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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number: 0-26176
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0336997
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5701 S. SANTA FE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 723-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A Common
Stock, $0.01 par value
6 3/4% Series C Cumulative Convertible Preferred Stock
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 5, 1999, the aggregate market value of Class A Common Stock
held by non-affiliates* of the Registrant approximated $846 million based upon
the closing price of the Class A Common Stock as reported on the Nasdaq National
Market as of the close of business on that date.
As of March 5, 1999, the Registrant's outstanding Common stock consisted of
15,517,910 shares of Class A Common Stock and 29,804,401 shares of Class B
Common Stock, each $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Form 10-K by reference:
Portions of the Registrant's definitive Proxy Statement to be filed in
connection with the Annual Meeting of Shareholders of Registrant to be held
April 16, 1999 are incorporated by reference in Part III herein.
* Without acknowledging that any individual director or executive officer of
the Company is an affiliate, the shares over which they have voting control
have been included as owned by affiliates solely for purposes of this
computation.
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TABLE OF CONTENTS
PART I
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . 23
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . 36
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . 37
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . 38
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
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PART I
ITEM 1. BUSINESS
GENERAL
Our common stock is publicly traded on the Nasdaq National Market. We
conduct substantially all of our operations through our subsidiaries. We operate
three business units:
- The DISH Network - our direct broadcast satellite, or DBS, subscription
television service in the United States. As of December 31, 1998, we
had approximately 1.9 million DISH Network subscribers.
- EchoStar Technologies Corporation - our engineering division, which is
principally responsible for the design of digital set-top boxes, or
satellite receivers, necessary for consumers to receive DISH Network
programming, and set-top boxes sold to international direct-to-home
satellite operators. We also provide uplink center design,
construction oversight and other project integration services for
international direct-to-home ventures.
- Satellite Services - our division that provides video, audio and data
services to business television customers and other satellite users.
RECENT DEVELOPMENTS
AGREEMENT WITH NEWS CORPORATION LIMITED AND MCI TELECOMMUNICATIONS
CORPORATION/WORLDCOM
On November 30, 1998, we announced an agreement with MCI, News Corporation
and its American Sky Broadcasting, LLC subsidiary, pursuant to which we would
acquire or receive:
- the rights to 28 frequencies at the 110DEG. West Longitude orbital
location from which we could transmit programming to the entire
continental United States;
- two DBS satellites constructed by Space Systems/Loral, delivered
in-orbit, and currently expected to be launched in 1999;
- a recently-constructed digital broadcast operations center located in
Gilbert, Arizona;
- a worldwide license agreement to manufacture and distribute set-top
boxes internationally using News Data System, Limited's
encryption/decoding technology;
- a commitment by an affiliated entity of News Corporation to purchase
from ETC a minimum of 500,000 set-top boxes; and
- a three-year, no fee retransmission consent agreement for DISH Network
to rebroadcast FOX Network owned-and-operated local station signals to
their respective markets.
We will not incur any costs associated with the construction, launch or
insurance (including launch insurance and one year of in-orbit insurance) of the
two DBS satellites. We and MCI also agreed that MCI will have the non-exclusive
right to bundle DISH Network service with MCI's telephony service offerings on
mutually agreeable terms. In addition, we agreed to carry the FOX News Channel
on the DISH Network. We received standard program launch support payments in
exchange for carrying the programming. Throughout this document, we refer to
the above transaction as the "110 acquisition".
Subject to FCC approval, if we combine the capacity of the two newly
acquired satellites with our four current satellites, we expect that DISH
Network will have the capacity to provide more than 500 channels of programming,
Internet and high-speed data services and high definition television nationwide
to a subscriber's single 18-inch satellite dish. We also believe that this
transaction would position us to offer a one-dish solution for
satellite-delivered local programming to major markets across the country.
Since we plan to use many of those channels for local programming, no particular
consumer could subscribe to all 500 channels, but all of those channels would be
capable of being received from a single dish. We also expect to be able to
begin small dish service to Alaska, Hawaii, Puerto Rico and the United States
territories in the Caribbean. However, we expect to expend over $100 million,
and
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perhaps more than $125 million during 1999 and 2000 in one-time expenses
associated with repositioning subscriber satellite dishes to the new orbital
location.
