from Dish
one share of Class A Common Stock at a purchase price of $0.01 per share, which
price has been paid in advance. No additional amounts are required to be paid
upon exercise of the Warrants. The Warrants expire on June 1, 2004.
Substantially all of the Warrants have been exercised.
1996 NOTES
On March 25, 1996, ESBC completed the offering related to the 1996 Notes
(the "1996 Notes Offering") consisting of $580.0 million aggregate principal
amount at stated maturity of the 1996 Notes. The 1996 Notes Offering resulted in
net proceeds to ESBC of approximately $336.9 million (after payment of
underwriting discount and other issuance costs aggregating approximately $13.1
million). The 1996 Notes bear interest at a rate of 13 1/8%, computed on a
semi-annual bond equivalent basis. Interest on the 1996 Notes will not be
payable in cash prior to March 15, 2000, with the 1996 Notes accreting to a
principal amount at stated maturity of $580.0 million by that date. Commencing
September 15, 2000, interest on the 1996 Notes will be payable in cash on
September 15 and March 15 of each year. The 1996 Notes mature on March 15, 2004.
The 1996 Notes rank PARI PASSU in right of payment with all senior
indebtedness of ESBC. The 1996 Notes are guaranteed on a subordinated basis by
EchoStar and are secured by liens on certain assets of ESBC, EchoStar and
certain of EchoStar's subsidiaries, including all of the outstanding capital
stock of Dish, which currently owns substantially all of EchoStar's operating
subsidiaries. Although the 1996 Notes are titled "Senior": (i) ESBC has not
issued, and does not have any plans to issue, any indebtedness to which the 1996
Notes would be senior; and (ii) the 1996 Notes are effectively subordinated to
all liabilities of EchoStar (except liabilities to general creditors) and its
other subsidiaries (except liabilities of ESBC), including liabilities to
general creditors.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1996 Notes are not redeemable at ESBC's option
prior to March 15, 2000. Thereafter, the 1996 Notes are subject to redemption,
at the option of ESBC, in whole or in part, at redemption prices ranging from
106.5625% during the year commencing March 15, 2000 to 100% on or after March
15, 2003 of principal amount at stated maturity, together with accrued and
unpaid interest thereon to the redemption date. The entire principal balance of
the 1996 Notes will mature on March 15, 2004.
In the event of a change of control, as described in the 1996 Notes
Indenture, ESBC will be required to make an offer to each holder of 1996 Notes
to repurchase all of such holder's 1996 Notes at a purchase price equal to 101%
of the accreted value thereof on the date of purchase, if prior to March 15,
2000, or 101% of the aggregate principal amount at stated maturity thereof,
together with accrued and unpaid interest thereon to the date of purchase, if on
or after March 15, 2000.
The indenture relating to the 1996 Notes (the "1996 Notes Indenture")
contains restrictive covenants that, among other things, impose limitations on
ESBC with respect to its ability to: (i) incur additional indebtedness
(including the guarantee of indebtedness); (ii) issue preferred stock; (iii)
sell assets; (iv) create, incur or assume liens; (v) create dividend and other
payment restrictions with respect to ESBC's subsidiaries; (vi) merge,
consolidate or sell assets; and (vii) enter into transactions with affiliates.
104
<PAGE>
The 1996 Notes Indenture permits ESBC to pay dividends and make other
distributions to EchoStar, or any of EchoStar's wholly-owned subsidiaries,
without restrictions, but restricts the ability of EchoStar to pay dividends and
make other distributions.
1997 NOTES
On June 25, 1997, DBS Corp completed the offering related to the 1997 Notes
(the "1997 Notes Offering") consisting of $375.0 million aggregate principal
amount of the 1997 Notes. The 1997 Notes Offering resulted in net proceeds to
DBS Corp of approximately $362.5 million (after payment of underwriting discount
and other issuance costs aggregating approximately $12.5 million). The 1997
Notes bear interest at a rate of 12 1/2%, computed on a semi-annual bond
equivalent basis. Interest on the 1997 Notes is payable in cash semi-annually on
January 1 and July 1 of each year, commencing January 1, 1998. The 1997 Notes
mature July 1, 2002.
The 1997 Notes rank PARI PASSU in right of payment with all senior
indebtedness of DBS Corp. The 1997 Notes are guaranteed on a subordinated basis
by EchoStar, and contingent upon the occurrence of certain events, will be
guaranteed by ESBC and Dish and certain other subsidiaries of DBS Corp and
EchoStar. The 1997 Notes are secured by liens on the capital stock of DBS Corp,
the EchoStar IV satellite and certain other assets of DBS Corp and EchoStar.
Although the 1997 Notes are titled "Senior": (i) DBS Corp has not issued, and
does not have any plans to issue, any indebtedness to which the 1997 Notes would
be senior; and (ii) the 1997 Notes are effectively subordinated to all
liabilities of DBS Corp's subsidiaries, including liabilities to general
creditors (except to the extent that any subsidiary of DBS Corp may guarantee
the 1997 Notes), and the guarantee of EchoStar is effectively subordinated to
all liabilities of EchoStar, except liabilities to general creditors.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1997 Notes are not redeemable at DBS Corp's
option prior to July 1, 2000. Thereafter, the 1997 Notes are subject to
redemption, at the option of DBS Corp, in whole or in part, at redemption prices
ranging from 106.5625% during the twelve month period commencing July 1, 2000 to
100% on or after July 1, 2002.
In the event of a change of control, as described in the 1997 Notes
Indenture, DBS Corp will be required to make an offer to each holder of 1997
Notes to repurchase all of such holder's 1997 Notes at a purchase price equal to
101% of the aggregate principal amount thereof, together with accrued and unpaid
interest thereon, to the date of repurchase.
The indenture relating to the 1997 Notes (the "1997 Notes Indenture")
contains restrictive covenants that, among other things, impose limitations on
DBS Corp with respect to its ability to: (i) incur additional indebtedness
(including the guarantee of indebtedness); (ii) issue preferred stock; (iii)
sell assets; (iv) create, incur or assume liens; (v) create dividend and other
payment restrictions with respect to DBS Corp's subsidiaries; (vi) merge,
consolidate or sell assets; and (vii) enter into transactions with affiliates.
105
<PAGE>
DESCRIPTION OF ECHOSTAR CAPITAL STOCK
GENERAL
Pursuant to EchoStar's Amended and Restated Articles of Incorporation, as in
effect on the date hereof, EchoStar's authorized capital stock consists of: (i)
400,000,000 shares of common stock, of which 200,000,000 shares are designated
"Class A Common Stock," 100,000,000 shares are designated "Class B Common
Stock," and 100,000,000 shares are designated "Class C Common Stock;" and (ii)
20,000,000 shares of preferred stock, including the following series which have
been authorized: 1,616,681 shares of Series A Preferred Stock and 900,000 shares
of Series B Preferred Stock. As of October 7, 1997, 11,870,521 shares of Class A
Common Stock were issued and outstanding and held of record by 2,334
stockholders, 29,804,401 shares of Class B Common Stock were issued and
outstanding and held of record by Charles W. Ergen, EchoStar's President and
Chief Executive Officer, and no shares of Class C Common Stock were issued and
outstanding. At October 7, 1997, there were 1,616,681 shares of Series A
Preferred Stock outstanding held by Messrs. Ergen and DeFranco, and 200,000
shares of Series B Preferred Stock outstanding held by certain qualified
institutional buyers. See "Security Ownership of Certain Beneficial Owners and
Management." All outstanding shares of the Class A Common Stock and Class B
Common Stock are fully paid and nonassessable. The designation and the powers,
preferences and rights of the shares of each class of common stock and each
series of preferred stock and the qualifications, limitations and restrictions
thereof are as set forth below.
EchoStar's Board of Directors is authorized to divide the preferred stock
into series and, with respect to each series, to determine the preferences and
rights and the qualifications, limitations, or restrictions thereof, including
the dividend rights, conversion rights, voting rights, redemption rights and
terms, liquidation preferences, sinking fund provisions, the number of shares
constituting the series and the designation of such series. The Board of
Directors may, without stockholder approval, issue preferred stock with voting
and other rights that could adversely affect the voting power of the holders of
common stock and could have certain anti-takeover effects.
The transfer agent for EchoStar's capital stock, including the Class A
Common Stock, is American Securities Transfer & Trust, Inc.
CLASS A COMMON STOCK
Each holder of Class A Common Stock is entitled to one vote for each share
of Class A Common Stock owned of record on all matters submitted to a vote of
stockholders. Except as otherwise required by law, the Class A Common Stock
votes together with the Class B Common Stock, the Class C Common Stock and the
Series A Preferred Stock on all matters submitted to a vote of stockholders.
Subject to the preferential rights of any outstanding series of Preferred Stock
and to the restrictions on payment of dividends imposed by the 1994 Notes, the
1996 Notes and the 1997 Notes (see "Description of Certain Indebtedness") and
any other indebtedness of EchoStar, the holders of Class A Common Stock are
entitled to such dividends as may be declared from time to time by the Board of
Directors from funds legally available therefor, and, together with the holders
of the Class B Common Stock, are entitled, after payment of all prior claims, to
receive pro rata all assets of EchoStar upon the liquidation, dissolution or
winding up of EchoStar. Holders of Class A Common Stock have no redemption,
conversion or preemptive rights.
CLASS B COMMON STOCK
Each holder of Class B Common Stock is entitled to ten votes for each share
of Class B Common Stock on all matters submitted to a vote of stockholders.
Except as otherwise required by law, the Class B Common Stock votes together
with the Class A Common Stock, the Class C Common Stock and the Series A
Preferred Stock on all matters submitted to a vote of the stockholders. Each
share of Class B Common Stock is convertible, at the option of the holder, into
one share of Class A Common Stock. The
106
<PAGE>
conversion ratio is subject to adjustment from time to time upon the occurrence
of certain events, including: (i) dividends or distributions on Class A Common
Stock payable in Class A Common Stock or certain other capital stock; (ii)
subdivisions, combinations or certain reclassifications of Class A Common Stock;
and (iii) issuances of rights, warrants or options to purchase Class A Common
Stock at a price per share less than the fair market value of the Class A Common
Stock. Each share of Class B Common Stock is entitled to receive dividends and
distributions upon liquidation on a basis equivalent to that of the Class A
Common Stock.
CLASS C COMMON STOCK
Each holder of Class C Common Stock is entitled to one vote for each share
of Class C Common Stock on all matters submitted to a vote of stockholders.
Except with respect to transactions involving the issuance of capital stock
which negatively affect the rights of holders of Series A Preferred Stock, or as
otherwise required by law, the Class C Common Stock votes together with Class A
Common Stock, the Class B Common Stock and the Series A Preferred Stock on all
matters submitted to a vote of the stockholders. Each share of Class C Common
Stock is convertible into Class A Common Stock on the same terms as the Class B
Common Stock. Each share of Class C Common Stock is entitled to receive
dividends and distributions upon liquidation on a basis equivalent to that of
the Class A Common Stock. Upon a Change of Control (as defined) of EchoStar,
each holder of outstanding shares of Class C Common Stock is entitled to cast
ten votes for each share of Class C Common Stock held by such holder. "Change of
Control" has the same meaning as set forth in each of the Notes Indentures. See
"Description of Certain Indebtedness." EchoStar has no present intention to
issue any shares of Class C Common Stock and, under current NASD rules, will not
be able to issue so long as the Class A Common Stock is quoted on the Nasdaq
National Market.
SERIES A PREFERRED STOCK
Each share of Series A Preferred Stock is convertible, at the option of the
holder, into one share of Class A Common Stock, subject to adjustment from time
to time upon the occurrence of certain events, including: (i) dividends or
distributions on Class A Common Stock payable in Class A Common Stock or certain
other capital stock; (ii) subdivisions, combinations or certain
reclassifications of Class A Common Stock; and (iii) issuances of rights,
warrants or options to purchase Class A Common Stock at a price per share less
than the liquidation preference per share. The aggregate liquidation preference
for all outstanding shares of Series A Preferred Stock is limited to
approximately $15.1 million plus cumulative unpaid dividends. At June 30, 1997,
accrued and unpaid dividends on the Series A Preferred Stock totaled $3.9
million. The holders of the Series A Preferred Stock contractually subordinated
their rights to receive dividends to the Series B Preferred Stock.
Each share of Series A Preferred Stock is entitled to receive dividends
equal to eight percent per annum of the liquidation preference for such share
calculated from May 6, 1994. The 1994 Notes Indenture, the 1996 Notes Indenture,
the 1997 Notes Indenture and the Series B Preferred Stock Certificate of
Designation restrict the Company's ability to pay dividends on the Series A
Preferred Stock. The Company currently has no intention to begin paying
dividends on the Series A Preferred Stock.
Shares of Series A Preferred Stock automatically convert into shares of
Class A Common Stock if they are transferred to any person other than permitted
transferees. Each share of Series A Preferred Stock is entitled to the
equivalent of ten votes for each share of Class A Common Stock into which it is
convertible and, except with respect to transactions involving the issuance of
capital stock which negatively affects the rights of holders of Series A
Preferred Stock (as more particularly described in the Certificate of
Designations, Preferences and Rights for the Series A Preferred Stock) or as
otherwise required by law, votes together with the Class A Common Stock, Class B
Common Stock and Class C Common Stock as a single class on all matters submitted
to a vote of stockholders.
107
<PAGE>
SERIES B PREFERRED STOCK
In 1997, EchoStar established from authorized preferred stock its Series B
Preferred Stock consisting of 900,000 shares authorized, and issued 200,000
shares to qualified institutional buyers. Each share of Series B Preferred Stock
is entitled to dividends at 12 1/8% per annum, payable when, as, and if declared
quarterly in cash or, at the sole discretion of EchoStar, in additional shares
of Series B Preferred Stock, on each January 1, April 1, July 1 and October 1 of
each year, commencing January 1, 1998. The liquidation preference of the Series
B Preferred Stock is $1,000 per share, plus accumulated and unpaid dividends. On
or after July 1, 2000, the Series B Preferred Stock will be redeemable in cash,
at the option of EchoStar, in whole or in part, at a price equal to the
redemption price (expressed as a percentage of the liquidation preference
thereof), together with accumulated and unpaid dividends thereon to the
applicable redemption date. At any time prior to July 1, 2000, EchoStar may,
subject to and upon compliance with certain conditions, redeem shares of Series
B Preferred Stock at a redemption price, payable in cash (expressed as a
percentage of the liquidation preference thereof, plus an amount equal to a
prorated dividend for the period from the dividend payment date immediately
prior to the redemption date), with the net proceeds of one public or private
sale of equity interests of EchoStar or any of its subsidiaries. The Series B
Preferred Stock will be subject to mandatory redemption in whole on July 1, 2004
at a price, payable in cash, equal to the liquidation preference thereof, plus
all accumulated and unpaid dividends to the date of redemption.
Upon the occurrence of a Change of Control (as such term is defined in the
Certificate of Designation for the Series B Preferred Stock), EchoStar will be
required, provided certain conditions are met, to make an offer to each holder
of Series B Preferred Stock to repurchase all or any part of such holder's
Series B Preferred Stock at a cash purchase price equal to 101% of the
liquidation preference thereof, plus accumulated and unpaid dividends to the
date of repurchase.
The Series B Preferred Stock ranks: (i) senior to all common stock of
EchoStar and to each series of preferred stock existing on September 26, 1997
and to each other class of capital stock or series of preferred stock issued by
EchoStar, which is established after September 26, 1997, the terms of which do
not expressly provide that it ranks senior to or on a parity with Series B
Preferred Stock; (ii) subject to certain conditions, on a parity with any class
of capital stock or series of preferred stock issued by EchoStar, which is
established after September 26, 1997, the terms of which expressly provide that
such class or series will rank on a parity with the Series B Preferred Stock;
and (iii) subject to certain conditions, junior to each class of capital stock
or series of preferred stock issued by EchoStar, which is established after
September 26, 1997, the terms of which expressly provide that such class or
series will rank senior to the Series B Preferred Stock.
Holders of the Series B Preferred Stock have no voting rights with respect
to general corporate matters except as provided by law or set forth in the
certificate of designation for the Series B Preferred Stock. The certificate of
designation for the Series B Preferred Stock restricts, among other things, the
ability of EchoStar and certain of its subsidiaries to (i) pay dividends with
the proceeds from the offering of the Series B Preferred Stock, (ii) pay cash
dividends on any junior or parity securities and (iii) incur indebtedness or
pledge the stock of certain subsidiaries as collateral. The Series B Preferred
Stock has not been registered under the Securities Act and is subject to certain
conditions on transfer.
Subject to certain conditions, the Series B Preferred Stock is exchangeable
into additional shares of Series B Preferred Stock or shares of a new series of
preferred stock with substantially identical rights and preferences or into
Series B Exchange Notes, in an aggregate principal amount equal to the aggregate
liquidation preference of, plus accumulated but unpaid dividends on, the Series
B Preferred Stock to the date of exchange, at any time at the option of
EchoStar, in whole, but not in part. Each Series B Exchange Note will bear
interest at 12 1/8% per annum and interest is payable on April 1 and October 1
of each year. EchoStar will pay interest on the Series B Exchange Notes in
additional Series B Exchange Notes or in cash. On or after July 1, 2000, the
Series B Exchange Notes will be redeemable in cash, at the option of
108
<PAGE>
EchoStar, in whole or in part, at a price equal to the redemption price
(expressed as a percentage of the principal amount thereof), together with
accrued and unpaid interest thereon to the applicable redemption date. At any
time prior to July 1, 2000, EchoStar may redeem Series B Exchange Notes at a
redemption price, payable in cash, equal to 112.125% of the principal amount
thereof, together with accrued and unpaid interest thereon to the redemption
date, with net proceeds of one public or private sale of equity interests of
EchoStar or any of its subsidiaries.
Upon the occurrence of a Change of Control (as such term is defined in the
Indenture for the Series B Exchange Notes), EchoStar will be, provided certain
conditions are met, required to make an offer to each holder of Series B
Exchange Notes to repurchase all or any portion of such holder's Series B
Exchange Notes at a cash purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest thereon to the date of repurchase. In
addition, upon the occurrence of certain events, EchoStar will be, provided
certain conditions are met, required to make an offer to repurchase one-half of
all outstanding Series B Exchange Notes at a cash purchase price of 101% of the
aggregate principal amount thereof, together with accrued and unpaid interest
thereon to the date of purchase. The holders of the Series B Preferred Stock are
entitled to certain registration rights pursuant to a Registration Rights
Agreement.
SERIES C PREFERRED STOCK
During November 1997, EchoStar consummated the Series C Offering of
2,300,000 shares of 6 3/4% Series C Preferred Stock. The liquidation preference
of the Series C Preferred Stock is $50 per share (the "Liquidation Preference").
Simultaneously with the closing of the Series C Offering, the purchasers of
the Series C Preferred Stock deposited approximately $14.6 million into an
account (the "Deposit Account"), and will be entitled to a quarterly cash
payment from the Deposit Account in an amount equal to $0.844 per share of
Preferred Stock (the "Quarterly Return Amount"), commencing February 1, 1998 and
continuing until November 1, 1999. After such date, dividends will begin to
accrue on the Series C Preferred Stock. EchoStar may, prior to the date on which
any Quarterly Return Amount would otherwise be payable, deliver notice
instructing the deposit agent (i) to purchase from EchoStar, for transfer to
each holder of Series C Preferred Stock, in lieu of the Quarterly Return Amount,
that number of whole shares of Class A Common Stock determined by dividing the
Quarterly Return Amount by 95% of the Market Value of the Class A Common Stock
as of the date of such notice or (ii) defer delivery of the Quarterly Return
Amount to holders of Series C Preferred Stock on such quarterly payment date
until the next quarterly payment date or any subsequent payment date. However,
no later than November 1, 1999 (the "Deposit Expiration Date"), any amounts
remaining in the Deposit Account, as of such date, or which have previously been
deferred, will be (i) paid to the holders of the Series C Preferred Stock or
(ii) used to purchase from EchoStar for transfer to each holder of Series C
Preferred Stock that number of whole shares of Class A Common Stock determined
by dividing the balance remaining in the Deposit Account by 95% of the Market
Value of the shares of Class A Common Stock as of the Deposit Expiration Date.
Dividends on the Series C Preferred Stock will accrue from November 2, 1999,
and holders of the Series C Preferred Stock will be entitled to receive
cumulative dividends at an annual rate of 6 3/4% of the Liquidation Preference,
payable quarterly in arrears, commencing February 1, 2000. Dividends may, at the
option of EchoStar, be paid in cash, by delivery of fully paid and nonassessable
shares of Class A Common Stock, or a combination thereof. The Series C Preferred
Stock is redeemable at any time on or after November 1, 2000, in whole or in
part, at the option of EchoStar, in cash, by delivery of fully paid and
nonassessable shares of Class A Common Stock, or a combination thereof,
initially at a redemption premium of 103.857% and thereafter at redemption
premiums declining to 100.000% per share on or after November 1, 2004, plus in
each case all accumulated and unpaid dividends to the redemption date.
109
<PAGE>
Upon any Change of Control holders of Series C Preferred Stock will, in the
event that the Market Value at such time is less than the Conversion Price, have
a one time option to convert all of their outstanding shares into shares of
Class A Common Stock at an adjusted conversion price equal to the greater of (i)
the Market Value as of the Change of Control Date and (ii) 66.67% of the Market
Value as of the date of this Prospectus. In lieu of issuing the shares of Class
A Common Stock issuable upon conversion in the event of a Change of Control,
EchoStar may, at its option, make a cash payment equal to the Market Value of
such Class A Common Stock otherwise issuable.
The Series C Preferred Stock is convertible at any time, unless previously
redeemed, at the option of the holder thereof, into such number of whole shares
of Class A Common Stock as is equal to the Liquidation Preference divided by an
initial conversion price of $24 3/8, subject to adjustment under certain
circumstances.
The Series C Preferred Stock ranks prior to the Class A Common Stock and
senior or PARI PASSU with other existing and future offerings of preferred stock
in right of payment. Holders of the Series C Preferred Stock have no voting
rights with respect to general corporate matters except as provided by law or as
set forth in the Certificate of Designation for the Series C Preferred Stock.
The affirmative vote or consent of holders of at least 66 2/3% of the
outstanding Series C Preferred Stock will be required for the issuance of any
class or series of stock (or security convertible into stock) of EchoStar
ranking senior to or PARI PASSU with the Series C Preferred Stock as to
dividends or liquidation rights (other than additional shares of Series B
Preferred Stock or certain PARI PASSU securities with an aggregate liquidation
preference not to exceed $100 million) and for amendments to EchoStar's Articles
of Incorporation that would affect adversely the rights of holders of the Series
C Preferred Stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Amended and Restated Articles of Incorporation provide that a director
of EchoStar will not be personally liable to EchoStar or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except in
certain cases where liability is mandated by the Nevada General Corporate Law
("NGCL"). The provision has no effect on any non-monetary remedies that may be
available to EchoStar or its stockholders, nor does it relieve EchoStar or its
directors from compliance with federal or state securities laws. The Amended and
Restated Articles of Incorporation and the By-Laws of EchoStar provide for
indemnification, to the fullest extent permitted by the NGCL, of any person who
is or was involved in any manner in any investigation, claim or other proceeding
by reason of the fact that such person is or was a director or officer of
EchoStar, or is or was serving at the request of EchoStar as a director or
officer of another corporation, against all expenses and liabilities actually
and reasonably incurred by such person in connection with the investigation,
claim or other proceeding except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable for negligence or misconduct in the performance of such
person's duty to EchoStar.
NEVADA LAW AND LIMITATIONS ON CHANGES IN CONTROL
The NGCL prevents an "interested stockholder" (defined in Section 78.423 of
the NGCL, generally, as a person owning 10% or more of a corporation's
outstanding voting stock) from engaging in a "combination" (as defined in
Section 78.416) with a publicly-held Nevada corporation for three years
following the date such person became an interested stockholder unless, before
such person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder became
an interested stockholder or approves the combination.
The provisions authorizing the Board of Directors to issue Preferred Stock
without stockholder approval and the provisions of the NGCL relating to
combinations with interested stockholders could have the effect of delaying,
deferring or preventing a change in control of EchoStar or the removal of
existing
110
<PAGE>
management. Each of the Notes Indentures for the 1994, 1996 and 1997 Notes also
contains provisions with respect to a change of control of EchoStar. See
"Description of Certain Indebtedness." The Series B Preferred Stock certificate
of designation also contains certain change of control provisions.
Charles W. Ergen, President and Chief Executive Officer of EchoStar, owns
29,804,401 shares of Class B Common Stock, which constitute all of the
outstanding shares of such stock. These shares are transferable to other persons
subject to securities laws limitations. If Mr. Ergen transferred approximately
50.8% or more of his shares of Class B Common Stock, a change in control of
EchoStar would result and Mr. Ergen would receive any premium paid for control
of EchoStar. In addition, any such change in control would result in an
obligation on the part of EchoStar to offer to purchase at a premium all 1994
Notes. See "Description of Certain Indebtedness."
111
<PAGE>
DESCRIPTION OF SENIOR PREFERRED STOCK
The summary contained herein of certain provisions of the Senior Preferred
Stock applies equally to the Exchange Shares as to the Old Series B Shares, both
of which are governed by the same Certificate of Designation. This summary does
not purport to be complete and is qualified in its entirety by reference to the
provisions of the Certificate of Designation for the Senior Preferred Stock (the
"Certificate of Designation"). The Exchange Shares, when issued in exchange for
the Old Series B Shares, will be fully paid and non-assessable, and there are no
subscription or preemptive rights related thereto. The definitions of certain
terms used in the Certificate of Designation are set forth below under
"--Certain Definitions."
Certain of the covenants described below are applicable solely to DBS Corp,
a wholly owned subsidiary of the Issuer, and do not impose any restrictions or
limitations on the Issuer. In addition, holders of Senior Preferred Stock will
be entitled to elect two directors as their sole remedy for the breach of any
covenant contained in the Certificate of Designation, and will not be entitled
to seek early redemption of their Senior Preferred Stock. See "Risk
Factors--Applicability of Certain Covenants; Availability of Certain Remedies."
DIVIDENDS
Holders of Senior Preferred Stock will be entitled to receive, when, as and
if declared by the Board of Directors, out of funds legally available therefor,
dividends on the Senior Preferred Stock at a rate per annum equal to 12 1/8% of
the liquidation preference per share. All dividends will be cumulative, whether
or not earned or declared, compounded on a quarterly basis on January 1, April
1, July 1 and October 1 of each year from the Issue Date, commencing January 1,
1998. Subject to the next paragraph, the Issuer may pay dividends, at its
option, in cash or in additional fully paid and non-assessable shares of Senior
Preferred Stock having an aggregate liquidation preference equal to the amount
of such dividends. The 1996 Notes Indenture currently prohibits the Issuer from
paying any dividends in cash. See "Risk Factors-- Other Restrictive Covenants"
and "Description of Certain Indebtedness."
Subject to the next sentence, no full dividends may be declared or paid or
funds set apart for the payment of dividends on any Parity Securities (as
defined) for any period unless full cumulative dividends on the Senior Preferred
Stock shall have been or contemporaneously are declared and paid in full through
the immediately preceding dividend payment date and, if the dividend on the
Parity Securities is declared as payable in cash, a sum in cash is set apart for
the next succeeding payment on the Senior Preferred Stock at the next succeeding
dividend payment date. If full dividends are not so paid, the Senior Preferred
Stock will share dividends pro rata with any Parity Securities. No dividends may
be paid or set apart for payment on Parity Securities or Junior Securities (as
defined), except dividends on Junior Securities payable in additional shares of
Junior Securities and dividends on Parity Securities payable in additional
shares of Parity Securities or Junior Securities; provided, however, that
notwithstanding the provisions of the previous sentence and this sentence,
whether or not full dividends have been or will be paid in cash on the shares of
Senior Preferred Stock, the Issuer shall be entitled to declare and pay cash
dividends on Parity Securities and Junior Securities to the extent that the
funds for such cash dividend payments are derived, directly or indirectly, from
the proceeds of an offering of Parity Securities or Junior Securities with
respect to which such cash dividends are to be paid (or a concurrent offering of
related Securities) and provided that in connection with such offering it is
disclosed to the purchasers of such Parity Securities or Junior Securities, as
the case may be, in an offering memorandum, prospectus or similar communication
that a portion of the proceeds thereof may be used for the payment of cash
dividends on such securities (any transaction in which the Issuer obtains the
right to make cash dividend payments on Parity Securities or Junior Securities
pursuant to this provision being referred to as a "Self-funding Event"). No
Junior Securities or Parity Securities may be repurchased, redeemed or otherwise
retired nor may funds be set apart for payment with respect thereto, if full
cumulative dividends have not been paid in cash on the Senior Preferred Stock
through the immediately preceding dividend payment date or contemporaneously
112
<PAGE>
provided for; provided that, notwithstanding the foregoing: (x) cash dividends
may be paid on Parity Securities and Junior Securities to the extent permitted
by the immediately preceding sentence and (y) the Issuer may repurchase, redeem
or otherwise retire or set aside funds for those purposes with respect to any
Parity Securities or Junior Securities in exchange for, or out of the net
proceeds of, the substantially concurrent sale (other than to a Subsidiary of
the Issuer) of other Parity Securities or Junior Securities (other than
Disqualified Stock), as the case may be, of the Issuer.
If the Issuer shall at any time pay any dividend on any Equity Interest (as
defined) other than the Senior Preferred Stock in cash, then the Issuer shall be
required to make a cash dividend payment on the next succeeding dividend payment
date with respect to the Senior Preferred Stock and shall be required to
continue to make such payments in cash until the Issuer shall have made a
dividend payment on its other outstanding Equity Interests in a form other than
cash; provided that (i) the requirements of this sentence shall not be
applicable if the source of the cash dividend payment in respect of any such
Equity Interest was a Self-funding Event and (ii) subject to the foregoing, the
Issuer shall not be prohibited from making dividend payments in cash or kind on
different dividend payment dates.
The Senior Preferred Stock will be exchangeable, at the option of the
Issuer, into the Senior Exchange Notes, unissued shares of Senior Preferred
Stock, or a newly authorized Series of Preferred Stock, at any time, after the
Issue Date. See "--Exchange" below.
RANKING
With respect to dividend distributions and distributions upon the
liquidation, winding-up or dissolution of the Issuer, the Senior Preferred Stock
ranks: (i) senior to all classes of common stock and to each series of preferred
stock existing on the date of the Certificate of Designation and each other
class of capital stock or series of preferred stock issued by the Issuer, which
is established after the date of the Certificate of Designation, the terms of
which do not expressly provide that such class or series will rank senior to or
on a parity with the Senior Preferred Stock as to dividend distributions and
distribution upon the liquidation, winding-up or dissolution of the Issuer
(collectively, with the common stock, referred to as the "Junior Securities");
(ii) subject to certain conditions, on a parity with any class of capital stock
or series of preferred stock issued by the Issuer, which is established after
the date of the Certificate of Designation by the Board of Directors, the terms
of which expressly provide that such class or series will rank on a parity with
the Senior Preferred Stock as to dividend distributions and distributions upon
the liquidation, winding-up or dissolution of the Issuer (collectively, referred
to as "Parity Securities"); and (iii) subject to certain conditions, junior to
each class of capital stock or series of preferred stock issued by the Issuer,
which is established after the date of the Certificate of Designation, the terms
of which expressly provide that such class or series will rank senior to the
Senior Preferred Stock as to dividend distributions and distributions upon
liquidation, winding-up or dissolution of the Issuer (collectively referred to
as "Senior Securities"). In addition, creditors and preferred stockholders of
the Issuer's Subsidiaries will have priority over the Issuer with respect to
claims on, or interests in, the assets of such Subsidiaries. The Issuer will be
entitled to amend its articles of incorporation to authorize additional series
of preferred stock, file Certificates of Designation and issue without
restriction, from time to time, any series of Junior Securities, Parity
Securities or Senior Securities, provided, however, that the Issuer may not
issue any new class of Parity Securities or Senior Securities without the prior
approval of the holders of at least 50% of the shares of Senior Preferred Stock
then outstanding, voting or consenting, as the case may be, together as one
class, except that without the approval of the holders of Senior Preferred
Stock, the Issuer may amend its articles of incorporation to authorize
additional series of preferred stock, file certificates of designation and issue
and have outstanding shares of Parity Securities (x) issued from time to time in
exchange for, or the proceeds of which are used to redeem or repurchase, any or
all of the shares of Senior Preferred Stock or other Parity Securities or (y)
with an aggregate liquidation preference, at any one time outstanding, not to
exceed $100 million. The Issuer's Series A Senior Preferred Stock has been
subordinated to the Senior Preferred Stock with respect to dividend
distributions and distributions upon
113
<PAGE>
the liquidation, winding-up or dissolution of the Issuer. The Issuer's Series C
Preferred Stock is defined by its Certificate of Designation to be a Junior
Security.
REDEMPTION OF SENIOR PREFERRED STOCK
OPTIONAL REDEMPTION. Except as provided in the next paragraph, shares of
Senior Preferred Stock will not be redeemable prior to July 1, 2000. Thereafter,
the Senior Preferred Stock will be subject to redemption at the option of the
Issuer in cash, in whole or in part, upon not less than 30 nor more than 60
days' notice, at the redemption prices (expressed as a percentage of the
liquidation preference thereof) set forth below, together with accumulated and
unpaid dividends thereon to the applicable redemption date, (including an amount
in cash equal to a prorated dividend for the period from the dividend payment
date immediately prior to the redemption date to the redemption date) if
redeemed during the 12-month period beginning on July 1 of the years indicated
below (provided that the Issuer may pay the amount of any prorated or
accumulated dividend in additional shares of Senior Preferred Stock if the
Issuer is, at such time, contractually prohibited from paying dividends in
cash):
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2000.............................................................................. 106.0625%
2001.............................................................................. 104.0417%
2002.............................................................................. 102.0208%
Thereafter........................................................................ 100.0000%
</TABLE>
Notwithstanding the foregoing, at any time prior to July 1, 2000, the Issuer
may redeem shares of Senior Preferred Stock at a redemption price, payable in
cash, equal to 112.125% of the liquidation preference thereof, plus an amount
equal to a prorated dividend for the period from the dividend payment date
immediately prior to the redemption date (subject to the right of holders of
Senior Preferred Stock on any relevant record dates to receive dividends due on
relevant dividend payment dates), with the net proceeds of one public or private
sale of Equity Interests (other than Disqualified Stock) of the Issuer or any of
its Subsidiaries (other than proceeds from a sale to the Issuer or any of its
Subsidiaries); provided that (a) Senior Preferred Stock representing at least
two-thirds in aggregate liquidation preference of all Senior Preferred Stock
originally issued remains outstanding immediately after the occurrence of such
redemption and (b) such redemption occurs within 120 days of the date of the
closing of any such sale; and, provided, further, that the Issuer may pay the
amount of any prorated or accumulated dividend in additional shares of Senior
Preferred Stock if the Issuer is, at such time, contractually prohibited from
paying dividends in cash.
In the event of a partial redemption of the Senior Preferred Stock, the
shares to be redeemed will be selected on a pro rata basis, except that the
Issuer may redeem all shares of Senior Preferred Stock held by any holder of
fewer than ten shares (or all shares of Senior Preferred Stock owned by any
holder who would hold less than ten shares as a result of such redemption), as
determined by the Issuer. No partial redemption of the Senior Preferred Stock
may be authorized or made unless prior thereto all accumulated and unpaid
dividends thereon shall have been paid in cash or declared and a sum set apart
for such payment (provided that the Issuer may pay the amount of any prorated or
accumulated dividend in additional shares of Senior Preferred Stock if the
Issuer is, at such time, contractually prohibited from paying dividends in
cash). The 1996 Notes Indenture restricts the Issuer's ability to redeem the
Senior Preferred Stock and any other future agreements of the Issuer, or one of
its subsidiaries, may contain similar provisions.
MANDATORY REDEMPTION. The Senior Preferred Stock will be subject to
mandatory redemption (subject to the legal availability of funds therefor but
without regard to any contractual or other restrictions with respect thereto) in
whole on July 1, 2004 at a price, payable in cash, equal to the liquidation
preference thereof, plus all accumulated and unpaid dividends to the date of
redemption.
114
<PAGE>
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Issuer will be required
(subject to any contractual and other restrictions with respect thereto and the
legal availability of funds therefor) to make an Offer to Purchase to each
holder of Senior Preferred Stock to repurchase all or any part of such holder's
Senior Preferred Stock at a cash purchase price equal to 101% of the liquidation
preference thereof, plus accumulated and unpaid dividends (if any) to the date
of repurchase (the "Change of Control Payment") ; provided that any obligation
to make such an offer shall not become effective until such time as the 1997
Notes and the 1996 Notes have been paid in full or have otherwise matured. The
Offer to Purchase must be made within 30 days following a Change of Control, or
the date the offer becomes effective (if later), must remain open for at least
30 and not more than 40 days and must comply with the requirements of Rule 14e-1
under the Exchange Act and any other applicable securities laws and regulations.
None of the Provisions in the Certificate of Designation relating to a
purchase upon a Change of Control are waivable by the Board of Directors. The
Issuer could, in the future, enter into certain transactions, including certain
recapitalizations, that would not constitute a Change of Control, but would
increase the amount of Indebtedness outstanding at such time. There can be no
assurance that the Issuer would have sufficient funds to pay the purchase price
for all Senior Preferred Stock that the Issuer would be required to purchase if
a Change of Control with respect to the Senior Preferred Stock is deemed to
occur. In the event that the Issuer were required to purchase outstanding Senior
Preferred Stock pursuant to an Offer to Purchase, the Issuer expects that it
would need to seek third-party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Issuer would be able to obtain such financing. In addition,
the Issuer's ability to purchase the Senior Preferred Stock may be limited by
other then-existing agreements and by restrictions imposed by Nevada law.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Issuer, holders of Senior Preferred Stock will be entitled to be paid, out
of assets of the Issuer available for distribution, the liquidation preference
per share, plus an amount in cash equal to all accumulated and unpaid dividends
thereon to the date fixed for liquidation, dissolution or winding-up (including
an amount equal to a prorated dividend for the period from the last dividend
payment date to the date fixed for liquidation, dissolution or winding-up),
before any distribution is made on any Junior Securities, including, without
limitation, the common stock. If, upon any voluntary or involuntary liquidation,
dissolution or winding-up of the Issuer, the amounts payable with respect to the
Senior Preferred Stock and all other Parity Securities are not paid in full, the
holders of the Senior Preferred Stock and the Parity Securities will share
equally and ratably in any distribution of assets of the Issuer in proportion to
the full liquidation preference and accumulated and unpaid dividends to which
each is entitled. After payment of the full amount of the liquidation
preferences and accumulated and unpaid dividends to which they are entitled, the
holders of shares of Senior Preferred Stock will not be entitled to any further
participation in any distribution of assets of the Issuer. However, neither the
sale, conveyance, exchange or transfer (for cash, shares of stock, securities or
other consideration) of all or substantially all of the property or assets of
the Issuer nor the consolidation or merger of the Issuer with or into one or
more corporations will be deemed to be a liquidation, dissolution or winding-up
of the Issuer.
The Certificate of Designation does not contain any provision requiring
funds to be set aside to protect the liquidation preference of the Senior
Preferred Stock, although such liquidation preference will be substantially in
excess of the par value of such shares of Senior Preferred Stock. In addition,
the Issuer is not aware of any provision of Nevada law or any controlling
decision of the courts of the State of Nevada (the state of incorporation of the
Issuer) that requires a restriction upon the surplus of the Issuer solely
because the liquidation preference of the Senior Preferred Stock will exceed its
par value. Consequently, there will be no restriction upon the surplus of the
Issuer solely because the liquidation preference of the
115
<PAGE>
Senior Preferred Stock will exceed the par value and there will be no remedies
available to holders of the Senior Preferred Stock before or after the payment
of any dividend, other than in connection with the liquidation of the Issuer,
solely by reason of the fact that such dividend would reduce the surplus of the
Issuer to an amount less than the difference between the liquidation preference
of the Senior Preferred Stock and its par value.
VOTING RIGHTS
Holders of the Senior Preferred Stock will have no voting rights with
respect to general corporate matters except as provided by law or as set forth
in the Certificate of Designation. The Certificate of Designation provides that:
(a) if (i) dividends on the Senior Preferred Stock are in arrears and unpaid for
four consecutive quarterly periods or six quarterly periods (whether or not
consecutive); (ii) the Issuer fails to discharge any redemption obligation with
respect to the Senior Preferred Stock; (iii) a breach or violation of the
provisions described under the caption "--Certain Covenants" occurs and the
breach or violation continues for a period of 30 days or more; (iv) an Orbital
Event occurs; or (v) a default occurs on the obligation to pay principal of,
interest on or any other payment obligation when due (a "Default Payment") at
final maturity on one or more classes of Indebtedness of the Issuer, DBS Corp or
any Restricted Subsidiary of DBS Corp, whether such Indebtedness exists on the
Issue Date or is incurred thereafter, having individually or in the aggregate an
outstanding principal amount of $5,000,000 or more, or any other Default Payment
occurs on one or more such classes of Indebtedness having individually or in the
aggregate an outstanding principal amount of $5,000,000 or more and such class
or classes of Indebtedness are declared due and payable prior to their
respective maturities, then, in each such case, the number of directors
constituting the Board of Directors will be adjusted to permit the holders of
the majority of the then outstanding Senior Preferred Stock, voting separately
as a class, to elect two directors; (b) in addition, the approval of holders of
a majority of the outstanding shares of Senior Preferred Stock, voting as a
separate class, will be required for any merger, consolidation or sale of
substantially all of the assets of the Issuer, except as permitted pursuant to
the covenant entitled "Merger or Consolidation." Each such event described in
clause (a) above is referred to herein as a "Voting Rights Triggering Event."
Voting rights arising as a result of a Voting Rights Triggering Event will
continue until such time as all dividends in arrears on the Senior Preferred
Stock are paid in full and any failure, breach or default referred to in clause
(a) is remedied.
In addition, the Certificate of Designation provides that, except as stated
above under "--Ranking," the Issuer will not authorize any class of Senior
Securities or Parity Securities without the affirmative vote or consent of
holders of at least a majority of the shares of Senior Preferred Stock then
outstanding, voting or consenting, as the case may be, as one class. The
Certificate of Designation also provides that the Issuer may not amend the
Certificate of Incorporation so as to affect adversely the specified rights,
preferences, privileges or voting rights of holders of shares of the Senior
Preferred Stock, or authorize the issuance of any additional shares of Senior
Preferred Stock (other than shares of Senior Preferred Stock which are used to
pay accrued dividends on the Senior Preferred Stock and other than as stated
above under "--Ranking), without the affirmative vote or consent of the holders
of at least a majority of the then outstanding shares of Senior Preferred Stock,
voting or consenting, as the case may be, as one class. The Certificate of
Designation also provides that, except as set forth above, (a) the creation,
authorization or issuance of any shares of Junior Securities, Parity Securities
or Senior Securities or (b) the increase or decrease in the amount of authorized
capital stock of any class, including any preferred stock, shall not require the
consent of the holders of Senior Preferred Stock and shall not be deemed to
affect adversely the rights, preferences, privileges or voting rights of holders
of shares of Senior Preferred Stock.
Under Nevada law, holders of Senior Preferred Stock will be entitled to vote
as a class upon a proposed amendment to the Certificate of Designation, whether
or not entitled to vote thereon by the Certificate of Designation, if the
amendment would increase or decrease the par value of the shares of such class,
or alter or change the powers, preferences or special rights of the shares or
such class so as to affect them adversely.
116
<PAGE>
Any exercise of rights will be subject to applicable provisions of the
Communications Act, including, without limitation, the requirements of prior
approval for transfer of control or assignment of Title III licenses.
CERTAIN COVENANTS
RESTRICTED PAYMENTS. DBS Corp shall not, and shall not permit any of its
Restricted Subsidiaries, to, directly or indirectly:
(a) declare or pay any dividend or make any distribution on account of any
Equity Interests of DBS Corp or any of its Subsidiaries, other than
dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of DBS Corp or dividends or distributions payable to any
Wholly Owned Subsidiary of DBS Corp (other than Unrestricted Subsidiaries of
DBS Corp);
(b) purchase, redeem or otherwise acquire or retire for value any outstanding
Equity Interests of DBS Corp, any of its Subsidiaries or any other Affiliate
of DBS Corp, other than any such Equity Interests owned by DBS Corp or any
of its Wholly Owned Subsidiaries (other than Unrestricted Subsidiaries of
DBS Corp); or
(c) make any Restricted Investment
(all such prohibited payments and other actions set forth in clauses (a), (b),
and (c) above being collectively referred to as "Restricted Payments") unless,
at the time of such Restricted Payment:
(i) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof;
(ii) after giving effect to such Restricted Payment and the incurrence of
any Indebtedness the net proceeds of which are used to finance such
Restricted Payment, the Indebtedness to Cash Flow Ratio of DBS Corp would
not have exceeded 6.0 to 1; and
(iii) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by DBS Corp after the Issue Date, is less than
the sum of: (A) the difference of cumulative (x) Consolidated Cash Flow
determined at the time of such Restricted Payment (or, in case such
Consolidated Cash Flow shall be a deficit, minus 100% of such deficit)
minus (y) 150% of Consolidated Interest Expense of DBS Corp, each as
determined for the period (taken as one accounting period) from October
1, 1997 to the end of DBS Corp's most recently ended fiscal quarter for
which internal financial statements are available at the time of such
Restricted Payment; plus (B) an amount equal to 100% of the aggregate net
cash proceeds received by DBS Corp and its Subsidiaries from the issue or
sale of Equity Interests (other than Disqualified Stock) of DBS Corp or
the Issuer (other than Equity Interests sold to a Subsidiary of DBS Corp
or the Issuer, and provided that any sale of Equity Interests of the
Issuer shall only be included in such calculation to the extent that the
proceeds thereof are contributed to the capital of DBS Corp other than as
Disqualified Stock or Indebtedness), since June 25, 1997.
The foregoing provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of declaration
thereof, if at such date of declaration such payment would have complied
with the provisions of the Certificate of Designation;
(2) the redemption, repurchase, retirement or other acquisition of any Equity
Interests of DBS Corp in exchange for, or out of the net proceeds of, the
substantially concurrent sale (other than to a Subsidiary of DBS Corp) of
other Equity Interests of DBS Corp (other than Disqualified Stock);
(3) the payment of dividends on, or the redemption of, the Dish Senior Preferred
Stock;
(4) Investments in an aggregate amount not to exceed $20 million; provided that
such Investments are in businesses of the type described under "--Activities
of EchoStar";
117
<PAGE>
(5) Investments to fund the financing activity of DNCC in the ordinary course of
its business in an amount not to exceed, as of the date of determination,
the sum of (A) $25.0 million plus (B) 30% of the aggregate cost to DNCC for
each Satellite Receiver purchased by DNCC and leased by DNCC to a retail
consumer in excess of 100,000 units;
(6) the purchase of employee stock options, or capital stock issued pursuant to
the exercise of employee stock options, in an aggregate amount not to exceed
$2 million in any calendar year and in an aggregate amount not to exceed $10
million since the Issue Date;
(7) a Permitted Refinancing (as defined below in "--Incurrence of Indebtedness,
Issuance of Disqualified Stock and Issuance of Preferred Equity Interests of
Subsidiaries");
(8) Investments in an amount equal to the net proceeds received by DBS Corp or
any of its Restricted Subsidiaries from the issue and sale of Equity
Interests of the Issuer (other than Equity Interests sold to a Subsidiary of
the Issuer and other than Disqualified Stock), since June 25, 1997; provided
that the entity making such Investment (if other than the Issuer) receives a
capital contribution from the Issuer in an amount greater than or equal to
the amount of such Investment;
(9) the purchase of odd-lots of Equity Interests of the Issuer, in an amount not
to exceed $1 million in the aggregate;
(10) Investments in ExpressVu Inc. or an Affiliate thereof, in an amount not to
exceed the amount necessary to exercise the purchase options granted,
through the Issue Date, to the Issuer or its Subsidiaries with respect to
ExpressVu, Inc.;
(11) Investments in ABCN, Inc. or an Affiliate thereof, in an amount not to
exceed the amount necessary to exercise the purchase options granted,
through the Issue Date, to the Issuer or its Subsidiaries with respect to
ABCN, Inc.; or
(12) the payment of any dividend, or making of any distribution or Investment,
the proceeds of which are, within five Business Days of receipt thereof,
used to pay (x) for the construction, launch, operation or insurance of
EchoStar III, provided that at the time of any such payment, distribution or
Investment, EchoStar III shall be owned by the Issuer or any Wholly Owned
Subsidiary of the Issuer, or (y) any cash dividend on the Senior Preferred
Stock.
Restricted Payments made pursuant to clauses (1) and (8) shall be included
as Restricted Payments in any computation made pursuant to clause (c) (iii)
above.
In addition, the Issuer shall not use any proceeds from the offering of the
Senior Preferred Stock to pay any dividends or make any distributions on any
common stock of the Issuer or any series of preferred stock other than the
Senior Preferred Stock.
Not later than the date of making any Restricted Payment, DBS Corp shall
deliver an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed, which calculations shall be
based upon the Issuer's latest available financial statements.
INCURRENCE OF INDEBTEDNESS, ISSUANCE OF DISQUALIFIED STOCK AND ISSUANCE OF
PREFERRED EQUITY INTERESTS OF SUBSIDIARIES. DBS Corp shall not, and DBS Corp
shall not permit any of its Restricted Subsidiaries to, directly or indirectly,
create, incur, issue, assume, guaranty or otherwise become directly or
indirectly liable with respect to (collectively, "incur") any Indebtedness
(including Acquired Debt) or issue any Disqualified Stock and DBS Corp shall not
permit any of its Restricted Subsidiaries to issue any Preferred Equity
Interest; provided, however, that notwithstanding the foregoing DBS Corp and
each of its Restricted Subsidiaries may incur Indebtedness or issue Disqualified
Stock or Preferred Equity Interests if, after giving effect to the incurrence of
such Indebtedness or the issuance of such Disqualified Stock or Preferred Equity
Interests and the application of the net proceeds thereof, the Indebtedness to
Cash Flow Ratio of DBS Corp would not have exceeded 6.0 to 1.
118
<PAGE>
The foregoing limitation will not apply to:
(i) the incurrence of the Deferred Payments and letters of credit with
respect thereto;
(ii) the incurrence of Bank Debt;
(iii) the incurrence of Indebtedness in an aggregate amount not to exceed
$15 million upon a finding by DBS Corp (evidenced by a resolution of the
Board of Directors of the Issuer set forth in an Officers' Certificate)
that such Indebtedness is necessary to finance costs in connection with
the development, construction, launch or insurance of EchoStar III or IV
(or any permitted replacements thereof);
(iv) Indebtedness between and among DBS Corp and each of its Restricted
Subsidiaries;
(v) Acquired Debt of a Person incurred prior to the date upon which such
Person was acquired by DBS Corp or any of its Subsidiaries (excluding
Indebtedness incurred by such entity other than in the ordinary course of
its business in connection with, or in contemplation of, such entity
being so acquired) in an aggregate principal amount not to exceed $15
million, provided that such Indebtedness and the holders thereof do not
at any time have direct or indirect recourse to any property or assets of
DBS Corp or any of its Restricted Subsidiaries other than the property
and assets of such acquired entity and its Subsidiaries;
(vi) Existing Indebtedness;
(vii) additional Indebtedness in an aggregate amount not to exceed $15
million at any one time outstanding;
(viii) the incurrence of Purchase Money Indebtedness by DBS Corp and any
Restricted Subsidiary in an aggregate amount not to exceed $30 million
at any one time outstanding; or
(ix) the incurrence by DBS Corp or any of its Restricted Subsidiaries of
Indebtedness issued in exchange for, or the proceeds of which are used to
extend, refinance, renew, replace, substitute or refund Indebtedness
referred to in clauses (i), (iii), (v), (vi), (vii) and (viii) above
("Refinancing Indebtedness"); PROVIDED, HOWEVER, that (A) the principal
amount of such Refinancing Indebtedness shall not exceed the principal
amount and accrued interest of the Indebtedness so extended, refinanced,
renewed, replaced, substituted or refunded; and (B) the Refinancing
Indebtedness shall have a final maturity later than, and a Weighted
Average Life to Maturity equal to or greater than; the final maturity and
Weighted Average Life to Maturity of the Indebtedness being extended,
refinanced, renewed, replaced or refunded.
In addition, the Issuer shall not incur any Indebtedness (including Acquired
Debt), and the Issuer shall not permit any Subsidiary of the Issuer which owns
any Equity Interests (including for these purposes any debt security that is
convertible into, or exchangeable for, Capital Stock) in DBS Corp (a "Bound
Subsidiary") to issue Disqualified Stock or Preferred Equity Interests or incur
any Indebtedness (including Acquired Debt); PROVIDED, HOWEVER, that,
notwithstanding the foregoing the Issuer may incur Indebtedness, and Bound
Subsidiaries may incur Indebtedness or issue Disqualified Stock or Preferred
Equity Interests if, after giving effect to the incurrence of such Indebtedness
or the issuance of the Disqualified Stock or Preferred Equity Interests, and the
application of the net proceeds thereof, the Indebtedness to Cash Flow Ratio of
the Issuer would not have exceeded 6.0 to 1.
The foregoing limitation will not apply to any of the following:
(i) Indebtedness between and among the Issuer and each of its Subsidiaries;
(ii) Acquired Debt of a person incurred prior to the date upon which such
person was acquired by the Issuer or any of its Bound Subsidiaries
(excluding Indebtedness incurred by such entity other than in the
ordinary course of its business in connection with, or in contemplation
of, such entity
119
<PAGE>
being so acquired) in an aggregate principal amount not to exceed $15
million, provided that such Indebtedness and the holders thereof do not
at any time have direct or indirect recourse to any property or assets of
the Issuer or any of its Bound Subsidiaries other than the property and
assets of such acquired entity and its subsidiaries;
(iii) Existing Indebtedness or Indebtedness incurred in connection with the
exchange of the Senior Preferred Stock for the Senior Exchange Shares;
(iv) Additional Indebtedness in an aggregate amount not to exceed $25
million at any one time outstanding;
(v) The incurrence of Purchase Money Indebtedness by the Issuer or any Bound
Subsidiary in an aggregate amount not to exceed $10 million at any one
time outstanding;
(vi) The incurrence by the Issuer or any of its Bound Subsidiaries of
Indebtedness issued in exchange for, or the proceeds of which are used to
extend, refinance, renew, replace, substitute or refund Indebtedness
referred to in clauses (ii), (iii), (iv) and (v) above ("Refinancing
Indebtedness"), PROVIDED, HOWEVER, that: (A) the principal amount of such
Refinancing Indebtedness shall not exceed the principal amount and
accrued interest of the Indebtedness so extended, refinanced, renewed,
replaced, substituted or refunded; (B) the refinancing Indebtedness shall
have a final maturity later than, and a Weighted Average Life to Maturity
equal to or greater than, the final maturity and Weighted Average Life to
Maturity of the Indebtedness being extended, refinanced, renewed,
replaced or refunded; and (C) the Refinancing Indebtedness shall be
subordinated in right of payment to the debt being refinanced, if at all,
on terms at least as favorable to the holders of such debt as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced or refunded; (a "Permitted Refinancing").
ASSET SALES. If DBS Corp or any of its Restricted Subsidiaries, in a single
transaction or a series of related transactions:
(a) sells, leases, conveys or otherwise disposes of any assets (including by
way of a sale-and-leaseback transaction), other than (i) sales of
inventory in the ordinary course of business, (ii) sales to DBS Corp or a
Wholly Owned Restricted Subsidiary of DBS Corp by any Restricted
Subsidiary of DBS Corp, (iii) sales of accounts receivable by EAC or DNCC
for cash in an amount at least equal to the fair market value of such
accounts receivable or (iv) sales of rights to satellite launches
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Issuer shall be governed by the
provisions of the Exchange Indenture described below under the caption
"Merger, Consolidation, or Sale of Assets");
(b) issue or sell equity securities of any Restricted Subsidiary of DBS
Corp, in either case, which assets or securities (i) have a fair market
value (as determined in good faith by the Board of Directors of the
Issuer evidenced by a resolution of the Board of Directors of the Issuer
and set forth in an Officers' Certificate; PROVIDED, HOWEVER, that if the
fair market value of such assets exceeds $20 million, the fair market
value shall be determined by an investment banking firm of national
standing selected by the Issuer) in excess of $10 million or (ii) are
sold or otherwise disposed of for net proceeds in excess of $10 million
(each of the foregoing, an "Asset Sale") then:
(A) DBS Corp or such Restricted Subsidiary, as the case may be, must
receive consideration at the time of such Asset Sale at least equal
to the fair market value (as determined in good faith by the Board of
Directors of the Issuer evidenced by a resolution of the Board of
Directors of the Issuer and set forth in an Officers' Certificate;
PROVIDED, HOWEVER, that if the fair market value of such assets
exceeds $20 million, the fair market value shall be determined by an
investment banking firm of national standing selected by the Issuer)
of the assets sold or otherwise disposed of; and
120
<PAGE>
(B) at least 80% of the consideration therefor received by DBS Corp or
such Restricted Subsidiary, as the case may be, is in the form of
cash or Cash Equivalents; provided, however, that DBS Corp may
consider up to $15 million of non-cash assets at any one time to be
cash for purposes of this clause (B), provided that the provisions of
the next paragraph are complied with as such non-cash assets are
converted to cash.
Any Net Proceeds from any Asset Sale that are not applied or invested in the
business of the Issuer as described under "--Activities of the Issuer" within
180 days after such Asset Sale, or not applied to an offer to repurchase 1994
Notes required by the 1994 Notes Indenture, 1996 Notes required by the 1996
Notes Indenture and 1997 Notes required by the 1997 Notes Indenture shall be
applied to an offer to purchase Senior Preferred Stock at a purchase price of
101% of the liquidation preference thereof, plus accumulated and unpaid
dividends to the date of purchase; provided that any obligation to make such an
offer shall not become effective until such time as the 1997 Notes and the 1996
Notes have been paid in full or have otherwise matured.
Notwithstanding the foregoing, any transaction which would not constitute an
Asset Sale, or which would not be subject to the terms of the Asset Sale
covenant contained in the 1997 Notes Indenture, shall not constitute an Asset
Sale for purposes of this Asset Sale covenant.
MERGER OR CONSOLIDATION. Without the affirmative vote or consent of holders
of a majority of the issued and outstanding shares of Senior Preferred Stock,
voting or consenting, as the case may be, as one class, the Issuer shall not, in
a single transaction or series of related transactions, consolidate or merge
with or into, or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its assets to, another Person or adopt a plan of
liquidation unless: (A) either (i) the Issuer is surviving or continuing Person
or (2) the Person (if other than the Issuer) formed by such consolidation or
into which the Issuer is merged or the Person that acquires by conveyance,
transfer or lease the properties and assets of the Issuer as an entirety or
substantially as an entirety or, in the case of a plan of liquidation, the
Person to which assets of the Issuer have been transferred, shall be a
corporation, partnership or trust organized and existing under the laws of the
United States or any State thereof or the District of Columbia; (B) the Senior
Preferred Stock shall be converted into or exchanged for and shall become shares
of such successor, transferee or resulting Person, having in respect of such
successor, transferee or resulting Person the same powers, preferences and
relative participating, optional or other special rights and the qualifications,
limitations or restrictions thereon, the Senior Preferred Stock had immediately
prior to such transaction; and (C) the Issuer has delivered to the transfer
agent for the Senior Preferred Stock prior to the consummation of the proposed
transaction an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger or transfer complies with the terms hereof and
that all conditions precedent herein relating to such transaction have been
satisfied. For purposes of the foregoing, the transfer (by lease, assignment,
sale or otherwise, in a single transaction or series of related transactions) of
all or substantially all of the properties or assets of one or more Subsidiaries
of the Issuer, the Capital Stock of which constitutes all or substantially all
of the properties and assets of the Issuer, shall be deemed to be the transfer
of all or substantially all of the properties and assets of the Issuer.
ACTIVITIES OF THE ISSUER. Neither the Issuer nor any of its Subsidiaries
may engage in any business other than developing, owning, engaging in and
dealing with all or any part of the business of domestic and international
satellite communications, and reasonably related extensions thereof, including
but not limited to the purchase, ownership, operation, leasing and selling of,
and generally dealing in or with, one or more communications satellites and the
transponders thereon, the acquisition, transmission, broadcast, production and
other provision of programming therewith and the manufacturing, distribution and
financing of equipment (including consumer electronic equipment) relating
thereto.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. DBS Corp
shall not, and DBS Corp shall not permit any of its Restricted Subsidiaries to,
directly or indirectly, create or otherwise cause or
121
<PAGE>
suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to:
(a) pay dividends or make any other distributions to DBS Corp or any of its
Restricted Subsidiaries on its Capital Stock or with respect to any other
interest or participation in, or measured by, its profits, or pay any
Indebtedness owed to DBS Corp or any of its Subsidiaries;
(b) make loans or advances to DBS Corp or any of its Subsidiaries; or
(c) transfer any of its properties or assets to DBS Corp or any of its
Subsidiaries, except for such encumbrances or restrictions existing under
or by reasons of:
(i) Existing Indebtedness and existing agreements as in effect on the
Issue Date;
(ii) any Credit Agreement containing any encumbrances or restrictions
that are no more restrictive with respect to the provisions set forth
in clauses (a), (b) and (c) above than the 1994 Credit Agreement as
in effect on the date of its expiration;
(iii) applicable law or regulation;
(iv) any instrument governing Acquired Debt as in effect at the time of
acquisition (except to the extent such Indebtedness was incurred in
connection with, or in contemplation of, such acquisition), which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that the
Consolidated Cash Flow of such Person shall not be taken into account
in determining whether such acquisition was permitted by the terms of
the Certificate of Designation;
(v) by reason of customary non-assignment provisions in leases entered
into in the ordinary course of business and consistent with past
practices; or
(vi) Refinancing Indebtedness, as defined in "--Incurrence of
Indebtedness, Issuance of Disqualified Stock and Issuance of
Preferred Equity Interests of Subsidiaries"), provided that the
restrictions contained in the agreements governing such Refinancing
Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
ACCOUNTS RECEIVABLE SUBSIDIARY. DBS Corp:
(a) may, and may permit any of its Subsidiaries to, notwithstanding the
provisions of the covenant entitled "Restricted Payments," or any other
requirement of this Certificate of Designation make Investments in an
Accounts Receivable Subsidiary: (i) the proceeds of which are applied
within five Business Days of the making thereof solely to finance: (A)
the purchase of accounts receivable of DBS Corp and its Subsidiaries or
(B) payments required in connection with the termination of all then
existing arrangements relating to the sale of accounts receivable or
participation interests therein by an Accounts Receivable Subsidiary
(provided that the Accounts Receivable Subsidiary shall receive cash,
Cash Equivalents and accounts receivable having an aggregate fair market
value not less than the amount of such payments in exchange therefor) and
(ii) in the form of Accounts Receivable Subsidiary Shares to the extent
permitted by clause (b) below;
(b) shall not, and shall not permit any of its Subsidiaries to, sell
accounts receivable to an Accounts Receivable Subsidiary except for
consideration in an amount not less than that which would be obtained in
an arm's length transaction and solely in the form of cash or Cash
Equivalents; provided that an Accounts Receivable Subsidiary may pay the
purchase price for any such accounts receivable in the form of Accounts
Receivable Subsidiary Notes so long as, after giving
122
<PAGE>
effect to the issuance of any such Accounts Receivable Subsidiary Notes,
the aggregate principal amount of all Accounts Receivable Subsidiary
Notes outstanding shall not exceed 20% of the aggregate purchase price
paid for all outstanding accounts receivable purchased by an Accounts
Receivable Subsidiary since the Issue Date (and not written-off or
required to be written off in accordance with the normal business
practice of an Accounts Receivable Subsidiary);
(c) shall not permit an Accounts Receivable Subsidiary to sell any accounts
receivable purchased from DBS Corp and its Subsidiaries or participation
interests therein to any other Person except on an arm's length basis and
solely for consideration in the form of cash or Cash Equivalents or
certificates representing undivided interests of a Receivables Trust;
provided an Accounts Receivable Subsidiary may not sell such certificates
to any other Person except on an arm's length basis and solely for
consideration in the form of cash or Cash Equivalents;
(d) shall not, and shall not permit any of its Subsidiaries to, enter into
any Guarantee, subject any of their respective properties or assets
(other than the accounts receivable sold by them to an Accounts
Receivable Subsidiary) to the satisfaction of any liability or obligation
or otherwise incur any liability or obligation (contingent or otherwise),
in each case, on behalf of an Accounts Receivable Subsidiary or in
connection with any sale of accounts receivable or participation
interests therein by or to an Accounts Receivable Subsidiary, other than
obligations relating to breaches of representations, warranties,
covenants and other agreements of DBS Corp or any of its Subsidiaries
with respect to the accounts receivable sold by DBS Corp or any of its
Subsidiaries to an Accounts Receivable Subsidiary or with respect to the
servicing thereof; provided that neither DBS Corp nor any of its
Subsidiaries shall at any time guarantee or be otherwise liable for the
collectibility of accounts receivable sold by them;
(e) shall not permit an Accounts Receivable Subsidiary to engage in any
business or transaction other than the purchase and sale of accounts
receivable or participation interests therein of DBS Corp and its
Subsidiaries and activities incidental thereto;
(f) shall not permit an Accounts Receivable Subsidiary to incur any
Indebtedness other than the Accounts Receivable Subsidiary Notes,
Indebtedness owed to DBS Corp and Non-Recourse Indebtedness; provided
that the aggregate principal amount of all such Indebtedness of an
Accounts Receivable Subsidiary shall not exceed the book value of its
total assets as determined in accordance with GAAP;
(g) shall cause any Accounts Receivable Subsidiary to remit to DBS Corp or a
Subsidiary of DBS Corp on a monthly basis as a distribution all available
cash and Cash Equivalents not held in a collection account pledged to
acquirors of accounts receivable or participation interests therein, to
the extent not applied to (i) pay interest or principal on the Accounts
Receivable Subsidiary Notes or any Indebtedness of such Accounts
Receivable Subsidiary owed to DBS Corp, (ii) pay or maintain reserves for
reasonable operating expenses of such Accounts Receivable Subsidiary or
to satisfy reasonable minimum operating capital requirements or (iii) to
finance the purchase of additional accounts receivable of DBS Corp and
its Subsidiaries; and
(h) shall not, and shall not permit any of its Subsidiaries to, sell
accounts receivable to, or enter into any other transaction with or for
the benefit of, an Accounts Receivable Subsidiary (i) if such Accounts
Receivable Subsidiary pursuant to or within the meaning of any Bankruptcy
Law (A) commences a voluntary case, (B) consents to the entry of an order
for relief against it in an involuntary case, (C) consents to the
appointment of a Custodian of it or for all or substantially all of its
property, (D) makes general assignment for the benefit of its creditors,
or (E) generally is not paying its debts as they become due; or (ii) if a
court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that (A) is for relief against such Accounts Receivable
Subsidiary in an involuntary case, (B) appoints a Custodian of such
Accounts Receivable Subsidiary or for all or substantially all of the
property of such Accounts Receivable Subsidiary,
123
<PAGE>
or (C) orders the liquidation of such Accounts Receivable Subsidiary,
and, with respect to clause (ii) hereof, the order or decree remains
unstayed and in effect for 60 consecutive days.
PROHIBITION ON STOCK PLEDGE. EchoStar shall not, and shall not permit any
Subsidiary to, grant any lien on, or security interest in, or otherwise pledge
as collateral, any of the capital stock of DBS Corp or any Bound Subsidiary,
except for any lien, security interest or pledge which may be granted in
connection with an extension, renewal, refinancing or refunding of Indebtedness
existing on the Issue Date provided that no additional capital stock of DBS
Corp. or any Bound Subsidiary is used as collateral for such extension, renewal,
refinancing or refunding.
TRANSACTIONS WITH AFFILIATES. The Issuer shall not, and shall not permit
any of its Subsidiaries to, sell, lease, transfer or otherwise dispose of any of
its properties or assets to, or purchase any property or assets from, or enter
into any contract, agreement, understanding, loan, advance or guarantee with, or
for the benefit of, any Affiliate (including any Unrestricted Subsidiary) (each
of the foregoing, an "Affiliate Transaction"), unless:
(a) such Affiliate Transaction is on terms that are no less favorable to DBS
Corp or its Subsidiaries than those that would have been obtained in a
comparable transaction by DBS Corp or such Subsidiaries with an unrelated
Person;
(b) if such Affiliate Transaction involves aggregate payments in excess of
$500,000, DBS Corp delivers to the transfer agent a resolution of the
Board of Directors of DBS Corp set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (a) above
and such Affiliate Transaction is approved by a majority of disinterested
members of the Board of Directors of the Issuer; and
(c) if such Affiliate Transaction involves aggregate payments in excess of
$15 million, DBS Corp delivers to the transfer agent an opinion as to the
fairness to DBS Corp or such Subsidiaries from a financial point of view
of such Affiliate Transaction issued by an investment banking firm of
national standing;
PROVIDED, HOWEVER, that (i) the payment of compensation to directors and
management of the Issuer in amounts approved by the Compensation Committee of
the Board of Directors of the Issuer (which shall consist of a majority of
outside directors); (ii) transactions between or among DBS Corp and its Wholly
Owned Subsidiaries (other than Unrestricted Subsidiaries of DBS Corp); (iii) the
transfer of rights and interests in any permits or licenses relating to the use
of channels at the 166 DEG. West Longitude or 175 DEG. WL orbital slot; (iv)
transactions permitted by clauses (1), (3), (5), (6), (7), (9) and (12) of the
second paragraph of the covenant "Restricted Payments"; and (v) any transactions
between or among the Issuer and any Subsidiary of the Issuer which is not also a
Subsidiary of DBS Corp, shall, in each case, not be deemed Affiliate
Transactions.
REPORTS. Whether or not required by the rules and regulations of the SEC,
so long as any shares of Senior Preferred Stock remain outstanding, the Issuer
shall cause copies of all quarterly and annual financial reports and of the
information, documents, and other reports (or copies of such portions of any of
the foregoing as the SEC may by rules and regulations prescribe) which the
Issuer is required to file with the SEC pursuant to Section 13 or 15(d) of the
Exchange Act (including all information that would be required to be contained
in Forms 10-Q and 10-K) to be filed with the SEC and mailed to the holders of
Senior Preferred Stock, in each case, within 15 days of filing with the SEC. If
the Issuer is not subject to the requirements of Section 13 or 15(d) of the
Exchange Act, the Issuer shall nevertheless continue to cause the annual and
quarterly financial statements, including any notes thereto (and, with respect
to annual reports, an auditors' report by an accounting firm of established
national reputation) and a "Management's Discussion and Analysis of Financial
Condition and Results of Operations," comparable to that which would have been
required to appear in annual or quarterly reports filed under Section 13 or
15(d) of the Exchange Act (including all information that would be required to
be contained in Forms 10-Q and 10-K),
124
<PAGE>
to be so filed with the SEC for public availability and mailed to the holders of
Senior Preferred Stock within 120 days after the end of the Issuer's fiscal
years and within 60 days after the end of each of the first three quarters of
each such fiscal year.
PAYMENTS FOR CONSENTS. None of the Issuer, DBS Corp nor any of their
Subsidiaries may, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any holder of
Senior Preferred Stock for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the Certificate of Designation
unless such consideration is offered to be paid or agreed to be paid to all
holders of Senior Preferred Stock that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATORS AND
STOCKHOLDERS.
No director, officer, employee, incorporator or stockholder of DBS Corp, the
Issuer or any of their Affiliates, as such, shall have any liability for any
obligations of DBS Corp, the Issuer and any of their Affiliates under the Senior
Preferred Stock or the Certificate of Designation or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each holder of
Senior Preferred Stock waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Senior Preferred
Stock. Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such waiver is against
public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuer may, at its option and at any time, elect to have all obligations
discharged with respect to the outstanding Senior Preferred Stock ("Legal
Defeasance"). Such Legal Defeasance means that the Issuer will be deemed to have
paid and discharged the entire obligation under the outstanding Senior Preferred
Stock, except for: (a) the rights of holders of outstanding Senior Preferred
Stock to receive dividend, distribution and premium payments when such payments
are due, or on the redemption date, as the case may be; (b) the Issuer's
obligations with respect to the Senior Preferred Stock concerning issuing
temporary Certificates, registration of Certificates, mutilated, destroyed, lost
or stolen Certificates, and the maintenance of an office or agency for payment
and money for security payments held in trust; and (c) the Legal Defeasance
provisions of the Certificates. In addition, the Issuer may, at its option and
at any time, elect to have all obligations released with respect to certain
covenants that are described in the Certificate of Designation ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a breach of any covenant with respect to the Certificates.
In order to exercise either Legal Defeasance or Covenant Defeasance: (i) the
Issuer must irrevocably deposit with a Trustee, in trust, for the benefit of the
holders of the Senior Preferred Stock, cash in U.S. dollars, non-callable U.S.
government obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants selected by the trustee, to pay the aggregate liquidation
preference, premium (if any), plus all accumulated and unpaid dividends to the
redemption date, (ii) in the case of Legal Defeasance, the Issuer shall have
delivered to the trustee an Opinion of Counsel reasonably acceptable to the
trustee confirming that (A) the Issuer has received from, or there has been
published by the Internal Revenue Service, a ruling or (B) since the Issue Date,
there has been a change in the applicable Federal income tax law, in each case
to the effect that, and based thereon such opinion of counsel shall confirm
that, the holders of such Senior Exchange Shares will not recognize income, gain
or loss for Federal income tax purposes as a result of such Legal Defeasance,
and will be subject to Federal income tax in the same amount, in the same manner
and at the same times as would have been the case if such Legal Defeasance had
not occurred; (iii) in the case of Covenant Defeasance, the Issuer shall have
delivered to the trustee an Opinion of Counsel reasonably acceptable to such
trustee confirming that the holders of such Senior Preferred Stock will not
recognize income, gain or loss for Federal income tax purposes as a result of
such Covenant Defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been
125
<PAGE>
the case if such Covenant Defeasance had not occurred; (iv) such Legal
Defeasance or Covenant Defeasance shall not result in a breach or violation of,
or constitute a default under the Certificate of Designation or any other
material agreement or instrument to which the Issuer or any of its Subsidiaries
is a party; (v) the Issuer shall have delivered to the trustee an Officers'
Certificate stating that the deposit was not made by the Issuer with the intent
of preferring the holders of such Senior Preferred Stock over the Issuer or with
the intent of defeating, hindering, delaying or defrauding any other creditors
of the Issuer or others; and (vii) the Issuer shall have delivered to the
Trustee an Officers' Certificate stating that all conditions precedent provided
for or relating to the Legal Defeasance or the Covenant Defeasance have been
complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Without the consent of any holder of Senior Preferred Stock, the Issuer may
amend or supplement the Certificate of Designation to cure any ambiguity, defect
or inconsistency, to provide for uncertificated Senior Preferred Stock in
addition to or in place of certificated Senior Preferred Stock, to provide for
the assumption of the Issuer's obligations to holders of the Senior Preferred
Stock in the case of a merger or consolidation, to make any change that would
provide any additional rights or benefits to the holders of the Senior Preferred
Stock or that does not adversely affect the legal rights under the Certificate
of Designation of any such holder.
BOOK-ENTRY; DELIVERY AND FORM
THE DEPOSITORY TRUST CO. The certificates representing the Senior Preferred
Stock will be issued in fully registered form.
Senior Preferred Stock sold in reliance on Rule 144A will be represented by
a single, permanent global Senior Preferred Stock Certificate, in definitive,
fully registered form (the "Restricted Global Senior Preferred Stock
Certificate") and will be deposited with a custodian for DTC and registered in
the name of a nominee of DTC. The Global Senior Preferred Stock Certificate (as
defined) (and any Senior Preferred Stock issued in exchange therefor) will be
subject to certain restrictions on transfer set forth therein and will bear the
legend regarding such restrictions set forth under a "Notice to Investors."
Owners of beneficial interests in Global Senior Preferred Stock Certificate will
generally not be entitled to receive physical delivery of a physical certificate
for their Senior Preferred Stock ("Certificated Senior Preferred Stock"). The
Senior Preferred Stock is not issuable in bearer form.
Upon the issuance of the Restricted Global Senior Preferred Stock
Certificate, DTC or its custodian will credit, on its internal system, the
respective liquidation preference of the individual beneficial interests
represented by such Restricted Global Senior Preferred Stock Certificate, to the
accounts of persons who have accounts with such depositary. Ownership of
beneficial interests in a Restricted Global Senior Preferred Stock Certificate
will be limited to persons who have accounts with DTC ("participants") or
persons who hold interests through participants. Ownership of beneficial
interests in the Restricted Global Senior Preferred Stock Certificate will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). Qualified institutional buyers may hold their
interests in the Restricted Global Senior Preferred Stock Certificate directly
through DTC if they are participants in such system, or indirectly through
organizations that are participants in such system.
So long as DTC or its nominee is the registered owner or holder of the
Restricted Global Senior Preferred Stock Certificate, DTC or such nominee, as
the case may be, will be considered the sole owner or holder of the Senior
Preferred Stock represented by such Restricted Global Senior Preferred Stock
Certificate for all purposes under the Certificate of Designation and the Senior
Preferred Stock. No beneficial owner of an interest in the Restricted Global
Senior Preferred Stock Certificate will be able to
126
<PAGE>
transfer that interest except in accordance with DTC's applicable procedures, in
addition to those provided for under the Purchase Agreement.
Payments made with respect to the Restricted Global Senior Preferred Stock
Certificate will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither EchoStar nor the Initial Purchasers will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Restricted
Global Senior Preferred Stock Certificate or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
The Issuer expects that DTC or its nominee, upon receipt of any payments
made with respect to the Restricted Global Senior Preferred Stock Certificate,
will credit participants' accounts with payments in amounts proportionate to
their respective beneficial interests in the amount of such Restricted Global
Senior Preferred Stock Certificate as shown on the records of DTC or its
nominee. The Issuer also expects that payment by participants to owners of
beneficial interests in such Restricted Global Senior Preferred Stock
Certificate held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary in
accordance with DTC rules and will be settled in same-day funds.
The Issuer understands that DTC will take any action permitted to be taken
by a holder of Senior Preferred Stock (including the presentation of Senior
Preferred Stock for exchange as described below) only at the direction of one or
more participants to whose account the DTC interests in the Restricted Global
Senior Preferred Stock Certificate is credited and only in respect of such
portion of the aggregate liquidation preference of Senior Preferred Stock as to
which such participant or participants has or have given such direction.
The Issuer understands that DTC is a limited purpose trust company organized
under the laws of the State of New York, a "banking organization" within the
meaning of New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the Uniform Commercial Code and a
"Clearing Agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its participants and
facilitate the clearance and settlement of securities transaction between
participant through electronic book entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Restricted Global Senior Preferred
Stock certificate among participants of DTC, it is under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time. Neither the Issuer nor the Initial Purchasers will
have any responsibility for the performance by DTC or its respective
participants or indirect participants of its respective obligations under the
rules and procedures governing their operations.
CERTIFICATED SENIOR PREFERRED STOCK.
If DTC is at any time unwilling or unable to continue as a depository for
the Restricted Global Senior Preferred Stock Certificate and a successor
depositary is not appointed by the Issuer within 90 days, the Issuer will issue
Certificated Senior Preferred Stock in exchange for the Restricted Global Senior
Preferred Stock Certificate, which will bear the legend referred to under the
hearing "Notice to Investors."
127
<PAGE>
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Certificate of
Designation and in the Exchange Indenture. Reference is made to the Certificate
of Designation and Exchange Indenture for a full disclosure of all such terms,
as well as any other capitalized terms used herein for which no definition is
provided.
"ACCOUNTS RECEIVABLE SUBSIDIARY" means one Unrestricted Subsidiary of DBS
Corp specifically designated as an Accounts Receivable Subsidiary for the
purpose of financing the accounts receivable of DBS Corp or any Subsidiary, and
provided that any such designation shall not be deemed to prohibit DBS Corp or
any Subsidiary from financing accounts receivable through any other entity,
including without limitation, any other Unrestricted Subsidiary.
"ACCOUNTS RECEIVABLE SUBSIDIARY NOTES" means the Shares to be issued by the
Accounts Receivable Subsidiary for the purchase of accounts receivable.
"ACQUIRED DEBT" means, with respect to any specified Person, Indebtedness of
any other Person existing at the time such other Person merges with or into or
becomes a Subsidiary of such specified Person, or Indebtedness incurred by such
Person in connection with the acquisition of assets, including Indebtedness
incurred in connection with, or in contemplation of, such other Person merging
with or into or becoming a Subsidiary of such specified person or the
acquisition of such assets, as the case may be.
"ADDITIONAL PAYMENT OBLIGATIONS" means the portion of the payment
obligations, under any vendor financing arrangements, of any of DBS Corp, the
Issuer or any of DBS Corp's Subsidiaries with respect to the construction,
launch or insurance of EchoStar IV in excess of $15.0 million.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED, HOWEVER,
that beneficial ownership of 10% or more of the voting securities of a person
shall be deemed to be control; PROVIDED FURTHER that no individual, other than a
director of the Issuer or an officer of the Issuer with a policy making
function, shall be deemed an Affiliate of the Issuer or any of its Subsidiaries,
solely by reason of such individual's employment, position or responsibilities
by or with respect to the Issuer or any of its Subsidiaries.
"BANK DEBT" means Indebtedness incurred pursuant to the Credit Agreement in
an aggregate amount not to exceed 90% of the accounts receivable of the
borrowers under the Credit Agreement eligible for inclusion in the borrowing
base under the Credit Agreement, plus 75% of the inventory of the Credit
Agreement borrowers under the Credit Agreement eligible for inclusion in the
borrowing base under the Credit Agreement, plus 100% of the cash collateral and
marketable securities of the Borrowers under the Credit Agreement eligible for
inclusion in the borrowing base under the Credit Agreement.
"BANKRUPTCY LAW" means title 11, U.S. Code or any similar federal or state
law for the relief of debtors.
"BUSINESS DAY" means any day other than a Legal Holiday.
"CAPITAL LEASE" means, at the time any determination thereof is made, any
lease of property, real or personal, in respect of which the present value of
the minimum rental commitment would be capitalized on a balance sheet of the
lessee in accordance with GAAP.
128
<PAGE>
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"CAPITAL STOCK" means any and all shares, interests, participations, rights
or other equivalents (however designated) of corporate stock or partnership or
membership interests, whether common or preferred.
"CASH EQUIVALENTS" means: (a) U.S. dollars; (b) securities issued or
directly and fully guaranteed or insured by the U.S. government or any agency or
instrumentality thereof having maturities of not more than six months from the
date of acquisition; (c) certificates of deposit and eurodollar time deposits
with maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500 million; (d) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in clauses
(b) and (c) entered into with any financial institution meeting the
qualifications specified in clause (c) above; and (e) commercial paper rated
P-1, A-l or the equivalent thereof by Moody's Investors Service, Inc. or
Standard & Poor's Corporation, respectively, and in each case maturing within
six months after the date of acquisition.
"CHANGE OF CONTROL" means: (a) any transaction or series of transactions
(including, without limitation, a tender offer, merger or consolidation) the
result of which is that the Principals and their Related Parties or an entity
controlled by the Principals and their Related Parties cease to (i) be the
"beneficial owners" (as defined in Rule 13(d)(3) under the Exchange Act) of at
least 30% of the total Equity Interests in the Issuer and (ii) have the voting
power to elect at least a majority of the Board of Directors of the Issuer; (b)
the first day on which a majority of the members of the Board of Directors of
the Issuer are not Continuing Directors; (c) any transaction or series of
transactions (including, without limitation, a tender offer, merger or
consolidation) the result of which is that the Principals and their Related
Parties or any entity controlled by the Principals and their Related Parties
cease to be the "beneficial owners" (as defined in Rule 13(d)(3) under the
Exchange Act) of at least 30% of the total Equity Interests in DBS Corp and have
the voting power to elect at least a majority of the Board of Directors of DBS
Corp, or (d) the first day on which a majority of the members of the Board of
Directors of DBS Corp are not Continuing Directors.
"COMMUNICATIONS ACT" means the Communications Act of 1934, as amended.
"CONSOLIDATED CASH FLOW" means, with respect to any person for any period,
the Consolidated Net Income of such person for such period, plus, to the extent
deducted in computing Consolidated Net Income: (a) provision for taxes based on
income or profits; (b) Consolidated Interest Expense; (c) depreciation and
amortization (including amortization of goodwill and other intangibles) of such
person for such period; and (d) any extraordinary loss and any net loss realized
in connection with any Asset Sale, in each case, on a consolidated basis
determined in accordance with GAAP, provided that Consolidated Cash Flow shall
not include interest income derived from the net proceeds of the offering of the
1997 Notes.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, consolidated interest expense of such Person for such period, whether
paid or accrued (including amortization of original issue discount and deferred
financing costs, non-cash interest payments and the interest component of
Capital Lease Obligations), on a consolidated basis determined in accordance
with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided,
however, that: (a) the Net Income of any Person that is not a Subsidiary or that
is accounted for by the equity method of accounting shall be included only to
the extent of the amount of dividends or distributions paid in cash to such
person, in the case of a gain, or to the extent of
129
<PAGE>
any contributions or other payments by the referent Person, in the case of a
loss; (b) the Net Income of any Person that is a Subsidiary that is not a Wholly
Owned Subsidiary shall be included only to the extent of the amount of dividends
or distributions paid in cash to the referent Person; (c) the Net Income of any
Person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition shall be excluded; (d) the Net Income of any
Subsidiary of such person shall be excluded to the extent that the declaration
or payment of dividends or similar distributions is not at the time permitted by
operation of the terms of its charter or bylaws or any other agreement,
instrument, judgment, decree, order, statute, rule or government regulation to
which it is subject; and (e) the cumulative effect of a change in accounting
principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any Person, the sum of: (a)
the stockholders' equity of such Person; plus (b) the amount reported on such
Person's most recent balance sheet with respect to any series of preferred stock
(other than Disqualified Stock) that by its terms is not entitled to the payment
of dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only to the
extent of any cash received by such person upon issuance of such preferred
stock, less: (i) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going concern
business made within 12 months after the acquisition of such business)
subsequent to the date of the Exchange Indenture in the book value of any asset
owned by such person or a consolidated Subsidiary of such person; and (ii) all
unamortized debt discount and expense and unamortized deferred charges, all of
the foregoing determined in accordance with GAAP.
"CONTINUING DIRECTOR" means, as of any date of determination, any member of
the Board of Directors of DBS Corp or the Issuer, as the case may be, who: (a)
was a member of such Board of Directors on the Issue Date; or (b) was nominated
for election or elected to such Board of Directors with the affirmative vote of
a majority of the Continuing Directors who were members of such Board at the
time of such nomination or election.
"CREDIT AGREEMENT" means any one or more credit agreements (which may
include or consist of revolving credits) between DBS Corp, the Issuer or any of
DBS Corp's Restricted Subsidiaries and one or more banks or other financial
institutions providing financing for the business of DBS Corp, the Issuer and
DBS Corp's Restricted Subsidiaries, provided that the lenders party to the
Credit Agreement may not be Affiliates of the Issuer.
"DBS" means direct broadcast satellite.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DEFERRED PAYMENTS" means Indebtedness to satellite contractors incurred in
connection with the construction and launch of EchoStar I, EchoStar II, EchoStar
III and EchoStar IV in an amount not to exceed $135.0 million.
"DISH" means Dish, Ltd., a Nevada corporation.
"DISH SENIOR PREFERRED STOCK" means Dish's 8% Series A Cumulative Senior
Preferred Stock having an aggregate liquidation preference not in excess of
$15.1 million.
"DISQUALIFIED STOCK" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to July 1,
2004.
"DNCC" means DISH Network Credit Corporation, a Colorado corporation.
"DBS CORP" means EchoStar DBS Corporation, a Colorado corporation.
130
<PAGE>
"ECHOSTAR DBS SYSTEM" means the digital direct broadcast satellite system of
the Issuer.
"ECHOSTAR I" means DBS Corp's high-powered direct broadcast satellite
designated as EchoStar I in the Prospectus.
"ECHOSTAR II" means DBS Corp's high-powered direct broadcast satellite
designated as EchoStar II in the Prospectus.
"ECHOSTAR III" means the high-powered direct broadcast satellite being
constructed by DBSC as of the Issue Date, and any replacement satellite thereof
to the extent permitted by the 1997 Notes Indenture.
"ECHOSTAR IV" means the high-powered direct broadcast satellite being
constructed which is designated as EchoStar IV in the Prospectus, and any
replacement satellite thereof to the extent permitted by the terms of the 1997
Notes Indenture.
"ECHOSTAR RECEIVER SYSTEM" means a satellite dish, digital satellite
receiver, remote control and related components, used in connection with the DBS
service provided by the Issuer and its Subsidiaries.
"ELIGIBLE INSTITUTION" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent in
foreign currency, whose debt is rated Investment Grade at the time as of which
any investment or rollover therein is made.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"ESBC" means EchoStar Satellite Broadcasting Corporation.
"ESC" means EchoStar Satellite Corporation.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXISTING INDEBTEDNESS" means any Indebtedness of the Issuer and its
Subsidiaries in existence on the Issue Date or any Indebtedness arising after
the Issue Date if such Indebtedness resulted from a contractual commitment
outstanding on the Issue Date which related to the construction, launch or
insurance of any satellite owned by, or under contract to, the Issuer or any of
its Subsidiaries as of the Issue Date, until such amounts are repaid.
"FCC" means Federal Communications Commission.
"FULL-CONUS ORBITAL SLOT" means the 101, 110 or 119 degrees West Longitude
orbital slot.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the U.S., which are applicable as of the date of determination;
PROVIDED, HOWEVER; that these definitions and all ratios and calculations
contained in the covenants "Restricted Payments," "Incurrence of Indebtedness,
Issuance of Disqualified Stock and Issuance of Preferred Equity Interests of
Subsidiaries," "Asset Sales," and "Dividend and Other Payment Restrictions
Affecting Subsidiaries" shall be determined in accordance with GAAP as in effect
and applied by the Issuer and its Subsidiaries on the Issue Date, consistently
applied; PROVIDED, FURTHER, that in the event of any change in GAAP or in any
change by the Issuer or any of its Subsidiaries in GAAP applied that would
result in any change in any such ratio or calculation, the Issuer shall deliver
to the Trustee, each time any such ratio or calculation is required to be
determined or made, an Officers' Certificate setting forth the computations
showing the effect of such change or application on such ratio or calculation.
"GLOBAL NOTE" means a note evidencing all or part of the Senior Exchange
Notes issued to the Depository for such Senior Exchange Shares.
131
<PAGE>
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States of America is
pledged.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"GUARANTOR" means any entity that executes a Guarantee of the obligations of
the Issuer under the Senior Exchange Notes, and their respective successors and
assigns.
"HEDGING OBLIGATIONS" means, with respect to any person, the obligations of
such person under: (a) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements; and (b) other agreements or
arrangements designed to protect such person against fluctuations in interest
rates.
"HOLDER" means a Person in whose name an Exchange Note is registered.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or representing the balance
deferred and unpaid of the purchase price of any property (including pursuant to
capital leases) or representing any Hedging Obligations, except any such balance
that constitutes an accrued expense or trade payable, if and to the extent any
of the foregoing (other than Hedging Obligations) would appear as a liability
upon a balance sheet of such person prepared in accordance with GAAP, and also
includes, to the extent not otherwise included, the Guarantee of items that
would be included within this definition.
"INDEBTEDNESS TO CASH FLOW RATIO" means, with respect to any Person, the
ratio of: (a) the Indebtedness of such Person and its Subsidiaries as of the end
of the most recently ended fiscal quarter, plus the amount of any Indebtedness
incurred subsequent to the end of such fiscal quarter; to (b) such person's
Consolidated Cash Flow for the most recently ended four full fiscal quarters for
which internal financial statements are available immediately preceding the date
on which such event for which such calculation is being made shall occur (the
"Measurement Period"), PROVIDED, HOWEVER, that: (i) in making such computation,
Indebtedness shall include the total amount of funds outstanding and available
under any revolving credit facilities; and (ii) in the event that DBS Corp or
any of its Subsidiaries consummates a material acquisition or an Asset Sale or
other disposition of assets subsequent to the commencement of the Measurement
Period but prior to the event for which the calculation of the Indebtedness to
Cash Flow Ratio is made, then the Indebtedness to Cash Flow Ratio shall be
calculated giving pro forma effect to such material acquisition or Asset Sale or
other disposition of assets, as if the same had occurred at the beginning of the
applicable period.
"INVESTMENT GRADE" means with respect to a security, that such security is
rated, by at least two nationally recognized statistical rating organizations,
in one of each such organization's four highest generic rating categories.
"INVESTMENTS" means, with respect to any Person, all investments by such
person in other persons (including Affiliates) in the forms of loans (including
Guarantees), advances or capital contributions (excluding commission, travel and
similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
"ISSUE DATE" means the date on which the Senior Preferred Stock is
originally issued under the Certificate of Designation.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a
132
<PAGE>
payment date is a Legal Holiday at a place of payment, payment may be made at
that place on the next succeeding day that is not a Legal Holiday, and no
interest shall accrue for the intervening period.
"MARKETABLE SECURITIES" means: (a) Government Securities; (b) any
certificate of deposit maturing not more than 365 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution; (c)
commercial paper maturing not more than 365 days after the date of acquisition
issued by a corporation (other than an Affiliate of the Issuer) with an
Investment Grade rating, at the time as of which any investment therein is made,
issued or offered by an Eligible Institution; (d) any bankers acceptances or
money market deposit accounts issued or offered by an Eligible Institution; and
(e) any fund investing exclusively in investments of the types described in
clauses (a) through (d) above.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP, excluding, however, any gain
(but not loss), together with any related provision for taxes on such gain (but
not loss), realized in connection with any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions), and
excluding any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss).
"NET PROCEEDS" means the aggregate cash proceeds received by the Issuer, DBS
Corp or any Restricted Subsidiaries of DBS Corp, as the case may be, in respect
of any Asset Sale, net of the direct costs relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees,
and sales commissions) and any relocation expenses incurred, as a result
thereof, taxes paid or payable as a result thereof (after taking into account
any available tax credits or deductions and any tax sharing arrangements),
amounts required to be applied to the repayment of Indebtedness secured by a
lien on the asset or assets that are the subject of such Asset Sale and any
reserve for adjustment in respect of the sale price of such asset or assets. Net
Proceeds shall exclude any non-cash proceeds received from any Asset Sale, but
shall include such proceeds when and as converted by DBS Corp or any Restricted
Subsidiary of DBS Corp to cash.
"1994 NOTES INDENTURE" means the Indenture relating to the 1994 Notes.
"1994 NOTES" means the 12 7/8% Senior Discount Notes due 2004 of Dish.
"1994 CREDIT AGREEMENT" has the meaning set forth in the 1996 Notes
Indenture.
"1996 NOTES INDENTURE" means the Indenture relating to the 1996 Notes.
"1996 NOTES" means the 13 1/8% Senior Discount Notes due 2004 of ESBC.
"1997 NOTES INDENTURE" means the Indenture relating to the 1997 Notes.
"1997 NOTES" means the 12 1/2% Senior Secured Notes due 2002 of DBS Corp.
"NON-RECOURSE INDEBTEDNESS" of any person means Indebtedness of such Person
that: (i) is not guaranteed by any other Person (except a Wholly Owned
Subsidiary of the referent Person); (ii) is not recourse to and does not
obligate any other person (except a Wholly Owned Subsidiary of the referent
Person) in any way; (iii) does not subject any property or assets of any other
person (except a Wholly Owned Subsidiary of the referent Person), directly or
indirectly, contingently or otherwise, to the satisfaction thereof; and (iv) is
not required by GAAP to be reflected on the financial statements of any other
person (other than a Subsidiary of the referent Person) prepared in accordance
with GAAP.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFICER" means, with respect to any Person, the Chairman of the Board, the
Chief Executive Officer, the President, the Chief Operating Officer, the Chief
Financial Officer, the Treasurer, any Assistant Treasurer, Controller, Secretary
or any Vice-President of such Person.
133
<PAGE>
"OFFICERS' CERTIFICATE" means a certificate signed on behalf of the Issuer
by two Officers of the Issuer, one of whom must be the principal executive
officer, principal financial officer, treasurer or principal accounting officer
of the Issuer.
"OPINION OF COUNSEL" means an opinion from legal counsel, who may be an
employee of or counsel to the Issuer (or any Guarantor, if applicable), any
Subsidiary of the Issuer (or any Guarantor, if applicable) or the Trustee.
"ORBITAL EVENT" means the first date on which the Issuer and its
Subsidiaries do not have the right to use orbital slot authorizations granted by
the FCC covering a minimum of 21 transponders at a single Full-CONUS Orbital
Slot.
"PERMITTED INVESTMENTS" means: (a) Investments in DBS Corp or in a Wholly
Owned Subsidiary of DBS Corp, other than Unrestricted Subsidiaries of DBS Corp,
(b) Investments in Cash Equivalents and Marketable Securities; (c) conversion of
debentures of SSET and DBS Industries, Inc. ("DBSI"), in accordance with their
terms, into Equity Interests of SSET and DBSI; and (d) Investments by DBS Corp
or any Subsidiary of DBS Corp in a Person if, as a result of such Investment:
(i) such Person becomes a Wholly Owned Restricted Subsidiary of DBS Corp, or
(ii) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated into,
DBS Corp or a Wholly Owned Subsidiary of DBS Corp that is not an Unrestricted
Subsidiary of DBS Corp.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock issuer,
trust or unincorporated organization (including any subdivision or ongoing
business of any such entity or substantially all of the assets of any such
entity, subdivision or business).
"PREFERRED EQUITY INTEREST", in any person, means an Equity Interest of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such person, over Equity
Interests of any other class in such person.
"PRINCIPALS" means Charles W. Ergen, James DeFranco, R. Scott Zimmer, Steven
B. Schaver and David K. Moskowitz.
"PURCHASE MONEY INDEBTEDNESS" means indebtedness of the Issuer, any of its
Bound Subsidiaries, DBS Corp or any Restricted Subsidiaries of DBS Corp,
incurred (within 180 days of such purchase) to finance the purchase of any
assets of the Issuer, any Bound Subsidiary, DBS Corp or any of Restricted
Subsidiaries of DBS Corp: (a) to the extent the amount of Indebtedness
thereunder does not exceed 80% of the purchase cost of such assets; (b) to the
extent the purchase cost of such assets is or should be included in "additions
to property, plant and equipment" in accordance with GAAP; (c) to the extent
that such Indebtedness is not recourse to the Issuer, any Bound Subsidiary, DBS
Corp or any Restricted Subsidiaries of DBS Corp or any of their respective
assets, other than the assets so purchased; and (d) if the purchase of such
assets is not part of an acquisition of any Person.
"RECEIVER SUBSIDY" means a subsidy, rebate or other similar payment by the
Issuer or any of its Subsidiaries, in the ordinary course of business, to
subscribers, vendors or distributors, relating to an EchoStar Receiver System,
not to exceed the cost of such EchoStar Receiver System, together with the cost
of installation of such EchoStar Receiver System.
"RECEIVABLES TRUST" means a trust organized solely for the purpose of
securitizing the accounts receivable held by the Accounts Receivable Subsidiary
that (a) shall not engage in any business other than (i) the purchase of
accounts receivable or participation interests therein from the Accounts
Receivable Subsidiary and the servicing thereof, (ii) the issuance of and
distribution of payments with respect to the securities permitted to be issued
under clause (b) below and (iii) other activities incidental to the foregoing,
(b) shall not at any time incur Indebtedness or issue any securities, except (i)
certificates representing undivided interests in the Trust issued to the
Accounts Receivable Subsidiary and (ii) debt securities issued in an arm's
length transaction for consideration solely in the form of cash and Cash
134
<PAGE>
Equivalents, all of which (net of any issuance fees and expenses) shall promptly
be paid to the Accounts Receivable Subsidiary, and (c) shall distribute to the
Accounts Receivable Subsidiary as a distribution on the Accounts Receivable
Subsidiary's beneficial interest in the Receivables Trust no less frequently
than once every six months all available cash and Cash Equivalents held by it,
to the extent not required for reasonable operating expenses or reserves
therefor or to service any securities issued pursuant to clause (b) above that
are not held by the Accounts Receivable Subsidiary.
"RELATED PARTY" means, with respect to any Principal, (a) the spouse and
each immediate family member of such Principal and (b) each trust, corporation,
partnership or other entity of which such Principal beneficially holds an 80% or
more controlling interest.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
among the Issuer, Donaldson, Lufkin & Jenrette Securities Corporation and Lehman
Brothers Inc.
"RESPONSIBLE OFFICER," when used with respect to the Trustee, means any
officer within the Corporate Trust Administration of the Trustee (or any
successor group of the Trustee) or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.
"RESTRICTED INVESTMENT" means an Investment other than Permitted
Investments.
"RESTRICTED SUBSIDIARY" means, any corporation, association or other
business entity of which more than 50% of the total voting power of shares of
Capital Stock entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by DBS Corp or one or more
Subsidiaries of DBS Corp or a combination thereof, other than Unrestricted
Subsidiaries.
"SATELLITE RECEIVER" means any satellite receiver capable of receiving
programming from the EchoStar DISH Network.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SSET" means Satellite Systems Engineering Technologies, Inc. and its
Affiliates.
"SUBSIDIARY" means, with respect to any person, any corporation, association
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by such person or
one or more of the other Subsidiaries of such person or a combination thereof.
"TIA" means the Trust Indenture Act of 1939 as in effect on the date on
which the Indenture is qualified under the TIA.
"TRUSTEE" means the party named as such above until a successor replaces it
in accordance with the applicable provisions of the Exchange Indenture and
thereafter means the successor serving hereunder.
"TT&C" means telemetry, tracking and control.
"UNRESTRICTED SUBSIDIARY" means; (A) EchoStar Real Estate Corporation,
EchoStar Real Estate Corporation II, EchoStar International (Mauritius) Ltd.,
EchoStar Manufacturing and Distribution Pvt. Ltd. and Satrec Mauritius Ltd.; and
(B) any Subsidiary of DBS Corp designated as an Unrestricted Subsidiary in a
resolution of the Board of Directors of DBS Corp: (a) no portion of the
Indebtedness or any other obligation (contingent or otherwise) of which, at the
time of such designation: (i) is guaranteed by DBS Corp or any other Subsidiary
of DBS Corp (other than another Unrestricted Subsidiary); (ii) is recourse to or
obligates DBS Corp or any other Subsidiary of DBS Corp (other than another
Unrestricted Subsidiary) in any way; or (iii) subjects any property or asset of
DBS Corp or any other Subsidiary of DBS
135
<PAGE>
Corp (other than another Unrestricted Subsidiary), directly or indirectly,
contingently or otherwise, to satisfaction thereof; (b) with which neither DBS
Corp nor any other Subsidiary of DBS Corp (other than another Unrestricted
Subsidiary) has any contract, agreement, arrangement, understanding or is
subject to an obligation of any kind, written or oral, other than on terms no
less favorable to DBS Corp or such other Subsidiary than those that might be
obtained at the time from persons who are not Affiliates of DBS Corp; (c) with
which neither DBS Corp nor any other Subsidiary of DBS Corp (other than another
Unrestricted Subsidiary) has any obligation: (i) to subscribe for additional
shares of Capital Stock or other equity interests therein; or (ii) to maintain
or preserve such Subsidiary's financial condition or to cause such Subsidiary to
achieve certain levels of operating results and (d) which does not provide
direct broadcast services in any capacity other than as a selling, billing and
collection agent for one or more of DBS Corp and its Restricted Subsidiaries;
PROVIDED, HOWEVER, that none of DBS Corp, EchoStar Satellite Broadcasting
Corporation, Dish, EchoStar Satellite Corporation, DirectSat Corporation, Echo
Acceptance Corporation, Houston Tracker Systems, Inc., EchoStar International
Corporation and Echosphere Corporation may be designated as Unrestricted
Subsidiaries. At the time that DBS Corp designates a Subsidiary as an
Unrestricted Subsidiary, DBS Corp will be deemed to have made a Restricted
Investment in an amount equal to the fair market value (as determined in good
faith by the Board of Directors of DBS Corp evidenced by a resolution of the
Board of Directors of DBS Corp and set forth in an Officers' Certificate
delivered to the Trustee; PROVIDED, HOWEVER, that if the fair market value of
such Subsidiary exceeds $10 million, the fair market value shall be determined
by an investment banking firm of national standing selected by DBS Corp) of such
Subsidiary; provided that DBS Corp may designate DNCC as an Unrestricted
Subsidiary at any time and such designation shall not be deemed a Restricted
Investment if, but only if, the provisions of clauses (B) (a), (b), (c) and (d)
shall have been complied with prior to such designation. An Unrestricted
Subsidiary may be designated as a Restricted Subsidiary of DBS Corp if, at the
time of such designation after giving pro forma effect thereto as if such
designation had occurred at the beginning of the applicable four-quarter period,
DBS Corp would be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Cash Flow Ratio test set forth in the covenant entitled
"--Incurrence of Indebtedness, Issuance of Disqualified Stock and Issuance of
Preferred Equity Interest of Subsidiaries."
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
principal amount of such Indebtedness into (b) the total of the product obtained
by multiplying (i) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal, including payment at
final maturity, in respect thereof, by (ii) the number of years (calculated to
the nearest one-twelfth) that will elapse between such date and the making of
such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means a Wholly Owned Subsidiary of DBS
Corp that is a Restricted Subsidiary of the Issuer.
"WHOLLY OWNED SUBSIDIARY" means, with respect to any person, any Subsidiary
all of the outstanding voting stock (other than directors' qualifying shares) of
which is owned by such person, directly or indirectly.
EXCHANGE
Even following the completion of this Exchange Offer, the Issuer may, at the
sole option of the Board of Directors (subject to the legal availability of
funds therefor), at any time after the Issue Date, exchange all, but not less
than all, of the outstanding shares of Senior Preferred Stock, including any
shares of Senior Preferred Stock issued as payment for dividends, into Senior
Exchange Notes, subject to the conditions set forth in the next succeeding
paragraph.