In connection with this agreement, the litigation with News Corporation
described below under "LEGAL PROCEEDINGS" has been stayed and will be dismissed
with prejudice upon closing or if the transaction is terminated for reasons
other than the breach by, or failure to fulfill a condition within the control
of, News Corporation or MCI, or in certain other limited circumstances.
During December 1998, the Department of Justice provided antitrust
clearance for the transaction to proceed. Both the FCC and our shareholders
still must approve the transaction before we can close. Charles W. Ergen, our
controlling shareholder, has agreed to vote in favor of the transaction, so
shareholder approval is assured. During December 1998 we asked the FCC to
approve the transaction. That approval has not yet been provided and we can not
predict when the FCC will act on our request. To the best of our knowledge, we
do not need to obtain any other regulatory approvals prior to consummating the
transaction. See " - GOVERNMENT REGULATION."
DISH NETWORK
We started offering subscription television services on the DISH Network in
March 1996. As of December 31, 1998, more than 1.9 million households subscribed
to DISH Network programming services. We added 100,000 new DISH Network
subscribers during each of the five months ended February 1999. There can be no
assurance, however, that we will be able to sustain this growth rate in the
future. Our market share of new DBS subscribers has consistently increased and,
during the fourth quarter of 1998, we estimate that we captured almost 40% of
all new satellite subscribers. We presently have four operational DBS
satellites. Currently, we have the ability to provide approximately 200
channels of digital television programming and CD quality audio programming
services to the entire continental United States. We believe that the DISH
Network offers programming packages that have a better "price-to-value"
relationship than packages currently offered by most other subscription
television providers, particularly cable TV operators. As of December 31, 1998,
approximately 9 million United States households subscribed to direct broadcast
satellite and other direct-to-home satellite services. However, we believe that
there continues to be significant unsatisfied demand for high quality,
reasonably priced television programming services.
Since 1994, we have dedicated significant resources to develop the DISH
Network and our related DBS system. Our DBS system presently includes
FCC-allocated DBS licenses, four operational DBS satellites, digital satellite
receivers, a digital broadcast operations center, customer service facilities,
and other assets used in our operations.
"DBS" describes a satellite service with frequency allocation and wide
spacing between satellites that generally permits higher powered transmissions
than other satellite services and allows for reception with a small, 18-24 inch
satellite dish. We believe that DBS provides the most cost-efficient national
point to multi-point transport of video and audio services available today.
We presently have four operational DBS satellites in geostationary orbit
approximately 22,500 miles above the equator. Satellites are located in orbital
positions, or slots, that are designated by their longitude. An orbital
position describes both a physical location and an assignment of spectrum in the
applicable frequency band. The FCC has divided each orbital position into 32
frequency channels. Each transponder on our satellites can exploit one frequency
channel. Through digital compression technology, we can currently transmit
approximately eight digital video channels from each transponder. We are
licensed by the FCC to operate 56 frequencies at the orbital positions where our
satellites are currently located, including 21 frequencies at the 119DEG. WL
orbital slot capable of providing service to the entire continental United
States. See " - GOVERNMENT REGULATION - DBS RULES."
COMPONENTS OF A DBS SYSTEM
In order to provide programming services to DISH Network subscribers, we
have entered into agreements with programmers, who deliver their programming
content to our digital broadcast operations center in Cheyenne, Wyoming, via
commercial satellites, fiber optics or microwave transmissions. We monitor those
signals for quality, and can add promotional messages, public service
programming or other information. Equipment at our digital broadcast operations
center then digitizes, compresses, encrypts and combines the signal with other
necessary data,
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such as conditional access information. We then "uplink" or transmit the signals
to one of our DBS satellites where it is then broadcast directly to DISH Network
subscribers.
In order to receive DISH Network programming, a subscriber needs:
- a satellite antenna, sometimes referred to as a dish and related
components;
- an integrated receiver/decoder, sometimes referred to as a "satellite
receiver" or "set-top box"; and
- a television set.
Set-top boxes communicate with our authorization center through telephone
lines to report the purchase of pay-per-view movies and other events.
We use digital video and audio compression to maximize the amount of
programming we can offer to consumers. We use conditional access technology to
encrypt the programming so only those who pay can receive the programming. We
use microchips placed on credit card-sized access cards, or "smart cards" to
control access to authorized programming content. These smart cards, which can
be updated or replaced periodically, are a key element in preserving the
security of our conditional access system. When a consumer orders a particular
channel, we send a message by satellite that instructs the smart card to permit
decryption of the programming for viewing by that consumer. The programming is
then decompressed and sent to the consumer's television.