In order to effectuate such exchange, the Issuer shall send a written notice
of exchange by mail to each holder of record of Senior Preferred Stock, which
notice shall state: (i) that the Issuer is exchanging the Senior Preferred Stock
into Senior Exchange Notes pursuant to the Certificate of Designation, and (ii)
the
136
<PAGE>
date fixed for exchange (the "Exchange Date"), which date shall not, subject to
compliance with applicable laws, be less than 10 days nor more than 60 days
following the date on which such notice is mailed (except as provided in the
last sentence of this paragraph). On the Exchange Date, if the conditions set
forth in clauses (A) through (E) below are satisfied, the Issuer shall issue
Senior Exchange Notes in exchange for the Senior Preferred Stock as provided in
the next paragraph, provided that on the Exchange Date: (A) there shall be
legally available funds sufficient therefor (including, without limitation,
legally available funds sufficient therefor under Nevada law); (B) a
registration statement relating to the Senior Exchange Notes shall have been
declared effective under the Securities Act prior to such exchange and shall
continue to be effective on the Exchange Date or the Issuer shall have obtained
a written opinion of counsel that an exemption from the registration
requirements of the Securities Act is available for such exchange and that upon
receipt of such Senior Exchange Notes pursuant to such exchange made in
accordance with such exemption, each holder of an Exchange Note that is not an
Affiliate of the Issuer will not be subject to any restrictions imposed by the
Securities Act upon the resale of such Senior Exchange Notes, and such exemption
is relied upon by the Issuer for such exchange; (C) the Exchange Indenture and
the trustee thereunder shall have been qualified under the TIA; (D) immediately
after giving effect to such exchange, no Default or Event of Default (each as
defined in the Exchange Indenture) would exist under the Exchange Indenture; and
(E) the Issuer shall have delivered to the Trustee under the Exchange Indenture
a written opinion of counsel, dated the Exchange Date, regarding the
satisfaction of the conditions set forth in clauses (A), (B), and (C). In the
event that: (i) the issuance of the Senior Exchange Notes is not permitted on
the Exchange Date or (ii) any of the conditions set forth in clauses (A) through
(E) of the preceding sentence are not satisfied on the Exchange Date, the Issuer
shall use commercially reasonable efforts to satisfy such conditions and effect
such exchange as soon as practicable thereafter.
Upon any exchange pursuant to the preceding paragraph, the holders of
outstanding shares of Senior Preferred Stock will be entitled to receive a
principal amount of Senior Exchange Notes for shares of Senior Preferred Stock,
the liquidation preference of which, plus the amount of accumulated and unpaid
dividends related thereto (including a prorated dividend for the period from the
immediately preceding dividend payment due to the Exchange Date) equals such
principal amount; provided that the Issuer at its option may pay cash for any or
all accrued and unpaid dividends in lieu of issuing Senior Exchange Notes in
respect of such dividends. The Senior Exchange Notes will be issued in
registered form, without coupons. Senior Exchange Notes issued in exchange for
Senior Preferred Stock will be in principal amounts of $1,000 and integral
multiples thereof to the extent practicable, and will also be issued in
principal amounts less than $1,000 so that each holder of Senior Preferred Stock
will receive certificates representing the entire principal amount of Senior
Exchange Notes to which its shares of Senior Preferred Stock entitle it,
provided that the Issuer may, at the sole option of the Board of Directors, pay
cash in lieu of issuing an Exchange Note in a principal amount less than $1,000.
On and after the Exchange Date, dividends will cease to accrue on the
outstanding shares of Senior Preferred Stock, and all rights of the holders of
Senior Preferred Stock (except the right to receive the Senior Exchange Notes,
an amount in cash, to the extent applicable, equal to the accrued and unpaid
dividends to the Exchange Date, and, if the Issuer so elects, cash in lieu of
any Exchange Note which is in an amount that is not an integral multiple of
$1,000) will terminate; holders of Senior Preferred Stock will be required to
surrender their certificates, if any, for cancellation immediately prior to the
receipt of Senior Exchange Notes. The person entitled to receive the Exchange
Note issuable upon such exchange will be treated for all purposes as the
registered holder of such Exchange Note.
The Issuer will comply with the provisions of Rule 13e-4 promulgated
pursuant to the Exchange Act in connection with any exchange, to the extent
applicable.
137
<PAGE>
DESCRIPTION OF SENIOR EXCHANGE NOTES
The following summary of certain provisions of the Exchange Indenture does
not purport to be complete and is qualified in its entirety by reference to the
Exchange Indenture.
GENERAL
The Senior Exchange Notes will, if and when issued, be issued pursuant to an
indenture among the Issuer and a trustee selected by the Issuer (the "Trustee").
The terms of the Senior Exchange Notes include those stated in the Exchange
Indenture and those made part of the Exchange Indenture by the TIA. The Senior
Exchange Notes are subject to all such terms, and Holders are referred to the
Exchange Indenture and the TIA for a statement thereof.
The Senior Exchange Notes will rank PARI PASSU in right of payment with all
senior indebtedness of the Issuer. Although the Senior Exchange Notes would be
titled "Senior": (i) the Issuer has not issued, and does not have any plans to
issue, any indebtedness to which the Senior Exchange Notes would be senior; and
(ii) the Senior Exchange Notes will be effectively subordinated to all
liabilities of the Issuer's Subsidiaries, including liabilities to general
creditors (except to the extent that any subsidiary of the Issuer may guarantee
the Senior Exchange Notes). Holders of the Senior Exchange Notes will not be
permitted to exercise any remedies (other than to pursue a claim in bankruptcy)
against the Issuer prior to the date on which the 1997 Notes and the 1996 Notes
have been paid in full or have otherwise matured. See "Limitation on Suits."
PRINCIPAL, MATURITY AND INTEREST
The Senior Exchange Notes will mature on July 1, 2004. The Senior Exchange
Notes will accrue interest at 12 1/8% per annum from the Exchange Date or from
the most recent interest payment date to which interest has been paid or duly
provided for. Interest will be payable semiannually on April 1, and October 1 of
each year beginning on the first such date to occur after the Exchange Date, to
the holders of record on the immediately preceding March 15 and September 15,
respectively. Interest on the Senior Exchange Notes may, at the option of the
Issuer, be paid in cash or by issuing additional Senior Exchange Notes in an
aggregate principal amount equal to the amount of such interest. Interest on
overdue principal and (to the extent permitted by law) on overdue installments
of interest will accrue at a rate equal to the rate borne by the Senior Exchange
Notes. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
The Senior Exchange Notes will be payable both as to principal and interest
at the office or agency of the Issuer maintained for such purpose or, at the
option of the Issuer, payment of interest may be made by check mailed to the
holders of the Senior Exchange Notes at their respective addresses set forth in
the register of holders of Senior Exchange Notes. Until otherwise designated by
the Issuer, the Issuer's office or agency will be the office of the Trustee
maintained for such purpose.
OPTIONAL REDEMPTION
Except as provided in the next paragraph, the Issuer shall not have the
option to redeem the Senior Exchange Notes prior to July 1, 2000. Thereafter,
the Issuer shall have the option to redeem the Senior Exchange Notes, in cash,
in whole or in part, upon not less than 30 nor more than 60 days notice, at the
redemption prices (expressed as percentages of principal amount) set forth
below, together with accrued
139
<PAGE>
and unpaid interest thereon to the applicable redemption date, if redeemed
during the 12-month period beginning on July 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2000............................................................................ 106.0625%
2001............................................................................ 104.0417%
2002............................................................................ 102.0208%
Thereafter...................................................................... 100.0000%
</TABLE>
Notwithstanding the foregoing, at any time prior to July 1, 2000, the Issuer
may redeem Senior Exchange Notes at a redemption price, payable in cash, equal
to 112.125% of the principal amount thereof on the repurchase date, plus an
amount equal to accrued and unpaid interest thereon to the repurchase date, with
the net proceeds of one public or private sale of Equity Interests (other than
Disqualified Stock) of the Issuer or any of its Subsidiaries (other than
proceeds from a sale to the Issuer or any of its Subsidiaries); provided that
(a) at least two-thirds in aggregate principal amount of the Senior Exchange
Notes originally issued remain outstanding immediately after the occurrence of
such redemption; and (b) such redemption occurs within 120 days of the date of
the closing of any such sale.
SELECTION AND NOTICE
If less than all of the Senior Exchange Notes are to be redeemed at any
time, the selection of Senior Exchange Notes for redemption will be made by the
Trustee in compliance with the requirements of the principal national securities
exchange, if any, on which the Senior Exchange Notes are listed, or if the
Senior Exchange Notes are not so listed on a pro rata basis, by lot or in
accordance with any other method the Trustee considers fair and appropriate,
provided that no Senior Exchange Notes with a principal amount of $1,000 or less
shall be redeemed in part. In the event of partial redemption by lot, the
particular Senior Exchange Notes to be redeemed shall be selected, unless
otherwise provided herein, not less than 30 nor more than 60 days prior to the
redemption date by the Trustee from the outstanding Senior Exchange Notes not
previously called for redemption.
The Trustee shall promptly notify the Issuer in writing of the Senior
Exchange Notes selected for redemption and, in the case of any Exchange Note
selected for partial redemption, the principal amount thereof to be redeemed.
Senior Exchange Notes and portions of them selected shall be in amounts of
$1,000 or whole multiples of $1,000; except that if all of the Senior Exchange
Notes of a Holder are to be redeemed, the entire outstanding amount of Senior
Exchange Notes held by such Holder, even if not a multiple of $1,000, shall be
redeemed.
OFFER TO PURCHASE UPON CHANGE OF CONTROL OR ORBITAL EVENT
The provisions of the Exchange Indenture relating to a Change of Control
Offer upon a Change of Control will be substantially the same as the provisions
of the Certificate of Designation relating to such matters. In addition, upon
the occurrence of an Orbital Event, the Issuer will make an offer to repurchase
one-half of all outstanding Senior Exchange Notes at a purchase price of 101% of
the aggregate principal amount thereof, together with accrued and unpaid
interest thereon to the date of purchase. In either of the foregoing
circumstances, the Issuer will be entitled to defer any such offer to repurchase
until such time as both the 1996 and the 1997 Notes have been paid in full or
have otherwise matured.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Senior Exchange Notes in connection with an Offer to Purchase.
140
<PAGE>
SIGNIFICANT TRANSACTIONS
The Issuer or any of its Subsidiaries may enter into a transaction or series
of transactions (a "Significant Transaction") with another entity (a "Strategic
Partner"), notwithstanding the fact that such Significant Transaction would
otherwise be prohibited under the terms of the Exchange Indenture, in which the
Issuer or any such Subsidiary: (i) sells, leases, conveys or otherwise disposes
of any of its assets (including by way of a sale-and-leaseback transaction) to
such Strategic Partner or (ii) makes an Investment in or receives an Investment
from such Strategic Partner; provided that:
(i) the Issuer or such Subsidiary receives fair market value for any
property or assets (including capital stock) transferred in such
Significant Transaction in the opinion of a majority of the Board of
Directors of the Issuer as evidenced by an Officers' Certificate
delivered to the Trustee and an investment banking firm of national
standing selected by the Issuer; and
(ii) prior to the consummation of such Significant Transaction, the Issuer
makes an offer (a "Special Offer to Purchase") to each Holder of Senior
Exchange Notes to repurchase, within 15 days following the consummation
of such Significant Transaction, all or any part (equal to $1,000 or an
integral multiple thereof) of such Holder's Senior Exchange Notes at a
purchase price equal to 101% of the aggregate principal amount thereof,
together with accrued and unpaid interest thereon to the date of purchase
(in either case, the "Special Offer Payment"); provided that any
obligation to make such an offer shall not become effective until such
time as the 1997 Notes and the 1996 Notes have been paid in full or have
otherwise matured.
At least 30 days prior to the consummation of such Significant Transaction,
the Issuer shall mail a notice to each Holder stating:
(a) that the Special Offer to Purchase is being made pursuant to the covenant
entitled "Significant Transactions";
(b) the purchase price and the purchase date, which shall be no earlier than 30
days nor later than 60 days after the date such notice is mailed (the
"Special Offer Payment Date");
(c) that any Senior Exchange Notes tendered will only be repurchased in the
event that such Significant Transaction is consummated;
(d) that any Senior Exchange Notes not tendered or not repurchased will continue
to accrue interest in accordance with the terms of the Exchange Indenture;
(e) that, if such Significant Transaction is consummated, unless the Issuer
defaults in the payment of the Special Offer Payment, all Senior Exchange
Notes accepted for payment pursuant to the Special Offer to Purchase shall
cease to accrue interest after the Special Offer Payment Date;
(f) that Holders electing to have any Senior Exchange Notes purchased pursuant
to an Offer to Purchase will be required to surrender the Senior Exchange
Notes, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Senior Exchange Notes completed, to the Paying Agent at the
address specified in the notice prior to the close of business on the third
Business Day preceding the Special Offer Payment Date;
(g) that Holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the second Business Day
preceding the Special Offer Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of Senior Exchange Notes delivered for purchase, and a statement that
such Holder is withdrawing his election to have such Senior Exchange Notes
purchased;
(h) that Holders whose Senior Exchange Notes are being purchased only in part
will be issued new Senior Exchange Notes equal in principal amount to the
unpurchased portion of the Senior Exchange Notes
141
<PAGE>
surrendered, which unpurchased portion must be equal to $1,000 in principal
amount or an integral multiple thereof; and
(i) a description of such Significant Transaction, as well as any other
information material to such Holder's decision to tender Senior Exchange
Notes.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Senior Exchange Notes pursuant to a Special Offer to Purchase.
CERTAIN COVENANTS
RESTRICTED PAYMENTS. The provisions of the Exchange Indenture relating to
"Restricted Payments" will be substantially the same as the provisions of the
Certificate of Designation.
INCURRENCE OF INDEBTEDNESS, ISSUANCE OF DISQUALIFIED STOCK AND ISSUANCE OF
PREFERRED EQUITY INTERESTS OF SUBSIDIARIES. The provisions of the Exchange
Indenture relating to "Incurrence of Indebtedness, Issuance of Disqualified
Stock and Issuance of Preferred Equity Interests of Subsidiaries" will be
substantially the same as the Certificate of Designation.
ASSET SALES. The provisions of the Exchange Indenture relating to "Asset
Sales" will be substantially the same as the provisions of the Certificate of
Designation.
ACTIVITIES OF THE ISSUER. The provisions of the Exchange Indenture relating
to "Activities of the Issuer" will be substantially the same as the Certificate
of Designation.
SUBSIDIARY GUARANTEES. The Exchange Indenture will provide that if DBS Corp
or any Guarantor transfers or causes to be transferred, in one or a series of
related transactions, property or assets (including, without limitation,
businesses, divisions, real property, assets or equipment) having a fair market
value (as determined in good faith by the Board of Directors of the Issuer
evidenced by a resolution of the Board of Directors of the Issuer and set forth
in an Officers' Certificate delivered to the Trustee; PROVIDED, HOWEVER that if
the fair market value exceeds $10 million, the fair market value shall be
determined by an investment banking firm of national standing selected by DBS
Corp) exceeding $500,000 to any Restricted Subsidiary of DBS Corp that is
neither a Subsidiary of ESBC nor a Guarantor, the Issuer, to the extent not
otherwise precluded by obligations set forth in the 1997 Notes Indenture, 1996
Notes Indenture or the 1994 Notes Indenture, shall, or shall cause the owner of
such Subsidiary to: (a) enter into a pledge agreement in order to pledge all of
the issued and outstanding Capital Stock of such Subsidiary as security to the
Trustee for the benefit of the Holders of the Senior Exchange Notes; and (b)
cause such Subsidiary to: (i) execute and deliver to the Trustee a Supplemental
Indenture in form and substance reasonably satisfactory to the Trustee pursuant
to which such Subsidiary shall unconditionally Guarantee all of the Issuer's
obligations under the Senior Exchange Notes and execute a notation in form and
substance reasonably satisfactory to the Trustee; and (ii) deliver to the
Trustee an Opinion of Counsel reasonably satisfactory to the Trustee that such
pledge agreement and such Supplemental Indenture have been duly authorized,
executed and delivered by and are valid and binding obligations of such
Subsidiary or such owner, as the case may be; PROVIDED, HOWEVER, that the
foregoing provisions shall not apply to transfers of property or assets (other
than cash) by DBS Corp or any Guarantor in exchange for cash or Cash Equivalents
in an amount equal to the fair market value (as determined in good faith by the
Board of Directors of the Issuer evidenced by a resolution of the Board of
Directors of the Issuer and set forth in an Officers' Certificate delivered to
the Trustee; PROVIDED, HOWEVER, that if the fair market value exceeds $10
million, the fair market value shall be determined by an investment banking firm
of national standing selected by the Issuer) of such property or assets.
142
<PAGE>
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The
provisions of the Exchange Indenture relating to "Dividend and Other Payment
Restrictions Affecting Subsidiaries" will be substantially the same as the
Certificate of Designation.
ACCOUNTS RECEIVABLE SUBSIDIARY. The provisions of the Exchange Indenture
relating to "Accounts Receivable Subsidiary" will be substantially the same as
the Certificate of Designation.
MERGER, CONSOLIDATION, OR SALE OF ASSETS. The Exchange Indenture will
provide that DBS Corp may not consolidate or merge with or into (whether or not
DBS Corp is the surviving entity), or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets in one
or more related transactions to, another Person unless:
(a) DBS Corp is the surviving Person or the Person formed by or surviving
any such consolidation or merger (if other than DBS Corp) or to which
such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the
laws of the United States, any state thereof or the District of Columbia;
(b) the Person formed by or surviving any such consolidation or merger (if
other than DBS Corp) or the Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made
assumes all the obligations of DBS Corp, pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee, under the
Senior Exchange Notes and the Exchange Indenture;
(c) immediately after such transaction no Default or Event of Default
exists; and
(d) DBS Corp or the Person formed by or surviving any such consolidation or
merger (if other than DBS Corp), or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made (i)
shall have a Consolidated Net Worth immediately after the transaction
(but prior to any purchase accounting adjustments or accrual of deferred
tax liabilities resulting from the transaction) not less than the
Consolidated Net Worth of DBS Corp immediately preceding the transaction
and (ii) would, at the time of such transaction after giving pro forma
effect thereto as if such transaction had occurred at the beginning of
the applicable four-quarter period, be permitted to incur at least $1.00
of additional Indebtedness pursuant to the Indebtedness to Cash Flow
Ratio test set forth in the covenant entitled "Incurrence of
Indebtedness, Issuance of Disqualified Stock and Issuance of Preferred
Equity Interests of Subsidiaries."
Notwithstanding the foregoing, DBS Corp may merge with another Person if:
(i) DBS Corp is the surviving Person;
(ii) the consideration issued or paid by DBS Corp in such merger consists
solely of Equity Interests (other than Disqualified Stock) of DBS Corp;
and
(iii) immediately after giving effect to such merger, DBS Corp's Indebtedness
to Cash Flow Ratio does not exceed DBS Corp's Indebtedness to Cash Flow
Ratio immediately prior to such merger.
The Exchange Indenture will also provide that the Issuer may not consolidate
or merge with or into or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or more
related transactions to, another Person unless:
(a) the Issuer is the surviving Person or the Person formed by or surviving
any such consolidation or merger or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made is
a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia;
(b) the Person formed by or surviving any such consolidation or member or
the Person to which such sale, assignment, transfer, lease, conveyance or
other disposition will have been made assumes all
143
<PAGE>
the obligations of the Issuer, pursuant to a supplemental indenture in
form reasonably satisfactory to the Trustee, under the Senior Exchange
Notes and the Exchange Indenture;
(c) immediately after such transaction, no Default or Event of Default
exists; and
(d) the Issuer or the Person formed by or surviving any such consolidation
or merger, or to which such sale, assignment, transfer, lease, conveyance
or other disposition will have been made: (i) will have a Consolidated
Net Worth immediately after the transaction (but prior to any purchase
accounting adjustments or accrual of deferred tax liabilities resulting
from the transaction) not less than the Consolidated Net Worth of the
Issuer immediately preceding the transaction; and (ii) will have an
Indebtedness to Cash Flow Ratio immediately after the transaction that
does not exceed the Issuer's Indebtedness to Cash Flow Ratio immediately
preceding the transaction.
PROHIBITION ON STOCK PLEDGE. The provisions of the Exchange Indenture
relating to the "Prohibition on Stock Pledge" will be substantially the same as
the Certificate of Designation.
TRANSACTIONS WITH AFFILIATES. The provisions of the Exchange Indenture
relating to "Transactions with Affiliates" will be substantially the same as the
Certificate of Designation.
REPORTS. The provisions of the Exchange Indenture relating to "Reports"
will be substantially the same as the Certificate of Designation.
PAYMENTS FOR CONSENTS. The provisions of the Exchange Indenture relating to
"Payment of Consents" will be substantially the same as the Certificate of
Designation.
EXCESS PROCEEDS OFFER. The provisions of the Exchange Indenture relating to
"Excess Proceeds Offer" will be substantially the same as the Certificate of
Designation.
EVENTS OF DEFAULT AND REMEDIES
The Exchange Indenture will provide that each of the following constitutes
an Event of Default (unless the provisions described under "--Significant
Transactions" are applicable and DBS Corp or the Issuer complies with such
provisions):
(a) default for 30 days in the payment when due of interest on the Senior
Exchange Notes;
(b) default in payment when due of principal on the Senior Exchange Notes at
maturity, upon repurchase, redemption or otherwise;
(c) failure by the Issuer, DBS Corp or any of their Subsidiaries to comply
with the provisions described under "--Offer to Purchase upon Change of
Control or Orbital Event" "--Significant Transactions," "--Certain
Covenants--Transactions with Affiliates," or "--Certain Covenants-- Asset
Sales";
(d) default under the provisions described under "--Certain
Covenants--Restricted Payments" or "--Certain Covenants--Incurrence of
Indebtedness, and Issuance of Disqualified Stock and Issuance of
Preferred Equity of Subsidiaries" which default remains uncured for 15
days, or the breach of any representation or warranty, or the making of
any untrue statement, in any certificate delivered by the Issuer pursuant
to the Exchange Indenture;
(e) failure by the Issuer for 60 days after notice from the Trustee or the
holders of at least 25% in principal amount of the Senior Exchange Notes
then outstanding to comply with any of its other agreements in the
Exchange Indenture or the Senior Exchange Notes;
(f) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Issuer or
144
<PAGE>
any of its Subsidiaries other than an Independent Subsidiary (or the
payment of which is guaranteed by the Issuer or any of its Subsidiaries
other than an Independent Subsidiary), other than any Credit Agreement,
which default is caused by a failure to pay when due principal or
interest on such Indebtedness within the grace period provided in such
Indebtedness (a "Payment Default"), and the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default, aggregates $5
million or more;
(g) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Issuer or any of its Subsidiaries
other than an Independent Subsidiary (or the payment of which is
guaranteed by the Issuer or any of its Subsidiaries other than an
Independent Subsidiary), other than any Credit Agreement, which default
results in the acceleration of such Indebtedness prior to its express
maturity and the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness under which there has
been a Payment Default or the maturity of which has been so accelerated,
aggregates $5 million or more;
(h) failure by the Issuer or any of its Subsidiaries (other than an
Independent Subsidiary) to pay final judgments (other than any judgment
as to which a reputable insurance company has accepted full liability)
aggregating in excess of $2.0 million, which judgments are not stayed
within 60 days after their entry; and
(i) certain events of bankruptcy or insolvency with respect to the Issuer or
certain of its Subsidiaries (other than an Independent Subsidiary)
(including the filing of a voluntary case, the consent to an order of
relief in an involuntary case, the consent to the appointment of a
custodian, a general assignment for the benefit of creditors or an order
of a court for relief in an involuntary case, appointing a custodian or
ordering liquidation, which order remains unstayed for 60 days).
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the then outstanding Senior Exchange
Notes may declare all the Senior Exchange Notes to be due and payable
immediately (plus, in the case of an Event of Default that is the result of an
action by the Issuer or any of its Subsidiaries intended to avoid restrictions
on or premiums related to redemptions of the Senior Exchange Notes contained in
the Exchange Indenture or the Senior Exchange Notes, an amount of premium that
would have been applicable pursuant to the Senior Exchange Notes or as set forth
in the Exchange Indenture). Notwithstanding the foregoing, in the case of an
Event of Default arising from the events of bankruptcy or insolvency with
respect to the Issuer or any of its Subsidiaries described in (i) above, all
outstanding Senior Exchange Notes will become due and payable without further
action or notice. Holders of the Senior Exchange Notes may not enforce the
Exchange Indenture or the Senior Exchange Notes except as provided in the
Exchange Indenture. Subject to certain limitations, holders of a majority in
principal amount of the then outstanding Senior Exchange Notes may direct the
Trustee in its exercise of any trust or power. See "Limitation on Suits and
Exercise of Remedies." The Trustee may withhold from holders of the Senior
Exchange Notes notice of any continuing Default or Event of Default (except a
Default or Event of Default relating to the payment of principal or interest) if
it determines that withholding notice is in such holders' interest.
The holders of a majority in aggregate principal amount of the Senior
Exchange Notes then outstanding, by notice to the Trustee, may on behalf of the
holders of all of the Senior Exchange Notes waive any existing Default or Event
of Default and its consequences under the Exchange Indenture, except a
continuing Default or Event of Default in the payment of interest or premium on,
or principal of the Senior Exchange Notes.
The Issuer is required to deliver to the Trustee annually a statement
regarding compliance with the Exchange Indenture, and the Issuer is required
upon becoming aware of any Default or Event of Default to deliver to the Trustee
a statement specifying such Default or Event of Default.
145
<PAGE>
All powers of the Trustee will be subject to applicable provisions of the
Communications Act, including without limitation, the requirements of prior
approval for transfer of control or assignment of Title III licenses.
WAIVER OF PAST DEFAULTS. Holders of not less than a majority in aggregate
principal amount of Senior Exchange Notes then outstanding, by notice to the
Trustee, may on behalf of the Holders of all of the Senior Exchange Notes waive
an existing Default or Event of Default and its consequences under the Exchange
Indenture, except a continuing Default or Event of Default in the payment of the
principal of, premium, if any, or interest on, the Senior Exchange Notes. Upon
any such waiver, such Default shall cease to exist, and any Event of Default
arising therefrom shall be deemed to have been cured for every purpose of the
Exchange Indenture; but no such waiver shall extend to any subsequent or other
Default or impair any right consequent thereon.
CONTROL BY MAJORITY. Holders of a majority in principal amount of the then
outstanding Senior Exchange Notes may direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee or
exercising any trust or power conferred on it. However, the Trustee may refuse
to follow any direction that conflicts with the law or the Exchange Indenture
that the Trustee determines may be unduly prejudicial to the rights of other
Holders of Senior Exchange Notes or that may involve the Trustee in personal
liability.
LIMITATION ON SUITS AND EXERCISE OF REMEDIES. A Holder of a Senior Exchange
Note may pursue a remedy with respect to the Exchange Indenture or the Senior
Exchange Shares only if:
(a) the Holder of a Senior Exchange Note gives to the Trustee written notice
of a continuing Event of Default;
(b) the Holders of at least 25% in principal amount of the then outstanding
Senior Exchange Notes make a written request to the Trustee to pursue the
remedy;
(c) such Holder of a Senior Exchange Note or Holders of Senior Exchange
Notes offer and, if requested, provide to the Trustee indemnity
satisfactory to the Trustee against any loss, liability or expense;
(d) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer and, if requested, the provision of
indemnity; and
(e) during such 60-day period the Holders of a majority in principal amount
of the then outstanding Senior Exchange Notes do not give the Trustee a
direction inconsistent with the request.
A Holder of a Senior Exchange Note may not use the Exchange Indenture to
prejudice the rights of another Holder of an Exchange Note or to obtain a
preference or priority over another Holder of a Senior Exchange Note.
Notwithstanding the foregoing or anything else to the contrary in the
Exchange Indenture, neither the Trustee nor any Holder may seek any remedy
(other than pursuit of a claim in bankruptcy) against the Issuer, including any
acceleration of the maturity thereof, until both the 1997 Notes and the 1996
Notes have been paid in full or have otherwise matured.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATORS AND
STOCKHOLDERS.
No director, officer, employee, incorporator or stockholder of the Issuer,
DBS Corp or any of their Affiliates, as such, shall have any liability for any
obligations of the Issuer, DBS Corp and any of their Affiliates under the Senior
Exchange Notes or the Exchange Indenture or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each Holder of the
Senior Exchange Notes by accepting an Exchange Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Senior Exchange Notes. Such waiver may not be effective to waive
146
<PAGE>
liabilities under the federal securities laws and it is the view of the
Commission that such waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuer may, at its option and at any time, elect to have all obligations
discharged with respect to the outstanding Senior Exchange Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Issuer will be deemed to have
paid and discharged the entire Indebtedness represented by the outstanding
Senior Exchange Notes, except for: (a) the rights of holders of outstanding
Senior Exchange Notes to receive payments in respect of the principal of,
premium, if any, and interest on the Senior Exchange Notes when such payments
are due, or on the redemption date, as the case may be; (b) the Issuer's
obligations with respect to the Senior Exchange Notes concerning issuing
temporary Senior Exchange Notes, registration of Senior Exchange Notes,
mutilated, destroyed, lost or stolen Senior Exchange Notes and the maintenance
of an office or agency for payment and money for security payments held in
trust; (c) the rights, powers, trust, duties and immunities of the Trustee, and
the Issuer's obligations in connection therewith; and (d) the Legal Defeasance
provisions of the Exchange Indenture. In addition, the Issuer may, at its option
and at any time, elect to have all obligations released with respect to certain
covenants that are described in the Exchange Indenture ("Covenant Defeasance")
and thereafter any omission to comply with such obligations shall not constitute
a Default or Event of Default with respect to the Senior Exchange Notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"--Events of Default and Remedies" will no longer constitute an Event of Default
with respect to the Senior Exchange Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance: (i) the
Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Senior Exchange Notes, cash in U.S. dollars, non-callable
U.S. government obligations, or a combination thereof, in such amounts as will
be sufficient, in the opinion of a nationally recognized firm of independent
public accountants selected by the Trustee, to pay the principal of, premium, if
any, and interest on the outstanding Senior Exchange Notes on the stated
maturity or on the applicable optional redemption date, as the case may be; (ii)
in the case of Legal Defeasance, the Issuer shall have delivered to the Trustee
an Opinion of Counsel in the U.S. reasonably acceptable to the Trustee
confirming that (A) the Issuer has received from, or there has been published by
the Internal Revenue Service, a ruling or (B) since the date of the Exchange
Indenture, there has been a change in the applicable Federal income tax law, in
each case to the effect that, and based thereon such Opinion of Counsel shall
confirm that, the holders of such Senior Exchange Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such Legal
Defeasance, and will be subject to Federal income tax in the same amount, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Issuer shall have delivered to the Trustee an Opinion of Counsel reasonably
acceptable to such Trustee confirming that the holders of such Senior Exchange
Notes will not recognize income, gain or loss for Federal income tax purposes as
a result of such Covenant Defeasance and will be subject to Federal income tax
on the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit or
insofar as Events of Default from bankruptcy or insolvency events are concerned,
at any time in the period ending on the 91st day after the date of deposit; (v)
such Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under the Exchange Indenture or any other
material agreement or instrument to which the Issuer or any of its Subsidiaries
is a party or by which the Issuer or any of its Subsidiaries is bound; (vi) the
Issuer shall have delivered to the Trustee an Officers' Certificate stating that
the deposit was not made by the Issuer with the intent of preferring the holders
of such Senior Exchange Notes over any other creditors of the Issuer or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the Issuer or others; and (vii) the Issuer shall have delivered to the Trustee
an Officers' Certificate
147
<PAGE>
stating that all conditions precedent provided for or relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next paragraph, the Exchange Indenture and the
Senior Exchange Notes may be amended or supplemented with the consent of the
holders of at least a majority in principal amount of the Senior Exchange Notes
then outstanding (including consents obtained in connection with a tender offer
or exchange offer for Senior Exchange Notes), and any existing default or
compliance with any provision of the Exchange Indenture or the Senior Exchange
Notes may be waived with the consent of the holders of a majority in principal
amount of the then outstanding Senior Exchange Notes (including consents
obtained in connection with a tender offer or exchange offer for Senior Exchange
Notes).
Without the consent of each holder affected, however, an amendment or waiver
may not (with respect to any Exchange Note held by a non-consenting holder):
(a) reduce the aggregate principal amount of Senior Exchange Notes whose
holders must consent to an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of any Exchange
Note or alter the provisions with respect to the redemption of the Senior
Exchange Notes;
(c) reduce the rate of or change the time for payment of interest on any
Senior Exchange Notes;
(d) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Senior Exchange Notes (except a
rescission of acceleration of the Senior Exchange Notes by the holders of
at least a majority in aggregate principal amount of the Senior Exchange
Notes and a waiver of the payment default that resulted from such
acceleration);
(e) make any Exchange Note payable in money other than that stated in the
Senior Exchange Notes;
(f) make any change in the provisions of the Exchange Indenture relating to
waivers of past Defaults or the rights of holders of Senior Exchange
Notes to receive payments of principal of or interest on the Senior
Exchange Notes;
(g) waive a redemption payment with respect to any Exchange Note; or
(h) make any change in the foregoing amendment and waiver provisions.
In addition, without the consent of at least 66 2/3% of the Senior Exchange
Notes then outstanding, an amendment or a waiver may not make any change to the
covenants in the Exchange Indenture entitled "Offer to Purchase upon Change of
Control or Orbital Event," "Asset Sales" and "Excess Proceeds Offer" (including,
in each case, the related definitions).
Notwithstanding the foregoing, without the consent of any holder of Senior
Exchange Notes, the Issuer and the Trustee may amend or supplement the Exchange
Indenture and the Senior Exchange Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Senior Exchange Notes in addition
to or in place of certificated Senior Exchange Notes, to provide for the
assumption of the Issuer's obligations to holders of the Senior Exchange Notes
in the case of a merger or consolidation, to make any change that would provide
any additional rights or benefits to the holders of the Senior Exchange Notes or
that does not adversely affect the legal rights under the Exchange Indenture of
any such holder, or to comply with requirements of the SEC in order to effect or
maintain the qualification of the Exchange Indenture under the TIA.
148
<PAGE>
CONCERNING THE TRUSTEE
The Exchange Indenture contains certain limitations on the rights of the
Trustee, should the Trustee become a creditor of the Issuer, to obtain payment
of claims in certain cases, or to realize on certain property received in
respect of any such claim as security or otherwise. The Trustee will be
permitted to engage in other transactions with the Issuer; however, if the
Trustee acquires any conflicting interest, it must eliminate such conflict
within 90 days, apply to the SEC for permission to continue as Trustee or
resign.
The holders of a majority in principal amount of the then outstanding Senior
Exchange Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Exchange Indenture provides that in case an
Event of Default shall occur (which shall not be cured), the Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. The Trustee will not be relieved from
liabilities for its own negligent action, its own negligent failure to act or
its own willful misconduct, except that: (i) this sentence shall not limit the
preceding sentence of this paragraph; (ii) the Trustee shall not be liable for
any error of judgment made in good faith, unless it is proved that the Trustee
was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall
not be liable with respect to any action it takes or omits to take in good faith
in accordance with a direction received by it pursuant to the first sentence of
this paragraph. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Exchange Indenture
at the request of any holder of Senior Exchange Notes, unless such holder shall
have offered to the Trustee security and indemnity satisfactory to it against
any loss, liability or expense.
149
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the principal United States federal
income tax consequences of the purchase, ownership, exchange and disposition of
the Senior Preferred Stock and the Senior Exchange Notes, and does not purport
to be a complete analysis of all of the potential tax effects of such purchase,
ownership, exchange or disposition. This summary deals only with Senior
Preferred Stock and Senior Exchange Notes held as "capital assets" within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the
"Code") by U.S. Holders (as defined below). It does not address all aspects of
the U.S. federal income tax consequences of purchasing, owning, exchanging or
disposing of the Senior Preferred Stock or the Senior Exchange Notes that may be
relevant to a particular investor in the context of such investor's individual
investment circumstances or to investors in special situations, such as life
insurance companies, financial institutions, tax-exempt organizations, dealers
in securities and currencies, persons holding Senior Preferred Stock or Senior
Exchange Notes as a part of a hedging or conversion transaction or a straddle,
U.S. Holders whose "functional currency" is not the U.S. dollar or Non-U.S.
Holders (as defined). This summary also does not discuss tax consequences under
state, local, or foreign tax laws. Persons considering the purchase of the
Senior Preferred Stock should consult their own tax advisors concerning the
application of and the potential changes in United States federal income tax
laws, as well as the laws of any state, local or foreign taxing jurisdiction, to
their particular situation. Furthermore, the discussion below is based upon the
provisions of the Code and existing and proposed Treasury regulations,
administrative rulings and judicial decisions thereunder as of the date hereof,
and such authorities may be repealed, revoked or modified, possibly with
retroactive effect, so as to result in U.S. federal income tax consequences
different from those discussed below.
As used herein, a "U.S. Holder" means a beneficial owner that is a citizen
or resident of the United States, a corporation, partnership or other entity
used for the conduct of business, created or organized in or under the laws of
the United States or any political subdivision thereof, or an estate the income
of which is subject to United States federal income taxation regardless of its
source or a trust over which a court within the United States is able to
exercise primary supervision or as to which one or more United States
fiduciaries have the authority to control all substantial decisions. An
individual may, subject to certain exceptions, be deemed to be a resident (as
opposed to a non-resident alien) of the United States for certain purposes by
virtue of being present in the United States on at least 31 days in the calendar
year and for an aggregate of at least 183 days during a three-year period ending
in the current calendar year (counting for such purposes all of the days present
in the current year, one-third of the days present in the immediately preceding
year, and one-sixth of the days present in the second preceding year). A
"Non-U.S. Holder" is a holder that is not a U.S. Holder.
ALL PROSPECTIVE PURCHASERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP, EXCHANGE AND DISPOSITION OF THE SENIOR PREFERRED STOCK OR
THE SENIOR EXCHANGE NOTES.
DISTRIBUTIONS ON THE SENIOR PREFERRED STOCK
Distributions of cash or, under Section 305(b)(4) of the Code, of additional
shares of Senior Preferred Stock on the Senior Preferred Stock will be treated
as dividends taxable as ordinary income to U.S. Holders to the extent of
EchoStar's current and accumulated earnings and profits as determined under U.S.
federal income tax principles. The amount of a distribution of additional shares
of Senior Preferred Stock will equal the fair market value of the shares of
Senior Preferred Stock distributed as of the date of such distribution. To the
extent that the amount of a distribution on the Senior Preferred Stock exceeds
EchoStar's current and accumulated earnings and profits, such distributions will
be treated as a nontaxable return of capital and will be applied against and
reduce the adjusted tax basis of such Senior Preferred Stock in the hands of
each U.S. Holder (but not below zero), thus increasing the amount of any gain
(or
150
<PAGE>
reducing the amount of any loss) which would otherwise be recognized by such
U.S. Holder upon the sale or other taxable disposition of such Senior Preferred
Stock. The amount of any such distribution which exceeds the adjusted tax basis
of the Senior Preferred Stock in the hands of the U.S. Holder will be treated as
capital gain and will be either long-term, mid-term or short-term capital gain
depending on the U.S. Holder's holding period for the Senior Preferred Stock.
The initial tax basis of additional Senior Preferred Stock in the hands of a
holder who received such additional Senior Preferred Stock as a distribution on
Senior Preferred Stock will equal the fair market value of such additional
Senior Preferred Stock at the time of distribution.
EchoStar presently does not have any current or accumulated earnings and
profits as determined under United States federal income tax principles and it
is unlikely to have current or accumulated earnings and profits in the
foreseeable future. As a result, until such time as EchoStar does have earnings
and profits, distributions of cash and additional Senior Preferred Stock on the
Senior Preferred Stock will be treated as a nontaxable return of capital and
will be applied against and reduce the adjusted tax basis (but not below zero)
in the hands of each holder of the shares of Senior Preferred Stock on which
such distribution is made, thus increasing the amount of any gain (or reducing
the amount of any loss) which would otherwise be realized by such holder upon
the sale or other disposition of such shares of Senior Preferred Stock. In the
case of distributions of additional Senior Preferred Stock, such basis reduction
should be offset on an overall standpoint by a corresponding amount of tax basis
for a holder in the additional Senior Preferred Stock. Further, until such time,
distributions with respect to the Senior Preferred Stock will not be treated as
dividends for United States federal income tax purposes and, thus, will not
qualify for any dividends received deduction generally available to U.S.
corporate holders as described below. U.S. Holders would recognize gain to the
extent that any distribution was to exceed current or accumulated earnings and
profits and basis in the Senior Preferred Stock.
Under Section 243 of the Code, corporate U.S. Holders generally will be able
to deduct 70% of the amount of any distribution qualifying as a dividend. There
are, however, many exceptions and restrictions relating to the availability of
such dividends-received deduction. Section 246A of the Code reduces the
dividends-received deduction allowed to a corporate U.S. Holder that has
indebtedness "directly attributable" to its investment in portfolio stock.
Section 246(c) of the Code requires that, in order to be eligible for the
dividends-received deduction, a corporate U.S. Holder generally must hold the
shares of Senior Preferred Stock for a 91-day minimum holding period or a
181-day holding period in certain circumstances. A taxpayer's holding period for
these purposes is suspended during any period in which a U.S. Holder has certain
options or contractual obligations with respect to substantially identical stock
or holds one or more other positions with respect to substantially identical
stock that diminishes the risk of loss from holding the Senior Preferred Stock.
Under Section 1059 of the Code, a corporate U.S. Holder is required to
reduce its tax basis (but not below zero) in the Senior Preferred Stock by the
non-taxed portion of any "extraordinary dividend" if such stock has not been
held for more than two years before the earliest of the date such dividend is
declared, announced or agreed to. Generally, the non-taxed portion of an
extraordinary dividend is the amount excluded from income by operation of the
dividends-received deduction provisions of Section 243 of the Code. An
extraordinary dividend on the Senior Preferred Stock generally would be a
dividend that (i) equals or exceeds 5% of the corporate U.S. Holder's adjusted
tax basis in the Senior Preferred Stock, generally treating all dividends
received by the U.S. Holder and having ex-dividend dates within an 85-day period
as one dividend, or (ii) exceeds 20% of the corporate U.S. Holder's adjusted tax
basis in such Senior Preferred Stock, generally treating all dividends received
by the U.S. Holder and having ex-dividend dates within a 365-day period as one
dividend. In determining whether a dividend paid on the Senior Preferred Stock
is an extraordinary dividend, a corporate U.S. Holder may elect to substitute
the fair market value of the Senior Preferred Stock for such U.S. Holders' tax
basis for purposes of applying these tests, provided such fair market value is
established to the satisfaction of the Secretary of Treasury (the "Secretary")
as of the day before the ex-dividend date. An extraordinary dividend also
includes any amount treated as a
151
<PAGE>
dividend in the case of a redemption that is either non-pro rata as to all
stockholders or in partial liquidation of the redeeming corporation, regardless
of the stockholder's holding period and regardless of the size of the dividend.
If any part of the non-taxed portion of an extraordinary dividend is not applied
to reduce the corporate U.S. Holder's tax basis as a result of the limitation on
reducing such basis below zero, such part will be treated as gain in the taxable
year in which the extraordinary dividend is received. CORPORATE U.S. HOLDERS ARE
URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE POSSIBLE APPLICATION TO
SECTION 1059 TO THEIR PURCHASE, OWNERSHIP, EXCHANGE AND DISPOSITION OF THE
SENIOR PREFERRED STOCK.
A corporate U.S. Holder's liability for alternative minimum tax may be
affected by the portion of the dividends received which such corporate U.S.
Holder deducts in computing taxable income. This results from the fact that
corporate stockholders are required to increase alternative minimum taxable
income by 75% of the excess of the current earnings and profits (with certain
adjustments) over alternative minimum taxable income (determined without regard
to earnings and profit adjustments or the alternative tax net operating loss
deduction).
REDEMPTION PREMIUM
Under Section 305 of the Code and the applicable Treasury regulations
thereunder, if the redemption price of Senior Preferred Stock exceeds its issue
price, the difference ("redemption premium") may be taxable as a constructive
distribution of additional Senior Preferred Stock to the U.S. Holder (treated as
a dividend to the extent of EchoStar's current and accumulated earnings and
profits and otherwise subject to the treatment described above for
distributions) over a certain period.
Because the Senior Preferred Stock provides for optional rights of
redemption by EchoStar at prices in excess of the issue price, U.S. Holders
could be required to recognize such redemption premium under a constant yield
method similar to that described below for accruing OID (see "--Interest and OID
on the Senior Exchange Notes--Original Issue Discount") if, based on all of the
facts and circumstances, the optional redemption is more likely than not to
occur. If stock may be redeemed at more than one time, the time and price at
which such redemption is most likely to occur must be determined based on all of
the facts and circumstances. Applicable Treasury regulations provide a "safe
harbor" under which a right to redeem will not be treated as more likely than
not to occur if (i) the issuer and the holder are not related within the meaning
of the Treasury regulations; (ii) there are no plans, arrangements or agreements
that effectively require or are intended to compel the issuer to redeem the
stock (disregarding, for this purpose, a separate mandatory redemption); and
(iii) exercise of the right to redeem would not reduce the yield of the stock,
as determined under the Treasury regulations. Further, the Treasury regulations
provide that such redemption premium is not taxable as a constructive
distribution if it is solely in the nature of a penalty for premature
redemption. A redemption premium is solely in the nature of a penalty for
premature redemption if it is paid as a result of changes in economic or market
conditions over which neither the issuer nor the holder has control. Regardless
of whether the optional redemption is more likely than not to occur, or whether
the redemption premium is solely in the nature of a penalty for premature
redemption, constructive dividend treatment will not result if the redemption
premium does not exceed a de minimis amount. Based on the Treasury regulations,
EchoStar intends to take the position that the existence of EchoStar's optional
redemption rights do not result in a constructive distribution to the U.S.
Holders.
Further, because the Senior Preferred Stock provides for an optional right
of the U.S. Holders to require EchoStar to acquire the Senior Preferred Stock at
a price equal to 101% of the liquidation value upon a Change in Control, U.S.
Holders could be required to recognize such redemption premium under the
constant yield method discussed above unless, very generally, the likelihood of
redemption is remote. Here, too, regardless of whether the likelihood of
redemption is remote, constructive dividend treatment will not result if the
redemption premium does not exceed a de minimis amount of 1/4 of 1% of the
stated redemption price at maturity multiplied by the number of complete years
to maturity. EchoStar intends to
152
<PAGE>
take the position that the existence of U.S. Holders' optional redemption right
does not result in a constructive distribution to the Holders.
Moreover, the Senior Preferred Stock provides for a mandatory redemption at
a redemption price equal to the liquidation value of the Senior Preferred Stock,
plus accrued and unpaid dividends. If at the time of issuance of Senior
Preferred Stock, there is no intention for dividends to be paid currently, the
IRS may treat the payment of such dividends on redemption as disguised
redemption premium subject to the constant yield rules discussed above.
Dividends on the Senior Preferred Stock are payable in cash or in additional
shares of Senior Preferred Stock. EchoStar intends to pay all such dividends
currently. Thus, while the appropriate treatment of unpaid cumulative dividends
has not yet been addressed in Treasury regulations and no assurance can be given
as to the outcome of such guidance, EchoStar intends to take the position that
the terms of the mandatory redemption should not result in a constructive
distribution to the U.S. Holders.
Finally, in the event that additional Senior Preferred Stock is distributed
on the Senior Preferred Stock and such additional Senior Preferred Stock has a
fair market value at the time of distribution that is less than its redemption
price, such additional Senior Preferred Stock would have a redemption premium
that may be taxable as a constructive distribution of additional stock to a U.S.
Holder (treated as a dividend to the extent of EchoStar's current and
accumulated earnings and profits) under the constant yield method over the term
of such additional Senior Preferred Stock. In such case, shares of additional
Senior Preferred Stock may not be fungible with other shares of Senior Preferred
Stock because income could accrue in different amounts.
REDEMPTION, SALE OR EXCHANGE OF SENIOR PREFERRED STOCK
EXCHANGE OR DISTRIBUTION CHARACTERIZATION. The sale of the Senior Preferred
Stock by a U.S. Holder will be a taxable transaction. Likewise, a redemption of
shares of the Senior Preferred Stock for cash or an exchange of the Senior
Preferred Stock for Senior Exchange Notes will be a taxable transaction. For
U.S. federal income tax purposes, the exchange of the Senior Preferred Stock for
Senior Exchange Notes will be treated as if EchoStar made a distribution of the
Senior Exchange Notes in redemption of the Senior Preferred Stock. Under Section
302(b) of the Code, such a redemption for cash or the Senior Exchange Notes will
be treated as a sale or exchange transaction on which a U.S. Holder generally
will recognize capital gain or loss (except to the extent of amounts received on
the exchange that are attributable to declared dividends, which will be treated
in the same manner as distributions described above) provided that the
redemption (i) results in complete termination of the holder's stock interest in
EchoStar under Section 302(b)(3) of the Code; (ii) is "substantially
disproportionate" with respect to the stockholder under Section 302(b)(2) of the
Code or (iii) is not "essentially equivalent to a dividend" under Section
302(b)(1) of the Code because it results in a "meaningful reduction" in a U.S.
Holder's stock interest in EchoStar. Whether a redemption will result in a
meaningful reduction depends on the particular holder's facts and circumstances.
In determining whether any of these results have been met, the holder is deemed,
under the constructive ownership rules of Section 302(c) of the Code, to own any
shares of EchoStar stock that are owned, or deemed owned, by certain related
persons and entities and any shares that such holder, or related person or
entity, has the right to acquire by exercise of an option.
On the other hand, an exchange of the Old Series B Shares for the Exchange
shares will be considered to be a "like-kind" exchange pursuant to Section 1035
of the Code and will not be a taxable event to the holder making such an
exchange.
DISTRIBUTION TREATMENT. If the redemption of the Senior Preferred Stock
does not result in a complete termination or meaningful reduction and is not
substantially disproportionate, the transaction will be treated as a
distribution of cash or Senior Exchange Notes, as the case may be. The amount of
such distribution will be measured by the amount of cash received by the U.S.
Holder or the "issue price," as defined below, of the Senior Exchange Notes
received by the U.S. Holder, and such distribution will be
153
<PAGE>
treated in the same manner as distributions described above. Corporate U.S.
Holders should be aware that to the extent such distribution is treated as a
dividend it may be treated as an extraordinary dividend under Section 1059 of
the Code. A U.S. Holder's aggregate tax basis in the Senior Exchange Notes will
be equal to the issue price of the Senior Exchange Notes received by the U.S.
Holder.
SALE OR EXCHANGE TREATMENT. If a U.S. Holder sells the Senior Preferred
Stock, or the redemption of the Senior Preferred Stock results in a complete
termination or meaningful reduction or is substantially disproportionate, the
gain or loss recognized on such sale or exchange (subject, for corporate U.S.
Holders, to the rules of section 1059 of the Code) generally will be equal to
the difference between the amount realized by the U.S. Holder and such U.S.
Holder's adjusted tax basis in the Senior Preferred Stock surrendered. In the
case of a sale or redemption for cash, the amount realized will be the amount of
cash received on such sale or redemption. In the case of an exchange of Senior
Preferred Stock for Senior Exchange Notes, the amount realized on receipt of the
Senior Exchange Notes will be equal to the "issue price" of the Senior Exchange
Notes. Thus, the amount realized on the exchange will be equal to the issue
price of the Senior Exchange Notes plus any cash received on the exchange (other
than amounts received with respect to declared dividends). Generally speaking,
if, as of the exchange date, the Senior Exchange Notes or the Senior Preferred
Stock are traded on an established securities market on or at any time during
the 60-day period ending 30 days after the exchange date, the issue price of an
Exchange Note would be equal to the fair market value of the traded instrument
as of the exchange date. If neither the Senior Preferred Stock nor the Senior
Exchange Notes are so traded, the issue price of an Exchange Note would be the
stated principal amount of the Exchange Note provided that the yield on the
Exchange Note is equal to or greater than the "applicable federal rate" in
effect at the time the Exchange Note is issued. If the yield on the Senior
Exchange Notes is less than such applicable federal rate, its issue price under
Section 1274 of the Code would be equal to the present value, as of the issue
date, of all payments to be made on the Senior Exchange Notes, discounted at the
applicable federal rate. It cannot be determined at the present time whether the
Senior Preferred Stock or the Senior Exchange Notes will be, at the relevant
time, traded on an established securities market within the meaning of the OID
Regulations or whether the yield on the Senior Exchange Notes will equal or
exceed the applicable federal rate, as discussed above. However, EchoStar does
not expect a public market for the Senior Preferred Stock (or the Senior
Exchange Notes) to develop in the foreseeable future. A U.S. Holder's adjusted
tax basis in the Senior Preferred Stock surrendered in the redemption will equal
the amount paid for such stock plus the fair market value of any distributions
of additional Senior Preferred Stock and any amount included in gross income as
a constructive distribution of redemption premium, in each case under Section
305 of the Code, as described in "--Distributions on the Senior Preferred Stock"
and "--Redemption Premium," and reduced by the amount of any distribution
treated as a nontaxable return of capital that reduced the adjusted tax basis of
the Senior Preferred Stock, as described in "--Distributions on the Senior
Preferred Stock." Such gain or loss will be either long-term, mid-term or
short-term capital gain depending on the U.S. Holder's holding period for the
Senior Preferred Stock at the time of redemption, sale, exchange or retirement
of the Senior Preferred Stock.
Depending upon a U.S. Holder's particular circumstances, the tax
consequences of holding Senior Exchange Notes may be less advantageous than the
tax consequences of holding Senior Preferred Stock because, for example,
payments of interest on the Senior Exchange Notes will not be eligible for any
dividends-received deduction that may be available to corporate U.S. Holders.
INTEREST AND OID ON THE SENIOR EXCHANGE NOTES
The tax treatment of the Senior Exchange Notes will turn on whether or not
they are issued with original issue discount ("OID"). Senior Exchange Notes will
not be issued with OID unless, generally, their stated redemption price at
maturity, as defined below, exceeds their issue price, as defined above. Senior
Exchange Notes issued with OID will be referred to as "OID Notes." PROSPECTIVE
INVESTORS ARE
154
<PAGE>
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE CONSEQUENCES OF PURCHASING,
OWNING AND DISPOSING OF SENIOR EXCHANGE NOTES.
STATED INTEREST. Payments of interest on a debt instrument generally will
be includible in a U.S. Holder's income as ordinary income under the holder's
method of accounting for U.S. federal income tax purposes. However, Senior
Exchange Notes (including Senior Exchange Notes issued in exchange for Senior
Preferred Stock) likely will be treated as issued with OID, and stated interest
on such Senior Exchange Notes would not be treated as interest for U.S. federal
income tax purposes, but instead will be subject to the OID rules described
below. If Senior Exchange Notes were not issued with OID, then interest on such
Senior Exchange Notes generally would be includible in a U.S. Holder's income as
ordinary income under the U.S. Holder's method of accounting.
ORIGINAL ISSUE DISCOUNT. U.S. Holders of OID Notes will be subject to
special tax accounting rules, as described in greater detail below. U.S. Holders
of OID Notes should be aware that they generally must include OID in gross
income for U.S. federal income tax purposes on an annual basis under a constant
yield accrual method regardless of their method of accounting. As a result, U.S.
Holders will include OID in income in advance of the receipt of cash
attributable to such income. However, U.S. Holders of OID Notes generally will
not be required to include separately in income cash payments received on such
Notes, even if denominated as interest, to the extent such payments do not
constitute qualified stated interest (as defined below).
The amount of OID, if any, on a debt instrument is the excess of its "stated
redemption price at maturity" over its "issue price," subject to a statutorily
defined de minimis exception. The "stated redemption price at maturity" of a
debt instrument is the sum of its principal amount plus all other payments
required thereunder, other than payments of "qualified stated interest." For
this purpose, "qualified stated interest" generally means stated interest that
is unconditionally payable in cash or in property (other than the debt
instruments of the issuer), at least annually at a single fixed rate during the
entire term of the debt instrument that appropriately takes into account the
length of intervals between payments. The "issue price" of a Senior Exchange
Note will be determined as described under
"--Redemption, Sale or Exchange of Senior Preferred Stock."
Since EchoStar has the option to pay interest in additional Senior Exchange
Notes, the Senior Exchange Notes should be treated as having been issued without
qualified stated interest. Accordingly, the sum of all interest payable pursuant
to the stated interest rate on such Senior Exchange Notes over the entire term
should be included (along with the stated principal) in the stated redemption
price at maturity of such Senior Exchange Notes. Any Senior Exchange Notes
likely will be treated as OID Notes, and none of the stated interest on such OID
Notes will be treated as qualified stated interest. Any OID Notes so issued
would be treated as having been issued with OID equal to the excess of their
stated redemption price at maturity (which will be equal to the sum of the
principal amount plus all payments of stated interest) over their issue price
(which will be as described under "--Redemption, Sale or Exchange of Senior
Preferred Stock" above). Any additional OID Notes issued in lieu of cash would
not be treated as debt instruments separate from the OID Notes upon which they
were issued, but instead would be aggregated with such OID Notes for OID
purposes.
If the issue price of the Senior Exchange Notes is at least equal to their
principal amount, the yield to maturity of the Senior Exchange Notes, if the
option to pay interest with additional Senior Exchange Notes is exercised, will
be no less than the yield to maturity would be, if the option is not exercised.
Accordingly, for purposes of calculating OID, it would be assumed that EchoStar
will not exercise the option because exercise of the option will not minimize
the yield. If the option was in fact subsequently exercised and additional
Senior Exchange Notes were issued by EchoStar in lieu of cash, such additional
Senior Exchange Notes would be aggregated with the Senior Exchange Notes upon
which they were issued, and OID would be calculated for the remainder of the
term of the Senior Exchange Notes based upon an adjusted issue price which
includes the principal amount of the additional Senior Exchange Notes. As a
155
<PAGE>
result of such exercise, U.S. Holders of Senior Exchange Notes would include OID
in income in advance of the receipt of cash, regardless of such U.S. Holders'
regular method of accounting.
If the issue price of Senior Exchange Notes is less than their principal
amount, the yield to maturity of the Senior Exchange Notes, if the option to pay
interest with additional Senior Exchange Notes is exercised, will be less than
the yield to maturity, if the option is not exercised. Accordingly, for purposes
of calculating OID, it would be assumed that EchoStar will exercise the option
because to do so will minimize the yield. If EchoStar does in fact exercise its
option and issues additional Senior Exchange Notes in lieu of cash, U.S. Holders
of Senior Exchange Notes will include OID in income in advance of the receipt of
cash, regardless of such U.S. Holders' regular method of accounting.
If EchoStar makes a cash payment instead of exercising its option of issuing
additional Senior Exchange Notes, the cash payment made will be treated as a
prepayment of the Senior Exchange Notes, partially retiring such Senior Exchange
Notes on a pro rata basis on the date of such payment. Such retirement would be
a taxable event to a U.S. Holder of the Senior Exchange Notes.
The amount of OID includible in income by an initial U.S. Holder of an OID
Note is the sum of the "daily portions" of OID with respect to the OID Note for
such day during the taxable year or portion of the taxable year in which such
U.S. Holder holds such note ("accrued OID"). The daily portion is determined by
allocating to each day in any "accrual period" a pro rata portion of the OID
allocable to the accrual period. The "accrual period" for an OID Note may be of
any length and may vary in length over the term of the OID Note, provided that
each accrual period is no longer than one year and each scheduled payment of
principal or interest occur on the first day or final day of an accrual period.
The amount of OID allocable to any accrual period is an amount equal to the
excess, if any, of (a) the product of the OID Note's adjusted issue price at the
beginning of such accrual period and its yield to maturity (determined on the
basis of compounding at the close of each accrual period and properly adjusted
for the length of the accrual period) over (b) the sum of any qualified stated
interest allocable to the actual period. OID allocable to a final accrual period
is the difference between the amount payable at maturity (other than a payment
of qualified stated interest) and the adjusted issue price at the beginning of
the final accrual period. Special rules will apply for calculating OID for an
initial short accrual period. The "adjusted issue price" of an OID Note at the
beginning of any accrual period is equal to its issue price increased by the
accrued OID for each prior accrual period (determined without regard to the
amortization of any acquisition bond premium, as described below) and reduced by
any payments made on such note (other than qualified stated interest) on or
before the first day of the accrual period.
Senior Exchange Notes may be redeemed prior to their stated maturity at the
option of EchoStar and at a redemption price in excess of their issue price. For
purposes of computing the yield of such instruments, EchoStar will be deemed to
exercise or not exercise its option to redeem the OID Notes in a manner that
minimizes the yield on the OID Notes. Since it is anticipated that the issue
price of the Senior Exchange Notes will equal their stated principal amount and,
therefore, the Senior Exchange Notes will be issued with a redemption premium,
it is not anticipated that EchoStar's ability to redeem prior to stated maturity
would affect the yield of an OID Note.
U.S. Holders may elect to treat all interest on any Senior Exchange Notes as
OID and calculate the amount includible in gross income under the constant yield
method described above. For the purposes of this election, interest includes
stated interest, acquisition discount, OID, de minimis OID, market discount, de
minimis market discount and unstated interest, as adjusted by any amortizable
bond premium or acquisition premium. The election is to be made for the taxable
year in which the U.S. Holder acquired the Senior Exchange Notes, and may not be
revoked without the consent of the IRS. U.S. Holders should consult with their
own tax advisors about this election.
156
<PAGE>
MARKET DISCOUNT ON SENIOR EXCHANGE NOTES
If a U.S. Holder acquires Senior Exchange Notes (other than an OID Note) for
an amount less than its stated redemption price at maturity or, in the case of
an OID Note, for an amount that is less than its adjusted issue price, the
amount of the difference will be treated as "market discount" for federal income
tax purposes, unless such difference is less than a specified de minimis amount.
Under the market discount rules, a U.S. Holder will be required to treat any
principal payment on Senior Exchange Notes, or any gain on the sale, exchange,
retirement or other disposition of, Senior Exchange Notes as ordinary income to
the extent of the market discount which has not previously been included in
income and is treated as having accrued on such Senior Exchange Notes at the
time of such payment or disposition. In addition, the U.S. Holder may be
required to defer, until the maturity of the Senior Exchange Notes or its
earlier disposition in a taxable transaction, the deduction of all or a portion
of the interest expense on any indebtedness incurred or continued to purchase or
carry such Senior Exchange Notes.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Senior Exchange Notes,
unless the U.S. Holder elects to accrue on a constant interest method. A U.S.
Holder of Senior Exchange Notes may elect to include market discount in income
currently as it accrues (on either a ratable or constant interest method), in
which case the rule described above regarding deferral of interest deductions
will not apply. This election to include market discount in income currently,
once made, applies to all market discount obligations acquired on or after the
first taxable year to which the election applies and may not be revoked without
the consent of the IRS.
ACQUISITION PREMIUM; AMORTIZABLE BOND PREMIUM
A U.S. Holder that is treated as acquiring Senior Exchange Notes with OID
for an amount that is greater than its adjusted issue price but equal to or less
than the sum of all amounts payable on the Senior Exchange Notes after the
purchase date, other than qualified stated interest, will be considered to have
purchased such Senior Exchange Notes at an "acquisition premium." Under the
acquisition premium rules, the amount of OID, if any, which such U.S. Holder
must include in its gross income with respect to such Senior Exchange Notes for
any taxable year will be reduced by the portion of such acquisition premium
properly allocable to such year.
If immediately after the time the Senior Preferred Stock is exchanged for
Senior Exchange Notes or immediately after the time a subsequent U.S. Holder
acquires Senior Exchange Notes, the U.S. Holder's tax basis in any such Senior
Exchange Notes exceeds the sum of all amounts payable on the Senior Exchange
Notes after the exchange date or purchase date, other than qualified stated
interest, such excess may constitute "premium" and such U.S. Holder will not be
required to include any OID in income. A U.S. Holder generally may elect to
amortize bond premium over the remaining term of the Senior Exchange Notes on a
constant yield method. The amount amortized in any year will be treated as a
reduction of the U.S. Holder's interest income, including OID, from the Senior
Exchange Notes.
Bond premium on Senior Exchange Notes held by a U.S. Holder that does not
make such an election will decrease the gain or increase the loss otherwise
recognized on disposition of the Senior Exchange Notes. The election to amortize
bond premium on a constant yield method, once made, applies to all debt
obligations held or subsequently acquired by the electing U.S. Holder on or
after the first day of the first taxable year to which the election applies and
may not be revoked without the consent of the IRS.
REDEMPTION, SALE OR EXCHANGE OF SENIOR EXCHANGE NOTES
Upon the redemption, sale, exchange or retirement of Senior Exchange Notes,
a U.S. Holder will recognize gain or loss equal to the difference between the
amount realized upon the redemption, sale, exchange or retirement (less any
accrued qualified stated interest, not previously taken into account, which will
be taxable as such) and the adjusted tax basis of the Senior Exchange Notes. The
adjusted tax basis of a
157
<PAGE>
U.S. Holder who received Senior Exchange Notes in exchange for Senior Preferred
Stock will, in general, be equal to the issue price of such Senior Exchange
Notes, increased by OID and market discount previously included in income by the
U.S. Holder and reduced by any amortized premium and any cash payments on the
Senior Exchange Notes other than qualified interest. Such gain or loss will be
either long-term, mid-term or short-term capital gain depending on the U.S.
Holder's holding period for the Senior Exchange Notes at the time of redemption,
sale, exchange or retirement of the Senior Exchange Notes.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS
If (x) the term of the OID Notes is more than five years, (y) the
yield-to-maturity of the OID Notes, computed as of their issue date, equals or
exceeds the sum of (A) the "applicable federal rate" (as determined under
Section 1274(d) of the Code) in effect for the month in which the OID Notes are
issued (the "AFR") and (B) 5% and (z) the OID on such OID Notes is
"significant," the OID Notes will be considered applicable high yield debt
obligations ("AHYDOs") under Section 163(i) of the Code. OID is significant if
the aggregate amount includible in gross income for periods before the close of
any accrual period ending more than five years after the issue date exceeds the
sum of the aggregate amount of interest to be paid before the close of such
accrual period plus the product of the issue price and the yield to maturity. If
the OID Notes are AHYDOs, EchoStar would not be allowed to take a deduction for
OID accrued on the OID Notes for U.S. federal income tax purposes until such
time as EchoStar actually paid such OID in cash or in other property (other than
stock or debt of EchoStar or a person deemed to be related to EchoStar under
Section 453(f)(1) of the Code).
Moreover, if the yield-to-maturity on the OID Notes were to exceed the sum
of the AFR and 6% (such excess shall be referred to hereinafter as the
"Disqualified Yield"), the deduction for OID accrued on the OID Notes would be
permanently disallowed for U.S. federal income tax purposes (regardless of
whether EchoStar actually paid such OID in cash or in other property) to the
extent such OID is attributable to such Disqualified Yield ("Dividend-Equivalent
Interest"). For the purposes of the dividends-received deduction, such
Dividend-Equivalent Interest will be treated as a dividend to the extent it is
deemed to have been paid out of EchoStar's current or accumulated earnings and
profits.
Because the amount of OID, if any, attributable to the OID Notes will be
determined at the time such OID Notes are issued and the AFR at the time such
OID Notes are issued in exchange for Senior Preferred Stock is not predictable,
it is impossible to determine at the present time whether an OID Note will be
treated as an AHYDOs.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments of dividends, principal, interest, OID, and premium and to the proceeds
of sales of Senior Exchange Notes, and Senior Preferred Stock made to U.S.
Holders other than certain exempt recipients (such as corporations). A 31%
backup withholding tax will apply to such payments if the U.S. Holder fails to
provide a correct taxpayer identification number or certification of exempt
status or, with respect to certain payments, the U.S. Holder fails to report in
full dividend and interest income and the IRS notifies the payor of such
underreporting.
Any amounts withheld under the backup withholding rules will be allowed as a
credit against such U.S. Holder's U.S. federal income tax liability and may
entitle such U.S. Holder to a refund, provided the required information is
furnished to the IRS.
CONSEQUENCES TO FOREIGN HOLDERS OF PREFERRED STOCK
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of the
Senior Preferred Stock by a person who is a "Non-U.S. Holder." For this purpose,
a "Non-U.S. Holder" means a beneficial owner of the Senior Preferred Stock
158
<PAGE>
that for United States federal income tax purposes is not (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the law of the United States or any political
subdivision thereof (other than any partnership treated as foreign under U.S.
Treasury regulations which may be issued under recently enacted amendments to
the Code), (iii) an estate or trust the income of which is subject to United
States federal income taxation regardless of its source, or (iv) in certain
circumstances, a former citizen or resident of the United States.
DIVIDENDS AND INTEREST. Generally, dividends on the Senior Preferred Stock
and interest on the Senior Exchange Notes paid to a Non-U.S. Holder are subject
to United States withholding tax either at a rate of 30% of the gross amount of
the dividend or interest payment or such lower rate as may be specified by an
applicable tax treaty. To the extent EchoStar elects to make dividend payments
in Shares of Senior Preferred Stock or interest payments in Senior Exchange
Notes, EchoStar intends to withhold a number of shares of Senior Preferred
Stocks or Senior Exchange Notes with a fair market value equal to the
withholding tax.
Dividends that are effectively connected with the conduct of a trade or
business by the Non-U.S. Holder within the United States and, where a tax treaty
applies, are attributable to a United States permanent establishment of the
Non-U.S. Holder, are not subject to the withholding tax (provided the Non-U.S.
Holder files appropriate documentation, including, under current law, Form 4224,
with EchoStar or its agent), but instead are subject to United States federal
income tax on a net income basis at applicable graduated individual or corporate
rates. Any such effectively connected dividends received by a Non-U.S. Holder
that is a corporation may, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
In order to claim the benefit of an applicable tax treaty, EchoStar (or its
agent) may require a Non-U.S. Holder of Senior Preferred Stock or Senior
Exchange Notes to provide EchoStar or its agent an exemption or reduced treaty
rate certificate or letter in accordance with the terms of the treaty. In
addition, backup withholding, as discussed below, may apply in certain
circumstances if applicable certification and other requirements are not met.
A Non-U.S. Holder of Senior Preferred Stock or Senior Exchange Notes
eligible for a reduced rate of United States withholding tax pursuant to an
income tax treaty may obtain a refund of any excess amounts withheld by filing
an appropriate claim for refund with the Internal Revenue Service.
SALE OR EXCHANGE. A Non-U.S. Holder will not be subject to United States
income tax on any gain realized upon the sale or exchange of the Senior
Preferred Stock or Senior Exchange Notes if such holder has no connection with
the United States other than holding the Preferred Stock or Senior Exchange
Notes and in particular (i) such gain is not effectively connected with a trade
or business in the United States of the Non-U.S. Holder, and (ii) in the case of
a Non-U.S. Holder who is an individual which has a "tax home" (as defined in
Section 911(d)(3) of the Code) in the the United States, such Non-U.S. Holder is
not present in the United State for 183 days or more in the taxable year of such
disposition.
A Non-U.S. Holder engaged in a trade or business in the United States whose
income from the Senior Preferred Stock (including gain from the sale or exchange
thereof) is effectively connected with the conduct of such trade or business
will generally be subject to regular United States federal income tax on such
income in the same manner as if it were a U.S. Person. Any such effectively
connected dividends received by a Non-U.S. Holder that is a corporation may,
under certain circumstances, be subject to an additional "branch profits tax" at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.
159
<PAGE>
FEDERAL ESTATE TAX
An individual Non-U.S. Holder who is treated as the owner of the Senior
Preferred Stock or Senior Exchange Notes at the time of such individual's death
or has made certain lifetime transfers of an interest in the Senior Preferred
Stock or Senior Exchange Notes will be required to include the value of such
Preferred Stock or Senior Exchange Notes in such individual's gross estate for
United States federal estate tax purposes and may be subject to United States
federal estate tax, unless an applicable tax treaty provides otherwise.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Under certain circumstances,
the Internal Revenue Service requires "information reporting" and "backup
withholding" at a rate of 31% with respect to payments of dividends and
interest. Non-U.S. Holders generally would be exempt from Internal Revenue
Service reporting requirements and United States backup withholding with respect
to dividends payable on the Senior Preferred Stock or interest payable in Senior
Exchange Notes. A Non-U.S. Holder of Senior Preferred Stock or Senior Exchange
Notes that fails to certify its Non-U.S. Holder status in accordance with the
requirements of the proposed regulations, would under certain circumstances be
subject to United States backup withholding at a rate of 31% on payments of
dividends and interest. The application for exemption is available by providing
a properly completed Internal Revenue Service Form W-8.
The payment of the proceeds of the disposition of the Senior Preferred Stock
or Senior Exchange Notes by a Non-U.S. Holder to or through the United States
office of a broker or through a non-United States branch of a United States
broker generally will be subject to information reporting and backup withholding
at a rate of 31% unless the holder either certifies its status as a Non-U.S.
Holder under penalties of perjury or otherwise establishes an exemption. The
payment of the proceeds of the disposition by a Non-U.S. Holder of Senior
Preferred Stock or Senior Exchange Notes to or through a non-United States
office of a non-United States broker will not be subject to backup withholding
or information reporting unless the non-United States broker has certain United
States relationships.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be refunded (or credited against the holder's United States
federal income tax liability, if any) provided that the required information is
furnished to the Internal Revenue Service.
PLAN OF DISTRIBUTION
Based on interpretation by the Staff set forth in no-action letters issued
to third parties, the Issuer believes that Exchange Shares issued pursuant to
the Exchange Offer in exchange for the Old Series B Shares may be offered for
resale, resold and otherwise transferred by holders thereof (other than any
holder which is (i) an affiliate of the Issuer, (ii) a broker-dealer who
acquired Old Series B Shares directly from the Issuer or (iii) a broker-dealer
who acquired Old Series B Shares as a result of market-making or other trading
activities) without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such Exchange Shares are acquired
in the ordinary course of such holders' business, and such holders are not
engaged in, and do not intend to engage in, and have no arrangement or
understanding with any person to participate in, a distribution of such Exchange
Shares; provided further that broker-dealers ("Participating Broker-Dealers")
receiving Exchange Shares in the Exchange Offer will be subject to a prospectus
delivery requirement with respect to resales of such Exchange Shares. To date,
the Staff has taken the position that Participating Broker-Dealers may fulfill
their prospectus delivery requirements with respect to transactions involving an
exchange of securities such as the exchange pursuant to the Exchange Offer
(other than a resale of an unsold allotment from the sale of the Old Series B
Shares to the Initial Purchasers) with the prospectus contained in the
Registration Statement. Pursuant to the Registration Rights Agreement, the
Issuer has agreed to permit Participating Broker-Dealers and other persons, if
any, subject to similar prospectus delivery requirements to use this Prospectus
in connection with the resale of such Exchange Shares. The Issuer has agreed
that, for a period
160
<PAGE>
of 180 days after the Exchange Date, it will make this Prospectus, and any
amendment or supplement to this Prospectus, available to any broker-dealer that
requests such documents in the Letter of Transmittal.
Each holder of the Old Series B Shares who wishes to exchange its Old Series
B Shares for Exchange Shares in the Exchange Offer will be required to make
certain representations to the Issuer as set forth in "The Exchange Offer--Terms
and Conditions of the Letter of Transmittal." In addition, each holder who is a
broker-dealer and who receives Exchange Shares for its own account in exchange
for Old Series B Shares that were acquired by it as a result of market-making
activities or other trading activities will be required to acknowledge that it
will deliver a Prospectus in connection with any resale by it of such Exchange
Shares.
The Issuer will not receive any proceeds from any sale of Exchange Shares by
broker-dealers. Exchange Shares received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Shares or a combination of such methods
of resale, at market prices prevailing at the time of resale, at prices related
to such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer and/or the purchasers of any such Exchange Shares. Any broker-dealer that
resells Exchange Shares that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such Exchange Shares may be deemed to be an "underwriter" within the meaning
of the Securities Act and any profit on any such resale of Exchange Shares and
any commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Issuer has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Shares (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act, as set forth in the
Registration Rights Agreement.
161
<PAGE>
NOTICE TO INVESTORS
Because the following instructions will apply to any Old Series B Shares
held by holders who do not participate in the Exchange Offer, holders of the Old
Series B Shares are advised to consult legal counsel prior to making any offer,
resale, pledge or transfer of any of the Old Series B Shares.
The Old Series B Shares have not been registered under the Securities Act
and may not be offered or sold within the United States or to U.S. Persons (as
such terms as defined under the Securities Act) except pursuant to an exemption
from, or in a transaction not subject to the registration requirements of the
Securities Act. Accordingly, the Old Series B Shares were offered only to
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act) in reliance on the exemption from the registration requirements of the
Securities Act provided by Rule 144A, and to a limited number of institutional
"accredited investors" within the meaning of Rule 501(a)(1), (2), (3) and (7)
under the Securities Act.
Each purchaser of Old Series B Shares purchased in a sale made in reliance
on Rule 144A has been deemed to have represented and agreed as follows (terms
used in this paragraph that are defined in Rule 144A are used herein as defined
therein):
(1) The purchaser is either (A) a qualified institutional buyer and is
aware that the sale to it is being made in reliance on Rule 144A, and such
qualified institutional buyer has acquired such Old Series B Shares for its
own account or for the account of another qualified institutional buyer or,
(B) an "accredited investor" within the meaning of Rule 501(a)(1), (2), (3)
or (7) under the Securities Act (an "accredited investor") or, (C) if the
Old Series B Shares are to be purchased for one or more accounts ("investor
accounts") for which it is acting as fiduciary or agent, each such account
is an accredited investor on a like basis.
(2) The purchaser understands that the Old Series B Shares were offered
in a transaction not involving any public offering in the United States
within the meaning of the Securities Act, that the Old Series B Shares have
not been registered under the Securities Act and that: (A) the Old Series B
Shares may be offered, resold, pledged or otherwise transferred only: (i) to
a person who the seller reasonable believes is a qualified institutional
buyer in the transaction meeting the requirements of Rule 144A, in a
transaction meeting the requirements of Rule 144 under the Securities Act,
outside the United States to a foreign person in a transaction meeting the
requirement of Rule 904 under the Securities Act or in accordance with
another exemption form the registration requirements of the Securities Act
(and based upon an Opinion to Counsel if the Issuer so requests); (ii) to
the Issuer; or (iii) pursuant to an effective registration statement, and,
in each case, in accordance with any applicable securities laws of any State
of the United States or any other applicable jurisdiction; and (B) the
purchaser will, and each subsequent holder is required to, notify any
subsequent purchaser from it of the resale restrictions set forth in (A)
above.
(3) The purchaser understands that the certificates evidencing the Old
Series B Shares bear, and if not exchanged pursuant to the Exchange Offer
will continue to bear, a legend substantially to the following effect unless
otherwise agreed by the Issuer and the holder thereof:
"THIS SECURITY (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND,
ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED
WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S.
PERSONS, EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION
HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER (1) REPRESENTS THAT IT
IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) (A "QIB"), (2) AGREES THAT IT WILL NOT, WITHIN THE TIME
PERIOD REFERRED TO UNDER RULE 144(k) (TAKING INTO
162
<PAGE>
ACCOUNT THE PROVISIONS OF RULE 144(d) UNDER THE SECURITIES ACT, IF
APPLICABLE) UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE
TRANSFER OF THIS SECURITY, RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT
(A) TO THE ISSUER OR ANY SUBSIDIARY THEREOF, (B) TO A PERSON WHOM THE HOLDER
REASONABLY BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR FOR THE
ACCOUNT OF A QIB IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C)
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT (IF AVAILABLE), (D) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN
OPINION OF COUNSEL ACCEPTABLE TO THE ISSUER) OR (E) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND, IN EACH CASE, IN
ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, AND (3) AGREES THAT IT
WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY OR AN INTEREST HEREIN IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND."
(4) The purchaser acknowledged that none of the Issuer, the Initial
Purchasers, or any person representing the Issuer or the Initial Purchasers
made any representations to it with respect to the Issuer or the offering or
sale of the Old Series B Shares, other than the information contained in the
Offering Memorandum dated September 26, 1997, relating to the Old Series B
Shares (the "Offering Memorandum"), which was delivered to it and upon which
it relied in making its investment decision with respect to the Old Series B
Shares. The purchaser had access to such financial and other information
concerning the Issuer and the Old Series B Shares as it deemed necessary in
connection with its decision to purchase the Old Series B Shares, including
an opportunity to ask questions of and request information from the Issuer
and the Initial Purchasers.
(5) The purchaser acknowledged that the Issuer and the Initial
Purchasers, and others relied upon the truth and accuracy of the foregoing
acknowledgements, representations and agreements and agrees that, if any of
the foregoing acknowledgements, representations or agreements deemed to have
been made by it are no longer accurate, it shall promptly notify the Initial
Purchasers. If such purchaser acquired Old Series B Shares as a fiduciary or
agent for one or more investor accounts, such purchaser represented that it
has sole investment discretion with respect to each such account and that it
has full power to make the foregoing acknowledgements, representations and
agreements on behalf of each such account.
Each purchaser of Old Series B Shares that is an institutional accredited
investor executed and delivered a purchaser's letter for the benefit of the
Initial Purchasers and the Issuer, substantially in the form included as
Appendix A to the Prospectus, whereby such institutional accredited investor (a)
agreed to the restrictions on transfer set forth in clause (2) above, (b)
confirmed that it: (i) acquired Old Series B Shares having a minimum purchase
price of at least $100,000 for its own account and for each separate account for
which it is acting; (ii) acquired such Old Series B Shares for its own account
or for certain qualified institutional accounts, as specified therein; and (iii)
did not acquire the Shares with a view to distribution thereof in a transaction
that would violate the Securities Act or the securities laws of any State of the
United States or any other applicable jurisdiction; and (c) acknowledged that
the registrar and transfer agent for the Old Series B Shares will not be
required to accept for registration of transfer any Old Series B Shares acquired
by them, except upon presentation of evidence satisfactory to the Issuer that
the restriction on transfer set forth in clause (2) above have been complied
with, and that any such Old Series B Shares will be in the form of definitive
physical certificates bearing the legend set forth in clause (3) above.
The Old Series B Shares may not be sold or transferred to, and each
purchaser, by its purchase of the Old Series B Shares has been deemed to have
represented and covenanted that it did not acquire the Old Series B Shares for
or on behalf of, and will not transfer the Old Series B Shares to, any pension
or welfare
163
<PAGE>
plan (as defined in Section 3 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), except that such a purchase for or on behalf of a
pension or welfare plan shall be permitted:
(a) to the extent such purchase is made by or on behalf of a bank collective
investment fund maintained by the purchaser in which (i) no plan
(together with any other plans maintained by the same employer or
employee organization) has an interest in excess of ten percent (10%) of
the total assets in such collective investment fund and (ii) the
conditions of Section III of Prohibited Transaction Class Exemption 91-38
issued by the Department of Labor are satisfied;
(b) to the extent such purchase is made by or on behalf of an insurance
company pooled separate account maintained by the purchaser in which (i)
at any time while the Senior Preferred Stock is held by the purchaser, no
plan (together with any other plans maintained by the same employer or
employee organization) has an interest in excess of ten percent (10%) of
the total assets in such pooled separate account and (ii) the conditions
of Section III of Prohibited Transaction Class Exemption 90-1 issued by
the Department of Labor are satisfied;
(c) to the extent such purchase is made on behalf of a plan by (i) an
investment adviser registered under the Investment Advisors Act of 1940
that had as of the last day of its most recent fiscal year total assets
under its management and control in excess of $50,000,000 and had
stockholders' or partners' equity in excess of $750,000, as shown in its
most recent balance sheet prepared in accordance with generally accepted
accounting principles, (ii) a bank as defined in Section 202(a)(2) of the
Investment Advisers Act of 1940 with equity capital in excess of
$1,000,000 as of the last day of its most recent fiscal year or (iii) an
insurance company which is qualified under the laws of more than one
state to manage, acquire or dispose of any assets of a plan, which
insurance company has as of the last day of its most recent fiscal year,
net worth in excess of $1,000,000 and which is subject to supervision and
examination by a state authority having supervision over insurance
companies. In any case, such investment adviser, bank or insurance
company is otherwise a qualified professional asset manager, as such term
is used in Prohibited Transaction Exception 84-14 issued by the
Department of Labor, and the assets of such plan when combined with the
assets of other plans established or maintained by the same employer (or
affiliate thereof) or employee organization and managed by such
investment adviser, bank or insurance company do not represent more than
twenty percent (20%) of the total client assets managed by such
investment adviser, bank or insurance company and the conditions of Part
I of such exemption are satisfied;
(d) to the extent such plan is a governmental plan (as defined in Section 3
of ERISA) which is not subject to the provisions of Title 1 of ERISA or
Section 4975 of the Code;
(e) to the extent such purchase is made by or on behalf of an insurance
company with assets in its insurance company general account, and the
conditions of Prohibited Transaction Class Exemption 95-60 issued by the
Department of Labor are satisfied; or
(f) to the extent such purchase is made on behalf of a plan by an in-house
asset manager and the conditions of Part I of Prohibited Class Exemption
96-23 issued by the Department of Labor are satisfied.
LEGAL MATTERS
The legality of the Exchange Shares to be exchanged for the outstanding Old
Series B Shares will be passed upon for the Issuer by Friedlob Sanderson Raskin
Paulson & Tourtillott, LLC (the "Firm"). Mr. Friedlob, a member of the Firm, is
also a member of the Board of Directors of EchoStar, and owns options to
purchase 6,000 Shares of Class A Common Stock of EchoStar.
164
<PAGE>
INDEPENDENT ACCOUNTANTS
The audited financial statements of the Issuer included in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of such firm as experts in giving such reports.
AVAILABLE INFORMATION
EchoStar is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. The reports, proxy statements and other
information filed by EchoStar may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W. Washington D.C. 20549, and at the Commission's regional offices
located at 7 World Trade Center, New York, New York 10048, and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. Class A Common Stock is
traded on the Nasdaq National Market and reports and other information herein
and therein concerning EchoStar can also be inspected at the Nasdaq National
Market Exchange, 1735 K Street, N.W., Washington, D.C. 20546. Such material may
also be accessed electronically by means of the Commission's home page on the
Internet at HTTP://WWW.SEC.GOV.
EchoStar has filed with the Commission a Registration Statement on Form S-3
under the Securities Act with respect to the Class A Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to EchoStar and the securities offered hereby,
reference is made to the Registration Statement, including the exhibits and
schedules thereto, which may be inspected at, and copies thereof may be obtained
at prescribed rates from, the public reference facilities of the Commission at
the address set forth above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are incorporated by
reference into this Prospectus:
(i) EchoStar's Annual Report on Form 10-K, as amended, for the year
ended December 31, 1996;
(ii) EchoStar's Quarterly Report on Form 10-Q for the quarterly
periods ended March 31, 1997 and June 30, 1997;
(iii) EchoStar's Current Reports on Form 8-K dated March 3, 1997,
April 28, 1997, and September 11, 1997;
(iv) EchoStar's definitive proxy statement for its annual meeting of
shareholders held on September 12, 1997.
All documents filed by EchoStar pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Common Offering shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
such documents.
Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained in this Prospectus, or in any other
subsequently filed document which is also incorporated herein by reference,
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed to constitute a part of this Prospectus except as
so modified or superseded.
165
<PAGE>
EchoStar hereby undertakes to provide without charge to each person to whom
a copy of this Prospectus has been delivered, on the written or oral request of
any such person, a copy of any or all of the documents referred to above which
have been or may be incorporated into this Prospectus by reference, other than
exhibits to such documents. Requests for such copies should be directed to
Investor Relations, EchoStar Communications Corporation, 90 Inverness Circle
East, Englewood, Colorado 80112, telephone number (303) 799-8222.
166
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ECHOSTAR COMMUNICATIONS CORPORATION
<TABLE>
<S> <C>
Consolidated Financial Statements:
Report of Independent Public Accountants............................................ F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 and June 30, 1997......... F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995
and 1996, and the six months ended June 30, 1996 and 1997......................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1994, 1995 and 1996, and the six months ended June 30, 1997.......... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996, and the six months ended June 30, 1996 and 1997......................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EchoStar Communications Corporation:
We have audited the accompanying consolidated balance sheets of EchoStar
Communications Corporation (a Nevada corporation) and subsidiaries, as described
in Note 1, as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Companies' management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of EchoStar
Communications Corporation and subsidiaries as of December 31, 1995 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 14, 1997.
F-2
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................................... $ 21,754 $ 39,231 $ 182,852
Marketable investment securities............................................ 15,670 18,807 4,952
Trade accounts receivable, net of allowance for uncollectible accounts of
$1,106, $1,494 and $1,642, respectively................................... 9,179 13,516 29,475
Inventories................................................................. 38,769 72,767 63,043
Income tax refund receivable................................................ 3,554 4,830 145
Deferred tax assets......................................................... 1,779 - -
Subscriber acquisition costs, net........................................... - 68,129 68,584
Other current assets........................................................ 13,037 18,356 10,177
--------- --------- -----------
Total current assets.......................................................... 103,742 235,636 359,228
Restricted Cash and Marketable Investment Securities:
1994 Notes escrow........................................................... 73,291 - -
1996 Notes escrow........................................................... - 47,491 -
Satellite Escrow............................................................ - - 112,086
Interest Escrow............................................................. - - 109,084
Other....................................................................... 26,400 31,800 8,445
--------- --------- -----------
Total restricted cash and marketable investment securities.................... 99,691 79,291 229,615
Property and equipment, net................................................... 354,000 590,621 728,237
FCC authorizations, net....................................................... 11,309 72,667 94,386
Deferred tax assets........................................................... 12,109 79,339 79,339
Other noncurrent assets....................................................... 42,240 83,826 43,675
--------- --------- -----------
Total assets.............................................................. $ 623,091 $1,141,380 $1,534,480
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable...................................................... $ 19,063 $ 40,819 $ 49,752
Deferred revenue--DISH Network subscriber promotions........................ - 97,959 117,121
Deferred programming revenue -- DISH Network................................ - 4,407 5,269
Deferred programming revenue--C-band........................................ 584 734 588
Accrued expenses and other current liabilities.............................. 26,314 30,495 78,186
Deferred tax liabilities.................................................... - 12,563 12,198
Current portion of long-term obligations.................................... 4,782 11,334 12,332
--------- --------- -----------
Total current liabilities..................................................... 50,743 198,311 275,446
Long-term obligations, net of current portion:
Long-term deferred signal carriage revenue.................................. - 5,949 7,366
1994 Notes.................................................................. 382,218 437,127 467,210
1996 Notes.................................................................. - 386,165 411,256
1997 Notes.................................................................. - - 375,000
Mortgage and other notes payable, excluding current portion................. 33,444 51,428 45,379
Other long-term obligations................................................. - 1,203 5,691
--------- --------- -----------
Total long-term obligations, net of current portion........................... 415,662 881,872 1,311,902
--------- --------- -----------
Total liabilities......................................................... 466,405 1,080,183 1,587,348
Commitments and Contingencies (Note 11)
Stockholders' Equity (Deficit) (Notes 2 and 9):
Preferred Stock, 20,000,000 shares authorized, 1,616,681 shares of 8% Series
A Cumulative Preferred Stock issued and outstanding, including accrued
dividends of $2,143, $3,347 and $3,949, respectively...................... 17,195 18,399 19,001
Class A Common Stock, $.01 par value, 200,000,000 shares authorized,
10,535,003, 11,115,582 and 11,821,513 shares issued and outstanding,
respectively.............................................................. 105 111 118
Class B Common Stock, $.01 par value, 100,000,000 shares authorized,
29,804,401 shares issued and outstanding.................................. 298 298 298
Class C Common Stock, $.01 par value, 100,000,000 shares authorized, none
outstanding............................................................... - - -
Common Stock Warrants....................................................... 714 16 11
Additional paid-in capital.................................................. 151,674 158,113 170,701
Unrealized holding gains (losses) on available-for-sale securities, net of
deferred taxes............................................................ 239 (11) (11)
Accumulated deficit......................................................... (13,539) (115,729) (242,986)
--------- --------- -----------
Total stockholders' equity (deficit).......................................... 156,686 61,197 (52,868)
--------- --------- -----------
Total liabilities and stockholders' equity (deficit)...................... $ 623,091 $1,141,380 $1,534,480
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ---------- ----------- ---------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
DTH products and technical services.............. $ 172,753 $ 146,910 $ 135,812 $ 97,199 $ 33,649
DISH Network promotions -- subscription
television services and products............... -- -- 22,746 -- 76,251
DISH Network subscription television services.... -- -- 37,898 6,046 57,588
C-band programming............................... 14,540 15,232 11,921 6,643 4,079
Loan origination and participation income........ 3,690 1,748 3,034 5,103 1,278
---------- ---------- ----------- ---------- -----------
Total revenue...................................... 190,983 163,890 211,411 114,991 172,845
EXPENSES:
DTH products and technical services.............. 133,635 116,758 123,790 90,278 27,718
DISH Network programming......................... -- -- 19,079 1,769 45,259
C-band programming............................... 11,670 13,520 10,510 6,058 3,308
Selling, general and administrative.............. 30,219 38,525 90,372 29,816 66,389
Subscriber promotion subsidies................... -- -- 33,591 -- 31,013
Amortization of subscriber acquisition costs..... -- -- 15,991 92 61,418
Depreciation and amortization.................... 2,243 3,114 27,423 9,664 25,357
---------- ---------- ----------- ---------- -----------
Total expenses..................................... 177,767 171,917 320,756 137,677 260,462
---------- ---------- ----------- ---------- -----------
Operating income (loss)............................ 13,216 (8,027) (109,345) (22,686) (87,617)
Other Income (Expense):
Interest income.................................. 8,420 14,059 15,630 9,383 3,343
Interest expense, net of amounts capitalized..... (21,408) (23,985) (61,487) (33,184) (42,043)
Minority interest in loss of consolidated joint
venture and other.............................. 261 722 (477) (134) (294)
---------- ---------- ----------- ---------- -----------
Total other income (expense)....................... (12,727) (9,204) (46,334) (23,935) (38,994)
---------- ---------- ----------- ---------- -----------
Income (loss) before income taxes.................. 489 (17,231) (155,679) (46,621) (126,611)
Income tax (provision) benefit, net................ (399) 5,745 54,693 16,846 (44)
---------- ---------- ----------- ---------- -----------
Net income (loss).................................. $ 90 $ (11,486) $ (100,986) $ (29,775) $ (126,655)
---------- ---------- ----------- ---------- -----------
---------- ---------- ----------- ---------- -----------
Net loss attributable to common shares............. $ (849) $ (12,690) $ (102,190) $ (30,377) $ (127,257)
---------- ---------- ----------- ---------- -----------
---------- ---------- ----------- ---------- -----------
Weighted-average common shares outstanding......... 32,442 35,562 40,548 40,404 41,265
---------- ---------- ----------- ---------- -----------
---------- ---------- ----------- ---------- -----------
Loss per common and common equivalent share........ $ (0.03) $ (0.36) $ (2.52) $ (0.75) $ (3.08)
---------- ---------- ----------- ---------- -----------
---------- ---------- ----------- ---------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT AND
SHARES OF UNREALIZED
COMMON COMMON ADDITIONAL HOLDING
STOCK PREFERRED COMMON STOCK PAID-IN GAINS
OUTSTANDING STOCK STOCK WARRANTS CAPITAL (LOSSES)
----------------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
(NOTES 1 AND 9)
Balance, December 31, 1993........... 32,221 $ - $ 322 $ - $ 49,378 $ -
Issuance of Class A Common Stock:
For acquisition of DirectSat,
Inc. .......................... 999 - 11 - 8,989 -
For cash......................... 324 - 3 - 3,830 -
Issuance of 1,616,681 shares of 8%
Series A Cumulative Preferred
Stock............................ - 15,052 - - - -
Issuance of Common Stock
Warrants......................... - - - 26,133 - -
8% Series A Cumulative Preferred
Stock dividends.................. - 939 - - - (939)
Net income......................... - - - - - 90
------ ----------- ----- ----------- ----------- ------------
Balance, December 31, 1994........... 33,544 15,991 336 26,133 62,197 (849)
8% Series A Cumulative Preferred
Stock dividends.................. - 1,204 - - - (1,204)
Issuance of Class A Common Stock
pursuant to initial public
offering, net of stock issuance
costs of $5,067.................. 4,004 - 40 - 62,893 -
Exercise of Common Stock
Warrants......................... 2,731 - 26 (25,419) 25,393 -
Employee Savings Plan contribution
and launch bonuses funded by
issuance of Class A Common
Stock............................ 60 - 1 - 1,191 -
Unrealized holding gains on
available-for-sale securities,
net.............................. - - - - - 239
Net loss........................... - - - - - (11,486)
------ ----------- ----- ----------- ----------- ------------
Balance, December 31, 1995........... 40,339 17,195 403 714 151,674 (13,300)
8% Series A Cumulative Preferred
Stock dividends.................. - 1,204 - - - (1,204)
Exercise of Class A Common Stock
options.......................... 442 - 4 - 2,255 -
Exercise of Common Stock
Warrants......................... 75 - 1 (698) 697 -
Income tax benefit of deduction for
income tax purposes on exercise
of Class A Common Stock
options.......................... - - - - 2,372 -
Employee Savings Plan contribution
issuable and launch bonuses
funded by issuance of Class A
Common Stock..................... 64 - 1 - 1,115 -
Unrealized holding losses on
available-for-sale securities,
net.............................. - - - - - (250)
Net loss........................... - - - - - (100,986)
------ ----------- ----- ----------- ----------- ------------
Balance, December 31, 1996........... 40,920 18,399 409 16 158,113 (115,740)
Issuance of Class A Common Stock
for acquisition of Direct
Broadcasting Satellite
Corporation (unaudited).......... 647 - 6 - 11,986 -
8% Series A Cumulative Preferred
Stock dividends (unaudited)...... - 602 - - - (602)
Exercise of Class A Common Stock
options (unaudited).............. 58 - 1 - 543 -
Exercise of Common Stock Warrants
(unaudited)...................... - - - (5) 5 -
Employee incentives funded by
issuance of Class A Common Stock
(unaudited)...................... 1 - - - 54 -
Net loss (unaudited)............... - - - - - (126,655)
------ ----------- ----- ----------- ----------- ------------
Balance, June 30, 1997 (unaudited)... 41,626 $ 19,001 $ 416 $ 11 $ 170,701 $ (242,997)
------ ----------- ----- ----------- ----------- ------------
------ ----------- ----- ----------- ----------- ------------
<CAPTION>
TOTAL
---------
<S> <C>
Balance, December 31, 1993........... $ 49,700
Issuance of Class A Common Stock:
For acquisition of DirectSat,
Inc. .......................... 9,000
For cash......................... 3,833
Issuance of 1,616,681 shares of 8%
Series A Cumulative Preferred
Stock............................ 15,052
Issuance of Common Stock
Warrants......................... 26,133
8% Series A Cumulative Preferred
Stock dividends.................. -
Net income......................... 90
---------
Balance, December 31, 1994........... 103,808
8% Series A Cumulative Preferred
Stock dividends.................. -
Issuance of Class A Common Stock
pursuant to initial public
offering, net of stock issuance
costs of $5,067.................. 62,933
Exercise of Common Stock
Warrants......................... -
Employee Savings Plan contribution
and launch bonuses funded by
issuance of Class A Common
Stock............................ 1,192
Unrealized holding gains on
available-for-sale securities,
net.............................. 239
Net loss........................... (11,486)
---------
Balance, December 31, 1995........... 156,686
8% Series A Cumulative Preferred
Stock dividends.................. -
Exercise of Class A Common Stock
options.......................... 2,259
Exercise of Common Stock
Warrants......................... -
Income tax benefit of deduction for
income tax purposes on exercise
of Class A Common Stock
options.......................... 2,372
Employee Savings Plan contribution
issuable and launch bonuses
funded by issuance of Class A
Common Stock..................... 1,116
Unrealized holding losses on
available-for-sale securities,
net.............................. (250)
Net loss........................... (100,986)
---------
Balance, December 31, 1996........... 61,197
Issuance of Class A Common Stock
for acquisition of Direct
Broadcasting Satellite
Corporation (unaudited).......... 11,992
8% Series A Cumulative Preferred
Stock dividends (unaudited)...... -
Exercise of Class A Common Stock
options (unaudited).............. 544
Exercise of Common Stock Warrants
(unaudited)...................... -
Employee incentives funded by
issuance of Class A Common Stock
(unaudited)...................... 54
Net loss (unaudited)............... (126,655)
---------
Balance, June 30, 1997 (unaudited)... $ (52,868)
---------
---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ 90 $ (11,486) $(100,986) $ (29,775) $(126,655)
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Depreciation and amortization..................... 2,243 3,114 27,423 9,664 25,357
Amortization of subscriber acquisition costs...... - - 15,991 92 61,418
Deferred income tax benefit....................... (7,330) (4,763) (50,365) (11,534) (365)
Amortization of debt discount and deferred
financing costs................................. 20,662 23,528 61,695 24,530 38,731
Employee benefits funded by issuance of Class A
Common Stock.................................... - 1,192 1,116 - -
Change in reserve for excess and obsolete
inventory....................................... 502 1,212 2,866 634 1,987
Change in long-term deferred signal carriage
revenue......................................... - - 5,949 4,163 1,417
Change in accrued interest on notes receivable
from DBSC....................................... - - (3,382) - -
Change in accrued interest on convertible
subordinated debentures from SSET............... (279) (860) (484) - -
Other, net........................................ (37) 375 1,215 (666) 4,542
Changes in current assets and current liabilities,
net(see Note 2)................................. 8,354 (32,640) 11,537 (17,163) (15,623)
--------- --------- --------- --------- ---------
Net cash flows provided by (used in) operating
activities.......................................... 24,205 (20,328) (27,425) (20,055) (9,191)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities......... (15,100) (25,230) (138,295) (44,782) (4,706)
Sales of marketable investment securities............. 4,439 40,563 135,176 15,479 18,561
Purchases of restricted marketable investment
securities.......................................... (11,400) (15,000) (21,100) (9,800) (1,645)
Funds released from restricted cash and marketable
investment securities -- other...................... - - 15,700 - -
Purchases of property and equipment................... (3,507) (4,048) (50,954) (7,537) (19,129)
Offering proceeds and investment earnings placed in
escrow.............................................. (329,831) (9,589) (193,972) (181,778) (221,654)
Funds released from escrow accounts................... 144,400 122,149 219,352 71,545 72,975
Investment in SSET.................................... (8,750) - -
Payments received on (investments in) convertible
subordinated debentures from SSET................... - - 6,445 - (500)
Investment in convertible subordinated debentures from
DBSI................................................ - (1,000) (3,640) (3,000) -
Long-term notes receivable from and investment in
DBSC................................................ (4,210) (16,000) (30,000) (12,500) -
Expenditures for satellite systems under
construction........................................ (115,752) (129,506) (170,935) (73,932) (47,975)
Expenditures for FCC authorizations................... (159) (458) (55,419) (13,652) (129)
Other................................................. 1,305 - - - (478)
--------- --------- --------- --------- ---------
Net cash flows used in investing activities........... (338,565) (38,119) (287,642) (259,957) (204,680)
CASH FLOWS FROM FINANCING ACTIVITIES:
Minority investor investment in and loan to
consolidated joint venture.......................... 1,000 - - - -
Net proceeds from issuance of 1994 Notes and Common
Stock Warrants...................................... 323,325 - - - -
Net proceeds from issuance of Class A Common Stock.... 3,833 62,933 - - -
Net proceeds from issuance of 1996 Notes.............. - - 336,916 337,043 -
Net proceeds from issuance of 1997 Notes.............. - - - - 362,500
Expenditures from escrow for offering costs........... (837) - - - -
Proceeds from refinancing of mortgage indebtedness.... 4,200 - - - -
Repayments of mortgage indebtedness and notes
payable............................................. (3,435) (238) (6,631) (1,082) (5,551)
Loans from stockholder, net........................... 4,000 - - - -
Repayment of loans from stockholder................... (4,075) - - - -
Stock options exercised............................... - - 2,259 722 543
Dividends paid........................................ (3,000) - - - -
--------- --------- --------- --------- ---------
Net cash flows provided by financing activities....... 325,011 62,695 332,544 336,683 357,492
--------- --------- --------- --------- ---------
Net increase in cash and cash equivalents............. 10,651 4,248 17,477 56,671 143,621
Cash and cash equivalents, beginning of year.......... 6,855 17,506 21,754 21,754 39,231
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of year................ $ 17,506 $ 21,754 $ 39,231 $ 78,425 $ 182,852
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND JUNE 30, 1997 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
EchoStar Communications Corporation ("ECC"), and together with its
subsidiaries ("EchoStar" or the "Company"), currently is one of only three
direct broadcast satellite ("DBS") companies in the United States with the
capacity to provide comprehensive nationwide DBS programming service. EchoStar's
DBS service (the "DISH Network") commenced operations in March 1996 after the
successful launch of its first satellite ("EchoStar I") in December 1995.
EchoStar launched its second satellite ("EchoStar II") on September 10, 1996.
EchoStar II significantly increased the channel capacity and programming
offerings of the DISH Network when it became fully operational in November 1996.
EchoStar currently provides approximately 120 channels of near laser disc
quality digital video programming and over 30 channels of near CD quality audio
programming to the entire continental United States. In addition to its DISH
Network business, EchoStar is engaged in the design, manufacture, distribution
and installation of satellite direct-to-home ("DTH") products, domestic
distribution of DTH programming, and consumer financing of EchoStar's DISH
Network and domestic DTH products and services.
EchoStar's business objective is to become one of the leading providers of
subscription television and other satellite-delivered services in the United
States. EchoStar had approximately 350,000 and 590,000 subscribers to DISH
Network programming as of December 31, 1996 and June 30, 1997, respectively.
RECENT DEVELOPMENTS
SERIES B SENIOR REDEEMABLE EXCHANGEABLE PREFERRED OFFERING
On October 2, 1997, EchoStar consummated an offering (the "Preferred
Offering") of 12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock
due 2004, par value $0.01 per share (including any additional shares of such
stock issued from time to time in lieu of cash dividends, (the "Senior Preferred
Stock"). The Preferred Offering resulted in net proceeds to EchoStar of
approximately $193.0 million. The Senior Preferred Stock was issued in a private
placement pursuant to Rule 144A of the Securities Act. Each share of Senior
Preferred Stock will have a liquidation preference of $1,000 per share.
Dividends on the Senior Preferred Stock are payable quarterly in arrears,
commencing on January 1, 1998. EchoStar may, at its option, pay dividends in
cash or by issuing additional shares of Senior Preferred Stock having an
aggregate liquidation preference equal to the amount of such dividends. EchoStar
may, at its option, exchange all, but not less than all, of the shares of Senior
Preferred Stock then outstanding for EchoStar's 12 1/8% Senior Exchange Notes
due 2004 (including any such senior notes issued from time to time in lieu of
cash interest, the "Senior Exchange Notes"). The Senior Exchange Notes will bear
interest at a rate of 12 1/8 per annum, payable semiannually in arrears on April
1 and October 1 of each year, commencing with the first such date to occur after
the date of the exchange. Interest on the Senior Exchange Notes may, at the
option of EchoStar, be paid in cash or by issuing additional Senior Exchange
Notes in an aggregate principal amount equal to the amount of such interest.