CONDITIONAL ACCESS SYSTEM. We own 50% of NagraStar LLC, a joint venture
that provides us with "smart cards" that control access to DISH Network
programming. NagraStar purchases these smart cards from Nagra Plus SA, a Swiss
company that owns the other 50% of NagraStar LLC. The access control system is
central to the security network that prevents unauthorized viewing of
programming. Other DBS operators' access control systems have been commercially
pirated. We recently received data that suggests that our access control system
may also have been compromised. We are presently evaluating the data to
determine the corrective measures that are necessary. Though there can be no
assurance, we do not presently believe that the potential compromise will
materially affect future results of operations.
PROGRAMMING. We currently offer more than 200 channels of digital
television programming and CD-quality audio programming to consumers in the
continental United States from our EchoStar I and EchoStar II satellites.
EchoStar III has the FCC licensed capacity to provide almost 100 additional
channels to consumers in the Eastern and Central United States time zones.
EchoStar IV has the FCC licensed and operational capacity to provide almost 100
additional channels to consumers in the Mountain and Pacific United States time
zones. Currently we use those satellites to provide local network programming,
data, business television and other "niche" services. Any particular consumer
could only subscribe to a small percentage of those niche services. If we
consummate the 110 acquisition and successfully deploy two new DBS satellites,
we expect to be able to offer a total of over 500 channels of digital video and
audio programming broadcast nationwide, including satellite-delivered local
programming. Since we plan to use many of those channels for local
programming, no particular consumer could subscribe to all 500 channels, but all
of those channels would be capable of being received from a single dish. See
" - GOVERNMENT REGULATION - SATELLITE HOME VIEWER ACT AND RETRANSMISSION
CONSENT".
We use a "value-based" strategy in structuring the content and pricing of
programming packages available from the DISH Network. For example, we sell our
entry-level "America's Top 40" programming package, which includes 40 of the
most popular cable channels, to consumers for $19.99 per month. We estimate
cable operators charge over $30 per month, on average, for their entry-level
expanded basic service that consists of approximately 55 analog channels. We
believe that our "America's Top 100 CD" programming package, which we sell for
$28.99 per month, also compares favorably to similar cable television
programming. We believe that our America's Top 100 CD package is similar to an
expanded basic cable package plus a digital music service. Based on cable
industry statistics, we estimate that cable operators would charge in excess of
$40 per month for a similar package. Similarly, we offer up to seven premium
movie channels for only $10.99 per month, which is about the same as cable
subscribers typically pay for one or two movie channels.
We are expanding our offerings to include Internet and high-speed data
services. For example, we recently entered into an agreement with WebTV
Networks, Inc., which is wholly-owned by Microsoft Corporation, to provide
Internet TV. This service integrates DISH Network's digital satellite
television programming with Internet TV services
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from WebTV. This product also provides for digital video recording, an advanced
electronic program guide, broadband data delivery and video games. The vast
majority of the data delivery and video game services are provided through
telephone lines and are not delivered via satellite. While we are currently
only able to provide a limited number of one-way data services via satellite, we
are working to further develop this technology. There can be no assurance that
we will be able to cost-effectively develop this technology, or at all. We
believe we will be able to increase our subscriber base and average revenue per
subscriber by offering these and other similar services.
LOCAL STRATEGY. In order to provide the strongest possible competition to
cable, and thereby maximize our potential market, we are working on solutions to
seamlessly provide local broadcast network channels to our subscribers. Subject
to eligibility conditions, we currently offer satellite-delivered local network
signals to consumers in some of the largest markets in the continental United
States, including Atlanta, Boston, Chicago, Dallas/Ft. Worth, Denver, Los
Angeles, Miami, New York, Phoenix, Pittsburgh, Salt Lake City, San Francisco and
Washington, D.C. Under existing regulation, we can only broadcast these signals
to "unserved households" in the local areas from which those channels
originate. See " - GOVERNMENT REGULATION." Presently, a subscriber must install
a second 18-inch satellite dish to receive our satellite-delivered local
network programming in most markets. Therefore, we are still at a competitive
disadvantage compared to cable operators because many consumers do not want to
install a second satellite dish. We may be able to implement a one-dish
solution for local programming in 20 or more major markets around the United
States if, among other things, we are able to consummate the 110 acquisition
and effect changes in existing legislation.