EchoStar presently intends to use the net proceeds of the Preferred Offering to
fund subscriber acquisition and marketing expenses and for other general
corporate purposes.
F-7
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
1997 NOTES OFFERING
As more fully described in Note 7, on June 25, 1997, EchoStar DBS
Corporation ("DBS Corp"), a wholly-owned subsidiary of EchoStar, consummated an
offering (the "1997 Notes Offering") of 12 1/2% Senior Secured Notes due 2002
(the "1997 Notes"). The 1997 Notes Offering resulted in net proceeds to the
Company of approximately $362.5 million. Interest on the 1997 Notes is payable
semi-annually on January 1 and July 1 of each year, commencing January 1, 1998.
Approximately $109.0 million of the net proceeds of the 1997 Notes Offering were
placed in an escrow account to fund the first five semi-annual interest payments
(through January 1, 2000). The 1997 Notes were issued in a private placement
pursuant to Rule 144A of the Securities Act of 1933, as amended. The Company
agreed to exchange the privately issued notes for publicly registered notes and
on September 15, 1997 filed an amendment to a registration statement on Form S-4
(the "Registration Statement") with the Securities and Exchange Commission. Upon
the effectiveness of the Registration Statement, the Company will make an offer
to exchange the 1997 Notes for publicly registered notes with substantially
identical terms (including principal amount, interest rate, maturity, security
and ranking). Prior to consummation of the 1997 Notes Offering, EchoStar
contributed (the "Contribution") all of the outstanding capital stock of its
wholly-owned subsidiary EchoStar Satellite Broadcasting Corporation ("ESBC") to
DBS Corp. As a result of the Contribution, ESBC is a wholly-owned subsidiary of
DBS Corp.
NEWS CORPORATION LITIGATION
On February 24, 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar the
DBS permit for 28 frequencies at 110 DEG. West Longitude ("WL") purchased by MCI
Communications Corporation ("MCI") for over $682 million at a Federal
Communications Commission ("FCC") auction. During late April 1997, substantial
disagreements arose between the parties regarding their obligations under the
News Agreement.
During May 1997, EchoStar initiated litigation alleging, among other things,
breach of contract, failure to act in good faith, and other causes of action.
News has denied all of EchoStar's material allegations and has asserted numerous
counterclaims against EchoStar and its Chairman and Chief Executive Officer,
Charles W. Ergen. While EchoStar is confident of its position and believes it
will ultimately prevail, the litigation process could continue for many years
and there can be no assurance concerning the outcome of the litigation.
While EchoStar is confident of its position and believes it will ultimately
prevail, the litigation could continue for many years and there can be no
assurance concerning the outcome of the litigation.
ORGANIZATIONAL HISTORY AND LEGAL STRUCTURE
Certain companies principally owned and controlled by Mr. Charles W. Ergen
were reorganized in 1993 into Dish, Ltd., formerly known as EchoStar
Communications Corporation (together with its subsidiaries, "Dish, Ltd."). The
principal reorganized entities, Echosphere Corporation (formed in 1980) and
Houston Tracker Systems, Inc. (acquired in 1986), are primarily engaged in the
design, assembly, marketing and worldwide distribution of direct-to-home ("DTH")
satellite television products. Satellite Source, Inc. contracts for rights to
purchase C-band satellite delivered television programming for resale to
F-8
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
consumers and other DTH retailers. Through January 1996, Echo Acceptance
Corporation ("EAC") arranged nationwide consumer financing for purchasers of DTH
systems and programming. The FCC has granted EchoStar Satellite Corporation
("ESC") licenses for certain DBS frequencies. The reorganized group also
includes other less significant domestic enterprises and several foreign
entities involved in related activities outside the United States.
During 1994, Dish, Ltd. merged one of its subsidiaries with DirectSat
Corporation ("DirectSat"), an approximately 80% owned subsidiary of SSE Telecom,
Inc. ("SSET") at that time. DirectSat's stockholders received an approximate 3%
equity interest in Dish, Ltd. (subsequently exchanged for stock of ECC) in
exchange for all of DirectSat's then outstanding stock. DirectSat's principal
assets are a conditional satellite construction permit and frequency assignments
for ten DBS frequencies.
In June 1994, Dish, Ltd. completed an offering of 12 7/8% Senior Secured
Discount Notes due 2004 (the "1994 Notes," see Note 6) and Common Stock Warrants
(the "Warrants") (collectively, the "1994 Notes Offering"), resulting in net
proceeds of approximately $323.3 million. Dish, Ltd. and its subsidiaries are
subject to the terms and conditions of the indenture related to the 1994 Notes
(the "1994 Notes Indenture"). The assets of ECC are not subject to the 1994
Notes Indenture. Separate parent company only financial information for ECC is
supplementally provided in Note 16. As described in Note 6, the 1994 Notes
Indenture places significant restrictions on the payment of dividends or other
transfers by Dish, Ltd. to ECC.
In June 1995, ECC completed an initial public offering (the "IPO") of its
Class A Common Stock, which resulted in net proceeds to the Company of
approximately $62.9 million. Concurrently, Charles W. Ergen, President and Chief
Executive Officer of both ECC and Dish, Ltd., exchanged all of his then
outstanding shares of Class B Common Stock and 8% Series A Cumulative Preferred
Stock of Dish, Ltd. for like shares of ECC (the "Exchange") in the ratio of 0.75
shares of ECC for each share of Dish, Ltd. capital stock (the "Exchange Ratio").
All employee stock options of Dish, Ltd. were also assumed by ECC, adjusted for
the Exchange Ratio. In December 1995, ECC merged Dish, Ltd. with a wholly-owned
subsidiary of ECC (the "Merger") and all outstanding shares of Dish, Ltd. Class
A Common Stock and 8% Series A Cumulative Preferred Stock (other than those held
by ECC) were automatically converted into the right to receive like shares of
ECC in accordance with the Exchange Ratio. Also effective with the Merger, all
outstanding Warrants for the purchase of Dish, Ltd. Class A Common Stock
automatically became exercisable for shares of ECC's Class A Common Stock,
adjusted for the Exchange Ratio. As a result of the Exchange and Merger, ECC
owns all outstanding shares of Dish, Ltd. capital stock.
In March 1996, EchoStar Satellite Broadcasting Corporation ("ESBC"), a
wholly-owned subsidiary of ECC, completed an offering (the "1996 Notes
Offering") of 13 1/8% Senior Secured Discount Notes due 2004, which resulted in
net proceeds to the Company of approximately $337.0 million. In connection with
the 1996 Notes Offering, EchoStar contributed all of the outstanding capital
stock of Dish, Ltd. to ESBC. This transaction was accounted for as a
reorganization of entities under common control whereby Dish, Ltd. was treated
as the predecessor to ESBC. ESBC is subject to all, and ECC is subject to
certain of, the terms and conditions of the indenture related to the 1996 Notes
(the "1996 Notes Indenture"). EchoStar DBS Corporation ("DBS Corp") was formed
in January 1996 as a wholly-owned subsidiary of ECC for the initial purpose of
participating in a Federal Communications Commission auction. On January 26,
1996, DBS Corp submitted the winning bid of $52.3 million for 24 DBS frequencies
at 148 DEG. WL. Funds necessary to complete the purchase of the DBS frequencies
and commence construction of the Company's fourth DBS satellite, EchoStar IV,
have been loaned to DBS Corp by ECC and ESBC.
F-9
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
The following summarizes the Company's organizational structure for EchoStar
and its significant subsidiaries as described above as of June 30, 1997.
<TABLE>
<CAPTION>
REFERRED TO HEREIN
LEGAL ENTITY AS OWNERSHIP
- ------------------------------------------ -------------------- -------------------------
<S> <C> <C>
EchoStar Communications Corporation ECC Publicly owned
EchoStar DBS Corporation DBS Corp Wholly-owned by ECC
EchoStar Satellite Broadcasting Wholly-owned by DBS Corp
Corporation ESBC
Dish Network Credit Corporation DNCC Wholly-owned by ECC
Dish, Ltd. Dish, Ltd. Wholly-owned by ESBC
EchoStar Satellite Corporation Wholly-owned by Dish,
ESC Ltd.
Echosphere Corporation Wholly-owned by Dish,
EchoCorp Ltd.
Houston Tracker Systems, Inc. Wholly-owned by Dish,
HTS Ltd.
EchoStar International Corporation Wholly-owned by Dish,
EIC Ltd.
</TABLE>
Substantially all of EchoStar's operating activities are conducted by
subsidiaries of Dish, Ltd.
SIGNIFICANT RISKS AND UNCERTAINTIES
The commencement of EchoStar's DBS business has dramatically changed
EchoStar's operating results and financial position as compared to its
historical results. EchoStar consummated the 1994 Notes Offering, the 1996 Notes
Offering and the IPO to partially satisfy the capital requirements for the
construction, launch and operation of its first four DBS satellites (EchoStar I,
EchoStar II, EchoStar III, and EchoStar IV). As a result, annual interest
expense on the 1994 and 1996 Notes, and depreciation of the investment in the
satellites and related assets each exceeds historical levels of income before
income taxes. Consequently, beginning in 1995, EchoStar reported significant net
losses and expects such net losses to continue through at least 1999. As of
December 31, 1996, EchoStar expects to invest approximately an additional $344
million to fund contractor financing obligations with respect to its first four
satellites and to complete the construction phase and launch of EchoStar III and
EchoStar IV (see Note 11). EchoStar's plans also include the financing,
construction and launch of two fixed service satellites, additional DBS
satellites, and Ku-band and KuX-band satellites, assuming receipt of all
required FCC licenses and permits.
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 News Agreement, EchoStar was required to raise additional
capital to execute its contemplated business plan. In connection therewith, in
June 1997 DBS Corp issued the 1997 Notes. The 1997 Notes Offering resulted in
net proceeds to the Company of approximately $362.5 million, including
approximately $109.0 million restricted for certain interest payments on the
Notes. EchoStar intends to seek recovery from News for any costs of financing,
including those costs associated with the offering of the Notes, in excess of
the costs of the financing committed to by News under the News Agreement.
F-10
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements for 1995 present the consolidation of Dish, Ltd.
and its subsidiaries through the date of the Exchange (see Note 1) and the
consolidation of ECC and its subsidiaries, including Dish, Ltd., thereafter. The
Exchange and Merger was accounted for as a reorganization of entities under
common control and the historical cost basis of consolidated assets and
liabilities was not affected by the transaction. All significant intercompany
accounts and transactions have been eliminated.
The Company accounts for investments in 50% or less owned entities using the
equity method. At December 31, 1995 and 1996 and June 30, 1997, these
investments were not material to the consolidated financial statements.
The consolidated financial statements as of June 30, 1997 and for the six
months ended June 30, 1996 and 1997 include, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the Company's consolidated financial position, results of operations and
cash flows. Operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar because their sales and purchases are predominantly denominated in that
currency. Transactions denominated in currencies other than U.S. dollars are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period end translation) or realized
(upon settlement of the transaction). Net transaction gains (losses) during the
years ended December 31, 1994, 1995 and 1996 and the six-month periods ended
June 30, 1996 and 1997 were not material to the Company's results of operations.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with an original
maturity of ninety days or less to be cash equivalents. Cash equivalents as of
December 31, 1995 and 1996 and June 30, 1997 consist of money market funds,
corporate notes and commercial paper; such balances are stated at cost which
equates to market value.
F-11
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENTS OF CASH FLOWS DATA
The following summarizes net cash flows from changes in the Company's
current assets and current liabilities:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
Trade accounts receivable............................. $ 372 $ (1,082) $ (4,337)
Inventories........................................... 3,049 (19,654) (36,864)
Income tax refund receivable.......................... - (3,554) (1,276)
Subscriber acquisition costs.......................... - - (84,120)
Other current assets.................................. (183) (10,464) (5,319)
Trade accounts payable................................ 2,648 4,111 21,756
Deferred revenue--DISH Network subscriber
promotions.......................................... - - 97,959
Deferred programming revenue.......................... 564 (1,009) 4,557
Accrued expenses and other current liabilities........ 1,670 (988) 19,181
Other, net............................................ 234 - -
--------- --------- ---------
Net increase (decrease) in current assets and current
liabilities......................................... $ 8,354 $ (32,640) $ 11,537
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following presents the Company's supplemental cash flow statement
disclosure:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid for interest, net of amounts capitalized............. $ 436 $ 461 $ 3,007 $ 7,953 $ 2,352
Cash paid for income taxes..................................... 7,140 3,203 - - -
8% Series A Cumulative Preferred Stock dividends............... 939 1,204 1,204 602 602
Accrued satellite contract costs............................... - 15,000 - - 32,950
Satellite launch payment for EchoStar II applied to EchoStar I
launch....................................................... - - 15,000 15,000 -
Exchange of note payable to stockholder, and interest thereon,
for 8% Series A Cumulative Preferred Stock................... 15,052 - - - -
Issuance of Class A Common Stock to acquire investment in
DirectSat Corporation........................................ 9,000 - - - -
Property and equipment acquired under capital leases........... 934 - - - -
Note payable issued for deferred satellite construction
payments for EchoStar I...................................... - 32,833 3,167 3,167 -
Note payable issued for deferred satellite construction
payments for EchoStar II..................................... - - 28,000 - -
Employee Savings Plan Contribution and launch bonuses funded by
issuance of Class A Common Stock............................. - 1,192 1,116 8 20
The purchase price of DBS was allocated as follows in the
realted purchase accounting:
EchoStar III satellite under construction.................. -- -- -- -- 51,321
FCC authorizations......................................... -- -- -- -- 16,543
Notes receivable from DBSC, including accrued interest of
$3,382................................................... -- -- -- -- (49,382)
Investment in DBSC......................................... -- -- -- -- (4,044)
Accounts payable and accrued expenses...................... -- -- -- -- (1,946)
Other notes payable........................................ -- -- -- -- (500)
Common stock and additional paid-in capital................ -- -- -- -- (11,992)
</TABLE>
F-12
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE INVESTMENT SECURITIES AND RESTRICTED CASH AND MARKETABLE INVESTMENT
SECURITIES
At December 31, 1995 and 1996 and June 30, 1997, the Company has classified
all marketable investment securities as available-for-sale. Accordingly, these
investments are reflected at market value based on quoted market prices. Related
unrealized gains and losses are reported as a separate component of
stockholders' equity, net of related deferred income taxes of $146,000 and
$6,000 at December 31, 1995 and 1996, respectively, and $6,000 at June 30, 1997.
The specific identification method is used to determine cost in computing
realized gains and losses.
Marketable investment securities as of December 31, 1995 and 1996 are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNREALIZED UNREALIZED
HOLDING HOLDING
AMORTIZED GAIN MARKET AMORTIZED GAIN MARKET
COST (LOSS) VALUE COST (LOSS) VALUE
----------- ------------- --------- ----------- ------------- ---------
Commercial paper.................................... $ 1,126 $ - $ 1,126 $ 16,065 $ - $ 16,065
Corporate notes..................................... 12,353 (19) 12,334 - - -
Government bonds.................................... 2,038 - 2,038 2,540 - 2,540
Mutual funds........................................ 188 (16) 172 219 (17) 202
----------- --- --------- ----------- --- ---------
$ 15,705 $ (35) $ 15,670 $ 18,824 $ (17) $ 18,807
----------- --- --------- ----------- --- ---------
----------- --- --------- ----------- --- ---------
</TABLE>
Restricted Cash and Marketable Investment Securities in Escrow Accounts as
reflected in the accompanying consolidated balance sheets represent the
remaining net proceeds received from the 1994 Notes Offering, and a portion of
the proceeds from the 1996 Notes Offering, plus investment earnings, less
amounts expended to date in connection with the development, construction and
continued growth of the DISH Network. These proceeds are held in separate escrow
accounts (the "Dish Escrow Account" and the "ESBC Escrow Account") as required
by the respective indentures, and invested in certain permitted debt and other
marketable investment securities until disbursed for the express purposes
identified in the respective indentures.
Other Restricted Cash includes balances totaling $11.4 million, $5.7 million
and $5.7 million at December 31, 1995 and 1996 and June 30, 1997, respectively,
which were restricted to satisfy certain covenants in the 1994 Notes Indenture
regarding launch insurance for EchoStar I and EchoStar II. In addition, as of
each of December 31, 1995 and 1996 and June 30, 1997, $15.0 million was held in
escrow relating to a non-performing manufacturer of DBS receivers (see Note 3).
Also, as of December 31, 1996 and June 30, 1997, $10.0 million was on deposit in
a separate escrow account established, pursuant to an additional DBS receiver
manufacturing agreement, to provide for EchoStar's future payment obligations.
The $15.0 million and $10.0 million deposits were both released from these
escrow accounts during May 1997.
F-13
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The major components of Restricted Cash and Marketable Investment Securities
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNREALIZED UNREALIZED
HOLDING HOLDING
AMORTIZED GAIN MARKET AMORTIZED GAIN MARKET
COST (LOSS) VALUE COST (LOSS) VALUE
----------- ----------- --------- ----------- ----------- ---------
Commercial paper........................... $ 66,214 $ - $ 66,214 $ 77,569 $ - $ 77,569
Government bonds........................... 32,904 420 33,324 368 - 368
Certificates of deposit.................... - - - 1,100 - 1,100
Accrued interest........................... 153 - 153 254 - 254
----------- ----------- --------- ----------- ----------- ---------
$ 99,271 $ 420 $ 99,691 $ 79,291 $ - $ 79,291
----------- ----------- --------- ----------- ----------- ---------
----------- ----------- --------- ----------- ----------- ---------
</TABLE>
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method. Proprietary products are
manufactured by outside suppliers to the Company's specifications. EchoStar also
distributes non-proprietary products purchased from other manufacturers.
Manufactured inventories include materials, labor and manufacturing overhead.
Cost of other inventories includes parts, contract manufacturers' delivered
price, assembly and testing labor, and related overhead, including handling and
storage costs. Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- ------------
<S> <C> <C> <C>
(UNAUDITED)
EchoStar Receiver Systems..................................................... $ - $ 32,799 $ 46,499
Consigned DBS receiver components............................................. - 23,525 15,201
DBS receiver components....................................................... 9,615 15,736 2,681
Finished goods--C-band........................................................ 11,161 600 4,181
Finished goods--International................................................. 9,297 3,491 359
Competitor DBS Receivers...................................................... 9,404 - -
Spare parts................................................................... 2,089 2,279 1,771
Reserve for excess and obsolete inventory..................................... (2,797) (5,663) (7,649)
--------- --------- ------------
$ 38,769 $ 72,767 $ 63,043
--------- --------- ------------
--------- --------- ------------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Cost includes interest
capitalized of $5.7 million, $25.8 million and $25.7 million during the years
ended December 31, 1994, 1995 and 1996, respectively and $12.8 million and $11.4
million during the six-month periods ended June 30, 1996 and 1997, respectively.
The costs of satellites under construction are capitalized during the
construction phase, assuming the eventual successful launch and in-orbit
operation of the satellite. If a satellite were to fail during launch or while
in-orbit, the resultant loss would be charged to expense in the period such loss
was realized. The amount of any such loss would be reduced to the extent of
insurance proceeds received as a result of the launch or in-
F-14
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
orbit failure. Depreciation is recorded on a straight-line basis for financial
reporting purposes. Repair and maintenance costs are charged to expense when
incurred. Renewals and betterments are capitalized.
FCC AUTHORIZATIONS
FCC authorizations are recorded at cost and amortized using the
straight-line method over a period of 40 years. Such amortization commences at
the time the related satellite becomes operational; capitalized costs are
written off at the time efforts to provide services are abandoned. FCC
authorizations include interest capitalized of $1.3 million and $6.1 million
during the years ended December 31, 1995 and 1996, respectively, and $1.6
million and $5.2 million during the six-month periods ended June 30, 1996 and
1997, respectively. The merger with DirectSat described in Note 1 was accounted
for as a purchase. DirectSat's assets were valued at $9.0 million by the Company
at the time of the merger and are included in FCC authorizations in the
accompanying balance sheets.
REVENUE RECOGNITION
Revenue from sales of DTH products is recognized upon shipment to customers.
Revenue from the provision of DISH Network service and C-band programming
service to subscribers is recognized as revenue in the period such programming
is provided.
SUBSCRIBER PROMOTION SUBSIDIES, SUBSCRIBER ACQUISITION COSTS, AND DISH NETWORK
PROMOTIONS--SUBSCRIPTION TELEVISION SERVICES AND PRODUCTS
Total transaction proceeds to EchoStar from DISH Network programming and
equipment sold as a package under EchoStar promotions are initially deferred and
recognized as revenue over the related service period (normally one year),
commencing upon authorization of each new subscriber. The excess of EchoStar's
aggregate cost of the equipment, programming and other expenses for the initial
prepaid subscription period for DISH Network service over proceeds received
("subscriber promotion subsidies") is expensed upon shipment of the equipment.
Remaining costs, less programming costs and the amount expensed upon shipment as
per above, are capitalized and reflected in the accompanying consolidated
balance sheets as subscriber acquisition costs. Such costs are amortized over
the related prepaid subscription term of the customer. Programming costs are
expensed as service is provided. Excluding expected incremental revenues from
premium and Pay-Per-View programming, the accounting followed results in revenue
recognition over the initial period of service equal to the sum of programming
costs and amortization of subscriber acquisition costs.
DISH Network programming and equipment not sold as a package under EchoStar
promotions are separately presented in the accompanying consolidated statements
of operations.
DEFERRED DEBT ISSUANCE COSTS AND DEBT DISCOUNT
Costs of completing the 1994 Notes Offering and 1996 Notes Offering were
deferred (Note 5) and are being amortized to interest expense over their
respective terms. The original issue discounts related to the 1994 Notes and the
1996 Notes (Note 6) are being accreted to interest expense so as to reflect a
constant rate of interest on the accreted balance of the 1994 Notes and the 1996
Notes.
DEFERRED PROGRAMMING REVENUE
Deferred programming revenue consists of prepayments received from
subscribers to DISH Network programming. Such amounts are recognized as revenue
in the period the programming is provided to the
F-15
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
subscriber. Similarly, EchoStar defers prepayments received from subscribers to
C-band programming sold by EchoStar as an authorized distributor.
LONG-TERM DEFERRED SIGNAL CARRIAGE REVENUE
Long-term deferred signal carriage revenue consists of advance payments from
certain programming providers for carriage of their programming content on the
DISH Network. Such amounts are deferred and recognized as revenue on a
straight-line basis over the related contract terms (up to ten years).
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- ------------
<S> <C> <C> <C>
(UNAUDITED)
Accrued expenses.............................................................. $ 3,850 $ 20,269 $ 32,378
Accrued satellite contract costs.............................................. 15,000 - 32,950
Accrued programming........................................................... 4,979 9,463 12,095
Reserve for warranty costs.................................................... 1,013 763 763
Other......................................................................... 1,472 - -
--------- --------- ------------
$ 26,314 $ 30,495 $ 78,186
--------- --------- ------------
--------- --------- ------------
</TABLE>
The Company's C-band proprietary products are under warranty against defects
in material and workmanship for a period of one year from the date of original
retail purchase. The reserve for warranty costs is based upon historical units
sold and expected repair costs. The Company does not have a warranty reserve for
its DBS products because the warranty is provided by the contract manufacturer.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $2.3 million, $1.9
million and $16.5 million for the years ended December 31, 1994, 1995 and 1996,
respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, which are expensed as incurred, totaled $5.9
million, $5.0 million and $6.0 million for the years ended December 31, 1994,
1995 and 1996, respectively.
NET LOSS ATTRIBUTABLE TO COMMON SHARES
Net loss attributable to common shares is calculated based on the
weighted-average number of shares of common stock issued and outstanding for the
respective periods. Common stock equivalents (warrants and employee stock
options) are excluded as they are antidilutive. Net loss attributable to common
shares is also adjusted for cumulative dividends on the 8% Series A Cumulative
Preferred Stock.
RECLASSIFICATIONS
Certain amounts from the prior years consolidated financial statements have
been reclassified to conform with the 1996 presentation.
F-16
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. OTHER CURRENT ASSETS
Other current assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Deposit held by non-performing manufacturer.................................... $ 10,000 $ 10,000 $ -
Other.......................................................................... 3,037 8,356 10,177
--------- --------- -----------
$ 13,037 $ 18,356 $ 10,177
--------- --------- -----------
--------- --------- -----------
</TABLE>
EchoStar previously maintained agreements with two manufacturers for DBS
receivers. Only one of the manufacturers produced receivers acceptable to
EchoStar. EchoStar previously deposited $10.0 million with the non-performing
manufacturer and, as of December 31, 1996 and June 30, 1997, had an additional
$15.0 million on deposit in an escrow account as security for EchoStar's payment
obligations under that contract. During 1996 EchoStar provided the
non-performing manufacturer notice of its intent to terminate the contract and
filed suit against that manufacturer. On April 25, 1997, the Company and the
non-performing manufacturer executed a settlement and release agreement under
which the non-performing manufacturer agreed to return the $10.0 million deposit
and to release the $15.0 million held in escrow. The Company received these
amounts in May 1997.
EchoStar is currently dependent on one manufacturing source for its
receivers. The performing manufacturer presently manufactures receivers in
sufficient quantities to meet currently expected demand. If EchoStar's sole
manufacturer is unable for any reason to produce receivers in a quantity
sufficient to meet demand, EchoStar's liquidity and results of operations would
be adversely affected.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
LIFE ---------------------- JUNE 30,
(IN YEARS) 1995 1996 1997
------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
EchoStar I...................................................... 12 $ - $ 201,607 $ 201,607
EchoStar II..................................................... 12 - 228,694 228,694
Furniture, fixtures and equipment............................... 2-12 35,127 72,945 82,083
Buildings and improvements...................................... 7-40 21,006 26,035 27,488
Tooling and other............................................... 2 2,039 3,253 3,781
Land............................................................ - 1,613 2,295 2,317
Vehicles........................................................ 7 1,310 1,323 1,334
Construction in progress........................................ - 303,174 89,733 241,189
---------- ---------- -----------
Total property and equipment.................................... 364,269 625,885 788,493
Accumulated depreciation........................................ (10,269) (35,264) (60,256)
---------- ---------- -----------
Property and equipment, net..................................... $ 354,000 $ 590,621 $ 728,237
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-17
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT (CONTINUED)
Construction in progress consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
---------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Progress amounts for satellite construction, launch, launch insurance, and
capitalized interest:
EchoStar I................................................................. $ 193,629 $ - $ -
EchoStar II................................................................ 88,634 - -
EchoStar III............................................................... 20,801 29,123 151,570
EchoStar IV................................................................ - 56,320 77,002
Other........................................................................ 110 4,290 12,617
---------- --------- -----------
$ 303,174 $ 89,733 $ 241,189
---------- --------- -----------
---------- --------- -----------
</TABLE>
Construction in progress for each of EchoStar III and EchoStar IV, includes
capitalized costs related to the construction, insurance and launch of such
satellites. EchoStar III was launched on October 5, 1997; EchoStar IV is
currently scheduled to launch during the first quarter of 1998.
5. OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Long-term notes receivable from DBSC and accrued interest...................... $ 16,000 $ 49,382 $ -
Deferred debt issuance costs................................................... 10,622 21,284 33,619
SSET convertible subordinated debentures and accrued interest.................. 9,610 3,649 4,075
Investment in DBSC............................................................. 4,111 4,044 -
DBSI convertible subordinated debentures....................................... 1,000 4,640 4,640
Other, net..................................................................... 897 827 1,341
--------- --------- -----------
$ 42,240 $ 83,826 $ 43,675
--------- --------- -----------
--------- --------- -----------
</TABLE>
In 1994, the Company purchased $8.75 million of SSET's 6.5% convertible
subordinated debentures. During 1996, EchoStar received $6.4 million of payments
from SSET ($5.2 million principal and $1.2 million interest) related to these
convertible debentures. As of December 31, 1996, the debentures, if converted,
would represent approximately 5% of SSET's common stock, based on the number of
shares of SSET common stock outstanding at December 31, 1996. Management
estimates that the fair value of the SSET debentures approximates their carrying
value in the accompanying financial statements based on current interest rates
and the conversion features contained in the debentures. SSET is a reporting
company under the Securities Exchange Act of 1934 and is engaged in the
manufacture and sale of satellite telecommunications equipment. In March 1994,
the Company purchased an approximate 6% ownership interest in the stock of
Direct Broadcasting Satellite Corporation ("DBSC") and certain of DBSC's notes
and accounts receivable from SSET for $1.25 million.
F-18
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OTHER NONCURRENT ASSETS (CONTINUED)
In November 1994, the Company resolved a lawsuit brought by the Company
against DBSC regarding enforceability of the notes and accounts receivable. Such
receivables were exchanged for shares of DBSC common stock and the Company
purchased additional DBSC shares for $2,960,000 such that, together with the
shares of DBSC acquired from SSET, the Company owned approximately 40% of the
outstanding common stock of DBSC. DBSC's principal assets include an FCC
conditional satellite construction permit and specific orbital slot assignments
for a total of 22 DBS frequencies.
In December 1995, the Company advanced DBSC $16.0 million in the form of a
note receivable to enable DBSC to make required payments under its satellite
construction contract (EchoStar III). Additionally, during 1996, the Company
made monthly advances to DBSC, in the form of additional notes receivable, to
enable DBSC to meet the commitments under its satellite construction contract.
Such advances made during 1996 aggregated $30.0 million. The $16.0 million note
receivable from DBSC bears interest at 11.5% and the additional $30.0 million of
notes receivable from DBSC bears interest at 11.25%. These notes receivable
mature monthly, beginning December 29, 2003. Under the terms of the promissory
notes, equal installments of principal and interest are due annually commencing
December 1997. As of December 31, 1996, these notes receivable totaled $49.4
million, including accrued interest of $3.4 million. These notes are secured by
all of DBSC's assets, as defined in the Security Agreement. Management estimates
that the fair value of these notes approximates carrying value in the
accompanying financial statements based on current risk adjusted interest rates.
On January 8, 1997, EchoStar consummated the merger of DBSC with a wholly-owned
subsidiary of EchoStar ("New DBSC"). Through June 30, 1997 EchoStar had issued
approximately 647,000 shares (and expects to issue an additional 11,000 shares)
of its Class A Common Stock to acquire the remaining 60% of DBSC which it did
not previously own. This transaction was accounted for as a purchase and the
excess of the purchase price over the fair value of DBSC's tangible assets was
allocated to DBSC's FCC authorizations. DBSC's principal assets include an FCC
conditional construction permit and specific orbital slot assignments for
certain DBS frequencies. During 1997, upon consummation of the DBSC merger, the
aforementioned notes receivable were eliminated, on a consolidated basis, in the
related purchase accounting.
In 1995, the Company purchased $1.0 million of DBS Industries, Inc.'s
("DBSI") convertible subordinated debentures, which mature July 1, 1998. In
January and December 1996, the Company purchased an additional $3.0 million
(maturing January 12, 1999), and $640,000 (maturing December 12, 1999),
respectively, of DBSI's convertible subordinated debentures. If EchoStar were to
convert these debentures, it would own approximately 14% of DBSI's common stock,
based on the number of shares of DBSI common stock outstanding at December 31,
1996. Each of the debentures bears interest at the prime rate plus 2%, adjusted
and payable quarterly (aggregate rate of 10.25% at December 31, 1996). DBSI,
which is a reporting company under the Securities Exchange Act of 1934, is
engaged in the development of satellite and radio systems for use in automating
the control and distribution of gas and electric power by utility companies.
Management believes the fair value of the DBSI debentures approximates carrying
value in the accompanying financial statements based on current interest rates
and the conversion features contained in the debentures.
F-19
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT
1994 NOTES
On June 7, 1994, Dish, Ltd. issued the 1994 Notes which mature on June 1,
2004. The 1994 Notes issuance resulted in net proceeds to Dish, Ltd. of $323.3
million (including amounts attributable to the issuance of the Warrants (see
Note 9) and after payment of underwriting discount and other issuance costs
aggregating approximately $12.6 million).
The 1994 Notes bear interest at a rate of 12 7/8%, computed on a semi-annual
bond equivalent basis. Interest on the 1994 Notes will not be payable in cash
prior to June 1, 1999, with the 1994 Notes accreting to a principal value at
stated maturity of $624.0 million by that date. Commencing December 1, 1999,
interest on the 1994 Notes will be payable in cash on December 1 and June 1 of
each year.
The 1994 Notes rank senior in right of payment to all subordinated
indebtedness of Dish, Ltd. and PARI PASSU in right of payment with all other
senior indebtedness of Dish, Ltd., subject to the terms of an Intercreditor
Agreement between Dish, Ltd., certain of its principal subsidiaries, and certain
creditors thereof. The 1994 Notes are secured by liens on certain assets of
Dish, Ltd., including EchoStar I and EchoStar II and all other components of the
EchoStar DBS System owned by Dish, Ltd. and its subsidiaries. The 1994 Notes are
further guaranteed by each material direct subsidiary of Dish, Ltd. (see Note
12). Although the 1994 Notes are titled "Senior," Dish, Ltd. has not issued, and
does not have any current arrangements to issue, any significant indebtedness to
which the 1994 Notes would be senior; however, the 1996 Notes are effectively
subordinated to the 1994 Notes and all other liabilities of Dish, Ltd. and its
subsidiaries. Furthermore, at December 31, 1995 and 1996, the 1994 Notes were
effectively subordinated to approximately $5.4 million and $5.1 million of
mortgage indebtedness, respectively, with respect to certain assets of Dish,
Ltd.'s subsidiaries, not including the EchoStar DBS System, and rank PARI PASSU
with the security interest of approximately $30.0 million of contractor
financing.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1994 Notes are not redeemable at Dish, Ltd.'s
option prior to June 1, 1999. Thereafter, the 1994 Notes will be subject to
redemption, at the option of Dish, Ltd., in whole or in part, at redemption
prices ranging from 104.828% during the year commencing June 1, 1999 to 100% of
principal value at stated maturity on or after June 1, 2002 together with
accrued and unpaid interest thereon to the redemption date. On each of June 1,
2002 and June 1, 2003, Dish, Ltd. will be required to redeem 25% of the original
aggregate principal amount of 1994 Notes at a redemption price equal to 100% of
principal value at stated maturity thereof, together with accrued and unpaid
interest thereon to the redemption date. The remaining principal of the 1994
Notes matures on June 1, 2004.
In the event of a change of control and upon the occurrence of certain other
events, as described in the 1994 Notes Indenture, Dish, Ltd. will be required to
make an offer to each holder of 1994 Notes to repurchase all or any part of such
holder's 1994 Notes at a purchase price equal to 101% of the accreted value
thereof on the date of purchase, if prior to June 1, 1999, or 101% of the
aggregate principal amount thereof, together with accrued and unpaid interest
thereon to the date of purchase, if on or after June 1, 1999.
The 1994 Notes Indenture contains restrictive covenants that, among other
things, impose limitations on Dish, Ltd. and its subsidiaries with respect to
their ability to: (i) incur additional indebtedness; (ii) issue preferred stock;
(iii) apply the proceeds of certain asset sales; (iv) create, incur or assume
liens; (v) create dividend and other payment restrictions with respect to Dish,
Ltd.'s subsidiaries; (vi) merge, consolidate or sell assets; (vii) incur
subordinated or junior debt; and (viii) enter into transactions with affiliates.
In
F-20
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
addition, Dish, Ltd., may pay dividends on its equity securities only if (1) no
default is continuing under the 1994 Notes Indenture; and (2) after giving
effect to such dividend, Dish, Ltd.'s ratio of total indebtedness to cash flow
(calculated in accordance with the 1994 Notes Indenture) would not exceed 4.0 to
1.0. Moreover, the aggregate amount of such dividends generally may not exceed
the sum of 50% of Dish, Ltd.'s consolidated net income (calculated in accordance
with the 1994 Notes Indenture) from the date of issuance of the 1994 Notes, plus
100% of the aggregate net proceeds to Dish, Ltd. from the issuance and sale of
certain equity interests of Dish, Ltd. (including common stock).
1996 NOTES
On March 25, 1996, ESBC completed the 1996 Notes Offering consisting of
$580.0 million aggregate principal amount at stated maturity of the 1996 Notes.
The 1996 Notes Offering resulted in net proceeds to ESBC of approximately $336.9
million (after payment of underwriting discount and other issuance costs
aggregating approximately $13.1 million). The 1996 Notes bear interest at a rate
of 13 1/8%, computed on a semi-annual bond equivalent basis. Interest on the
1996 Notes will not be payable in cash prior to March 15, 2000, with the 1996
Notes accreting to a principal amount at stated maturity of $580.0 million by
that date. Commencing September 15, 2000, interest on the 1996 Notes will be
payable in cash on September 15 and March 15 of each year. The 1996 Notes mature
on March 15, 2004.
The 1996 Notes rank PARI PASSU in right of payment with all senior
indebtedness of ESBC. The 1996 Notes are guaranteed on a subordinated basis by
ESBC's parent, EchoStar, and are secured by liens on certain assets of ESBC,
EchoStar and certain of EchoStar's subsidiaries, including all of the
outstanding capital stock of Dish, Ltd., which currently owns substantially all
of EchoStar's operating subsidiaries. Although the 1996 Notes are titled
"Senior,": (i) ESBC has not issued, and does not have any current arrangements
to issue, any significant indebtedness to which the 1996 Notes would be senior;
and (ii) the 1996 Notes are effectively subordinated to all liabilities of ECC
(except liabilities to general creditors) and its other subsidiaries (except
liabilities of ESBC), including liabilities to general creditors. As of December
31, 1996, the liabilities of EchoStar and its subsidiaries, exclusive of the
1996 Notes, aggregated approximately $694.0 million. In addition, net cash flows
generated by the assets and operations of ESBC's subsidiaries will be available
to satisfy the obligations of the 1996 Notes only at any time after payment of
all amounts due and payable at such time under the 1994 Notes.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1996 Notes are not redeemable at ESBC's option
prior to March 15, 2000. Thereafter, the 1996 Notes will be subject to
redemption, at the option of ESBC, in whole or in part, at redemption prices
ranging from 106.5625% during the year commencing March 15, 2000 to 100% on or
after March 15, 2003 of principal amount at stated maturity, together with
accrued and unpaid interest thereon to the redemption date. The entire principal
balance of the 1996 Notes will mature on March 15, 2004.
The 1996 Notes Indenture contains restrictive covenants that, among other
things, impose limitations on ESBC with respect to its ability to: (i) incur
additional indebtedness; (ii) issue preferred stock; (iii) apply the proceeds of
certain asset sales; (iv) create, incur or assume liens; (v) create dividend and
other payment restrictions with respect to ESBC's subsidiaries; (vi) merge,
consolidate or sell assets; (vii) incur subordinated or junior debt; and (viii)
enter into transactions with affiliates. In addition, ESBC may pay dividends on
its equity securities only if (1) no default is continuing under the 1996 Notes
Indenture; and (2) after giving effect to such dividend, ESBC's ratio of total
indebtedness to cash flow (calculated in accordance with the 1996 Notes
Indenture) would not exceed 5.0 to 1.0. Moreover, the
F-21
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
aggregate amount of such dividends generally may not exceed the sum of 50% of
ESBC's consolidated net income (calculated in accordance with the 1996 Notes
Indenture) from January 1, 1996, plus 100% of the aggregate net cash proceeds
received by ESBC and its subsidiaries from the issue or sale of certain equity
interests of EchoStar (including common stock). The 1996 Notes Indenture permits
ESBC to pay dividends and make other distributions to EchoStar without
restrictions.
In the event of a change of control, as described in the 1996 Notes
Indenture, ESBC will be required to make an offer to each holder of 1996 Notes
to repurchase all of such holder's 1996 Notes at a purchase price equal to 101%
of the accreted value thereof on the date of purchase, if prior to March 15,
2000, or 101% of the aggregate principal amount at stated maturity thereof,
together with accrued and unpaid interest thereon to the date of purchase, if on
or after March 15, 2000.
1997 NOTES
On June 25, 1997, DBS Corp completed the 1997 Notes Offering consisting of
$375.0 million aggregate principal amount of the 1997 Notes. The 1997 Notes
Offering resulted in net proceeds to DBS Corp of approximately $362.5 million
(after payment of underwriting discounts and other issuance costs aggregating
approximately $12.5 million). The 1997 Notes bear interest at a rate of 12 1/2%,
computed semi-annually. Interest on the 1997 Notes will be payable in cash
semi-annually on January 1 and July 1 of each year, with the first interest
payment due January 1, 1998. Approximately $109.0 million of the net proceeds of
the 1997 Notes Offering were placed in the Interest Escrow account to fund the
first five semi-annual interest payments (through January 1, 2000).
Approximately $112.0 million of the net proceeds of the 1997 Notes Offering were
placed in the Satellite Escrow account to fund the construction launch and
insurance of EchoStar's fourth DBS satellite ("EchoStar IV"). The 1997 Notes
mature on July 1, 2002.
The 1997 Notes rank PARI PASSU in right of payment with all senior
indebtedness of DBS Corp. The 1997 Notes are guaranteed on a subordinated basis
by DBS Corp's parent, EchoStar, and, contingent upon the occurrence of certain
events, will be guaranteed by ESBC and Dish, Ltd. and certain other subsidiaries
of DBS Corp and EchoStar. The 1997 Notes are secured by liens on the capital
stock of DBS Corp, EchoStar IV, and certain other assets of DBS Corp and
EchoStar. Although the 1997 Notes are titled "Senior:" (i) DBS Corp has not
issued, and does not have any plans to issue, any significant indebtedness to
which the 1997 Notes would be senior; and (ii) the 1997 Notes are effectively
subordinated to all liabilities of ECC (except liabilities to general
creditors). In addition, the ability of Dish, Ltd. to make distributions to DBS
Corp is severely limited by the terms of an indenture to which it is subject,
and the cash flow generated by the assets and operations of DBS Corp's
subsidiaries will only be available to satisfy DBS Corp's obligations on the
1997 Notes to the extent that such subsidiaries are able to make distributions,
directly or indirectly, to DBS Corp.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1997 Notes are not redeemable at DBS Corp's
option prior to July 1, 2000. Thereafter, the 1997 Notes will be subject to
redemption, at the option of DBS Corp, in whole or in part, at redemption prices
decreasing from 106.25% during the year commencing July 1, 2000 to 100% on or
after July 1, 2002, together with accrued and unpaid interest thereon to the
redemption date.
The 1997 Notes Indenture contains restrictive covenants that, among other
things, impose limitations on the ability of DBS Corp to: (i) incur additional
indebtedness; (ii) issue preferred stock; (iii) apply the proceeds of certain
asset sales; (iv) create, incur or assume liens; (v) create dividend and other
payment
F-22
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
restrictions with respect to DBS Corp's subsidiaries; (vi) merge, consolidate or
sell assets; (vii) incur subordinated or junior debt; and (viii) enter into
transactions with affiliates. In addition, DBS Corp may pay dividends on its
equity securities only if: (1) no default is continuing under the 1997 Notes
Indenture; and (2) after giving effect to such dividend and the incurrence of
any indebtedness (the proceeds of which are used to finance the dividend), DBS
Corps's ratio of total indebtedness to cash flow (calculated in accordance with
the 1997 Notes Indenture) would not exceed 6.0 to 1.0. Moreover, the aggregate
amount of such dividends generally may not exceed the sum of the difference of
cumulative consolidated cash flow (calculated in accordance with the 1997 Notes
Indenture) minus 150% of consolidated interest expense of DBS Corp (calculated
in accordance with the 1997 Notes Indenture) plus an amount equal to 100% of the
aggregate net cash proceeds received by DBS Corp and its subsidiaries from the
issuance or sale of equity interests of DBS Corp or EchoStar (other than equity
interests sold to a subsidiary of DBS Corp or EchoStar, since June 25, 1997).
In the event of a change of control, as defined in the 1997 Notes Indenture,
DBS Corp will be required to make an offer to repurchase all of the 1997 Notes
at a purchase price equal to 101% of the aggregate principal amount thereof,
together with accrued and unpaid interest thereon, to the date of repurchase.
F-23
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
OTHER LONG-TERM DEBT
In addition to the 1994 Notes, the 1996 Notes and the 1997 Notes, other
long-term debt consists of the following (in thousands, except monthly payment
data):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
8.25% note payable for deferred satellite contract payments for EchoStar I due
in equal monthly installments of $722,027, including interest, through
February 2001................................................................ $ 32,833 $ 30,463 $ 27,333
8.25% note payable for deferred satellite contract payments for EchoStar II due
in equal monthly installments of $561,577, including interest, through
November 2001................................................................ - 27,161 24,873
8.0% mortgage note payable due in equal monthly installments of $41,635,
including interest, through May 2008; secured by land and office building
with a net book value of approximately $4.1 million.......................... 3,909 3,715 3,613
10.5% mortgage note payable due in equal monthly installments of $9,442,
including interest, through November 1998; final payment of $854,000 due
November 1998, secured by land and warehouse building with a net book value
of approximately $886,000.................................................... 910 892 882
9.9375% mortgage note payable due in equal quarterly principal installments of
$10,625 plus interest through April 2009, secured by land and office building
with a net book value of approximately $802,000.............................. 574 531 510
9.5% note payable due 90 days following the successful launch and checkout of
EchoStar III................................................................. - - 500
--------- --------- -----------
Total long-term debt, excluding the 1994 Notes, 1996 Notes and 1997 Notes...... 38,226 62,762 57,711
Less current portion........................................................... (4,782) (11,334) (12,332)
--------- --------- -----------
Long-term debt, excluding current portion...................................... $ 33,444 $ 51,428 $ 45,379
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-24
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
Future maturities of amounts outstanding under the Company's long-term debt
facilities as of December 31, 1996 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DEFERRED
SATELLITE
CONTRACT MORTGAGE
1994 NOTES 1996 NOTES PAYMENTS NOTES PAYABLE TOTAL
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDING DECEMBER 31,
1997......................................... $ - $ - $ 11,061 $ 273 $ 11,334
1998......................................... - - 12,009 1,141 13,150
1999......................................... - - 13,038 289 13,327
2000......................................... - - 14,156 309 14,465
2001......................................... - - 7,360 331 7,691
Thereafter................................... 624,000 580,000 - 2,795 1,206,795
Unamortized discount......................... (186,873) (193,835) - - (380,708)
----------- ----------- ----------- ------ ------------
Total........................................ $ 437,127 $ 386,165 $ 57,624 $ 5,138 $ 886,054
----------- ----------- ----------- ------ ------------
----------- ----------- ----------- ------ ------------
</TABLE>
The following table summarizes the book and fair values of the Company's
debt facilities at December 31, 1996 (dollars in thousands). Fair values for the
Company's 1994 Notes and 1996 Notes are based on quoted market prices. The fair
value of the Company's Deferred Satellite Contract Payments and mortgage notes
payable are estimated using discounted cash flow analyses. The interest rates
assumed in such discounted cash flow analyses reflect interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality.
<TABLE>
<CAPTION>
BOOK VALUE FAIR VALUE
----------- ------------
<S> <C> <C>
1994 Notes............................................................................. $ 437,127 $ 526,282
1996 Notes............................................................................. 386,165 435,986
Deferred satellite contract payments................................................... 57,624 56,471
Mortgage notes payable................................................................. 5,138 5,138
----------- ------------
$ 886,054 $ 1,023,877
----------- ------------
----------- ------------
</TABLE>
DEFERRED SATELLITE CONTRACT PAYMENTS
The majority of the purchase price for the satellites is required to be paid
in progress payments, with the remainder payable in the form of non-contingent
payments which are deferred until after the respective satellites are in orbit
(the "Deferred Payments"). Interest rates on the Deferred Payments range between
7.75% and 8.25% (to be determined 90 days prior to the launch of the each
satellite) and payments are made over a period of five years after the delivery
and launch of each such satellite. EchoStar utilized $36.0 million and $28.0
million of contractor financing for EchoStar I and EchoStar II, respectively.
The Deferred Payments with respect to EchoStar I and EchoStar II are secured by
substantially all assets of Dish, Ltd. and its subsidiaries (subject to certain
restrictions) and a corporate guarantee of ECC.
F-25
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
Contractor financing of $15.0 million also will be used for each of EchoStar III
and EchoStar IV. EchoStar will issue a corporate guarantee with respect to the
contractor financing for EchoStar III and EchoStar IV.
BANK CREDIT FACILITY
From May 1994 to May 1996, certain of EchoStar's subsidiaries maintained a
revolving credit facility (the "Credit Facility") with a bank for the purposes
of funding working capital advances and meeting letter of credit requirements
associated with certain inventory purchases and satellite construction payments.
The Credit Facility expired in May 1996. EchoStar currently does not intend to
obtain a replacement credit facility.
7. INCOME TAXES
The components of the (provision for) benefit from income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
Current (provision) benefit:
Federal.......................................................................... $ (5,951) $ 1,350 $ 4,586
State............................................................................ (853) (67) (49)
Foreign.......................................................................... (925) (301) (209)
--------- --------- ---------
(7,729) 982 4,328
Deferred benefit:
Federal.......................................................................... 6,342 4,383 47,902
State............................................................................ 988 380 2,463
--------- --------- ---------
7,330 4,763 50,365
--------- --------- ---------
Total benefit (provision)...................................................... $ (399) $ 5,745 $ 54,693
--------- --------- ---------
--------- --------- ---------
</TABLE>
As of December 31, 1996, the Company had net operating loss carryforwards
("NOLs") for Federal income tax purposes of approximately $77.6 million. The
NOLs expire beginning in year 2011. The use of the NOLs is subject to statutory
and regulatory limitations regarding changes in ownership. SFAS No. 109 requires
that the tax benefit of NOLs for financial reporting purposes be recorded as an
asset and that deferred tax assets and liabilities are recorded for the
estimated future tax effects of temporary differences between the tax basis of
assets and liabilities and amounts reported in the consolidated balance sheets.
To the extent that management assesses the realization of deferred tax assets to
be less than "more likely than not," a valuation reserve is established.
F-26
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The temporary differences which give rise to deferred tax assets and
liabilities as of December 31, 1995 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
<S> <C> <C>
1995 1996
--------- ----------
Current deferred tax assets:
Accrued royalties......................................................................... $ - $ 3,029
Inventory reserves and cost methods....................................................... 834 1,811
Accrued expenses and other................................................................ 257 1,582
Allowance for doubtful accounts........................................................... 456 674
Reserve for warranty costs................................................................ 385 284
--------- ----------
Total current deferred tax assets........................................................... 1,932 7,380
Current deferred tax liabilities:
Unrealized holding gain on marketable investment securities............................... (153) (6)
Subscriber acquisition costs.............................................................. - (19,937)
--------- ----------
Total current deferred tax liabilities...................................................... (153) (19,943)
--------- ----------
Net current deferred tax assets (liabilities)........................................... 1,779 (12,563)
Noncurrent deferred tax assets:
Net operating loss carryforwards.......................................................... - 77,577
Amortization of original issue discount on 1994 and 1996 Notes............................ 15,439 34,914
Other..................................................................................... 7 3,458
--------- ----------
Total noncurrent deferred tax assets........................................................ 15,446 115,949
Noncurrent deferred tax liabilities:
Capitalized costs deducted for tax........................................................ (2,351) (17,683)
Depreciation.............................................................................. (986) (18,927)
--------- ----------
Total noncurrent deferred tax liabilities................................................... (3,337) (36,610)
--------- ----------
Noncurrent net deferred tax assets...................................................... 12,109 79,339
--------- ----------
Net deferred tax assets................................................................. $ 13,888 $ 66,776
--------- ----------
--------- ----------
</TABLE>
No valuation reserve has been provided for the above deferred tax assets
because the Company currently believes it is more likely than not that these
assets will be realized. If future operating results differ materially and
adversely from the Company's current expectations, its judgment regarding the
need for a valuation allowance may change. EchoStar has fully reserved the 1997
additions to its deferred tax assets.
The actual tax provisions for 1994, 1995 and 1996 are reconciled to the
amounts computed by applying the statutory federal tax rate to income before
taxes as follows (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------------------------ ---------------------- ---------
<S> <C> <C> <C> <C> <C>
AMOUNT PERCENT AMOUNT PERCENT AMOUNT
----------- ----------- --------- ----------- ---------
Statutory rate............................................. $ (166) (34.0)% $ 6,031 35.0% $ 54,488
State income taxes, net of federal benefit................. (88 ) (18.0 ) 203 1.2 2,864
Tax exempt interest income................................. 60 12.3 10 0.1 -
Research and development credits........................... 156 31.9 31 0.2 -
Non-deductible interest expense............................ (258 ) (52.7 ) (293) (1.7 ) (2,099)
Other...................................................... (103 ) (21.1 ) (237) (1.5 ) (560)
----- ----- --------- --- ---------
Total (provision for) benefit from income taxes.......... $ (399 ) (81.6 )% $ 5,745 33.3% $ 54,693
----- ----- --------- --- ---------
----- ----- --------- --- ---------
<CAPTION>
<S> <C>
PERCENT
-----------
Statutory rate............................................. 35.0%
State income taxes, net of federal benefit................. 1.8
Tax exempt interest income................................. -
Research and development credits........................... -
Non-deductible interest expense............................ (1.3 )
Other...................................................... (0.4 )
---
Total (provision for) benefit from income taxes.......... 35.1%
---
---
</TABLE>
F-27
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Employee Savings Plan (the "401(k) Plan") for
eligible employees. Voluntary employee contributions to the 401(k) Plan may be
matched 50% by the Company, subject to a maximum annual contribution by the
Company of $1,000 per employee. The Company may also make an annual
discretionary contribution to the plan with approval by the Company's Board of
Directors, subject to the maximum deductible limit provided by the Internal
Revenue Code of 1986, as amended. The Company's total cash contributions to the
401(k) Plan totaled $170,000, $177,000 and $226,000 during 1994, 1995 and 1996,
respectively. Additionally, the Company contributed 55,000 shares of its Class A
Common Stock in each of 1995 and 1996 (fair value of approximately $1.1 million
and $935,000, respectively) to the 401(k) Plan as discretionary contributions.