ECHOSTAR RECEIVER SYSTEMS. EchoStar receiver systems include an 18-inch
satellite dish, a digital satellite receiver that descrambles signals for
television viewing, a remote control, and other related components. DISH Network
reception equipment cannot be utilized with competitors' systems. We offer a
number of set-top box models. Our standard system comes with an infrared remote
control, an on-screen program guide, and the ability to switch between DISH
Network and off-air local programming using the remote control. Our mid-level
model has all of the basic features but also includes a UHF remote control that
allows subscribers to control their EchoStar receiver system from up to 150 feet
away through walls, and a high-speed data port. Our premium model includes
additional features such as on-screen caller identification capability, event
timers to automatically tune into or record selected programming and one-touch
VCR recording.
Although we internally design and engineer our receiver systems, we do not
manufacture these systems. Rather, we outsource the manufacturing process to
high-volume contract electronics manufacturers. SCI Technology, Inc.
manufactures the majority of our receiver systems. During 1998, Vtech
Communications, Ltd. began manufacturing our set-top boxes. JVC Company of
America also manufactures other consumer electronics products, including a
digital VCR, that also incorporates an EchoStar receiver system.
INSTALLATION. Currently, third-parties perform the majority of EchoStar
receiver system installations. We also offer installation services from 21 of
our own locations throughout the United States. We currently intend to invest
to expand our installation business during 1999.
CUSTOMER SERVICE CENTER. We currently operate customer service centers in
Thornton, Colorado, Littleton, Colorado and McKeesport, Pennsylvania. These
centers field all of our customer service calls. Potential and existing
subscribers can call a single telephone number to receive assistance for
hardware, programming, installation and technical support.
DIGITAL BROADCAST OPERATIONS CENTER. Our digital broadcast operations
center is located in Cheyenne, Wyoming. We would acquire a second digital
broadcast operations center in Gilbert, Arizona, if we are able to consummate
the 110 acquisition. We plan to begin utilizing the second facility as our
customer base expands and the added expense can be justified. Almost all of the
functions necessary to provide satellite-delivered services occur at the digital
broadcast operations center. The digital broadcast operations center uses fiber
optic lines and downlink antennas to receive programming and other data at the
center. The digital broadcast operations center uplinks programming content to
our DBS satellites via large uplink antennas. The digital broadcast operations
center also maintains a number of large uplink antennas and other equipment
necessary to modulate and demodulate the programming and data signals. All
compression and encryption of the DISH Network's programming signals are
performed by equipment at our digital broadcast operations center.
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SUBSCRIBER MANAGEMENT. We presently use a third-party software system for
DISH Network subscriber management and billing functions. We are currently
negotiating a new, multi-year contract for subscriber management services and
expect to sign a contract during the first half of 1999.
SALES AND MARKETING
EchoStar receiver systems and DISH Network programming services are
currently marketed by approximately 18,000 independent distributors, retail
stores and consumer electronics. The majority of DISH Network satellite systems
were purchased by subscribers from our independent dealers. These independent
dealers are primarily local retailers who specialize in TV and home
entertainment systems. We intend to enhance consumer awareness of our products
by forming alliances with nationally recognized distributors of other consumer
electronics products. We formed a strategic alliance with JVC in May 1997. JVC
now distributes our receiver systems under the JVC label through certain of its
nationwide retailers.
Through our direct sales efforts, customers can call a single telephone
number (1-800-333-DISH) 24 hours a day, seven days a week, to order EchoStar
receiver systems, activate programming services, schedule installation and
obtain technical support. We believe that we are presently the only DBS provider
to offer a comprehensive, single-point customer service function.
We offer our distributors and retailers a competitive residual, or
commission, program. The program pays qualified distributors and retailers an
activation bonus, along with a fixed monthly residual for programming services
provided over the period that the respective DISH Network subscriber remains
active.
We use regional and national broadcast and print advertising to promote the
DISH Network. We also offer point-of-sale literature, product display,
demonstration kiosks and signage for retail outlets. We provide guides to our
dealers and distributors at nationwide educational seminars and directly by
mail, that describe DISH Network products and services. Our mobile sales and
marketing team visits retail outlets regularly to reinforce training and ensure
that point-of-sale needs are quickly fulfilled. Additionally, we dedicate one
DISH Network channel to providing information about special services and
promotions that we offer from time to time.