9. STOCKHOLDERS' EQUITY
COMMON STOCK
The Class A, Class B and Class C Common Stock are equivalent in all respects
except voting rights. Holders of Class A and Class C Common Stock are entitled
to one vote per share and holders of Class B Common Stock are entitled to ten
votes per share. Each share of Class B and Class C Common Stock is convertible,
at the option of the holder, into one share of Class A Common Stock. Upon a
change in control of ECC, each holder of outstanding shares of Class C Common
Stock is entitled to ten votes for each share of Class C Common Stock held.
ECC's principal stockholder owns all outstanding Class B Common Stock and all
other stockholders own Class A Common Stock.
8% SERIES A CUMULATIVE PREFERRED STOCK
On May 6, 1994, the Company exchanged 1,616,681 shares of its 8% Series A
Cumulative Preferred Stock with its principal stockholder in consideration for
the cancellation of a note, plus accrued and unpaid interest thereon.
Approximately 5%, or 80,834 shares, of the 8% Series A Cumulative Preferred
Stock were subsequently transferred to another stockholder and officer of the
Company.
Each share of the 8% Series A Cumulative Preferred Stock is convertible, at
the option of the holder, into one share of Class A Common Stock, subject to
adjustment from time to time upon the occurrence of certain events, including,
among other things: (i) dividends or distributions on Class A Common Stock
payable in Class A Common Stock or certain other capital stock; (ii)
subdivisions, combinations or certain reclassifications of Class A Common Stock;
and (iii) issuance of Class A Common Stock or rights, warrants or options to
purchase Class A Common Stock at a price per share less than the liquidation
preference per share. In the event of the liquidation, dissolution or winding up
of EchoStar, the holders of 8% Series A Cumulative Preferred Stock would be
entitled to receive an amount equal to approximately $11.38 per share as of
December 31, 1996.
The aggregate liquidation preference for all outstanding shares of 8% Series
A Cumulative Preferred Stock is limited to the principal amount represented by
the note, plus accrued and unpaid dividends thereon. Each share of 8% Series A
Cumulative Preferred Stock is entitled to receive dividends equal to eight
percent per annum of the initial liquidation preference for such share. Each
share of 8% Series A Cumulative Preferred Stock automatically converts into
shares of Class A Common Stock in the event they are transferred to any person
other than certain permitted transferees and is entitled to the equivalent of
ten votes for each share of Class A Common Stock into which it is convertible.
Except as otherwise
F-28
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
required by law, holders of 8% Series A Cumulative Preferred Stock vote together
with the holders of Class A and Class B Common Stock as a single class.
All accrued dividends payable to Mr. Ergen on his Dish, Ltd. 8% Series A
Cumulative Preferred Stock through the date of the Exchange ($1.4 million), and
all accrued dividends payable to the remaining holder of Dish, Ltd. 8% Series A
Cumulative Preferred Stock through the date of the Merger ($107,000), will
remain obligations of Dish, Ltd. (Note 1); however, no additional dividends will
accrue with respect to the Dish, Ltd. 8% Series A Cumulative Preferred Stock.
The 1994 Notes Indenture places significant restrictions on the payment of those
dividends. As of December 31, 1996 and June 30, 1997, additional accrued
dividends payable to Mr. Ergen by ECC on the ECC 8% Series A Cumulative
Preferred Stock totaled $1.7 million and $2.0 million, respectively. Cumulative
but unpaid dividends totaled approximately $2.1 million, $3.3 million and $3.6
million at December 31, 1995 and 1996 and June 30, 1997 respectively, including
amounts which remain the obligation of Dish, Ltd.
WARRANTS
In conjunction with the 1994 Notes Offering, described in Note 6, the
Company issued 3,744,000 Warrants for the purchase of Dish, Ltd. Class A Common
Stock. Effective with the Merger (see Note 1), the Warrants became exercisable
for 2,808,000 shares of ECC's Class A Common Stock. The Warrants were valued at
$26.1 million.
Each Warrant entitles the registered holder thereof, at such holder's
option, to purchase one share of ECC Class A Common Stock at a purchase price of
$0.01 per share (the "Exercise Price"). The Exercise Price with respect to all
of the Warrants was paid in advance and, therefore, no additional amounts are
receivable by the Company upon exercise of the Warrants. As of December 31,
1996, Warrants to purchase approximately 2,000 shares of the Company's Class A
Common Stock (as adjusted for the Exchange Ratio) remain outstanding.
10. STOCK COMPENSATION PLANS
The Company has two stock-based compensation plans, which are described
below. The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its stock-based compensation plans. Under APB
25, because the exercise price of the Company's employees stock options is equal
to the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting and Disclosure of Stock-Based
Compensation," ("SFAS No. 123") which established an alternative method of
expense recognition for stock-based compensation awards to employees based on
fair values. The Company elected to not adopt SFAS No. 123 for expense
recognition purposes.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its stock-based compensation plans using the fair value method prescribed by
that statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1995 and 1996, respectively: risk-free interest
rate of 6.12% and 6.80% for 1995 and 1996, respectively; dividend yields of 0.0%
during each period; volatility factors of the expected market price of the
F-29
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK COMPENSATION PLANS (CONTINUED)
Company's Class A Common Stock of 62%, and a weighted-average expected life of
the options of six years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. All options
are initially assumed to vest. Compensation previously recognized is reversed to
the extent applicable to forfeitures of unvested options. The Company's pro
forma net loss attributable to common shares and pro forma loss per common and
common equivalent share were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
<S> <C> <C>
1995 1996
---------- -----------
Net loss attributable to common shares................................................... $ (13,079) $ (103,120)
---------- -----------
Loss per common and common equivalent share.............................................. $ (0.37) $ (2.54)
---------- -----------
---------- -----------
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock-based compensation awards.
In April 1994, the Company adopted a stock incentive plan (the "Stock
Incentive Plan") to provide incentive to attract and retain officers, directors
and key employees. ECC assumed all outstanding options for the purchase of Dish,
Ltd. common stock effective with the Exchange and Merger and has reserved up to
10 million shares of its Class A Common Stock for granting awards under the
Stock Incentive Plan. Awards available under the Stock Incentive Plan include:
(i) common stock purchase options; (ii) stock appreciation rights; (iii)
restricted stock and restricted stock units; (iv) performance awards; (v)
dividend equivalents; and (vi) other stock-based awards. All options granted
through December 31, 1996 have included exercise prices not less than the fair
market value of the Shares at the date of grant and vest as determined by the
Company's Board of Directors, generally at the rate of 20% per year.
F-30
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK COMPENSATION PLANS (CONTINUED)
A summary of the Company's incentive stock option activity for the years
ended December 31, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
----------------------- -----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year......................... 744,872 $ 9.33 1,117,133 $ 12.23
Granted.......................................................... 419,772 17.13 138,790 27.02
Exercised........................................................ (4,284) 9.33 (103,766) 10.24
Forfeited........................................................ (43,227) 10.55 (126,884) 13.27
---------- ----------- ---------- -----------
Options outstanding at end of year............................... 1,117,133 $ 12.23 1,025,273 $ 14.27
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Exercisable at end of year....................................... 142,474 $ 9.33 258,368 $ 11.31
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Weighted-average fair value of options granted................... $ 9.86 $ 16.96
<CAPTION>
----------- -----------
----------- -----------
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
AS OF REMAINING AVERAGE AS OF AVERAGE
RANGE OF DECEMBER CONTRACTUAL EXERCISE DECEMBER EXERCISE
EXERCISE PRICES 31, 1996 LIFE PRICE 31, 1996 PRICE
- --------------------------------------------------- ----------- --------------- ----------- ----------- -----------
$9.333-$11.870..................................... 607,462 5.50 $ 9.48 203,757 $ 9.41
17.000-20.250...................................... 279,021 6.71 18.48 54,611 18.51
26.690-29.360...................................... 138,790 7.58 27.02 - -
----------- --- ----------- ----------- -----------
$9.333-$29.360..................................... 1,025,273 6.11 $ 14.27 258,368 $ 11.31
----------- --- ----------- ----------- -----------
----------- --- ----------- ----------- -----------
</TABLE>
In March 1994, the Company entered into an employment agreement with one of
its executive officers. The officer was granted an option, containing certain
conditions to vesting, to purchase 322,208 shares of Class A Common Stock of the
Company for $1.0 million at any time prior to December 31, 1999, subject to
certain limitations. One-half of this option became exercisable on December 31,
1994 and the remainder became exercisable on December 31, 1995. The option was
not granted pursuant to the Stock Incentive Plan. During 1996, this option was
fully exercised.
Effective March 1995, the Company granted an additional option to a key
employee to purchase 33,000 shares of EchoStar's Class A Common Stock, which
vests 50% in March 1996 and 50% in March 1997. The exercise price for each share
of Class A Common Stock is $11.87 per share. The option was not granted pursuant
to the Stock Incentive Plan. In December 1996, the vested portion of this option
was exercised and the unvested portion of the option was canceled.
F-31
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
EchoStar has contracted with Martin for the construction and delivery of
high powered DBS satellites and for related services. Martin constructed both
EchoStar I and EchoStar II and is in the construction phase on EchoStar III and
EchoStar IV. The construction contract for EchoStar III includes a per diem
penalty of $3,333, to a maximum of $100,000, if EchoStar III is not delivered by
July 31, 1997. Beginning September 1, 1997, additional delays in the delivery of
EchoStar III would result in additional per diem penalties of $33,333, up to a
maximum of $5.0 million in the aggregate. The contract for EchoStar IV includes
a per diem penalty of $50,000, to a maximum of $5.0 million in the aggregate, if
EchoStar IV is not delivered by February 15, 1998. The contract also contains a
provision whereby Martin is entitled to an early delivery incentive payment of
$50,000 for each day before February 15, 1998 the satellite is delivered to the
launch site of Baikonur, Kazakhstan, up to a maximum of $5.0 million in the
aggregate.
EchoStar has entered into a contract for launch services with Lockheed
Martin Commercial Launch Services, Inc. ("Lockheed") for the launch of EchoStar
III from Cape Canaveral Air Station, Florida during the fall of 1997, subject to
delay or acceleration in certain circumstances (the "Lockheed Contract"). The
Lockheed Contract provides for launch of the satellite utilizing an Atlas IIAS
launch vehicle. EchoStar has made an initial payment to Lockheed of $5.0 million
and the remaining price is payable in installments in accordance with the
payment schedule set forth in the Lockheed Contract, which requires that
substantially all payments be made to Lockheed prior to the launch.
EchoStar has contracted with Lockheed-Khrunichev-Energia-International, Inc.
("LKE") for the launch of EchoStar IV in the first quarter of 1998 from the
Baikonur Cosmodrome in the Republic of Kazakhstan, a territory of the former
Soviet Union, utilizing a Proton launch vehicle (the "LKE Contract"). Either
party may request a delay in the launch period, subject to the payment of
penalties based on the length of the delay and the proximity of the request to
the launch date. EchoStar has paid LKE $20.0 million pursuant to the LKE
Contract. Additional payments to LKE are required in 1997.
In addition to its working capital requirements, during the remainder of
1997 EchoStar expects to expend: (i) approximately $128.1 million in connection
with the construction launch, insurance and deployment of EchoStar III ($83.6
million) and EchoStar IV ($44.5 million). Additionally, EchoStar will expend
approximately $1.3 million per month to meet debt service requirements relative
to deferred satellite construction payments for EchoStar I and EchoStar II.
During the fourth quarter of 1997, EchoStar's debt service requirements on the
deferred satellite construction payments will increase to approximately $1.6
million per month following the launch of EchoStar III (launched on October 5,
1997). Capital expenditures related to EchoStar IV may increase in the event of
delays, cost overruns, increased costs associated with certain potential change
orders under the Company's satellite or launch contracts, or a change in launch
provider.
The Company has filed applications with the Federal Communications
Commission ("FCC") for authorization to construct, launch and operate a domestic
fixed satellite service system ("FSS System") and a two satellite Ka-band
satellite system. No assurances can be given that the Company's applications
will be approved by the FCC or that, if approved, the Company will successfully
develop the FSS System or the Ka-band satellite system. The Company believes
that establishment of the FSS System or the Ka-band satellite system would
enhance its competitive position in the DTH industry. In the event the Company's
FSS or Ka-band satellite system applications are approved by the FCC, additional
debt or equity financing would be required. Financing alternatives related to
the FSS and Ka-band satellite systems are currently
F-32
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
being pursued by the Company. No assurances can be given that financing will be
available, or that it will be available on terms acceptable to the Company.
LEASES
Future minimum lease payments under noncancelable operating leases as of
December 31, 1996, are as follows (in thousands):
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
1997.............................................................. $ 869
1998.............................................................. 492
1999.............................................................. 180
2000.............................................................. 21
2001.............................................................. 2
Thereafter........................................................ -
---------
Total minimum lease payments........................................ $ 1,564
---------
---------
</TABLE>
Rental expense for operating leases aggregated $1.4 million, $1.2 million,
and $950,000 during the years ended December 31, 1994, 1995 and 1996,
respectively.
PURCHASE COMMITMENTS
The Company has entered into agreements with various manufacturers to
purchase DBS satellite receivers and related components manufactured to its
specifications. As of June 30, 1997, the remaining commitments total
approximately $141.7 million and the total of all outstanding purchase order
commitments with domestic and foreign suppliers was $148.1 million. All of the
purchases related to these commitments are expected to be made during 1997. The
Company expects to finance these purchases from available cash, the proceeds of
the 1997 Notes Offering, and cash flows generated from sales of DISH Network
programming and related DBS inventory.
OTHER RISKS AND CONTINGENCIES
The Company is subject to various legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially affect
the financial position or results of operations of the Company.
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
Presented below is condensed consolidating financial information for
EchoStar and its subsidiaries as of and for the years ended December 31, 1995
and 1996. See Note 6 for a more complete description of the subsidiary
guarantors of each of the 1996 Notes and the 1994 Notes. Because the formations
of EchoStar (incorporated in 1995), DBS Corp (incorporated in 1996) and ESBC
(incorporated in 1996) were all accounted for as reorganizations of entities
under common control, the consolidated financial statements of Dish, Ltd. as of
December 31, 1994 and for the year then ended also represent the financial
statements of EchoStar, DBS Corp and ESBC. Therefore, condensed consolidating
financial information for the subsidiary guarantors of the 1996 Notes and the
1994 Notes for the year ended December 31, 1994 is not presented.
F-33
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
Condensed consolidating financial information is presented for the following
entities:
<TABLE>
<S> <C>
Consolidated Dish, Ltd. (referred to as "Dish") Consolidated DBS Corp (referred to as "DBS Corp")
ESBC Parent Company Only (referred to as "ESBC -- PC") ECC Parent Company Only (referred to as "ECC -- PC")
Consolidating and eliminating adjustments (referred to Other direct wholly owned subs of ECC (referred to as
as "C&E") "Other")
Consolidated ESBC (referred to as "ESBC") Consolidated ECC (referred to as "ECC")
DBS Corp Parent Company Only (referred to as "DBS Corp -- PC")
</TABLE>
CONDENSED CONSOLIDATING BALANCE SHEETS--AS OF DECEMBER 31, 1995 (IN MILLIONS)
<TABLE>
<CAPTION>
ECC-
DISH PC OTHER C&E ECC
--------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................. $ 14 $ 8 $ - $ - $ 22
Marketable investment securities...................................... - 15 - - 15
Trade accounts receivable, net........................................ 10 - - - 10
Inventories........................................................... 39 - - - 39
Other current assets.................................................. 18 - - - 18
--------- ----- ----- --------- ---------
Total current assets.................................................... 81 23 - - 104
Investments in subsidiaries............................................. - 93 - (93) -
Restricted cash and marketable investment securities.................... 100 - - - 100
Property and equipment, net............................................. 333 - 21 - 354
Advances to affiliates, net............................................. - 21 - (21) -
Other noncurrent assets................................................. 45 20 - - 65
--------- ----- ----- --------- ---------
Total assets........................................................ $ 559 $ 157 $ 21 $ (114) $ 623
--------- ----- ----- --------- ---------
--------- ----- ----- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable................................................ $ 19 $ - $ - $ - $ 19
Deferred revenue...................................................... 1 - - - 1
Accrued expenses and other current liabilities........................ 26 - - - 26
Current portion of long-term debt..................................... 5 - - - 5
--------- ----- ----- --------- ---------
Total current liabilities............................................... 51 - - - 51
Advances from affiliates, net........................................... - - 21 (21) -
1994 Notes.............................................................. 382 - - - 382
Mortgage and other notes payable, excluding current portion............. 33 - - - 33
--------- ----- ----- --------- ---------
Total long-term liabilities........................................... 415 - 21 (21) 415
--------- ----- ----- --------- ---------
Total liabilities................................................... 466 - 21 (21) 466
Stockholders' equity (deficit).......................................... 93 157 - (93) 157
--------- ----- ----- --------- ---------
Total liabilities and stockholders' equity (deficit)................ $ 559 $ 157 $ 21 $ (114) $ 623
--------- ----- ----- --------- ---------
--------- ----- ----- --------- ---------
</TABLE>
F-34
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS--AS OF DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<CAPTION>
DBS
DISH ESBC- PC C&E ESBC DBS CORP- PC C&E CORP
--------- ----------- --------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................... $ 25 $ 14 $ - $ 39 $ - $ - $ 39
Marketable investment securities............. - 19 - 19 - - 19
Trade accounts receivable, net............... 14 - - 14 - - 14
Inventories.................................. 73 - - 73 - - 73
Subscriber acquisition costs, net............ 68 - - 68 - - 68
Other current assets......................... 19 - - 19 - - 19
--------- ----- --------- --------- ----- --------- ---------
Total current assets........................... 199 33 - 232 - - 232
Investment in subsidiary....................... - 3 (3) - - - -
Restricted cash and marketable investment
securities................................... 32 47 - 79 - - 79
Property and equipment, net.................... 500 - - 500 29 - 529
Advances to affiliates, net.................... - 280 (135) 145 - (76) 69
Deferred tax assets............................ 74 5 - 79 - - 79
Other noncurrent assets........................ 26 12 - 38 60 - 98
--------- ----- --------- --------- ----- --------- ---------
Total assets............................... $ 831 $ 380 $ (138) $ 1,073 $ 89 $ (76) $ 1,086
--------- ----- --------- --------- ----- --------- ---------
--------- ----- --------- --------- ----- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable....................... $ 41 $ - $ - $ 41 $ - $ - $ 41
Deferred revenue............................. 103 - - 103 - - 103
Accrued expenses and other current
liabilities................................ 29 - - 29 2 - 31
Deferred tax liabilities..................... 13 - - 13 - - 13
Current portion of long-term debt............ 11 - - 11 - - 11
--------- ----- --------- --------- ----- --------- ---------
Total current liabilities...................... 197 - - 197 2 - 199
Long-term deferred signal carriage revenue..... 6 - - 6 - - 6
Advances from affiliates, net.................. 135 - (135) - 76 (76) -
Investment in subsidiaries..................... - - - - 6 (6) -
1994 Notes..................................... 437 - - 437 - - 437
1996 Notes..................................... - 386 - 386 - - 386
Mortgage and other notes payable, excluding
current portion.............................. 52 - - 52 12 - 64
Other long-term liabilities.................... 1 - - 1 - - 1
--------- ----- --------- --------- ----- --------- ---------
Total long-term liabilities.................. 631 386 (135) 882 94 (82) 894
--------- ----- --------- --------- ----- --------- ---------
Total liabilities.......................... 828 386 (135) 1,079 96 (82) 1,093
--------- ----- --------- --------- ----- --------- ---------
Stockholders' equity (deficit)................. 3 (6) (3) (6) (7) 6 (7)
--------- ----- --------- --------- ----- --------- ---------
Total liabilities and stockholders' equity
(deficit).................................. $ 831 $ 380 $ (138) $ 1,073 $ 89 $ (76) $ 1,086
--------- ----- --------- --------- ----- --------- ---------
--------- ----- --------- --------- ----- --------- ---------
<CAPTION>
ECC- PC OTHER C&E ECC
----- ----------- --------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................... $ - $ - $ - $ 39
Marketable investment securities............. - - - 19
Trade accounts receivable, net............... - - - 14
Inventories.................................. - - - 73
Subscriber acquisition costs, net............ - - - 68
Other current assets......................... 1 3 - 23
----- ----- --------- ---------
Total current assets........................... 1 3 - 236
Investment in subsidiary....................... - - - -
Restricted cash and marketable investment
securities................................... - - - 79
Property and equipment, net.................... - 62 - 591
Advances to affiliates, net.................... - - (69) -
Deferred tax assets............................ - 1 (1) 79
Other noncurrent assets........................ 70 - (12) 156
----- ----- --------- ---------
Total assets............................... $ 71 $ 66 $ (82) $ 1,141
----- ----- --------- ---------
----- ----- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable....................... $ - $ 1 $ (1) $ 41
Deferred revenue............................. - - - 103
Accrued expenses and other current
liabilities................................ 1 - (2) 30
Deferred tax liabilities..................... - - - 13
Current portion of long-term debt............ - - - 11
----- ----- --------- ---------
Total current liabilities...................... 1 1 (3) 198
Long-term deferred signal carriage revenue..... - - - 6
Advances from affiliates, net.................. 2 64 (66) -
Investment in subsidiaries..................... 7 - (7) -
1994 Notes..................................... - - - 437
1996 Notes..................................... - - - 386
Mortgage and other notes payable, excluding
current portion.............................. - - (12) 52
Other long-term liabilities.................... - - - 1
----- ----- --------- ---------
Total long-term liabilities.................. 9 64 (85) 882
----- ----- --------- ---------
Total liabilities.......................... 10 65 (88) 1,080
----- ----- --------- ---------
Stockholders' equity (deficit)................. 61 1 6 61
----- ----- --------- ---------
Total liabilities and stockholders' equity
(deficit).................................. $ 71 $ 66 $ (82) $ 1,141
----- ----- --------- ---------
----- ----- --------- ---------
</TABLE>
F-35
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ECC-
DISH PC C&E ECC
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUE:
DTH products and technical services.......................................... $ 147 $ - $ - $ 147
C-band programming........................................................... 15 - - 15
Loan origination and participation income.................................... 2 - - 2
----- --- --- ---------
Total revenue.................................................................. 164 - - 164
EXPENSES:
DTH products and technical services.......................................... 117 - - 117
C-band programming........................................................... 13 - - 13
Selling, general and administrative.......................................... 39 - - 39
Depreciation and amortization................................................ 3 - - 3
----- --- --- ---------
Total expenses................................................................. 172 - - 172
----- --- --- ---------
Operating income (loss)........................................................ (8) - - (8)
Other Income (Expense):
Interest income.............................................................. 13 1 - 14
Interest expense, net of amounts capitalized................................. (24) - - (24)
Minority interest in loss of consolidated joint venture and other............ 1 - - 1
Equity in losses of subsidiaries............................................. - (12) 12 -
----- --- --- ---------
Total other income (expense), net.............................................. (10) (11) 12 (9)
----- --- --- ---------
Income (loss) before income taxes.............................................. (18) (11) 12 (17)
Income tax (provision) benefit, net............................................ 6 - - 6
----- --- --- ---------
Net income (loss).............................................................. $ (12) $ (11) $ 12 $ (11)
----- --- --- ---------
----- --- --- ---------
Net loss attributable to common shares......................................... - - - $ (13)
----- --- --- ---------
----- --- --- ---------
Weighted-average common shares outstanding..................................... - - - 36
----- --- --- ---------
----- --- --- ---------
Loss per common and common equivalent share.................................... - - - $ (0.36)
----- --- --- ---------
----- --- --- ---------
</TABLE>
F-36
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS-YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ESBC- DBS CORP- DBS
DISH PC C&E ESBC PC C&E CORP
--------- ----------- ----- ----------- --------------- ----- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
DTH products and technical
services........................ $ 136 $ - $ - $ 136 $ - $ - $ 136
DISH Network
promotions-subscription
television services and
products........................ 23 - - 23 - - 23
DISH Network subscription
television services............. 38 - - 38 - - 38
C-band programming................ 12 - - 12 - - 12
Loan origination and participation
income.......................... 1 - - 1 - - 1
--------- ----- --- ----- ----- ----- ---------
Total revenue....................... 210 - - 210 - - 210
EXPENSES:
DTH products and technical
services........................ 124 - - 124 - - 124
DISH Network programming.......... 19 - - 19 - - 19
C-band programming................ 11 - - 11 - - 11
Selling, general and
administrative.................. 87 - - 87 - - 87
Subscriber promotion subsidies.... 35 - - 35 - - 35
Amortization of subscriber
acquisition costs............... 16 - - 16 - - 16
Depreciation and amortization..... 27 - - 27 - - 27
--------- ----- --- ----- ----- ----- ---------
Total expenses...................... 319 - - 319 - - 319
--------- ----- --- ----- ----- ----- ---------
Operating income (loss)............. (109) - - (109) - - (109)
Other Income (Expense):
Interest income................... 4 10 - 14 - - 14
Interest expense, net of amounts
capitalized..................... (37) (24) - (61) (1) - (62)
Equity in losses of
subsidiaries.................... - (92) 92 - (101) 101 -
--------- ----- --- ----- ----- ----- ---------
Total other income (expense), net... (33) (106) 92 (47) (102) 101 (48)
--------- ----- --- ----- ----- ----- ---------
Income (loss) before income taxes... (142) (106) 92 (156) (102) 101 (157)
Income tax (provision) benefit,
net................................. 50 5 - 55 - - 55
--------- ----- --- ----- ----- ----- ---------
Net income (loss)................... $ (92) $ (101) $ 92 $ (101) $ (102) $ 101 $ (102)
--------- ----- --- ----- ----- ----- ---------
--------- ----- --- ----- ----- ----- ---------
Net loss attributable to common
shares.............................. - - - - - - -
--------- ----- --- ----- ----- ----- ---------
--------- ----- --- ----- ----- ----- ---------
Weighted-average common shares
outstanding....................... - - - - - - -
--------- ----- --- ----- ----- ----- ---------
--------- ----- --- ----- ----- ----- ---------
Loss per common and common
equivalent share.................. - - - - - - -
--------- ----- --- ----- ----- ----- ---------
--------- ----- --- ----- ----- ----- ---------
<CAPTION>
ECC-
PC OTHER C&E ECC
----------- ----------- ----- ---------
<S> <C> <C> <C> <C>
REVENUE:
DTH products and technical
services........................ $ - $ - $ - $ 136
DISH Network
promotions-subscription
television services and
products........................ - - - 23
DISH Network subscription
television services............. - - - 38
C-band programming................ - - - 12
Loan origination and participation
income.......................... - 2 - 3
----- ----- ----- ---------
Total revenue....................... - 2 - 212
EXPENSES:
DTH products and technical
services........................ - - - 124
DISH Network programming.......... - - - 19
C-band programming................ - - - 11
Selling, general and
administrative.................. - 3 - 90
Subscriber promotion subsidies.... - - (1) 34
Amortization of subscriber
acquisition costs............... - - - 16
Depreciation and amortization..... - - - 27
----- ----- ----- ---------
Total expenses...................... - 3 (1) 321
----- ----- ----- ---------
Operating income (loss)............. - (1) 1 (109)
Other Income (Expense):
Interest income................... 1 - - 15
Interest expense, net of amounts
capitalized..................... - - - (62)
Equity in losses of
subsidiaries.................... (101) - 101 -
----- ----- ----- ---------
Total other income (expense), net... (100) - 101 (47)
----- ----- ----- ---------
Income (loss) before income taxes... (100) (1) 102 (156)
Income tax (provision) benefit,
net................................. (1) 1 - 55
----- ----- ----- ---------
Net income (loss)................... $ (101) $ - $ 102 $ (101)
----- ----- ----- ---------
----- ----- ----- ---------
Net loss attributable to common
shares.............................. - - - $ (102)
----- ----- ----- ---------
----- ----- ----- ---------
Weighted-average common shares
outstanding....................... - - - 41
----- ----- ----- ---------
----- ----- ----- ---------
Loss per common and common
equivalent share.................. - - - $ (2.52)
----- ----- ----- ---------
----- ----- ----- ---------
</TABLE>
F-37
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS--YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
ECC-
DISH PC OTHER C&E ECC
--------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ (12) $ (11) $ - $ 12 $ (11)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Equity in (earnings) losses of subsidiaries.................... - 12 - (12) -
Depreciation and amortization.................................. 3 - - - 3
Deferred income tax benefit.................................... (5) - - - (5)
Amortization of debt discount and deferred financing costs..... 24 - - - 24
Other, net..................................................... 1 - - - 1
Changes in current assets and current liabilities, net......... (33) - - - (33)
--------- --- ----- --- ---------
Net cash flows provided by (used in) operating activities........ (22) 1 - - (21)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities.................... (3) (22) - - (25)
Sales of marketable investment securities........................ 34 7 - - 41
Purchases of restricted marketable investment securities......... (15) - - - (15)
Advances (to) from affiliates, net............................... - (20) 20 - -
Purchases of property and equipment.............................. (4) - - - (4)
Offering proceeds and investment earnings placed in escrow....... (10) - - - (10)
Funds released from escrow accounts.............................. 122 - - - 122
Investment in convertible subordinated debentures from DBSI...... - (1) - - (1)
Investment in DBSC............................................... 4 (4) - - -
Long-term notes receivable from and investment in DBSC........... - (16) - - (16)
Expenditures for satellite systems under construction............ (110) - (20) - (130)
--------- --- ----- --- ---------
Net cash flows used in investing activities...................... 18 (56) - - (38)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Class A Common Stock............... - 63 - - 63
--------- --- ----- --- ---------
Net cash flows provided by (used in) financing activities........ - 63 - - 63
--------- --- ----- --- ---------
Net increase (decrease) in cash and cash equivalents............. (4) 8 - - 4
Cash and cash equivalents, beginning of year..................... 18 - - - 18
--------- --- ----- --- ---------
Cash and cash equivalents, end of year........................... $ 14 $ 8 $ - $ - $ 22
--------- --- ----- --- ---------
--------- --- ----- --- ---------
</TABLE>
F-38
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS--YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
DBS
DISH ESBC- PC C&E ESBC CORP-PC C&E DBS CORP
----- ----------- ----- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ (92) $ (101) $ 92 $ (101) $ (102) $ 101 $ (102)
Adjustments to reconcile net income (loss)
to net cash flows from operating
activities:
Equity in (earnings) losses of
subsidiaries.......................... -- 92 (92) -- 101 (101) --
Depreciation and amortization........... 27 -- -- 27 -- -- 27
Amortization of subscriber acquisition
costs................................. 16 -- -- 16 -- -- 16
Deferred income tax benefit............. (45) (5) -- (50) -- -- (50)
Amortization of debt discount and
deferred financing costs.............. 34 24 3 61 -- -- 61
Other, net.............................. 10 -- -- 10 -- -- 10
Changes in current assets and current
liabilities, net...................... 14 -- -- 14 1 -- 15
----- ----- --- ----- ----- --------- ---------
Net cash flows provided by (used in)
operating activities.................... (36) 10 3 (23) -- -- (23)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment
securities.............................. -- (138) -- (138) -- -- (138)
Sales of marketable investment
securities.............................. -- 120 -- 120 -- -- 120
Purchases of restricted marketable
investment securities................... (21) -- -- (21) -- -- (21)
Funds released from restricted cash and
marketable investment securities --
other................................... 16 -- -- 16 -- -- 16
Advances (to) from affiliates, net........ 138 (268) (3) (133) 69 -- (64)
Purchases of property and equipment....... (46) -- -- (46) -- -- (46)
Offering proceeds and investment earnings
placed in escrow........................ (11) (183) -- (194) -- -- (194)
Funds released from escrow accounts....... 84 136 -- 220 -- -- 220
Payments received on (investments in)
convertible subordinated debentures from
SSET.................................... 6 -- -- 6 -- -- 6
Investment in convertible subordinated
debentures from DBSI.................... -- -- -- -- -- -- --
Long-term notes receivable from and
investment in DBSC...................... -- -- -- -- -- -- --
Long-term note receivable from DBS Corp... -- -- -- -- -- -- --
Expenditures for satellite systems under
construction............................ (112) -- -- (112) (26) -- (138)
Expenditures for FCC authorizations....... -- -- -- -- (55) -- (55)
Other..................................... -- -- -- -- -- -- --
----- ----- --- ----- ----- --------- ---------
Net cash flows used in investing
activities.............................. 54 (333) (3) (282) (12) -- (294)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 1996
Notes................................... -- 337 -- 337 -- -- 337
Proceeds from note payable to ECC......... -- -- -- -- 12 -- 12
Repayments of mortgage indebtedness and
notes payable........................... (8) -- -- (8) -- -- (8)
Stock options exercised................... -- -- -- -- -- -- --
----- ----- --- ----- ----- --------- ---------
Net cash flows provided by (used in)
financing activities.................... (8) 337 -- 329 12 -- 341
----- ----- --- ----- ----- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................. 10 14 -- 24 -- -- 24
Cash and cash equivalents, beginning of
year.................................... 14 -- -- 14 -- -- 14
----- ----- --- ----- ----- --------- ---------
Cash and cash equivalents, end of year.... $ 24 $ 14 $ -- $ 38 $ -- $ -- $ 38
----- ----- --- ----- ----- --------- ---------
----- ----- --- ----- ----- --------- ---------
<CAPTION>
ECC- PC OTHER C&E ECC
----- ----------- ----- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ (101) $ -- $ 102 $ (101)
Adjustments to reconcile net income (loss)
to net cash flows from operating
activities:
Equity in (earnings) losses of
subsidiaries.......................... 101 -- (101) --
Depreciation and amortization........... -- -- -- 27
Amortization of subscriber acquisition
costs................................. -- -- -- 16
Deferred income tax benefit............. -- -- -- (50)
Amortization of debt discount and
deferred financing costs.............. -- -- -- 61
Other, net.............................. (2) -- -- 8
Changes in current assets and current
liabilities, net...................... 4 -- (8) 11
----- --- ----- ---------
Net cash flows provided by (used in)
operating activities.................... 2 -- (7) (28)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment
securities.............................. -- -- -- (138)
Sales of marketable investment
securities.............................. 15 -- -- 135
Purchases of restricted marketable
investment securities................... -- -- -- (21)
Funds released from restricted cash and
marketable investment securities --
other................................... -- -- -- 16
Advances (to) from affiliates, net........ 22 38 4 --
Purchases of property and equipment....... -- (5) -- (51)
Offering proceeds and investment earnings
placed in escrow........................ -- -- -- (194)
Funds released from escrow accounts....... -- -- -- 220
Payments received on (investments in)
convertible subordinated debentures from
SSET.................................... -- -- -- 6
Investment in convertible subordinated
debentures from DBSI.................... (3) -- -- (3)
Long-term notes receivable from and
investment in DBSC...................... (30) -- -- (30)
Long-term note receivable from DBS Corp... (12) -- 12 --
Expenditures for satellite systems under
construction............................ -- (33) -- (171)
Expenditures for FCC authorizations....... -- -- -- (55)
Other..................................... (3) -- 3 --
----- --- ----- ---------
Net cash flows used in investing
activities.............................. (11) -- 19 (286)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 1996
Notes................................... -- -- -- 337
Proceeds from note payable to ECC......... -- -- (12) --
Repayments of mortgage indebtedness and
notes payable........................... -- -- -- (8)
Stock options exercised................... 2 -- -- 2
----- --- ----- ---------
Net cash flows provided by (used in)
financing activities.................... 2 -- (12) 331
----- --- ----- ---------
Net increase (decrease) in cash and cash
equivalents............................. (7) -- -- 17
Cash and cash equivalents, beginning of
year.................................... 8 -- -- 22
----- --- ----- ---------
Cash and cash equivalents, end of year.... $ 1 $ -- $ -- $ 39
----- --- ----- ---------
----- --- ----- ---------
</TABLE>
F-39
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. OPERATIONS IN GEOGRAPHIC AREAS
The Company sells its products on a worldwide basis and has established
operations in Europe and the Pacific Rim. Information about the Company's
operations in different geographic areas is as follows (in thousands):
<TABLE>
<CAPTION>
UNITED OTHER
STATES EUROPE INTERNATIONAL TOTAL
------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1994:
Total revenue............................................. $ 137,233 $ 24,072 $ 29,678 $ 190,983
------------ --------- ------------ ------------
------------ --------- ------------ ------------
Export sales.............................................. $ 7,188
------------
------------
Operating income.......................................... $ 10,811 $ 1,244 $ 1,161 $ 13,216
------------ --------- ------------
------------ --------- ------------
Other income (expense), net............................... (12,727)
------------
Net income before income taxes............................ $ 489
------------
------------
Identifiable assets....................................... $ 77,172 $ 6,397 $ 2,359 $ 85,928
------------ --------- ------------
------------ --------- ------------
Corporate assets.......................................... 386,564
------------
Total assets.............................................. $ 472,492
------------
------------
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1995:
Total revenue............................................. $ 110,629 $ 31,351 $ 21,910 $ 163,890
------------ --------- ------------ ------------
------------ --------- ------------ ------------
Export sales.............................................. $ 6,317
------------
------------
Operating income (loss)................................... $ (7,916) $ 146 $ (257) $ (8,027)
------------ --------- ------------
------------ --------- ------------
Other income (expense), net............................... (9,204)
------------
Loss before income taxes.................................. $ (17,231)
------------
------------
Identifiable assets....................................... $ 63,136 $ 10,088 $ 3,788 $ 77,012
------------ --------- ------------
------------ --------- ------------
Corporate assets.......................................... 546,079
------------
Total assets.............................................. $ 623,091
------------
------------
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996:
Total revenue............................................. $ 173,919 $ 26,984 $ 10,508 $ 211,411
------------ --------- ------------ ------------
------------ --------- ------------ ------------
Export sales.............................................. $ 1,536
------------
------------
Operating loss............................................ $ (107,175) $ (1,274) $ (896) $ (109,345)
------------ --------- ------------
------------ --------- ------------
Other income (expense), net............................... (46,334)
------------
Loss before income taxes.................................. $ (155,679)
------------
------------
Identifiable assets....................................... $ 836,596 $ 5,795 $ 1,871 $ 844,262
------------ --------- ------------
------------ --------- ------------
Corporate assets.......................................... 297,118
------------
Total assets.............................................. $ 1,141,380
------------
------------
</TABLE>
F-40
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. VALUATION AND QUALIFYING ACCOUNTS
The Company's valuation and qualifying accounts as of December 31, 1994,
1995 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTIONS END OF YEAR
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994:
Assets:
Allowance for doubtful accounts........................... $ 346 $ 8 $ (168) $ 186
Loan loss reserve......................................... 50 75 (30) 95
Reserve for inventory..................................... 1,403 329 (147) 1,585
Liabilities:
Reserve for warranty costs................................ 1,350 508 (458) 1,400
Other reserves............................................ 93 -- -- 93
YEAR ENDED DECEMBER 31, 1995:
Assets:
Allowance for doubtful accounts........................... $ 186 $ 1,160 $ (240) $ 1,106
Loan loss reserve......................................... 95 19 (36) 78
Reserve for inventory..................................... 1,585 1,511 (299) 2,797
Liabilities:
Reserve for warranty costs................................ 1,400 562 (949) 1,013
Other reserves............................................ 93 -- (1) 92
YEAR ENDED DECEMBER 31, 1996:
Assets:
Allowance for doubtful accounts........................... $ 1,106 $ 2,340 $ (1,952) $ 1,494
Loan loss reserve......................................... 78 660 (94) 644
Reserve for inventory..................................... 2,797 4,304 (1,438) 5,663
Liabilities:
Reserve for warranty costs................................ 1,013 (250) -- 763
Other reserves............................................ 92 (92) -- --
</TABLE>
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly results of operations are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
<S> <C> <C> <C> <C>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ---------- ------------ ------------
YEAR ENDED DECEMBER 31, 1995:
Total revenue............................................... $ 40,413 $ 39,252 $ 43,606 $ 40,619
Operating income (loss)..................................... (698) 768 341 (8,438)
Net loss.................................................... (2,240) (1,787) (360) (7,099)
Loss per common and common equivalent share $ (0.08) $ (0.06) $ (0.02) $ (0.20)
YEAR ENDED DECEMBER 31, 1996:
Total revenue............................................... $ 41,467 $ 73,524 $ 42,402 $ 54,018
Operating loss.............................................. (8,629) (14,057) (26,898) (59,761)
Net loss.................................................... (7,221) (22,554) (26,518) (44,693)
Loss per common and common equivalent share................. $ (0.19) $ (0.57) $ (0.66) $ (1.10)
</TABLE>
In the fourth quarter of 1995 and each quarter in 1996, the Company incurred
operating and net losses principally as a result of expenses incurred related to
development of the EchoStar DBS System.
F-41
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE ISSUER
OR BY THE INITIAL PURCHASERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN SECURITIES
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 15
Use of Proceeds........................................................... 35
The Exchange Offer........................................................ 35
Capitalization............................................................ 44
Selected Financial Data................................................... 45
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 47
Business.................................................................. 60
Management................................................................ 95
Certain Relationships and Related Transactions............................ 100
Security Ownership of Certain Beneficial Owners and Management............ 101
Description of Certain Indebtedness....................................... 103
Description of EchoStar Capital Stock..................................... 106
Plan of Distribution...................................................... 160
Legal Matters............................................................. 164
Independent Accountants................................................... 165
Available Information..................................................... 165
Incorporation of Certain Documents by Reference........................... 165
Index to Financial Statements............................................. F-1
</TABLE>
200,000 SHARES
[LOGO]
ECHOSTAR COMMUNICATIONS
CORPORATION
-----------------
PROSPECTUS
-----------------
OFFER TO EXCHANGE SHARES OF ITS 12 1/8% SERIES B SENIOR REDEEMABLE EXCHANGEABLE
PREFERRED STOCK DUE 2004 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR
SHARES OF ITS 12 1/8% SERIES B SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK
DUE 2004
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
938 QUAIL STREET
LAKEWOOD, CO 80215
ATTN: MR. GREG TUBBS
TELEPHONE: 303-234-5300
FACSIMILE: 303-234-5340
SUBJECT TO COMPLETION,
DATED NOVEMBER 10, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Chapter 78.751(1) of the Nevada Revised Statutes allows EchoStar to
indemnify any person made or threatened to be made a party to any action (except
an action by or in the right of EchoStar, a "derivative action"), by reason of
the fact that he is or was a director, officer, employee or agent of EchoStar,
or is or was serving at the request of EchoStar as a director, officer, employee
or agent of another corporation, against expenses including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonable incurred
by him in connection with the action, suit or proceeding if he acted in a good
faith manner which he reasonably believed to be in or not opposed to the best
interests of EchoStar, and, with respect to any criminal proceeding, had no
reasonable cause to believe that his conduct was unlawful. Under Chapter
78.751(2), a similar standard of care applies to derivative actions, except that
indemnification is limited solely to expenses (including attorneys' fees)
incurred in connection with the defense or settlement of the action and court
approval of the indemnification is required where the person seeking
indemnification has been found liable to EchoStar. In addition, Chapter
78.751(5) allows EchoStar to advance payment of indemnifiable expenses prior to
final disposition of the proceeding in question. Decisions as to the payment of
indemnification are made by a majority of the Board of Directors at a meeting at
which a quorum of disinterested directors is present, or by written opinion of
special legal counsel, or by the stockholders. Provisions relating to liability
and indemnification of officers and directors of EchoStar for acts by such
officers and directors are contained in Article IX of the Amended and Restated
Articles of Incorporation of EchoStar, Exhibit 3.1(a) hereto and Article IX of
EchoStar's Bylaws, Exhibit 3.2(a) hereto, which are incorporated herein by
reference. These provisions state, among other things, that, consistent with and
to the extent allowable under Nevada law, and upon the decision of a
disinterested majority of EchoStar's Board of Directors, or a written opinion of
outside legal counsel, or EchoStar's stockholders: (1) EchoStar shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether formal or informal (other
than an action by or in the right of EchoStar) by reason of the fact that he is
or was a director, officer, employee, fiduciary or agent of EchoStar, or is or
was serving at the request of EchoStar as a director, officer, employee,
fiduciary of agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding,
if he conducted himself in good faith and in a manner he reasonably believed to
be in or not opposed to the best interest of EchoStar, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful; and (2) EchoStar shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of EchoStar to procure a judgment in its favor
by reason of the fact that he is or was a director, officer, employee, fiduciary
or agent of EchoStar, or is or was serving at the request of EchoStar as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of EchoStar and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable for negligence or misconduct in the performance of his
duty to EchoStar unless and only to the extent that the court in which such
action or suit was brought shall determine upon application that despite the
adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
4.1* Indenture of Trust between Dish and First Trust National Association ("First Trust"), as Trustee
(incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
4.2* Warrant Agreement between EchoStar and First Trust, as Warrant Agent (incorporated by reference to
Exhibit 4.2 to the Registration Statement on Form S-1 of Dish, Registration No. 33-76450).
4.3* Security Agreement in favor of First Trust, as Trustee under the Indenture filed as Exhibit 4.1
hereto (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
4.4* Escrow and Distribution Agreement between Dish and First Trust (incorporated by reference to Exhibit
4.4 to the Registration Statement on Form S-1 of Dish, Registration No. 33-76450).
4.5* Pledge Agreement in favor of First Trust, as Trustee under the Indenture filed as Exhibit 4.1 hereto
(incorporated by reference to Exhibit 4.5 to the Registration Statement of Form S-1 of Dish,
Registration No. 33-76450).
4.6* Intercreditor Agreement among First Trust , Continental Bank, N.A. and Martin Marietta Corporation
("Martin Marietta") (incorporated by reference to Exhibit 4.6 to the Registration Statement on Form
S-1 of Dish, Registration No. 33-76450).
4.7* Series A Preferred Stock Certificate of Designation of EchoStar (incorporated by reference to Exhibit
4.7 to the Registration Statement on Form S-1 of EchoStar, Registration No. 33-91276).
4.8* Registration Rights Agreement by and between EchoStar and Charles W. Ergen (incorporated by reference
to Exhibit 4.8 to the Registration Statement on Form S-1 of EchoStar, Registration No. 33-91276).
4.9* Indenture of Trust between ESBC and First Trust, as Trustee (incorporated by reference to Exhibit 4.9
to the Annual Report on Form 10-K of EchoStar for the year ended December 31, 1995, Commission File
No. 0-26176).
4.10* Security Agreement of ESBC in favor of First Trust, as Trustee under the Indenture filed as Exhibit
4.9 hereto (incorporated by reference to Exhibit 4.10 to the Annual Report on Form 10-K of EchoStar
for the year ended December 31, 1995, Commission File No. 0-26176).
4.11* Escrow and Disbursement Agreement between ESBC and First Trust (incorporated by reference to Exhibit
4.11 to the Annual Report on Form 10-K of EchoStar for the year ended December 31, 1995, Commission
File No. 0-26176).
4.12* Pledge Agreement of ESBC in favor of First Trust, as Trustee under the Indenture filed as Exhibit 4.9
hereto (incorporated by reference to Exhibit 4.12 to the Annual Report on Form 10-K of EchoStar for
the year ended December 31, 1995, Commission File No. 0-26176).
4.13* Pledge Agreement of EchoStar in favor of First Trust, as Trustee under the Indenture filed as Exhibit
4.9 hereto (incorporated by reference to Exhibit 4.13 to the Annual Report on Form 10-K of EchoStar
for the year ended December 31, 1995, Commission File No. 0-26176).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
4.14* Registration Rights Agreement by and between ESBC, EchoStar, Dish, Merger and Donaldson, Lufkin &
Jenrette Securities Corporation (incorporated by reference to Exhibit 4.14 to the Annual Report on
Form 10-K of EchoStar for the year ended December 31, 1995, Commission File No. 0-26176).
4.15* Registration Rights Agreement, dated as of June 25, 1997, by and among EDBS, EchoStar, ESBC, Dish,
Donaldson, Lufkin & Jenrette Securities Corporation and Lehman Brothers Inc.
4.16* Indenture of Trust, dated as of June 25, 1997, between EDBS and First Trust National Association
("First Trust"), as Trustee.
4.17* 12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock Certificate of Designation of
EchoStar (incorporated by reference to the like-numbered Exhibit to the Registration Statement on
Form S-3 of the Registrant, No. 333-37683).
4.18* Registration Rights Agreement by and among EchoStar and Donaldson, Lufkin & Jenrette Securities
Corporation and Lehman Brothers, Inc. dated as of October 2, 1997 (incorporated by reference to the
like-numbered Exhibit to the Registration Statement on Form S-3 of the Registrant, No. 333-37683).
4.19+ 6 3/4% Series C Cumulative Convertible Preferred Stock Certificate of Designation of EchoStar.
4.20* Form of Deposit Agreement among EchoStar and American Securities Transfer & Trust, Inc. (incorporated
by reference to the like-numbered Exhibit to the Registration Statement on Form S-3 of the
Registrant, No. 333-37683).
4.21* Form of Underwriting Agreement for 6 3/4% Series C Cumulative Convertible Preferred Stock between
EchoStar, Donaldson, Lufkin & Jenrette Securities Corporation and Lehman Brothers Inc. (incorporated
by reference to Exhibit 1.1 to the Registration Statement on Form S-3 of the Registrant, No.
333-37683).
4.22* Form of Underwriting Agreement for Class A Common Stock between EchoStar, Donaldson, Lufkin &
Jenrette Securities Corporation, BT Alex. Brown Incorporated and Unterberg Harris (incorporated by
reference to Exhibit 1.1 to the Registration Statement on Form S-3 of the Registrant, No. 333-37683).
5.1+ Opinion of Friedlob Sanderson Raskin Paulson & Tourtillott, LLC regarding legality of securities
being registered.
6.1+ Tax Opinion (included in Exhibit 5.1).
11* Computation of Earnings per share (incorporated by reference to the Registration Statement on Form
S-3, Commission No. 333-37683).
12+ Computation of Ratios.
23.1+ Consent of Arthur Andersen LLP.
23.2+ Consent of Friedlob Sanderson Raskin Paulson & Tourtillott, LLC (included in Exhibit 5.1.).
24.1+ Powers of Attorney authorizing signature of Charles W. Ergen, R. Scott Zimmer, James DeFranco, Alan
M. Angelich and Raymond L. Friedlob.
27* Financial Data Schedule (incorporated by reference to Exhibit 27 to the Annual Report on Form 10-K of
EchoStar for the year ended December 31, 1996 and the Quarterly Report on Form 10-Q of EchoStar for
the quarterly period ended June 30, 1997).
99.1+ Form of Letter of Transmittal.
99.2+ Form of Notice of Guaranteed Delivery.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
99.3+ Form of Letter to Securities Dealers, Commercial banks, Trust Companies and Other Nominees.
99.4+ Form of Letter to Clients.
99.5+ Guidelines for Certification of Taxpayer Identification Number on Form W-9.
</TABLE>
- ------------------------
* Incorporated by reference.
+ Filed herewith.
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporating documents by first class mail or
other equally prompt means. This includes information contained in the documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act.
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Englewood,
State of Colorado, as of November , 1997
<TABLE>
<S> <C> <C>
ECHOSTAR COMMUNICATIONS CORPORATION
By:
------------------------------------------
Charles W. Ergen,
CHAIRMAN AND PRINCIPAL EXECUTIVE OFFICER
</TABLE>
November , 1997
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and as of the dates indicated:
SIGNATURE TITLE DATE
Chief Executive Officer
- ------------------------------ and Director (Principal November , 1997
Charles W. Ergen Executive Officer)
Chief Operating Officer
and Chief Financial
- ------------------------------ Officer (Principal November , 1997
Steven B. Schaver Financial Officer)
Treasurer and Controller
- ------------------------------ (Principal Accounting November , 1997
John R. Hager Officer)
- ------------------------------ Director November , 1997
James DeFranco
- ------------------------------ Director November , 1997
R. Scott Zimmer
- ------------------------------ Director November , 1997
Alan M. Angelich
- ------------------------------ Director November , 1997
Raymond L. Friedlob
II-5
<PAGE>
SIGNATURE TITLE DATE
*By: -------------------------
David K. Moskowitz,
ATTORNEY-IN-FACT
II-6
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
CERTIFICATE OF DESIGNATION
ESTABLISHING THE
VOTING POWERS, DESIGNATIONS, PREFERENCES, LIMITATIONS,
RESTRICTIONS, AND RELATIVE RIGHTS OF
6 3/4% SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK
--------------------------------------------------------------
pursuant to Section 78.1955 of the
General Corporation Law of Nevada
--------------------------------------------------------------
Each of Charles W. Ergen, President, and David K. Moskowitz, the Senior
Vice President, General Counsel and Secretary of EchoStar Communications
Corporation (the "Issuer"), a corporation organized and existing under the
General Corporation Law of the State of Nevada, does hereby certify that
pursuant to authority conferred upon the Board of Directors of the Issuer by its
Articles of Incorporation and pursuant to the provisions of Section 78.1955 of
the General Corporation Law of the State of Nevada, the Board of Directors, on
October 27, 1997, adopted the following resolution establishing the Issuer's
63/4% Series C Cumulative Convertible Preferred Stock, which resolution remains
in full force and effect. Certain capitalized terms used herein are defined in
Article 11.
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation by the Articles of Incorporation, the
Board of Directors does hereby provide for the issue of a series of
Preferred Stock, $0.01 par value, of the Corporation, to be designated
"6 3/4% Series C Cumulative
-1-
<PAGE>
Convertible Preferred Stock" (referred to herein as the "Series C
Preferred Stock"), having the number of shares and, to the extent that
the designations, powers, preferences and relative and other special
rights and the qualifications, limitations and restrictions of such
Series C Preferred Stock are not stated and expressed in the Articles of
Incorporation, the powers, preferences and relative and other special
rights and the qualifications, limitations and restrictions thereof, as
follows:
1 DESIGNATION AND NUMBER OF SHARES
1.1 The series will be known as the 6 3/4% Series C Cumulative Convertible
Preferred Stock.
1.2 The Series C Preferred Stock will be a series consisting of 2,300,000
shares of the authorized but unissued preferred stock of this corporation (the
"Issuer").
2 DIVIDENDS
2.1 Holders of Series C Preferred Stock will be entitled to receive, when,
as and if declared by the Board of Directors, out of funds legally available
therefor, dividends on the Series C Preferred Stock at a rate per annum equal
to 6 3/4% of the liquidation preference per share.
(a) All dividends will be cumulative, whether or not earned or
declared, on a quarterly basis on February 1, May 1, August 1, and November 1 of
each year, commencing February 1, 2000 (each such date being referred to herein
as a "Dividend Payment Date"). Each distribution in the form of a dividend
shall be payable in arrears to Holders of record as they appear on the stock
books of the Issuer on each record date as established by the Board of Directors
of the Issuer (the "Dividend Payment Record Date") not more than 60 nor less
than ten days preceding a Dividend Payment Date.
(i) Dividends payable on the Series C Preferred Stock for each full
dividend period will be computed by dividing the annual dividend rate by
four. Dividends payable on the Series C Preferred Stock for any period
less than a full dividend period will be computed on the basis of a 360-day
year consisting of twelve 30-day months.
(ii) The Series C Preferred Stock will not be entitled to any dividend
whether payable in cash, property or securities, in excess of the full
cumulative dividends.
-2-
<PAGE>
(iii) No interest, or sum of money in lieu of interest, will be
payable in respect of any accumulated and unpaid dividends.
(b) Dividends, to the extent declared by the Issuer's Board of
Directors, may, at the option of the Issuer, be paid in cash, by delivery of
fully paid and nonassessable shares of Class A Common Stock, or a combination
thereof. If the Issuer elects to pay dividends in shares of Class A Common
Stock, the number of shares of Class A Common Stock to be distributed will be
calculated by dividing such payment by 95% of the Market Value as of the
Dividend Payment Record Date.
2.2 (a) Subject to this Section 2.2, no full dividends may be declared or
paid or funds set apart for the payment of dividends on any Parity Securities
for any period unless:
(i) full cumulative dividends on the Series C Preferred Stock
shall have been or contemporaneously are declared and paid in full through
the immediately preceding Dividend Payment Date, and
(ii) if the dividend on the Parity Securities is declared as
payable in cash, a sum in cash is set apart for the next succeeding payment
on the Series C Preferred Stock at the next succeeding Dividend Payment
Date.
If full dividends are not so paid, the Series C Preferred Stock will share
dividends pro rata with any Parity Securities.
(b) No dividends may be paid or set apart for payment on Parity
Securities or Junior Securities, except dividends:
(i) on Junior Securities payable in additional shares of Junior
Securities, and
(ii) on Parity Securities payable in additional shares of Parity
Securities or Junior Securities,
provided, however, that, notwithstanding the provisions of Sections 2.2(a)(ii),
2.2(b)(i) and 2.2(b)(ii), whether or not full dividends have been or will be
paid in cash on the shares of the Series C Preferred Stock, the Issuer shall be
entitled to declare and pay cash dividends on Parity Securities and Junior
Securities to the extent that
-3-
<PAGE>
(1) the funds for such cash dividend payments are derived,
directly or indirectly, from the proceeds of an offering of Parity
Securities or Junior Securities with respect to which such cash dividends
are to be paid (or a concurrent offering of related securities), and
(2) provided that in connection with such offering it is
disclosed to the purchasers of such Parity Securities or Junior Securities,
as the case may be, in an offering memorandum, prospectus, or similar
communication, that a portion of the proceeds thereof may be used for the
payment of cash dividends on such securities (any transaction in which the
Issuer obtains the right to make cash dividend payments on Parity
Securities or Junior Securities pursuant to Clauses 2.2(b)(1) and 2.2(b)(2)
being referred to as a "Self-Funding Event").
(c) No Junior Securities or Parity Securities may be repurchased,
redeemed or otherwise retired nor may funds be set apart for payment with
respect thereto if full cumulative and unpaid dividends have not been paid in
cash on the Series C Preferred Stock through the immediately preceding Dividend
Payment Date or contemporaneously provided for; provided that, notwithstanding
the foregoing:
(i) cash dividends may be paid on Parity Securities and Junior
Securities to the extent permitted by Section 2.2(b), and
(ii) the Issuer may repurchase, redeem or otherwise retire or set
aside funds for those purposes with respect to any Parity Securities or
Junior Securities in exchange for or out of the net proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Issuer) of
other Parity Securities or Junior Securities, as the case may be, of the
Issuer.
(d) Reserved.
(e) Notwithstanding the foregoing, if full dividends have not been
declared and paid or set apart on the Series C Preferred Stock and any other
Parity Securities, dividends may be declared and paid on the Series C Preferred
Stock and such other Parity Securities so long as the dividends are declared and
paid PRO RATA so that the amounts of dividends declared per share on the Series
C Preferred Stock and such other Parity Securities will in all cases bear to
each other the same ratio that accrued and unpaid dividends per share on the
shares of the Series C Preferred Stock and such other Parity Securities bear to
each other; provided, that if such dividends are paid in cash on the other
Parity Securities, dividends will also be paid in cash on the Series C Preferred
Stock.
-4-
<PAGE>
(f) (i) Except as provided in Clause (ii) of this Section 2.2(f),
the Holders of shares of the Series C Preferred Stock at the close of business
on a Dividend Payment Record Date will be entitled to receive the dividend
payment on those shares on the corresponding Dividend Payment Date
notwithstanding the subsequent conversion thereof or the Issuer's default in
payment of the dividend due on that Dividend Payment Date. (ii) Holders of
shares called for redemption on a Redemption Date which falls between the
Dividend Payment Record Date and the Dividend Payment Date will be entitled to
receive such dividend on such Redemption Date and will not be entitled to such
payment pursuant to Clause (i) hereof. (iii) Except as provided in Clauses (i)
and (ii) of this Section 2.2(f), the Issuer shall make no payment or allowance
for unpaid dividends, whether or not in arrears, on converted shares or for
dividends on the shares of Class A Common Stock issued upon conversion.
3 RANKING
3.1 The Series C Preferred Stock will, with respect to dividend
distributions and distributions upon the liquidation, winding-up or dissolution
of the Issuer, rank:
(a) senior to all classes of Common Stock and (except as described in
Sections 3.3 and 3.4, below) to each series of preferred stock existing on the
date of this Certificate of Designation and each other class of capital stock or
series of preferred stock issued by the Issuer, which is established after the
date of this Certificate of Designation, the terms of which do not expressly
provide that such class or series will rank senior to or on a parity with the
Series C Preferred Stock as to dividend distributions and distributions upon the
liquidation, winding-up or dissolution of the Issuer (collectively, with the
Common Stock, referred to as the "Junior Securities");
(b) subject to certain conditions, on a parity with any class of
capital stock or series of preferred stock issued by the Issuer, which is
established after the date of this Certificate of Designation by the Board of
Directors, the terms of which expressly provide that such class or series will
rank on a parity with the Series C Preferred Stock as to dividend distributions
and distributions upon the liquidation, winding-up or dissolution of the Issuer
(collectively with the Series A Preferred Stock, referred to as "Parity
Securities"); and
(c) subject to certain conditions, junior to each class of capital
stock or series of preferred stock issued by the Issuer, which is established
after the date of this Certificate of Designation by the Board of Directors, the
terms of which expressly provide that such class or series will rank senior to
the Series C Preferred Stock as to dividend distributions and distributions upon
liquidation, winding-up or dissolution of the Issuer
-5-
<PAGE>
including (without limitation) the Series B Preferred Stock (collectively
referred to as "Senior Securities").
3.2 Except as otherwise provided herein (including, without limitation
Section 8.3 hereof), the Issuer is entitled to amend its articles of
incorporation to authorize one or more additional series of preferred stock,
file certificates of designation, and issue without restriction, from time to
time, any series of Junior Securities, Parity Securities or Senior Securities.
3.3 The Issuer's Series A Preferred Stock is hereby designated a Parity
Security.
3.4 The Issuer's Series B Preferred Stock is hereby designated a Senior
Security.
4 CONVERSION.
4.1(a) Each Holder of Series C Preferred Stock shall have the right, at
its option, at any time and from time to time to convert, subject to the terms
and provisions of this Section 4, any or all of such Holder's shares of Series C
Preferred Stock. In such case, the shares of Series C Preferred Stock shall be
converted into such number of fully paid and nonassessable shares of Class A
Common Stock as is equal, subject to Section 4.6, to:
THE PRODUCT of the number of shares of Series C Preferred Stock being so
converted MULTIPLIED BY
THE QUOTIENT OF (i) the Liquidation Preference DIVIDED BY (ii) the
Conversion Price then in effect,
except that with respect to any share which shall be called for redemption such
right shall terminate at the close of business on the second Business Day
preceding the Redemption Date unless the Issuer shall default in making the
payment due upon redemption thereof.
(b) The conversion right of a Holder of Series C Preferred Stock
shall be exercised by the Holder by the surrender of the certificates
representing shares to be converted to the Issuer or to the Transfer Agent
accompanied by the Conversion Notice.
(i) Immediately prior to the close of business on the Conversion
Date, each converting Holder of Series C Preferred Stock shall be deemed to
be the Holder of record of Class A Common Stock issuable upon conversion of
such
-6-
<PAGE>
Holder's Series C Preferred Stock notwithstanding that the share register of
the Issuer shall then be closed or that certificates representing such
Class A Common Stock shall not then be actually delivered to such person.
(ii) Upon notice from the Issuer, each Holder of Series C Preferred
Stock so converted shall promptly surrender to the Issuer or the Transfer
Agent certificates representing the shares so converted (if not previously
delivered), duly endorsed in blank or accompanied by proper instruments of
transfer.
(iii) On any Conversion Date, all rights with respect to the shares of
Series C Preferred Stock so converted, including the rights, if any, to
receive notices, will terminate, except the rights of Holders thereof
to:(1) receive certificates for the number of shares of Class A Common
Stock into which such shares of Series C Preferred Stock have been
converted;(2) the payment in cash or shares of Class A Common Stock of any
accumulated and unpaid dividends accrued thereon pursuant to Section 4.2
hereof; and (3) exercise the rights to which they are entitled as Holders
of Class A Common Stock.
(c) If the Conversion Date shall not be a Business Day, then such
conversion right shall be deemed exercised on the next Business Day.
4.2 When shares of Series C Preferred Stock are converted pursuant to
this Section 4, all accumulated and unpaid dividends (whether or not declared or
currently payable) on the Series C Preferred Stock so converted to (and not
including) the Conversion Date shall be due and payable, at the Issuer's option,
(a) in cash;
(b) in a number of fully paid and nonassessable shares of Class A
Common Stock equal to the quotient of (i) the amount of accumulated and unpaid
dividends payable to the Holders of Series C Preferred Stock hereunder, DIVIDED
BY (ii) 95% of the Market Value for the period ending on the Conversion Date; or
(c) a combination thereof.
4.3 The Conversion Price shall be subject to adjustment if any Conversion
Price Adjustment Event described in Section 4.3(a) occurs. The adjustment will
be accomplished from time to time as described in Section 4.3(b).
(a) In case the Issuer shall at any time or from time to time:
-7-
<PAGE>
(i) make a redemption payment or pay a dividend (or other distribution)
payable in shares of Class A Common Stock to all Holders of any class of
Capital Stock of the Issuer (other than the issuance of shares of Class A
Common Stock in connection with the payment in redemption for, of dividends
on, or the conversion of the Series C Preferred Stock);
(ii) make any issuance to all Holders of shares of Common Stock of
rights, options or warrants entitling them to subscribe for or purchase
shares of Common Stock or securities convertible into or exchangeable for
shares of Common Stock at less than Market Value as of the date of
conversion or exchange; PROVIDED, HOWEVER, that no adjustment shall be made
with respect to such a distribution to the extent the Holder of shares of
Series C Preferred Stock would be entitled to receive such rights, option
or warrants upon conversion at any time of shares of Series C Preferred
Stock into Class A Common Stock and PROVIDED FURTHER that if such options
or warrants are only exercisable upon the occurrence of certain triggering
events, then the Conversion Price will not be adjusted until such
triggering events occur,
(iii) any subdivision, combination or reclassification of any class of
Common Stock,
(iv) any distribution consisting exclusively of cash (excluding any
cash distributed upon a merger or consolidation to which Section 4.5
applies) to all Holders of shares of any class of Common Stock (which
distribution is not also being made to the holders of the Series C
Preferred Stock based on the number of shares of Class A Common Stock into
which the Series C Preferred Stock is then convertible unless the Class A
Common Stock does not share PRO RATA in such distribution) in an aggregate
amount that, combined together with (1) all other such all-cash
distributions made within the then-preceding 12-months in respect of which
no adjustment has been made and (2)any cash and the fair market value of
other consideration paid or payable in respect of any tender offer by the
Issuer or any of its Subsidiaries for shares of any class of Common Stock
concluded within the then-preceding 12-months in respect of which no
adjustment has been made, exceeds 15% of the Issuer's Market Capitalization
on the record date of such distribution,
(v) the completion of a tender or exchange offer made by the Issuer or
any of its Subsidiaries for shares of any class of Common Stock that
involves an aggregate consideration that, together with (1) any cash and
other consideration payable in a tender or exchange offer by the Issuer or
any of its Subsidiaries for
-8-
<PAGE>
shares of any class of Common Stock expiring within the then-preceding
12-months in respect of which no adjustment has been made and (2) the
aggregate amount of any such all-cash distributions referred to in (iv)
above to all Holders of shares of any class of Common Stock within the
then-preceding 12-months in respect of which no adjustments have been
made, exceeds 15% of the Issuer's Market Capitalization just prior to the
expiration of such tender offer, or
(vi) a distribution to all Holders of any class of Common Stock (which
distribution is not also being made to the holders of the Series C
Preferred Stock based on the number of shares of Class A Common Stock into
which the Series C Preferred Stock is then convertible unless the Class A
Common Stock does not share PRO RATA in such distribution) consisting of
evidences of indebtedness, shares of capital stock other than Common Stock
of EchoStar or assets (including securities, but excluding those dividends,
rights, options, warrants and distributions referred to above).
(b) If any Conversion Price Adjustment Event occurs, the Issuer will
calculate the adjustment to the Conversion Price as follows for each specific
event. In the following descriptions, the variables have the following
definitions:
C EQUALS THE TOTAL NUMBER OF SHARES OF SERIES C PREFERRED STOCK OUTSTANDING
AT THE TIME OF THE CONVERSION PRICE ADJUSTMENT EVENT;
U EQUALS THE NUMBER OF SHARES OF COMMON STOCK UNDERLYING RIGHTS, OPTIONS, OR
WARRANTS ISSUED ENTITLING THE HOLDERS TO SUBSCRIBE FOR OR PURCHASE SHARES
OF COMMON STOCK OR SECURITIES CONVERTIBLE INTO OR EXCHANGEABLE FOR SHARES
OF COMMON STOCK ISSUED IN THE CONVERSION PRICE ADJUSTMENT EVENT;
X EQUALS THE TOTAL NUMBER OF SHARES OF CLASS A COMMON STOCK OUTSTANDING
IMMEDIATELY PRIOR TO THE CONVERSION PRICE ADJUSTMENT EVENT (NOT INCLUDING
UNEXERCISED OPTIONS, WARRANTS, OR RIGHTS);
Y EQUALS THE TOTAL NUMBER OF SHARES OF CLASS A COMMON STOCK OUTSTANDING
IMMEDIATELY AFTER THE CONVERSION PRICE ADJUSTMENT EVENT (NOT INCLUDING
UNEXERCISED OPTIONS, WARRANTS, OR RIGHTS);
Z EQUALS THE TOTAL NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT THE TIME
OF THE CONVERSION PRICE ADJUSTMENT EVENT.
-9-
<PAGE>
CASH EQUALS ANY DISTRIBUTION CONSISTING EXCLUSIVELY OF CASH (EXCLUDING ANY
CASH DISTRIBUTED UPON A MERGER OR CONSOLIDATION TO WHICH SECTION 4.5
APPLIES) TO ALL HOLDERS OF SHARES OF ANY CLASS OF COMMON STOCK IN AN
AGGREGATE AMOUNT THAT, COMBINED TOGETHER WITH (1) ALL OTHER SUCH
ALL-CASH DISTRIBUTIONS MADE WITHIN THE THEN-PRECEDING 12-MONTHS IN
RESPECT OF WHICH NO ADJUSTMENT HAS BEEN MADE AND (2) ANY CASH AND
THE FAIR MARKET VALUE OF OTHER CONSIDERATION PAID OR PAYABLE IN
RESPECT OF ANY TENDER OFFER BY THE ISSUER OR ANY OF ITS SUBSIDIARIES
FOR SHARES OF ANY CLASS OF COMMON STOCK CONCLUDED WITHIN THE
THEN-PRECEDING 12-MONTHS IN RESPECT OF WHICH NO ADJUSTMENT HAS BEEN
MADE PURSUANT TO SECTION 4.3(a)(iv);
ExP EQUALS THE EXERCISE PRICE OR OTHER CONSIDERATION TO BE PAID BY THE HOLDER
UPON THE EXERCISE OF OR CONVERSION OF "U";
MC EQUALS MARKET CAPITALIZATION;
MV EQUALS MARKET VALUE PER SHARE OF THE CLASS A COMMON STOCK OR THE FAIR
MARKET VALUE OF THE CLASS B COMMON STOCK OR CLASS C COMMON STOCK (AS THE
LATTER MAY BE DETERMINED IN GOOD FAITH BY THE BOARD OF DIRECTORS OF THE
ISSUER) AS OF THE DATE OF CONVERSION OR EXCHANGE OF "U";
#Sh EQUALS THE NUMBER OF SHARES IN THE CLASS OF COMMON STOCK RECEIVING THE
DISTRIBUTION CONTEMPLATED IN SECTION 4.3(a)(vi) OR SUBJECT TO THE TENDER
OFFER CONTEMPLATED IN SECTION 4.3(a)(v);
TOff EQUALS THE AGGREGATE CONSIDERATION THAT, TOGETHER WITH (1) ANY CASH AND
OTHER CONSIDERATION PAYABLE IN A TENDER OR EXCHANGE OFFER BY THE ISSUER
OR ANY OF ITS SUBSIDIARIES FOR SHARES OF ANY CLASS OF COMMON STOCK
EXPIRING WITHIN THE THEN-PRECEDING 12-MONTHS IN RESPECT OF WHICH NO
ADJUSTMENT HAS BEEN MADE AND (2) THE AGGREGATE AMOUNT OF ANY SUCH
ALL-CASH DISTRIBUTIONS REFERRED TO IN SECTION 4.3(a)(iv) TO ALL HOLDERS
OF SHARES OF ANY CLASS OF COMMON STOCK WITHIN THE THEN-PRECEDING
12-MONTHS IN RESPECT OF WHICH NO ADJUSTMENTS HAVE BEEN MADE;
TOff/S EQUALS THE TENDER OFFER PRICE, PER SHARE;
TPur EQUALS THE NUMBER OF SHARES PURCHASED IN THE TENDER OFFER;
VALUE EQUALS THE AGGREGATE FAIR MARKET VALUE OF THE DISTRIBUTION DESCRIBED IN
SECTION 4.3(a)(vi), AS DETERMINED IN GOOD FAITH BY THE BOARD OF
DIRECTORS OF THE ISSUER.
-10-
<PAGE>
CP EQUALS THE CONVERSION PRICE IMMEDIATELY PRIOR TO THE CONVERSION PRICE
ADJUSTMENT EVENT;
ACP EQUALS THE CONVERSION PRICE IMMEDIATELY AFTER THE CONVERSION PRICE
ADJUSTMENT EVENT;
(i) In the case of an event described in Sections 4.3(a)(i) or
4.3(a)(iii), the Conversion Price in effect immediately before such event
shall be adjusted pursuant to the following formula: X/Y MULTIPLIED BY
CP=ACP.(1)
(ii) In the case of an event described in Section 4.3(a)(ii), the
Conversion Price in effect immediately before such event shall be adjusted
pursuant to the following formula: X/(X+U((MV-ExP)/MV)) MULTIPLIED BY
CP=ACP.(2) If any options, warrants, convertible securities, or other
rights of the nature described in Section 4.3(a)(ii) ("Rights") expire
without exercise or conversion, the Conversion Price will be readjusted to
the Conversion Price which would otherwise be in effect had the adjustment
made upon the issuance of such Rights been made on the basis of delivery
of only the number of shares of Common Stock actually delivered upon the
exercise or conversion of such Rights.
(iii) In the case of an event described in Section 4.3(a)(iv), the
Conversion Price in effect immediately before such event shall be adjusted
pursuant to the following formula: CP-((Cash-15%MC)/C)=ACP.(3)
There will be no adjustment to the Conversion Price pursuant to Clause
4.3(a)(iv) if (Cash-15% MC) is less than or equal to zero.
(iv) In the case of an event described in Section 4.3(a)(v), and if
the tender offer price or exchange offer price per share is greater than
Market Value, the Conversion Price in effect immediately before such event
shall be adjusted
- --------------
(1) For example, where X=12 million shares, and 500,000 shares are being issued
in the Conversion Price Adjustment Event (Y=12,500,000), and CP is $32.00, the
Adjusted Conversion Price (ACP) is $30.72.
(2) For example, where X=12 million shares, and U=500,000 shares, MV is $40,
ExP is $35, and CP is $32.00, the Adjusted Conversion Price (ACP) is $31.83. If
ExP is $0, the Adjusted Conversion Price (ACP) is $30.72.
(3) For example, where Cash distributed equals $20,000,000, Market
Capitalization equals $100,000,000 (15%MC=$15,000,000), CP equals $32.00 and
there are 2,000,000 shares of Series C Preferred Stock outstanding (C), the
Adjusted Conversion Price (ACP) is $29.50.
-11-
<PAGE>
pursuant to the following formula: CP-((TPur MULTIPLIED BY
(TOff/S-MV))/(#SH-TPur))=ACP.(4)
There will be no adjustment to the Conversion Price pursuant to Clause
4.3(a)(v) if TOff/S is less than or equal to Market Value or if TPur
MULTIPLIED BY TOff/S is less than 15% MC.
(v) In the case of an event described in Section 4.3(a)(vi), the
Conversion Price in effect immediately before such event shall be adjusted
pursuant to the following formula: CP-(Value/#SH)=ACP.(5)
An adjustment made pursuant to this Section 4.3 shall become effective: (x)
in the case of a Conversion Price Adjustment Event described in Section
4.3(a)(i), (ii), (iv) or (vi), immediately following the close of business on
the record date for the determination of Holders of Common Stock entitled to
participate in such event; or (y) in the case of a Conversion Price
Adjustment Event described in Section 4.3(a)(iii), the close of business on
the day upon which such corporate action becomes effective; or (z) in the
case of a Conversion Price Adjustment Event described in Section 4.3(a)(v),
the close of business on the day of the completion of such tender offer or
exchange offer.
(c) Notwithstanding anything herein to the contrary, no adjustment
under this Section 4.3 need be made to the Conversion Price unless such
adjustment would require an increase or decrease of at least 1% of the
Conversion Price then in effect. Any lesser adjustment shall be carried
forward and shall be made at the time, if ever, of and together with the next
subsequent adjustment, which, together with any adjustment or adjustments so
carried forward, shall amount to an increase or decrease of at least 1% of
such Conversion Price.
(d) Notwithstanding anything to the contrary contained in this
Certificate of Designation, no Conversion Price adjustment will be made as a
result of the issuance of Class A Common Stock on conversion of the Series A
Preferred Stock, Series C Preferred Stock, or the Class B Common Stock.
- -------------
(4) For example, where TOff/S is $45.00 at a time when MV is $35, CP equals
$32.00, 1,000,000 shares were purchased in the tender offer (TPur), and there
were 12,000,000 shares of the class outstanding (#SH), the Adjusted Conversion
Price (ACP) is $31.09.
(5) For example, where CP is $32.00, Value equals $1,500,000, and there were
12,000,000 shares of the class outstanding (#SH), ACP is $31.875.
-12-
<PAGE>
(e) Each event requiring adjustment to the Conversion Price shall
require only a single adjustment even though more than one of the adjustment
clauses set forth in Section 4.3(a), Section 4.4, or Section 4.5, may be
applicable to such Conversion Price Adjustment Event.
(f) If the Issuer shall take a record of the Holders of any class
of its Capital Stock for the purpose of entitling them to receive a dividend
or other distribution which would otherwise constitute a Conversion Price
Adjustment Event, and shall thereafter and before the distribution to
stockholders thereof legally abandon its plan to pay or deliver such dividend
or distribution, then thereafter no adjustment in the Conversion Price then
in effect shall be required by reason of the taking of such record.
(g) Upon any increase or decrease in the Conversion Price, then,
and in each such case, the Issuer promptly shall deliver to each registered
Holder of Series C Preferred Stock a certificate signed by an authorized
officer of the Issuer, setting forth in reasonable detail the event requiring
the adjustment and the method by which such adjustment was calculated and
specifying the increased or decreased Conversion Price then in effect
following such adjustment.
(h) The Issuer reserves the right to make such reductions in the
Conversion Price in addition to those required in the foregoing provisions as
it considers to be advisable in order that any event treated for Federal
income tax purposes as a dividend of stock or stock rights will not be
taxable to the recipients. In the event the Issuer elects to make such a
reduction in the Conversion Price, the Issuer will comply with the
requirements of Rule 14e-1 under the 1934 Act, and any other securities laws
and regulations thereunder if and to the extent that such laws and
regulations are applicable in connection with the reduction of the Conversion
Price.
4.4 In the event the Issuer distributes rights or warrants (other than
those referred to in Section 4.3(a)(ii)) pro rata to all Holders of shares of
any class of Common Stock, so long as any such rights or warrants have not
expired or been redeemed by the Issuer, the Holder of any Series C Preferred
Stock surrendered for conversion will, in the discretion of the Issuer and
subject to the last paragraph of this Section 4.4, be entitled to receive
upon such conversion, in addition to the shares of Common Stock then issuable
upon such conversion (the "Conversion Shares"), a number of rights or
warrants to be determined as follows:
(a) if such conversion occurs on or prior to the date for the
distribution to the Holders of rights or warrants of separate certificates
evidencing such rights or warrants (the "Distribution Date"), the same number
of rights or warrants to which a Holder of a
-13-
<PAGE>
number of shares of Common Stock equal to the number of Conversion Shares is
entitled at the time of such conversion in accordance with the terms and
provisions applicable to the rights or warrants, and
(b) if such conversion occurs after such Distribution Date, the
same number of rights or warrants to which a Holder of the number of shares
of common stock of EchoStar into which such Series C Preferred Stock was
convertible immediately prior to such Distribution Date would have been
entitled on such Distribution Date in accordance with the terms and
provisions of and applicable to the rights or warrants.
In the event the Holders of the Series C Preferred Stock are not entitled
to receive such rights or warrants pursuant to Section 4.4(a) or 4.4(b), the
Conversion Price will be subject to adjustment upon any declaration or
distribution of such rights or warrants pursuant to Section 4.3, above.
4.5(a) In case of:
(i) any capital reorganization or reclassification or other change of
outstanding shares of Class A Common Stock (other than a change in par
value, or from par value to no par value, or from no par value to par
value), or
(ii) any consolidation or merger of the Issuer with or into another
Person (other than a consolidation or merger in which the Issuer is the
resulting or surviving Person and which does not result in any
reclassification or change of outstanding Class A Common Stock), or
(iii) any sale or other disposition to another Person of all or
substantially all of the assets of the Issuer (other than the sale,
transfer, assignment or distribution of shares of capital stock or assets
to a Subsidiary)
(any of the events described in Section 4.5(a) being referred to in this
Section 4.5 as a "Transaction"), then the adjustment described in Section
4.5(b) will be made.
(b) Each share of Series C Preferred Stock then outstanding shall,
without the consent of any Holder of Series C Preferred Stock, become
convertible only into the kind and amount of shares of stock or other
securities (of the Issuer or another issuer) or property or cash receivable
upon such Transaction by a Holder of the number of shares of Class A Common
Stock into which such share of Series C Preferred Stock could have been
converted immediately prior to such Transaction after giving effect to any
adjustment event.
-14-
<PAGE>
(c) The provisions of this Section 4.5 and any equivalent thereof in
any such certificate similarly shall apply to successive Transactions. The
provisions of this Section 4.5 shall be the sole right of Holders of Series C
Preferred Stock in connection with any Transaction and such Holders shall
have no separate vote thereon.
4.6 In the case of any distribution by the Issuer to its stockholders of
substantially all of its assets, each Holder of Series C Preferred Stock will
participate PRO RATA in such distribution based on the number of shares of
Class A Common Stock into which such Holders' shares of Series C Preferred
Stock would have been convertible immediately prior to such distribution.
4.7 If, as a result of any Conversion Price Adjustment Event, a Holder
of the Series C Preferred Stock becomes entitled to receive upon conversion
shares of two or more classes of Capital Stock, the Issuer shall determine
the reasonable allocation of the adjusted Conversion Price between the
classes of Capital Stock. After such allocation, the Conversion Price of
each class of Capital Stock shall thereafter be subject to adjustment on
terms comparable to the Series C Preferred Stock in this Article 4.
4.8 The Issuer shall at all times reserve and keep available for
issuance upon the conversion of the Series C Preferred Stock, such number of
its authorized but unissued shares of Class A Common Stock as will from time
to time be sufficient to permit the conversion of all outstanding shares of
Series C Preferred Stock, and shall take all action required to increase the
authorized number of shares of Class A Common Stock if at any time there
shall be insufficient authorized but unissued shares of Class A Common Stock
to permit such reservation or to permit the conversion of all outstanding
shares of Series C Preferred Stock.
4.9 The issuance or delivery of certificates for Class A Common Stock
upon the conversion of shares of Series C Preferred Stock shall be made
without charge to the converting Holder of shares of Series C Preferred Stock
for such certificates or for any tax in respect of the issuance or delivery
of such certificates or the securities represented thereby, and such
certificates shall be issued or delivered in the respective names of, or in
such names as may be directed by, the Holders of the shares of Series C
Preferred Stock converted; PROVIDED, HOWEVER, that the Issuer shall not be
required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate in a name other
than that of the Holder of the shares of Series C Preferred Stock converted,
and the Issuer shall not be required to issue or deliver such certificate
unless or until the Person or Persons requesting the issuance or delivery
thereof shall have paid to the Issuer the amount of such tax or shall have
established to the reasonable satisfaction of the Issuer that such tax has
been paid.
-15-
<PAGE>
5 OPTIONAL REDEMPTION OF SERIES C PREFERRED STOCK
5.1 (a) Shares of the Series C Preferred Stock will not be redeemable
prior to November 1, 2000.
(b) After October 31, 2000, the Series C Preferred Stock may be
redeemed, in whole or in part, at the option of the Issuer, in cash, by
delivery of fully paid and nonassessable shares of Class A Common Stock or a
combination thereof, upon not less than 20 days' notice nor more than 60
days' notice, during the twelve-month periods commencing on November 1 of the
years indicated below, at the following Redemption Prices per share, plus in
each case all accumulated and unpaid dividends to the Redemption Date:
YEAR REDEMPTION
---- PRICE PER SHARE
---------------
2000 ............................................... $51.929
2001 ............................................... $51.447
2002 ............................................... $50.965
2003 ............................................... $50.482
2004 and thereafter ............................... $50.000
--------------------------------------------------------------------
--------------------------------------------------------------------
(c) In the event that fewer than all the outstanding shares of the
Series C Preferred Stock are to be redeemed, the shares to be redeemed will
be determined pro rata or by lot.
(d) If the Issuer elects to pay the Redemption Price in shares of
Class A Common Stock, the number of shares of Class A Common Stock to be
distributed will be calculated by dividing the aggregate Redemption Price
payable to any Holder by 95% of the Market Value as of the Redemption Notice
Date.
(e) From and after the applicable Redemption Date (unless the
Issuer shall be in default of payment of the Redemption Price), dividends on
the shares of the Series C Preferred Stock to be redeemed on such Redemption
Date shall cease to accumulate, such shares shall no longer be deemed to be
outstanding, and all rights of the Holders thereof as stockholders of the
Issuer (except the right to receive the Redemption Price) will cease.
-16-
<PAGE>
5.2 If any dividends on the Series C Preferred Stock are in arrears, no
shares of the Series C Preferred Stock will be redeemed unless all outstanding
shares of the Series C Preferred Stock are simultaneously redeemed.
5.3 In the event the Issuer shall elect to redeem shares of the Series C
Preferred Stock pursuant to Section 5.1 hereof, the Issuer must provide the
Holders with the Redemption Notice as described in Section 5.1(b), and:
(a) (i) On or before any Redemption Date, each Holder of shares of
Series C Preferred Stock to be redeemed shall surrender the certificate or
certificates representing such shares of Series C Preferred Stock (properly
endorsed or assigned for transfer, if the Issuer shall so require and the
Redemption Notice shall so state), to the Issuer or the Redemption Agent
(if appointed) in the manner and at the place designated in the Redemption
Notice.
(ii) On the first Business Day following the Redemption Date, the
Issuer or the Redemption Agent, as applicable, shall pay or deliver to the
Holder, whose name appears on such certificate or certificates as the owner
thereof, the full Redemption Price due such Holder in cash, in fully paid
and nonassessable shares of Class A Common Stock or in a combination
thereof.
(iii) The shares represented by each certificate to be surrendered
shall be automatically (and without any further action of the Issuer or the
Holder) canceled as of the Redemption Date whether or not certificates for
such shares are returned to the Issuer and returned to authorized but
unissued shares of preferred stock of no series.
(iv) If fewer than all the shares represented by any such certificate
are to be redeemed, a new certificate shall be issued representing the
unredeemed shares, without costs to the Holder, together with the amount of
cash, if any, in lieu of fractional shares to the extent the Issuer is
legally and contractually entitled to pay cash for said fractional shares.
If the Issuer is not entitled to pay cash for fractional shares, it shall
pay cash to the Holder for the fractional shares when it becomes legally
and contractually able to pay such cash.
(b) If a Redemption Notice shall have been given as provided in
Section 5.1, dividends on the shares of Series C Preferred Stock so called for
redemption shall cease to accrue, such shares shall no longer be deemed to be
outstanding, and all rights of the Holders thereof as stockholders of the Issuer
with respect to shares so called for redemption (except for the right to receive
from the Issuer the Redemption Price) shall
-17-
<PAGE>
cease (excluding any right to receive the dividend payment on shares called
for redemption whether the Redemption Date falls between the Dividend Payment
Record Date and the Dividend Payment Date) either (i) from and after the
Redemption Date (unless the Issuer shall default in the payment of the
Redemption Price, in which case such rights shall not terminate at such time
and date) or (ii) if the Issuer shall so elect and state in the Redemption
Notice, from and after the time and date (which date shall be the Redemption
Date or an earlier date not less than 20 days after the date of mailing of
the Redemption Notice) on which the Issuer shall irrevocably deposit in trust
for the Holders of the shares to be redeemed with a designated Redemption
Agent as paying agent sufficient to pay at the office of such paying agent,
on the Redemption Date, the Redemption Price. Any money or shares of Class A
Common Stock so deposited with such Redemption Agent which shall not be
required for such redemption shall be returned to the Issuer forthwith.
Subject to applicable escheat laws, any moneys or shares of Class A Common
Stock so set aside by the Issuer and unclaimed at the end of one year from
the Redemption Date shall revert to the general funds of the Issuer, after
which reversion the Holders of such shares so called for redemption shall
look only to the general funds of the Issuer for the payment of the
Redemption Price without interest. Any interest accrued on funds held by the
Redemption Agent shall be paid to the Issuer from time to time.
(c) In the event that fewer than all the outstanding shares of the
Series C Preferred Stock are to be redeemed, the shares to be redeemed shall be
determined pro rata or by lot, as determined by the Issuer, except that the
Issuer may redeem such shares held by any Holder of fewer than 100 shares (or
shares held by Holders who would hold fewer than 100 shares as a result of such
redemption), as may be determined by the Issuer.
(d) If any Holder whose shares of Series C Preferred Stock are called
for redemption pursuant to this Article 5 fails to surrender the certificate
representing such shares (or fails to arrange for the appropriate book-entry
transfer if a global certificate has been issued), such Holder shall not be
entitled to receive payment of the redemption price until the certificate has
been surrendered for cancellation or the appropriate book-entry transfer is
made. Such Holder will not be entitled to receive any interest on the
Redemption Price from the Redemption Date.
-18-
<PAGE>
6 CHANGE OF CONTROL
6.1 (a) In the event of a Change of Control, Holders shall, if the Market
Value at such time is less than the Conversion Price, have a one time option,
upon not less than 30 days' notice nor more than 60 days' notice, to convert all
of their outstanding shares of Series C Preferred Stock into shares of Class A
Common Stock at an adjusted Conversion Price equal to the greater of:
(i) the Market Value as of the Change of Control date and
(ii) $13.00.
(b) In lieu of issuing the shares of Class A Common Stock issuable
upon conversion in the event of a Change of Control, the Issuer may, at its
option, make a cash payment equal to the Market Value of such Class A Common
Stock otherwise issuable.
6.2 The foregoing provision is not waivable by the Issuer.
7 LIQUIDATION PREFERENCE
7.1 Upon any voluntary or involuntary liquidation, dissolution or
winding-up of the Issuer, Holders of the Series C Preferred Stock will be
entitled to be paid, out of assets of the Issuer available for distribution the
Liquidation Preference per share plus an amount in cash equal to all accumulated
and unpaid dividends thereon to the date fixed for liquidation, dissolution or
winding-up (including an amount equal to a prorated dividend for the period from
the last dividend payment date to the date fixed for liquidation, dissolution or
winding-up), before any distribution is made on any Junior Securities,
including, without limitation, the common stock.
7.2 If, upon any voluntary or involuntary liquidation, dissolution or
winding-up of the Issuer, the amounts payable with respect to the Series C
Preferred Stock and all other Parity Securities are not paid in full, the
Holders of the Series C Preferred Stock and the Parity Securities will share
equally and ratably in any distribution of assets of the Issuer in proportion to
the full Liquidation Preference and accumulated and unpaid dividends to which
each is entitled.
7.3 After payment of the full amount of the Liquidation Preference and
accumulated and unpaid dividends to which they are entitled, the Holders of
shares of the Series C Preferred Stock will not be entitled to any further
participation in any distribution of assets of the Issuer.
-19-
<PAGE>
7.4 Neither the sale, conveyance, exchange or transfer (for cash, shares
of stock, securities or other consideration) of all or substantially all of the
property or business of the Issuer (other than in connection with the winding up
of its business) nor the merger or consolidation of the Issuer with or into any
other corporation will be deemed to be a dissolution, liquidation, or
winding-up, voluntary or involuntary, of the Issuer.
8 VOTING RIGHTS
8.1 Holders of the Series C Preferred Stock have no voting rights with
respect to general corporate matters except as provided by law or as set forth
herein.
8.2 If dividends on the Series C Preferred Stock are in arrears and unpaid
for six quarterly periods, the Holders of the Series C Preferred Stock voting
separately as a class with the shares of any other preferred stock or preference
securities having similar voting rights will be entitled at the next regular or
special meeting of stockholders of the Issuer to elect two directors of the
Issuer. Such voting rights will continue only until such time as the dividend
arrearage on the Series C Preferred Stock has been paid in full.
8.3 The affirmative vote or consent of the Holders of at least 66-2/3% of
the outstanding Series C Preferred Stock will be required for:
(a) the issuance of any class of Senior Securities or Parity Securities
(or security convertible into Senior Securities or Parity Securities or
evidencing a right to purchase any shares or any class or series of Senior
Securities or Parity Securities) (other than additional shares of Series B
Preferred Stock or Parity Securities with an aggregate liquidation preference,
at any one time outstanding, not to exceed $100 million), and
(b) amendments to the Issuer's Articles of Incorporation that would
affect adversely the rights of Holders of the Series C Preferred Stock,
including, without limitation,
(i) any increase in the authorized number of shares of Series C
Preferred Stock and
(ii) the issuance of any shares of Series C Preferred Stock in excess
of the number of shares of such stock authorized in this Certificate of
Designation.
In all such cases each share of Series C Preferred Stock shall be entitled to
one vote.
8.4 Except as set forth in this Certificate of Designation,
-20-
<PAGE>
(a) the creation, authorization or issuance of any shares of Junior
Securities, Parity Securities or Senior Securities or
(b) an increase or decrease in the amount of authorized capital stock
of any class, including any preferred stock,
shall not require the consent of the Holders of the Series C Preferred Stock and
shall not be deemed to affect adversely the rights, preferences, privileges or
voting rights of Holders of shares of the Series C Preferred Stock.
8.5 Any exercise of the voting rights contained herein will be subject to
applicable provisions of the Communications Act including, without limitation,
the requirements of prior approval for transfer of control or assignment of
Title III licenses (as that term is defined in the Communications Act).
9 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATORS AND
STOCKHOLDERS.
9.1 No director, officer, employee, incorporator or stockholder of the
Issuer or any of its Affiliates, as such, shall have any liability for any
obligations of the Issuer and any of its Affiliates under the Series C Preferred
Stock or the Certificate of Designation or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each Holder of the
Series C Preferred Stock waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Series C Preferred
Stock.
10 AMENDMENT, SUPPLEMENT AND WAIVER
10.1 Without the consent of any Holder of the Series C Preferred Stock, the
Issuer may amend or supplement this Certificate of Designation to cure any
ambiguity, defect or inconsistency, to provide for uncertificated Series C
Preferred Stock in addition to or in place of certificated Series C Preferred
Stock, to provide for the assumption of the Issuer's obligations to Holders of
the Series C Preferred Stock in the case of a merger or consolidation, to make
any change that would provide any additional rights or benefits to the Holders
of the Series C Preferred Stock or that does not adversely affect the legal
rights under this Certificate of Designation of any such Holder.
11 CERTAIN DEFINITIONS
Set forth below are certain defined terms used in this Certificate of
Designation.
-21-
<PAGE>
11.1 "AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED, HOWEVER,
that beneficial ownership of 10% or more of the voting securities of a person
shall be deemed to be control; PROVIDED FURTHER that no individual, other than a
director of the Issuer or an officer of the Issuer with a policy making
function, shall be deemed an Affiliate of the Issuer or any of its Subsidiaries,
solely by reason of such individual's employment, position or responsibilities
by or with respect to the Issuer or any of its Subsidiaries.
11.2 "BUSINESS DAY" means any day other than a Legal Holiday.
11.3 "CAPITAL STOCK" means any and all shares, interests, participations,
rights or other equivalents (however designated) of corporate stock or
partnership or membership interests, whether common or preferred.
11.4 "CHANGE OF CONTROL" means: (a) any transaction or series of
transactions (including, without limitation, a tender offer, merger or
consolidation) the result of which is that the Principals and their Related
Parties or an entity controlled by the Principals and their Related Parties
cease to (i) be the "beneficial owners" (as defined in Rule 13d-3 under the
Exchange Act) of at least 30% of the total Equity Interests in the Issuer and
(ii) have the voting power to elect at least a majority of the Board of
Directors of the Issuer; (b) the first day on which a majority of the members of
the Board of Directors of the Issuer are not Continuing Directors; (c) any
transaction or series of transactions (including, without limitation, a tender
offer, merger or consolidation) the result of which is that the Principals and
their Related Parties or any entity controlled by the Principals and their
Related Parties cease to be the "beneficial owners" (as defined in Rule 13d-3
under the Exchange Act) of at least 30% of the total Equity Interests in the
Issuer and have the voting power to elect at least a majority of the Board of
Directors of the Issuer, or (d) the first day on which a majority of the members
of the Board of Directors of the Issuer are not Continuing Directors.
11.5 "CLASS A COMMON STOCK" means the Issuer's authorized $.01 par value
Class A common stock.
-22-
<PAGE>
11.6 "CLASS B COMMON STOCK" means the Issuer's authorized $.01 par value
Class B common stock.
11.7 "CLASS C COMMON STOCK" means the Issuer's authorized $.01 par value
Class C common stock.
11.8 "COMMON STOCK" means the Class A Common Stock, the Class B Common
Stock, and the Class C Common Stock, collectively or individually.
11.9 "COMMUNICATIONS ACT" means the Communications Act of 1934, as amended.
11.10 "CONTINUING DIRECTOR" means, as of any date of determination, any
member of the Board of Directors of the Issuer who: (a) was a member of such
Board of Directors on the Issuance Date; or (b) was nominated for election or
elected to such Board of Directors with the affirmative vote of a majority of
the Continuing Directors who were members of such Board at the time of such
nomination or election.
11.11 The "CONVERSION DATE" shall be the date the Issuer or the Transfer
Agent receives the Conversion Notice.
11.12 The "CONVERSION NOTICE" is written notice from the Holder to the
Issuer stating that the Holder elects to convert all or a portion of the shares
of Series C Preferred Stock represented by certificates delivered to the Issuer
or the Transfer Agent contemporaneously. The Conversion Notice will specify or
include:
(i) The number of shares of Series C Preferred Stock being converted
by the Holder,
(ii) The name or names (with address and taxpayer identification
number) in which a certificate or certificates for shares of Class A Common
Stock are to be issued,
(iii) A written instrument or instruments of transfer in form
reasonably satisfactory to the Issuer or the Transfer Agent duly executed
by the Holder or its duly authorized legal representative, and
(iv) Transfer tax stamps or funds therefor, if required pursuant to
Section 4.9.
-23-
<PAGE>
11.13 The "CONVERSION PRICE" shall initially be $24.375, subject to
adjustment as set forth in Section 4.3.
11.14 "CONVERSION PRICE ADJUSTMENT EVENTS" are any of those events
specified in Section 4.3(a).
11.15 "DIVIDEND PAYMENT DATE" is as defined in Section 2.1, above.
11.16 "DIVIDEND PAYMENT RECORD DATE" is as defined in Section 2.1, above.
11.17 "EQUITY INTERESTS" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
11.18 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
11.19 "FCC" means Federal Communications Commission.
11.20 "HOLDER" means a Person in whose name shares of Capital Stock is
registered.
11.21 "ISSUANCE DATE" means the date on which the Series C Preferred Stock
is originally issued under this Certificate of Designation.
11.22 "ISSUER" means EchoStar Communications Corporation, a Nevada
corporation.
11.23 "JUNIOR SECURITY" is as defined in Section 3.1.
11.24 "LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place payment is to be received are
authorized by law, regulation or executive order to remain closed. If a payment
date is a Legal Holiday at a place of payment, payment may be made at that place
on the next succeeding day that is not a Legal Holiday, and no interest shall
accrue for the intervening period.
11.25 "LIQUIDATION PREFERENCE" means $50.00 per share of Series C Preferred
Stock.
11.26 "MARKET CAPITALIZATION" means the product of the then-current Market
Value times the total number of shares of Class A Common Stock then outstanding.
-24-
<PAGE>
11.27 "MARKET VALUE" means, as of any date, the average of the daily
closing price for the five consecutive trading days ending on such date. The
closing price for each day shall be the last sales price or in case no such
reported sales take place on such day, the average of the last reported bid and
asked price, in either case, on the principal national securities exchange on
which the shares of Class A Common Stock are admitted to trading or listed, or
if not listed or admitted to trading on such exchange, the representative
closing bid price as reported by the Nasdaq National Market, or other similar
organization if the Nasdaq National Market is no longer reporting such
information, or if not so available, the fair market price as determined, in
good faith, by the Board of Directors of the Issuer.
11.28 "OFFICER" means, with respect to any Person, the Chairman of the
Board, the Chief Executive Officer, the President, the Chief Operating Officer,
the Chief Financial Officer, the Treasurer, any Assistant Treasurer, Controller,
Secretary or any Vice-President of such Person.
11.29 "PARITY SECURITY" is as defined in Section 3.1.
11.30 "PERSON" means any individual, corporation, partnership, joint
venture, association, joint-stock issuer, trust or unincorporated organization
(including any subdivision or ongoing business of any such entity or
substantially all of the assets of any such entity, subdivision or business).
11.31 "PRINCIPALS" means Charles W. Ergen, James DeFranco, R. Scott Zimmer,
Steven B. Schaver and David K. Moskowitz.
11.32 "REDEMPTION AGENT" means that Person, if any, appointed by the Issuer
to hold funds deposited by the Issuer in trust to pay to the Holders of shares
to be redeemed.
11.33 "REDEMPTION DATE" means that certain date set forth in the Redemption
Notice on which date the redemption of the Series C Preferred Stock is
completed.
11.34 "REDEMPTION NOTICE" means that notice to be given by the Issuer to
the Holders notifying the Holders as to the redemption, in whole or in part, of
the Series C Preferred Stock pursuant to Article 4 hereof. The Redemption
Notice shall include the following information: (i) the Redemption Date and the
time of day on such date; (ii) the total number of shares of Series C Preferred
Stock to be redeemed and, if fewer than all the shares held by such Holder are
to be redeemed, the number of such shares to be redeemed from such Holder; (iii)
the Redemption Price (whether to be paid in cash or
-25-
<PAGE>
shares of Class A Common Stock); (iv) the place or places where certificates
for such shares are to be surrendered for payment of the Redemption Price and
delivery of certificates representing shares of Class A Common Stock (if the
Issuer so chooses); (v) that dividends on the shares to be redeemed will
cease to accrue on such Redemption Date unless the Issuer defaults in the
payment of the Redemption Price; and (vi) the name of any bank or trust
company, if any, performing the duties of Redemption Agent.
11.35 "REDEMPTION NOTICE DATE" means the date the Redemption Notice is
first mailed or delivered to any Holder.
11.36 "REDEMPTION PRICE" means that price established for redemption of the
Series C Preferred Stock established in Section 5.1(b) hereof.
11.37 "RELATED PARTY" means, with respect to any Principal, (a) the spouse
and each immediate family member of such Principal and (b) each trust,
corporation, partnership or other entity of which such Principal beneficially
holds an 80% or more controlling interest.
11.38 "SEC" means the Securities and Exchange Commission.
11.39 "SECURITIES ACT" means the Securities Act of 1933, as amended.
11.40 "SELF FUNDING EVENT" is as defined in Section 2.2, above.
11.41 "SERIES A PREFERRED STOCK" means the Issuer's authorized 8% Series A
Cumulative Preferred Stock.
11.42 "SERIES B PREFERRED STOCK" means the Issuer's authorized 12 1/8%
Series B Redeemable Exchangeable Preferred Stock due 2004 and any additional
series of preferred stock for which the Series B Preferred Stock is
exchangeable. The term "Series B Preferred Stock" also includes shares of
Capital Stock of the Issuer issuable as dividends on the Series B Preferred
Stock. The term "Series B Preferred Stock" also includes any Senior Securities
or Parity Securities issued in compliance with the certificate of designation
for the Series B Preferred Stock.
11.43 "SERIES C PREFERRED STOCK" means the Series C Preferred Stock
authorized in this Certificate of Designation.
11.44 "SENIOR SECURITIES" is as defined in Sections 3.1 and 3.4.
-26-
<PAGE>
11.45 "SUBSIDIARY" means, with respect to any person, any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
person or one or more of the other Subsidiaries of such person or a combination
thereof.
11.46 The "TRANSFER AGENT" shall be as established pursuant to Article 12
hereof.
12 TRANSFER AGENT AND REGISTRAR
The duly appointed Transfer Agent and registrar for the Series C Preferred
Stock shall be American Securities Transfer & Trust, Inc. The Issuer may, in
its sole discretion, remove the Transfer Agent in accordance with the agreement
between the Issuer and the Transfer Agent; PROVIDED that the Issuer shall
appoint a successor transfer agent who shall accept such appointment prior to
the effectiveness of such removal.
13 OTHER PROVISIONS
13.1 With respect to any notice to a Holder of shares of the Series C
Preferred Stock required to be provided hereunder, neither failure to mail such
notice, nor any defect therein or in the mailing thereof, to any particular
Holder shall affect the sufficiency of the notice or the validity of the
proceedings referred to in such notice with respect to the other Holders or
affect the legality or validity of any distribution, rights, warrant,
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up, or the vote upon any such action. Any notice which
was mailed in the manner herein provided shall be conclusively presumed to have
been duly given whether or not the Holder receives the notice.
13.2 Shares of Series C Preferred Stock issued and reacquired will be
retired and canceled promptly after reacquisition thereof and, upon compliance
with the applicable requirements of Nevada law, have the status of authorized
but unissued shares of preferred stock of the Issuer undesignated as to series
and may with any and all other authorized but unissued shares of preferred stock
of the Issuer be designated or redesignated and issued or reissued, as the case
may be, as part of any series of preferred stock of the Issuer.
13.3 In the Issuer's discretion, no fractional shares of Class A Common
Stock or securities representing fractional shares of Class A Common Stock will
be issued upon conversion, redemption, or as dividends payable on the Series C
Preferred Stock. Any
-27-
<PAGE>
fractional interest in a share of Class A Common Stock resulting from
conversion, redemption, or dividend payment will be paid in cash based on the
last reported sale price of the Class A Common Stock on the Nasdaq National
Market (or any national securities exchange or authorized quotation system on
which the Class A Common Stock is then listed) at the close of business on
the trading day next preceding the date of conversion or such later time as
the Issuer is legally and contractually able to pay for such fractional
shares.
13.4 All notices periods referred to herein shall commence on the date of
the mailing of the applicable notice.
-28-
<PAGE>
IN WITNESS WHEREOF, EchoStar Communications Corporation caused this
Certificate to be signed by each of Charles W. Ergen, President and David K.
Moskowitz, Senior Vice President and Secretary and caused Mr. Ergen's signature
to be attested to by David K. Moskowitz in his capacity as Secretary this 29th
day of October, 1997.
/s/ Charles W. Ergen /s/ David K. Moskowitz
- ----------------------------- ------------------------------------
Charles W. Ergen President David K. Moskowitz, Senior Vice
President and Secretary
State of New York )
)ss.
County of New York )
The foregoing instrument was subscribed to, sworn, and acknowledged before
me this 29th day of October, 1997, by David K. Moskowitz, Senior Vice President
and Secretary of EchoStar Communications Corporation.
Witness my hand and official seal.
/s/
--------------------------------------------
Notary Public
Address: 399 Park Avenue, New York, NY 10022
My commission expires:
-29-
<PAGE>
FRIEDLOB SANDERSON RASKIN PAULSON & TOURTILLOTT, LLC
1400 Glenarm Place, Suite 300
Denver, Colorado 80202
telephone: 303-571-1400
facsimile: 303-595-3159
November 10, 1997
EchoStar Communications Corporation
90 Inverness Circle East
Englewood, Colorado 80112
EchoStar Communications Corporation
Registration Statement on Form S-3
Registration No. 333-37683
-----------------------------------
Ladies and Gentlemen:
In connection with the above-captioned Registration Statement (the
"Registration Statement") filed by EchoStar Communications Corporation, Inc., a
Nevada corporation (the "Company"), with the Securities and Exchange Commission
on November 10, 1997 pursuant to the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations thereunder as amended through the date
hereof, we have been requested to render our opinion as to the legality of the
(i) 200,000 shares of the Company's 121/8% Series B Senior Redeemable
Exchangeable Preferred Stock, par value $.01 per share (the "Preferred Stock" or
the "Securities"); and(ii) such additional number of Securities as may be issued
as dividends thereon. Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings ascribed thereto in the Registration
Statement.
In connection with this opinion, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement (including all amendments thereto); (ii) the Certificate of
Designation of the Preferred Stock (the "Certificate of Designation"); (iii) the
Amended and Restated Articles of Incorporation and the By-laws of the Company,
each as amended to date; and (iv) records of certain of the Company's
proceedings relating to, among other things, the issuance and sale of the
Securities. In addition, we have made such other examinations of law and facts
as we considered necessary in order to form a basis for the opinions hereunder
expressed.
In our examination of the aforesaid documents, we have assumed, without
independent investigation, the genuineness of all signatures, the enforceability
of the documents against each party thereto other than the Company, the
authenticity of all documents submitted to us as originals, the conformity to
the original documents of all documents submitted to us as certified,
photostatic, reproduced or conformed copies of validly existing agreements or
other documents, the authenticity of all such latter documents and the legal
capacity of all individuals who have executed any of the documents we have
reviewed.
<PAGE>
In expressing the opinions set forth herein, we have relied upon
representations as to factual matters contained in certificates of officers of
the Company.
Based upon the foregoing, and subject to the assumptions, exceptions and
qualifications set forth herein, we are of the opinion that the Preferred Stock
has been duly authorized and when the Preferred Stock is issued and delivered in
accordance with the Exchange Offer, the Preferred Stock will be legally issued,
fully paid and nonassessable.
Although the discussion set forth under the caption "Certain Federal Income
Tax Consequences" does not purport to discuss all possible United States federal
income tax consequences of the purchase, ownership, and disposition of the
Preferred Stock, it is our opinion that such discussion constitutes, in all
material respects, a fair and accurate summary of the United States federal
income tax consequences of the purchase, ownership, and disposition of the
Preferred Stock under current law. It is possible that contrary positions may
be taken by the Internal Revenue Service, and that a court may agree with such
contrary position.
The foregoing opinions are limited to the federal laws of the United
States, the laws of the State of Colorado and the General Corporation Law of the
State of Nevada. Our opinion is rendered only with respect to the laws, and the
rules, regulations and orders thereunder, which are currently in effect. Please
be advised that no member of this firm is admitted to practice law in the State
of Nevada.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to us under the heading "Legal
Matters" in the Prospectus. In giving such consent, we do not thereby admit
that we are in the category of persons whose consent is required under Section 7
of the Act.
Very truly yours,
FRIEDLOB SANDERSON RASKIN PAULSON & TOURTILLOTT, LLC
<PAGE>
EXHIBIT 12
PAGE 1 OF 1
ECHOSTAR COMMUNICATIONS CORPORATION
COMPUTATION OF RATIOS
(IN THOUSANDS)
(UNAUDITED)
CALCULATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before
taxes........................ $ 11,079 $ 18,734 $ 489 $ (17,231) $ (155,679) $ (46,621) $ (126,611)
Preferred stock
dividends.................... -- -- 939 1,204 1,204 602 602
Interest expense.............. 708 632 21,408 23,985 61,487 33,184 42,043
Capitalized interest.......... 13 370 5,695 25,763 31,818 14,434 16,632
Interest component of rent
expense (1).................. 68 78 94 71 84 20 25
--------- --------- --------- ---------- ----------- ---------- -----------
Total fixed charges....... 789 1,080 28,136 51,023 94,593 48,240 59,302
Earnings before fixed
charges...................... $ 11,855 $ 19,444 $ 21,991 $ 6,825 $ (94,108) $ (13,417) $ (84,543)
Ratio of earnings to fixed
charges...................... 15.03 18.00 0.78 0.13 (0.99) (0.28) (1.43)
--------- --------- --------- ---------- ----------- ---------- -----------
--------- --------- --------- ---------- ----------- ---------- -----------
Deficiency of available
earnings to fixed charges.... $ -- $ -- $ 6,145 $ 44,198 $ 188,701 $ 61,657 $ 143,845
--------- --------- --------- ---------- ----------- ---------- -----------
--------- --------- --------- ---------- ----------- ---------- -----------
</TABLE>
- ------------------------
(1) The interest component of rent expense has been estimated by taking the
difference between the gross rent expense and net present value of rent
expense using a weighted-average cost of capital of approximately 13%. This
cost of capital is representative of EchoStar's outstanding secured
borrowings.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made part of this Registration
Statement.
ARTHUR ANDERSEN LLP
Denver, Colorado,
November 10, 1997
<PAGE>
EXHIBIT 24.___
FORM OF POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints DAVID K. MOSKOWITZ as his true and
lawful attorneys-in-fact and agents, for him and in his name, place and
stead, in any and all capacities, to execute a Registration Statement on Form
S-4 to be filed by EchoStar Communications Corporation (the "Registrant") on
or before November 30, 1997, relating to the offer, exchange, and sale of
shares of the Registrant's 12-1/8% Series B Senior Redeemable Exchangeable
Preferred Stock, including any and all amendments to such Registration
Statement, hereby ratifying and confirming that all such attorneys-in-fact
and agents, each acting alone, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Power of Attorney has been signed by the following persons in the
capacities indicated on November ___, 1997.
SIGNATURE TITLE
--------- -----
Chief Executive Officer,
- ------------------------------ Chairman and Director
Charles W. Ergen (Principal Executive Officer)
Chief Operating Officer,
- ------------------------------ Chairman and Director
Steven B. Schaver (Principal Financial Officer)
Vice Chairman, Vice President
- ------------------------------ and Director
R. Scott Zimmer
- ------------------------------ Executive Vice President and
James DeFranco Director
- ------------------------------ Director
Raymond L. Friedlob
- ------------------------------ Director
Alan M. Angelich
<PAGE>
EXHIBIT 99.1
<PAGE>
- ------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., EASTERN TIME, ON _________,
1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN
PRIOR TO 5:00 P.M., EASTERN TIME, ON THE EXPIRATION DATE.
- ------------------------------------------------------------------------------
ECHOSTAR COMMUNICATION CORPORATION
90 Inverness Circle East
Englewood, CO 80112
LETTER OF TRANSMITTAL
To Exchange 12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock due 2004
Exchange Agent:
AMERICAN SECURITIES TRANSFER & TRUST CO., INC.
---------------
To: American Securities Transfer & Trust Co., Inc.
---------------
FACSIMILE TRANSMISSION:
(303) 234-
CONFIRM BY TELEPHONE TO:
(303) 234-5300
---------------
BY MAIL/HAND DELIVERY/OVERNIGHT DELIVERY:
American Securities Transfer & Trust Co., Inc.
Attn: Greg Tubbs, Vice President
938 Quail Street
Lakewood, CO 80215
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE DOES
NOT CONSTITUTE A VALID DELIVERY.
<PAGE>
The undersigned acknowledges receipt of the Prospectus dated ________,
1997 (the "Prospectus") of EchoStar Communications Corporation, a Nevada
corporation (the "Issuer"), and this Letter of Transmittal for 12 1/8% Series
B Senior Redeemable Exchangeable Preferred Stock due 2004 which may be
amended from time to time (this "Letter"), which together constitute the
Issuer's offer (the "Exchange Offer") to exchange $1,000 principal amount of
its 12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock due 2004
(the "Exchange Shares") for each $1,000 in principal amount of its outstanding
12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock due 2004 (the
"Old Series B Shares") that were issued and sold in a transaction exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act").
The undersigned has completed, executed and delivered this Letter to
indicate the action he or she desires to take with respect to the Exchange
Offer.
All holders of Old Series B Shares who wish to tender their Old Series B
Shares must, prior to the Expiration Date: (1) complete, sign, date and
deliver this Letter, or a facsimile thereof, to the Exchange Agent, in person
or to the address set forth above; and (2) tender his or her Old Series B
Shares or, if a tender of Old Series B Shares is to be made by book-entry
transfer to the account maintained by the Exchange Agent at The Depository
Trust Company (the "Book-Entry Transfer Facility"), confirm such book-entry
transfer (a "Book-Entry Confirmation"), in each case in accordance with the
procedures for tendering described in the Instructions to this Letter.
Holders of Old Series B Shares whose certificates are not immediately
available, or who are unable to deliver their certificates or Book-Entry
Confirmation and all other documents required by this Letter to be delivered
to the Exchange Agent on or prior to the Expiration Date, must tender their
Old Series B Shares according to the guaranteed delivery procedures set forth
under the caption "The Exchange Offer--How to Tender" in the Prospectus.
(See Instruction 1).
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Old Series B Shares validly tendered and not
withdrawn and the issuance of the Exchange Series B Shares will be made on
the Exchange Date. For the purposes of the Exchange Offer, the Issuer shall
be deemed to have accepted for exchange validly tendered Old Series B Shares
when, as and if the Issuer has given written notice thereof to the Exchange
Agent.
The Instructions included with this Letter must be followed in their
entirety. Questions and requests for assistance or for additional copies of
the Prospectus or this Letter may be directed to the Exchange Agent, at the
address listed above, or David K. Moskowitz, Senior Vice President, General
Counsel and Secretary, EchoStar Communications Corporation, 90 Inverness
Circle East, Englewood, Colorado 80112, at (303) 799-8222.
<PAGE>
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL, INCLUDING
THE INSTRUCTIONS TO THIS LETTER, CAREFULLY
BEFORE CHECKING ANY BOX BELOW
Capitalized terms used in this Letter and not defined herein shall have the
respective meanings ascribed to them in the Prospectus.
List in Box 1 below the Old Series B Shares of which you are the holder. If
the space provided in Box 1 is inadequate, list the certificate numbers and
principal amount of Old Series B Shares on a separate signed schedule and affix
that schedule to this Letter.
BOX 1
<TABLE>
TO BE COMPLETED BY ALL TENDERING HOLDERS
- -------------------------------------------------------------------------------------------------------
Number of
Number of Old Series
Name(s) and Address(es) of Registered Holder(s) Certificate Old Series B Shares
(Please fill in if blank) Number(s)(1) B Shares Tendered (2)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Totals:
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Need not be completed if Old Series B Shares are being tendered by
book-entry transfer.
(2) Unless otherwise indicated, the entire principal amount of Old Notes
represented by a certificate or Book-Entry Confirmation delivered to the
Exchange Agent will be deemed to have been tendered.
<PAGE>
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned tenders to the Issuer the principal amount of Old Series B Shares
indicated above. Subject to, and effective upon, the acceptance for exchange
of the Old Series B Shares tendered with this Letter, the undersigned
exchanges, assigns and transfers to, or upon the order of, the Issuer all
right, title and interest in and to the Old Series B Shares tendered.
The undersigned constitutes and appoints the Exchange Agent as his or her
agent and attorney-in-fact (with full knowledge that the Exchange Agent also
acts as the agent of the Issuer) with respect to the tendered Old Series B
Shares, with full power of substitution, to: (a) deliver certificates for
such Old Notes; (b) deliver Old Series B Shares and all accompanying evidence
of transfer and authenticity to or upon the order of the Issuer upon receipt
by the Exchange Agent, as the undersigned's agent, of the Exchange Shares to
which the undersigned is entitled upon the acceptance by the Issuer of the
Old Series B Shares tendered under the Exchange Offer; and (c) receive all
benefits and otherwise exercise all rights of beneficial ownership of the Old
Series B Shares, all in accordance with the terms of the Exchange Offer. The
power of attorney granted in this paragraph shall be deemed irrevocable and
coupled with an interest.
The undersigned hereby represents and warrants that he or she has full
power and authority to tender, exchange, assign and transfer the Old Series B
Shares tendered hereby and that the Issuer will acquire good and unencumbered
title thereto, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The undersigned will,
upon request, execute and deliver any additional documents deemed by the
Issuer to be necessary or desirable to complete the assignment and transfer
of the Old Series B Shares tendered.
The undersigned agrees that acceptance of any tendered Old Series B
Shares by the Issuer and the issuance of Exchange Shares in exchange therefor
shall constitute performance in full by the Issuer of its obligations under
the Registration Rights Agreement (as defined in the Prospectus) and that,
upon the issuance of the Exchange Shares, the Issuer will have no further
obligations or liabilities thereunder (except in certain limited
circumstances). By tendering Old Series B Shares, the undersigned certifies
(a) that it is not an "affiliate" of the Issuer within the meaning of the
Securities Act (an "Affiliate"), that it is not a broker-dealer that owns Old
Series B Shares acquired directly from the Issuer or an Affiliate, that it is
acquiring the Exchange Shares acquired directly from the Issuer or an
Affiliate, that it is acquiring the Exchange Shares offered hereby in the
ordinary course of the undersigned's business and that the undersigned has no
arrangement with any person to participate in the distribution of such
Exchange Notes; or (b) that it is a Participating Broker-Dealer (as defined
in the Registration Rights Agreement) and that it will deliver a prospectus
in connection with any resale of the Exchange Shares.
If the undersigned is a broker-dealer that will receive Exchange Shares
for its own account, it will deliver a prospectus in connection with any
resale of such Exchange Shares. By so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Issuer may accept the undersigned's tender by delivering written
notice of acceptance to the Exchange Agent, at which time the undersigned's
right to withdraw such tender will terminate.
<PAGE>
All authority conferred or agreed to be conferred by this Letter shall
survive the death or incapacity of the undersigned, and every obligation of
the undersigned under this Letter shall be binding upon the undersigned's
heirs, personal representatives, successors and assigns. Tenders may be
withdrawn only in accordance with the procedures set forth in the
Instructions contained in this Letter.
Unless otherwise indicated under "Special Delivery Instructions" below,
the Exchange Agent will deliver Exchange Shares (and, if applicable, a
certificate for any Old Series B Shares not tendered but represented by a
certificate also encompassing Old Notes which are tendered) to the
undersigned at the address set forth in Box 1.
The Exchange Offer is subject to the more detailed terms set forth in the
Prospectus and, in case of any conflict between the terms of the terms of the
Prospectus and this Letter, the Prospectus shall prevail.
<PAGE>
/ / CHECK HERE IF TENDERED OLD SERIES B SHARES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:
----------------------------------------
Account Number:
-------------------------------------------------------
Transaction Code Number:
----------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
/ / CHECK HERE IF TENDERED OLD SERIES B SHARES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name(s) of Registered Owner(s):
---------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
-------------------
Window Ticket Number (if available):
----------------------------------
Name of Institution which Guaranteed Delivery:
------------------------
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
- -------------------------------------------------------------------------------
BOX 2
PLEASE SIGN HERE
WHETHER OR NOT OLD SERIES B SHARES ARE BEING
PHYSICALLY TENDERED HEREBY
This box must be signed by registered holder(s) of Old Series B Shares
as their name(s) appear(s) on certificate(s) for Old Series B Shares, or
by person(s) authorized to become registered holder(s) by endorsement
and documents transmitted with this Letter. If signature is by a
trustee, executor, administrator, guardian, officer or other person
acting in a fiduciary or representative capacity, such person must set
forth his or her full title below. (See Instruction 3)
X
---------------------------------------------------------------------------
X
---------------------------------------------------------------------------
Signature(s) of Owner(s) or Authorized Signatory
Date: ________________, 1997
Name(s)
----------------------------------------------------------------------
(Please Print)
Capacity:
-----------------------
Address:
------------------------
(Include Zip Code)
Area Code and Telephone No.:
----------------
PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN
SIGNATURE GUARANTEE (SEE INSTRUCTIONS 3 BELOW)
CERTAIN SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION
---------------------------------------------------------------------------
(Name of Eligible Institution Guaranteeing Signatures)
---------------------------------------------------------------------------
(Address (including zip code) and Telephone Number
(including area code) of Firm)
---------------------------------------------------------------------------
(Authorized Signature)
---------------------------------------------------------------------------
(Title)
---------------------------------------------------------------------------
(Printed Name)
Date: ________________, 1997
- -------------------------------------------------------------------------------
<PAGE>
BOX 3
TO BE COMPLETED BY ALL TENDERING HOLDERS
PAYOR'S NAME:___________________
- -------------------------------------------------------------------------------
Part 1 Social Security Number
or Employer Identification
PLEASE PROVIDE YOUR TIN IN THE Number
BOX AT RIGHT AND CERTIFY BY
SIGNING AND DATING BELOW.
- -------------------------------------------------------------------------------
SUBSTITUTE Part 2 / /
Form W-9
Department of the Check the box if you are NOT subject to back-up withholding
Treasury, Internal under the provisions of Section 2406(a)(1)(C) of the Internal
Revenue Service Revenue Code because (1) you have not been notified that you
are subject to back-up withholding as a result of failure to
report all interest or dividends or (2) the Internal Revenue
Service has notified you that you are no longer subject to
back-up withholding.
- -------------------------------------------------------------------------------
Payor's Request Part 3 / /
for Taxpayer
Identification Check if
Number (TIN) Awaiting TIN
- -------------------------------------------------------------------------------
CERTIFICATION UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT
THE INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT AND
COMPLETE.
Signature Date
------------------------------- -----------
-------------------------------
Name: (Please Print)
- -------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
BOX 4 BOX 5
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 3 and 4) (See Instructions 3 and 4)
- -------------------------------------------------------------------------------
To be completed ONLY if certificates To be completed ONLY if certificates
for Old Series B Shares not exchanged, for Old Series B Shares in a principal
or Exchange Shares, are to be issued amount or Exchange Notes, are
in the name of someone other than to be sent to someone other than the
the person whose signature appears person whose signature appears in
in Box 2, or if Old Series B Shares Box 2 or to an address other than that
delivered by book-entry transfer shown in Box 1.
which are not accepted for exchange
are to be returned by credit to an Deliver:
account maintained at the Book-
Entry Transfer Facility other than (check appropriate boxes)
the account indicated above.
/ / Old Series B Shares not tendered
Issue and deliver:
/ / Exchange Shares, to:
(check appropriate boxes)
(Please Print)
/ / Old Series B Shares not tendered
Name:
/ / Exchange Shares, to: ---------------------------------
(Please Print) Address:
------------------------------
Name:
-------------------------------- ------------------------------
Address: ------------------------------
-----------------------------
Please complete the Substitute Form
----------------------------- W-9 at Box 3.
----------------------------- Tax I.D. or Social Security Number:
Please complete the Substitute Form --------------------------------------
W-9 at Box 3.
Tax I.D. or Social Security Number:
- -------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND
CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER AND CERTIFICATES. Certificates for Old
Series B Shares or a Book-Entry Confirmation, as the case may be, as well as
a properly completed and duly executed copy of this Letter and any other
documents required by this Letter, must be received by the Exchange Agent at
one of its addresses set forth herein on or before the Expiration Date. The
method of delivery of this Letter, certificates for Old Series B Shares or a
Book-Entry Confirmation, as the case may be, and any other required documents
is at the election and risk of the tendering holder, but except as otherwise
provided below, the delivery will be deemed made when actually received by
the Exchange Agent. If delivery is by mail, the use of registered mail with
return receipt requested, properly insured, is suggested.
If tendered Old Series B Shares are registered in the name of the signer
of the Letter of Transmittal and the Exchange Shares to be issued in exchange
therefor are to be issued (and any untendered Old Series B Shares are to be
reissued) in the name of the registered holder, the signature of such signer
need not be guaranteed. In any other case, the tendered Old Series B Shares
must be endorsed or accompanied by written instruments of transfer in form
satisfactory to the Issuer and duly executed by the registered holder and the
signature on the endorsement or instrument of transfer must be guaranteed by
a bank, broker, dealer, credit union, savings association, clearing agency or
other institution (each an "Eligible Institution") that is a member of a
recognized signature guarantee medallion program within the meaning of Rule
17Ad-15 under the Exchange Act. If the Exchange Shares and/or Old Series B
Shares not exchanged are to be delivered to an address other than that of the
registered holder appearing on the note register for the Old Series B Shares,
the signature on the Letter of Transmittal must be guaranteed by an Eligible
Institution.
Any beneficial owner whose Old Series B Shares are registered in the name
of a broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender Old Series B Shares should contact such holder promptly and
instruct such holder to tender Old Series B Shares on such beneficial owner's
behalf. If such beneficial owner wishes to tender such Old Series B Shares
himself, such beneficial owner must, prior to completing and executing the
Letter of Transmittal and delivering such Old Series B Shares, either make
appropriate arrangements to register ownership of the Old Series B Shares in
such beneficial owner's name or follow the procedures described in the
immediately preceding paragraph. The transfer of record ownership may take
considerable time.
Holders whose Old Series B Shares are not immediately available or who
cannot deliver their Old Series B Shares or a Book-Entry Confirmation, as the
case may be, and all other required documents to the Exchange Agent on or
before the Expiration Date may tender their Old Series B Shares pursuant to
the guaranteed delivery procedures set forth in the Prospectus. Pursuant to
such procedure: (i) tender must be made by or through an Eligible
Institution; (ii) prior to the Expiration Date, the Exchange Agent must have
received from the Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by telegram, telex, facsimile transmission,
mail or hand delivery) (x) setting forth the name and address of the holder,
the description of the Old Series B Shares and the principal amount of Old
Series B Shares tendered, (y) stating that the tender is being made thereby
and (z) guaranteeing that, within five New York Stock Exchange trading days
after the date of execution of such Notice of Guaranteed Delivery, this
Letter together with the certificates representing the Old Series B Shares or
a Book-Entry Confirmation, as the case may be, and any other documents
required by this Letter will be deposited by the Eligible Institution with
the Exchange Agent; and (iii) the certificates for all tendered Old Series B
Shares or a Book-Entry Confirmation, as the case may be, as well as all other
documents required by this Letter, must be received by the Exchange Agent
within five New York Stock Exchange trading days after the date of execution
of such
<PAGE>
Notice of Guaranteed Delivery, all as provided in the Prospectus under the
caption "The Exchange Offer--How to Tender."
The method of delivery of Old Series B Shares and all other documents is
at the election and risk of the holder. If sent by mail, it is recommended
that registered mail, return receipt requested, be used, proper insurance be
obtained, and the mailing be made sufficiently in advance of the Expiration
Date to permit delivery to the Exchange Agent on or before the Expiration
Date.
Unless an exemption applies under the applicable law and regulations
concerning "backup withholding" of federal income tax, the Exchange Agent
will be required to withhold, and will withhold, 31% of the gross proceeds
otherwise payable to a holder pursuant to the Exchange Offer if the holder
does not provide his or her taxpayer identification number (social security
number or employer identification number) and certify that such number is
correct. Each tendering holder should complete and sign the main signature
form and the Substitute Form W-9 included as part of the Letter of
Transmittal, so as to provide the information and certification necessary to
avoid backup withholding, unless an applicable exemption exists and is proved
in a manner satisfactory to the Issuer and the Exchange Agent.
If a holder desires to accept the Exchange Offer and time will not permit
a Letter of Transmittal or Old Series B Shares to reach the Exchange Agent
before the Expiration Date, a tender may be effected if the Exchange Agent
has received at its office listed on the back cover hereof on or prior to the
Expiration Date a letter, telegram or facsimile transmission from an Eligible
Institution setting forth the name and address of the tendering holder, the
principal amount of the Old Series B Shares being tendered, the names in
which the Old Series B Shares are registered and, if possible, the
certificate numbers of the Old Notes to be tendered, and stating that the
tender is being made thereby and guaranteeing that within five New York Stock
Exchange trading days after the date of execution of such letter, telegram or
facsimile transmission by the Eligible Institution, the Old Series B Shares,
in proper form for transfer, will be delivered by such Eligible Institution
together with a properly completed and duly executed Letter of Transmittal
(and any other required documents). Unless Old Series B Shares being
tendered by the above-described method (or a timely Book-Entry Confirmation)
are deposited with the Exchange Agent within the time period set forth above
(accompanied or preceded by a properly completed Letter of Transmittal and
any other required documents), the Issuer may, at its option, reject the
tender. Copies of a Notice of Guaranteed Delivery which may be used by
Eligible Institutions for the purposes described in this paragraph are
available from the Exchange Agent.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Series B Shares (or a timely Book-Entry Confirmation)
is received by the Exchange Agent. Issuances of Exchange Notes in exchange
for Old Series B Shares tendered pursuant to a Notice of Guaranteed Delivery
or letter, telegram or facsimile transmission to similar effect (as provided
above) by an Eligible Institution will be made only against deposit of the
Letter of Transmittal (and any other required documents) and the tendered Old
Series B Shares (or a timely Book-Entry Confirmation).
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Series B Shares will be
determined by the Issuer, whose determination will be final and binding. The
Issuer reserves the absolute right to reject any or all tenders that are not
in proper form or the acceptance of which, in the opinion of the Issuer's
counsel, would be unlawful. The Issuer also reserves the right to waive any
irregularities or conditions of tender as to particular Old Series B Shares.
All tendering holders, by execution of this Letter, waive any right to
receive notice of acceptance of their Old Series B Shares. The Issuer's
interpretation of the terms and conditions of the Exchange Offer (including
the Letter of Transmittal and the instructions thereto) will be final and
binding.
<PAGE>
Neither the Issuer, the Exchange Agent nor any other person shall be
obligated to give notice of defects or irregularities in any tender, nor shall
any of them incur any liability for failure to give any such notice.
2. PARTIAL TENDERS; WITHDRAWALS. If less than the entire principal
amount of any Old Series B Share evidenced by a submitted certificate or by a
Book-Entry Confirmation is tendered, the tendering holder must fill in the
principal amount tendered in the fourth column of Box 1 above. All of the
Old Series B Shares represented by a certificate or by a Book-Entry
Confirmation delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated. A certificate for Old Series B Shares
not tendered will be sent to the holder, unless otherwise provided in Box 5,
as soon as practicable after the Expiration Date, in the event that less than
the entire principal amount of Old Series B Shares represented by a submitted
certificate is tendered (or, in the case of Old Series B Shares tendered by
book-entry transfer, such non-exchanged Old Series B Shares will be credited
to an account maintained by the holder with the Book-Entry Transfer Facility).
If not yet accepted, a tender pursuant to the Exchange Offer may be
withdrawn prior to the Expiration Date. To be effective with respect to the
tender of Old Series B Shares, a notice of withdrawal must: (i) be received
by the Exchange Agent before the Issuer notifies the Exchange Agent that it
has accepted the tender of Old Series B Shares pursuant to the Exchange
Offer; (ii) specify the name of the person who tendered the Old Series B
Shares; (iii) contain a description of the Old Series B Shares to be
withdrawn, the certificate numbers shown on the particular certificates
evidencing such Old Series B Shares and the principal amount of Old Series B
Shares represented by such certificates; and (iv) be signed by the holder in
the same manner as the original signature on this Letter (including any
required signature guarantee).
For a withdrawal to be effective, a written or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent at its
address set forth on the back cover of the Prospectus prior to the Expiration
Date. Any such notice of withdrawal must specify the person named in the
Letter of Transmittal as having tendered Old Series B Shares to be withdrawn,
the certificate numbers of Old Series B Shares to be withdrawn, the principal
amount of Old Series B Shares to be withdrawn, a statement that such holder
is withdrawing his election to have such Old Series B Shares exchanged, and
the name of the registered holder of such Old Series B Shares, and must be
signed by the holder in the same manner as the original signature on the
Letter of Transmittal (including any required signature guarantees) or be
accompanied by evidence satisfactory to the Issuer that the person
withdrawing the tender has succeeded to the beneficial ownership of the Old
Series B Shares being withdrawn. The Exchange Agent will return the properly
withdrawn Old Series B Shares promptly following receipt of notice of
withdrawal. All questions as to the validity of notices of withdrawals,
including time of receipt, will be determined by the Issuer, and such
determination will be final and binding on all parties.
3. SIGNATURES ON THIS LETTER; ASSIGNMENTS; GUARANTEE OF SIGNATURES. If
this Letter is signed by the holder(s) of Old Series B Shares tendered
hereby, the signature must correspond with the name(s) as written on the face
of the certificate(s) for such Old Series B Shares, without alteration,
enlargement or any change whatsoever.
If any of the Old Series B Shares tendered hereby are owned by two or
more joint owners, all owners must sign this Letter. If any tendered Old
Series B Shares are held in different names on several certificates, it will
be necessary to complete, sign and submit as many separate copies of this
Letter as there are names in which certificates are held.
If this Letter is signed by the holder of record and (i) the entire
principal amount of the holder's Old Series B Shares are tendered; and/or
(ii) untendered Old Series B Shares, if any, are to be issued to the holder
of record, then the holder of record need not endorse any certificates for
tendered Old Series B Shares, nor provide a separate bond power. In any
other case, the holder of record must transmit a separate bond power with
this Letter.
<PAGE>
If this Letter or any certificate or assignment is signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and proper evidence satisfactory to the
Issuer of their authority to so act must be submitted, unless waived by the
Issuer.
Signatures on this Letter must be guaranteed by an Eligible Institution,
unless Old Series B Shares are tendered: (i) by a holder who has not
completed the Box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on this Letter; or (ii) for the account of an Eligible
Institution. In the event that the signatures in this Letter or a notice of
withdrawal, as the case may be, are required to be guaranteed, such
guarantees must be by an eligible guarantor institution which is a member of
The Securities Transfer Agents Medallion Program (STAMP), The New York Stock
Exchanges Medallion Signature Program (MSP) or The Stock Exchanges Medallion
Program (SEMP). If Old Series B Shares are registered in the name of a
person other than the signer of this Letter, the Old Series B Shares
surrendered for exchange must be endorsed by, or be accompanied by a written
instrument or instruments of transfer or exchange, in satisfactory form as
determined by the Issuer, in its sole discretion, duly executed by the
registered holder with the signature thereon guaranteed by an Eligible
Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering holders
should indicate, in Box 4 or 5, as applicable, the name and address to which
the Exchange Shares or certificates for Old Series B Shares not exchanged are
to be issued or sent, if different from the name and address of the person
signing this Letter. In the case of issuance in a different name, the tax
identification number of the person named must also be indicated. Holders
tendering Old Series B Shares by book-entry transfer may request that Old
Series B Shares not exchanged be credited to such account maintained at the
Book-Entry Transfer Facility as such holder may designate.
5. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a
holder whose tendered Old Series B Shares are accepted for exchange must
provide the Exchange Agent (as payor) with his or her correct taxpayer
identification number ("TIN"), which, in the case of a holder who is an
individual, is his or her social security number. If the Exchange Agent is
not provided with the correct TIN, the holder may be subject to a $50 penalty
imposed by the Internal Revenue Service. In addition, delivery to the holder
of the Exchange Shares pursuant to the Exchange Offer may be subject to
back-up withholding. (If withholding results in overpayment of taxes, a
refund may be obtained.) Exempt holders (including, among others, all
corporations and certain foreign individuals) are not subject to these
back-up withholding and reporting requirements. See the enclosed Guidelines
for Certification of Taxpayer Identification Number on Substitute Form W-9
for additional instructions.
Under federal income tax laws, payments that may be made by the Issuer on
account of Exchange Shares issued pursuant to the Exchange Offer may be
subject to back-up withholding at a rate of 31%. In order to prevent back-up
withholding, each tendering holder must provide his or her correct TIN by
completing the "Substitute Form W-9" referred to above, certifying that the
TIN provided is correct (or that the holder is awaiting a TIN) and that: (i)
the holder has not been notified by the Internal Revenue Service that he or
she is subject to back-up withholding as a result of failure to report all
interest or dividends; (ii) the Internal Revenue Service has notified the
holder that he or she is no longer subject to back-up withholding; or (iii)
in accordance with the Guidelines, such holder is exempt from back-up
withholding. If the Old Series B Shares are in more than one name or are not
in the name of the actual owner, consult the enclosed Guidelines for
information on which TIN to report.
6. TRANSFER TAXES. The Issuer will pay all transfer taxes, if any,
applicable to the transfer of Old Series B Shares to it or its order pursuant
to the Exchange Offer. If, however, the Exchange Shares or certificates for
Old Series B Shares not exchanged are to be delivered to, or are to be issued
in the name of, any person other than the record holder,
<PAGE>
or if tendered certificates are recorded in the name of any person other than
the person signing this Letter, or if a transfer tax is imposed by any reason
other than the transfer of Old Series B Shares to the Issuer or its order
pursuant to the Exchange Offer, then the amount of such transfer taxes
(whether imposed on the record holder or any other person) will be payable by
the tendering holder. If satisfactory evidence of payment of taxes or
exemption from taxes is not submitted with this Letter, the amount of
transfer taxes will be billed directly to the tendering holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the certificates listed in this Letter.
7. WAIVER OF CONDITIONS. The Issuer reserves the absolute right to amend
or waive any of the specified conditions in the Exchange Offer in the case of
any Old Series B Shares tendered.
8. MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES. Any holder whose
certificates for Old Series B Shares have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above,
for further instructions.
9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to
the procedure for tendering, as well as requests for additional copies of the
Prospectus or this Letter, may be directed to the Exchange Agent.
IMPORTANT: THIS LETTER (TOGETHER WITH CERTIFICATES REPRESENTING TENDERED
OLD SERIES B SHARES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED
DOCUMENTS) MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION
DATE (AS DEFINED IN THE PROSPECTUS).
<PAGE>
EXHIBIT 99.2
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTICE OF GUARANTEED DELIVERY
of 12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock due 2004
As set forth in the Prospectus dated ________, 1997 (the "Prospectus") of
EchoStar Communications Corporation (the "Issuer") under "The Exchange
Offer--How to Tender" and in the Letter of Transmittal for 12 1/8% Senior
Redeemable Exchangeable Preferred Stock due 2004 (the "Letter of
Transmittal"), this form or one substantially equivalent hereto must be used
to accept the Exchange Offer (as defined below) of the Issuer if: (i)
certificates for the above-referenced shares ("Old Series B Shares") are not
immediately available, (ii) time will not permit all required documents to
reach the Exchange Agent (as defined below) on or prior to the Expiration
Date (as defined in the Prospectus) or (iii) the procedures for book-entry
transfer cannot be completed on or prior to the Expiration Date (as defined
below). Such form may be delivered by hand or transmitted by telegram,
telex, facsimile transmission or letter to the Exchange Agent.
To: American Securities Transfer & Trust Co., Inc.
(the "Exchange Agent")
BY FACSIMILE:
(303) 234-
CONFIRM BY TELEPHONE TO:
(303) 234-5300
---------------
BY MAIL/HAND DELIVERY/OVERNIGHT DELIVERY:
American Securities Transfer & Trust Co., Inc.
Attn: Greg Tubbs, Vice President
938 Quail Street
Lakewood, CO 80215
Delivery of this instrument to an address other than
as set forth above or transmittal of this instrument to
a facsimile or telex number other than as set forth
above does not constitute a valid delivery.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to the Issuer, upon the terms and
conditions set forth in the Prospectus and the Letter of Transmittal (which
together constitute the "Exchange Offer"), receipt of which are hereby
acknowledged, the principal amount of Old Series B Shares set forth below
pursuant to the guaranteed delivery procedures described in the Prospectus
and the Letter of Transmittal.
The Exchange Offer will expire at 5:00 p.m., Eastern Time, on ______,
______, 1998, unless extended by the Issuer. With respect to the Exchange
Offer, "Expiration Date" means such time and date, or if the Exchange Offer
is extended, the latest time and date to which the Exchange Offer is so
extended by the Issuer.
All authority herein conferred or agreed to be conferred by this Notice
of Guaranteed Delivery shall survive the death or incapacity of the
undersigned and every obligation of the undesigned under this Notice of
Guaranteed Delivery shall be binding upon the heirs, personal
representatives, executors, administrators, successors, assigns, trustees in
bankruptcy and other legal representatives of the undersigned.
- -------------------------------------------------------------------------------
SIGNATURES
--------------------------------------------------
Signature of Owner
--------------------------------------------------
Signature of Owner (if more than one)
Dated: , 1996
------------------------------------
Name(s):
-----------------------------------------
-----------------------------------------
(Please Print)
Address:
-----------------------------------------
-----------------------------------------
-----------------------------------------
(Include Zip Code)
Area Code and
Telephone No.:
-----------------------------------
Capacity (full title), if signing in a representative
capacity:
--------------------------------------------------
Taxpayer Identification or Social Security No.:
--------------------------------------------------
- -------------------------------------------------------------------------------
Number of Old Series B Shares Exchanged:
$
-------------------------------------------------
Certificate Nos. of Old Series B Shares (if available)
- ---------------------------------------------------
- ---------------------------------------------------
IF OLD SERIES B SHARES WILL BE DELIVERED BY BOOK-ENTRY TRANSFER, PROVIDE THE
DEPOSITORY TRUST COMPANY ("DTC") ACCOUNT NO.:
Account No.
---------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Securities Exchange Act
of 1934, as amended, hereby guarantees (a) that the above-named person(s)
own(s) the above-described securities tendered hereby within the meaning of
Rule 10b-4 under the Securities Exchange Act of 1934, (b) that such tender of
the above-described securities complies with Rule 10b-4, and (c) that
delivery of such certificates pursuant to the procedure for book-entry
transfer, in either case with delivery of a properly completed and duly
executed Letter of Transmittal (or facsimile thereof) and any other required
documents, is being made within five New York Stock Exchange trading days
after the date of execution of a Notice of Guaranteed Delivery of the
above-named person.
- -------------------------------------------------------------------------------
Name of Firm:
- -----------------------------------------------------------
- -----------------------------------------------------------
Number and Street or P.O. Box
- -----------------------------------------------------------
City State Zip Code
Tel. No.
--------------------------------------------------
Fax No.:
--------------------------------------------------
- -----------------------------------------------------------
(Authorized Signature)
Title:
- -----------------------------------------------------------
Date:
- -----------------------------------------------------------
- -------------------------------------------------------------------------------
NOTE: DO NOT SEND CERTIFICATES REPRESENTING NOTES WITH THIS NOTICE. OLD
SERIES B SHARES SHOULD BE SENT TO THE EXCHANGE AGENT TOGETHER WITH
A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL.
<PAGE>
EXHIBIT 99.3
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
OFFER TO EXCHANGE
12 1/8% SERIES B SENIOR REDEEMABLE
EXCHANGEABLE PREFERRED STOCK DUE 2004
FOR
12 1/8% SERIES B SENIOR REDEEMABLE
EXCHANGEABLE PREFERRED STOCK DUE 2004
THAT WAS ISSUED AND SOLD IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER THE SECURITIES
ACT OF 1933, AS AMENDED
To Securities Dealers, Commercial Banks
Trust Companies and Other Nominees:
Enclosed for your consideration is a Prospectus dated _______, 1997 (as
the same may be amended or supplemented from time to time (the "Prospectus")
and a form of Letter of Transmittal (the "Letter of Transmittal") relating to
the offer (the "Exchange Offer") by EchoStar Communications Corporation (the
"Issuer") to exchange up to 200,000 Shares of its 12 1/8% Series B Senior
Redeemable Exchangeable Preferred Stock due 2004 (the "Exchange Shares") for
up to 200,000 Shares of its outstanding 12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock due 2004 that were issued and sold in a
transaction exempt from registration under the Securities Act of 1933, as
amended (the "Old Series B Shares").
We are asking you to contact your clients for whom you hold Old Series B
Shares registered in your name or in the name of your nominee. In addition,
we ask you to contact your clients who, to your knowledge, hold Old Series B
Shares registered in their own name. The Issuer will not pay any fees or
commissions to any broker, dealer or other person in connection with the
solicitation of tenders pursuant to the Exchange Offer. You will, however,
be reimbursed by the Issuer for customary mailing and handling expenses
incurred by you in forwarding any of the enclosed materials to your clients.
The Issuer will pay all transfer taxes, if any, applicable to the tenderer of
Old Series B Shares to it or its order, except as otherwise provided in the
Prospectus and the Letter of Transmittal.
Enclosed are copies of the following documents:
1. The Prospectus;
2. A Letter of Transmittal for your use in connection with the
exchange of Old Series B Shares and for the information of your clients
(facsimile copies of the Letter of Transmittal may be used to exchange Old
Series B Shares);
3. A form of letter that may be sent to your clients for whose
accounts you hold Old Series B Shares registered in your name or the name
of your nominee, with space provided for obtaining the clients' instructions
with regard to the Exchange Offer;
4. A Notice of Guaranteed Delivery; and
5. Guidelines of the Internal Revenue Service for Certification of
Taxpayer Identification Number on Substitute Form W-9;
<PAGE>
Your prompt action is requested. The Exchange Offer will expire at 5:00
p.m., Eastern Time, on _____, _______, 1998, unless extended (the "Expiration
Date"). Old Series B Shares tendered pursuant to the Exchange Offer may be
withdrawn, subject to the procedures described in the Prospectus, at any time
prior to the Expiration Date.
To tender Old Series B Shares, certificates for Old Series B Shares or a
Book-Entry Confirmation, a duly executed and properly completed Letter of
Transmittal or a facsimile thereof, and any other required documents, must be
received by the Exchange Agent as provided in the Prospectus and the Letter
of Transmittal.
Questions and requests for assistance with respect to the Exchange Offer or
for additional copies of the enclosed material may be directed to the Exchange
Agent at its address set forth in the Prospectus or at 303-234-5300.
Very truly yours,
ECHOSTAR COMMUNICATIONS CORPORATION
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY PERSON AS AN AGENT OF THE ISSUER OR THE EXCHANGE AGENT, OR ANY AFFILIATE
THEREOF, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENTS OR USE ANY
DOCUMENT ON BEHALF OF ANY OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR
THE ENCLOSED DOCUMENTS AND THE STATEMENTS EXPRESSLY MADE IN THE PROSPECTUS AND
THE LETTER OF TRANSMITTAL.
<PAGE>
EXHIBIT 99.4
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
OFFER TO EXCHANGE
12 1/8% SERIES B SENIOR
REDEEMABLE EXCHANGEABLE
PREFERRED STOCK
FOR
12 1/8% SERIES B SENIOR
REDEEMABLE EXCHANGEABLE
PREFERRED STOCK
THAT WAS ISSUED AND SOLD IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER THE SECURITIES
ACT OF 1933, AS AMENDED
To Our Clients:
Enclosed for your consideration is a Prospectus dated ______, 1997 (as
the same may be amended or supplemented from time to time (the "Prospectus")
and a form of Letter of Transmittal (the "Letter of Transmittal") relating to
the offer (the "Exchange Offer") by EchoStar Communications Corporation (the
"Issuer") to exchange up to 200,000 shares of its 12 1/8% Series B Senior
Redeemable Exchangeable Preferred Stock (the "Exchange Shares") for up to
$200,000 shares of its outstanding 12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock that were issued and sold in a transaction
exempt from registration under the Securities Act of 1933, as amended (the
"Series B Shares").
The material is being forwarded to you as the beneficial owner of Old
Series B Shares carried by us for your account or benefit but not registered
in your name. A tender of any Old Series B Shares may be made only by us as
the registered holder and pursuant to your instructions. Therefore, the
Issuer urges beneficial owners of Old Series B Shares registered in the name
of a broker, dealer, commercial bank, trust company or other nominee to
contact such registered holder promptly if they wish to tender Old Series B
Shares in the Exchange Offer.
Accordingly, we request instructions as to whether you wish us to tender
any or all Old Series B Shares, pursuant to the terms and conditions set
forth in the Prospectus and Letter of Transmittal. We urge you to read
carefully the Prospectus and Letter of Transmittal before instructing us to
tender your Old Series B Shares.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to tender Old Series B Shares on your behalf in accordance
with the provisions of the Exchange Offer. The Exchange Offer will expire at
5:00 p.m., Eastern Time, on ______, _______, 1997, unless extended (the
"Expiration Date"). Old Series B Shares tendered pursuant to the Exchange
Offer may be withdrawn, subject to the procedures described in the
Prospectus, at any time prior to the Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for the exchange of 200,000 outstanding
(as of October 31, 1997) Old Series B Shares. The terms of the
Exchange Shares are substantially identical (including principal amount,
dividend rate, maturity, security and ranking) to the terms of the Old
Series B Shares, except that the Exchange Shares (i) are freely transferable
by holders thereof (except as provided in the Prospectus) and (ii) are not
entitled to certain registration rights and certain additional provisions
which are applicable to the Old Series B Shares under a registration rights
agreement dated as of October 2, 1997 (the "Registration Rights Agreement")
between the Issuer,
<PAGE>
and Donaldson, Lufkin and Jenrette Securities Corporation and Lehman
Brothers Inc. as initial purchasers.
2. THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CONDITIONS, SEE "THE
EXCHANGE OFFER--CONDITIONS TO THE EXCHANGE OFFER" IN THE PROSPECTUS.
3. The Exchange Offer and withdrawal rights will expire at 5:00
p.m., Eastern Time, on ______, 1998, unless extended.
4. The Issuer has agreed to pay the expenses of the Exchange Offer
except as provided in the Prospectus and the Letter of Transmittal.
5. Any transfer taxes incident to the transfer of Old Series B Shares
from the tendering holder to the Issuer will be paid by the Issuer, except
as provided in the Prospectus and the Letter of Transmittal.
The Exchange Offer is not being made to nor will exchange be accepted
from or on behalf of holders of Old Series B Shares in any jurisdiction in
which the making of the Exchange Offer or the acceptance thereof would not be
in compliance with the laws of such jurisdiction.
If you wish to have us tender any or all of your Old Series B Shares held
by us for your account or benefit, please so instruct us by completing,
executing and returning to us the instruction form that appears below. The
accompanying Letter of Transmittal is furnished to you for informational
purposes only and may not be used by you to tender Old Series B Shares held
by us and registered in our name for your account or benefit.
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer, including the
Prospectus and the Letter of Transmittal.
This form will instruct you to exchange the aggregate principal amount of
Old Series B Shares indicated below (or, if no aggregate principal amount is
indicated below, all Old Series B Shares) held by you for the account or
benefit of the undersigned, pursuant to the terms and conditions set forth in
the Prospectus and Letter of Transmittal.
- -------------------------------------------------------------------------------
Aggregate Liquidation Preference Amount of Old Series B Shares to be exchanged
$ *
---------------
- -------------------------------------------------------------------------------
<PAGE>
* I (we) agree that if I (we) sign these instruction forms without indicating
an aggregate principal amount of Old Series B Shares in the space above, all
Old Series B Shares held by you for my (our) account will be exchanged.
- -------------------------------------------------
- -------------------------------------------------
Signature(s)
- -------------------------------------------------
- -------------------------------------------------
- -------------------------------------------------
- -------------------------------------------------
(Please print name(s) and address above)
Dated: , 1997
--------------------
- -------------------------------------------------
(Area Code & Telephone Number)
- -------------------------------------------------
(Taxpayer Identification or
Social Security Number)
<PAGE>
EXHIBIT 99.5
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER OF SUBSTITUTE FORM W-9
Guidelines for Determining the Proper Identification Number to Give the
Payer--Social Security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employee identification numbers have nine digits separated by only
one hyphen: i.e. 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
- ----------------------------------------------------------- -----------------------------------------------------------------
Give the Give the EMPLOYER
SOCIAL SECURITY IDENTIFICATION
For this type of account: number of-- For this type of account: number of--
- ----------------------------------------------------------- -----------------------------------------------------------------
<S> <C> <C> <C>
1. An individual's account The individual 9. A valid trust, estate, The legal entity (Do not furnish
or pension trust the identifying number of the
2. Two or more individuals The actual owner of the account representative or trustee unless
(joint account) or, if combined funds, any one the legal entity itself is not
of the individuals (1) designated in the account title)
(5)
3. Husband and wife (joint The actual owner of the account
account) or, if joint funds, either person 10. Corporate account The corporation
(1)
11. Religious, charitable, The organization
4. Custodian account of a The minor (2) or educational
minor (Uniform Gift to organization account
Minors Act)
12. Partnership account held The partnership
5. Adult and minor (joint The adult or, if the minor is the in the name of the
account) only contributor, the minor (1) business
6. Account in the name of The ward, minor, or incompetent 13. Association, club, or The organization
guardian or committee person (3) other tax-exempt
for a designated ward, organization
minor, or incompetent
person 14. A broker or registered The broker or nominee
nominee
7. a. The usual revocable The grantor-trustee (1)
savings trust account 15. Account with the The public entity
(grantor is also trustee) Department of Agriculture
in the name of a public
b. So-called trust The actual owner (1) entity (such as a State or
account that is not a local government, school
legal or valid trust district, or prison) that
under State law receives agricultural
program payments
8. Sole proprietorship The owner (4)
account
</TABLE>
- -----------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate, or pension
trust.
Note: If no name is circled when there is more than one name, the number
will be considered to be that of the first name listed.
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER OF SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include the
following:
- A corporation
- A financial institution
- An organization exempt from tax under section 501(a), or an individual
retirement plan.
- The United States or any agency or instrumentality thereof.
- A State, the District of Columbia, a possession of the United States,
or any subdivision or instrumentality thereof.
- A foreign government, a political subdivision of a foreign government,
or any agency or instrumentality thereof.
- An international organization or any agency, or instrumentality
thereof.
- A registered dealer in securities or commodities registered in the
U.S. or a possession of the U.S.
- A real estate investment trust.
- A common trust fund operated by a bank under section 584(a).
- An exempt charitable remainder trust, or a nonexempt trust as
described in section 4947(a)(1).
- An entity registered at all times under the Investment Company Act of
1940.
- A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to
backup withholding include the following:
- Payments to nonresident aliens subject to withholding under section
1441.
- Payments to partnerships not engaged in a trade or business in the
U.S. and which have at least one nonresident partner.
- Payments of patronage dividends where the amount received is not paid
in money.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
Payments of interest not generally subject to backup withholding include
the following:
- Payments of interest on obligations issued by individuals. Note: You
may be subject to backup withholding if this interest is $600 or more
and is paid in the course of the payer's trade or business and you
have not provided your correct taxpayer identification number to the
payer.
- Payments of tax-exempt interest (including exempt-interest dividends
under section 852). Payments described in section 6049(b)(5) to
non-resident aliens.
- Payments on tax-free covenant bonds under section 1451.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
Exempt payees described above should file form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO
THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS,
ALSO SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and patronage dividends,
that are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under sections 6041, 6041A(a),
6045, and 6050A.
Privacy Act Notice--Section 6109 requires most recipients of dividends, interest
or other payments to give taxpayer identification numbers to payers who must
report the payments to IRS. IRS uses the numbers for identification purposes.
Payers must be given the numbers whether or not recipients are required to file
tax returns. Beginning January 1, 1993, payers must generally withhold 31% of
taxable interest, dividend, and certain other payments to a payee who does not
furnish a taxpayer identification number to a payer. Certain penalties may also
apply.
PENALTIES
(1) PENALTIES FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you
fail to furnish your taxpayer identification number to a payee, you are subject
to a penalty of $50 for each such failure unless your failure is due to a
reasonable cause and not to willful neglect.
(2) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS.--If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an
under-payment attributable to that failure unless there is clear and
convincing evidence to the contrary.
(3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