Our future success in the subscription television industry depends on our
ability to acquire and retain DISH Network subscribers, among other factors.
Beginning in 1996, to stimulate subscriber growth we reduced the retail price
charged to consumers for EchoStar receiver systems. Accordingly, since
August 1996, we have sold our receiver systems to DISH Network subscribers below
the manufactured cost. We developed these marketing promotions to rapidly build
our subscriber base, expand retail distribution of our products, and build
consumer awareness of the DISH Network brand. These programs emphasize our
long-term business strategy of maximizing future revenue by selling DISH Network
programming to the largest possible subscriber base and rapidly increasing the
size of that subscriber base. Since we subsidize our receivers, we incur
significant costs each time we acquire a new subscriber. Assuming subscriber
turnover remains at or near existing levels, we believe that we will be able to
fully recoup the up-front costs of subscriber acquisition from future
subscription television services.
Our marketing strategy is based on current competitive conditions. If
competition increases, or we determine for any other reason that it is necessary
to increase our subscriber acquisition costs to attract new customers, our
profitability and costs of operation could be adversely affected.
SATELLITES
EchoStar I and EchoStar II each have 16 transponders that operate at 130
watts of power. Subject to the anomalies described below, EchoStar III and
EchoStar IV each have 32 transponders that operate at approximately 120 watts
per channel, switchable to 16 transponders operating at over 230 watts per
channel. Each transponder is capable of transmitting multiple digital video,
audio and data channels. Each of our satellites were designed to operate for a
minimum of 12 years. From these four satellites, we have the capacity to provide
a total of over 400 channels of video and audio programming.
During 1998, three transponders on EchoStar III malfunctioned, resulting in
the failure of a total of six transponders on the satellite. While a maximum of
32 transponders can be operated at any time, the satellite was
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equipped with a total of 44 transponders to provide redundancy. As a result of
this redundancy and because we are only licensed by the FCC to operate 11
transponders at 61.5DEG. WL, where the satellite is located, the transponder
anomaly has not resulted in a loss of service to date. The satellite
manufacturer, Lockheed Martin, has advised us that it believes it has identified
the root cause of the failures, and that while further transponder failures are
possible, Lockheed Martin does not believe it is likely that the operational
capacity of EchoStar III will be reduced below 32 transponders. Lockheed Martin
also believes it is unlikely that our ability to operate at least the 11
licensed transponders on the satellite will be affected. We will continue to
evaluate the performance of EchoStar III and may be required to modify our loss
assessment as new events or circumstances develop.
The time for filing a claim for a loss under the satellite insurance policy
that covered EchoStar III at the time of the transponder failures has passed.
While the insurance carriers were notified of the anomaly, as a result of the
built-in redundancy on the satellite and Lockheed Martin's conclusions with
respect to further failures, no claim for loss was filed. During the anomaly
investigation, we obtained a $200 million in-orbit insurance policy on
EchoStar III at standard industry rates, which was renewed through June 25,
1999. However, the policy contains a three-transponder deductible if the
satellite is operating at 120 watts per transponder, or a six-transponder
deductible if the satellite is operating at 230 watts per transponder. As such,
the policy would not cover transponder failures unless transponder capacity is
reduced to less than 26 transponders in the 120 watt mode or 13 transponders in
the 230 watt mode, during the coverage period. As a result of the deductible,
we could potentially experience uninsured losses of capacity on EchoStar III.
Although there can be no assurance, we expect that in-orbit insurance can be
procured on more traditional terms in the future if no further failures occur in
the interim. If further failures do occur, we may not be able to obtain
additional insurance on EchoStar III on commercially reasonable terms. We do not
maintain insurance for lost profit opportunity.
As a result of the failure of the solar power panels on EchoStar IV to
properly deploy, there is currently only sufficient available power on the
satellite to operate approximately 20 transponders. The number of available
transponders will decrease over time. Based on current data, we expect that
approximately 16 transponders will probably be available over the entire 12-year
design life of the satellite, absent significant additional anomalies or other
failures. In addition to the solar array anomaly, EchoStar IV also experienced
an anomaly similar to that experienced by EchoStar III. Like EchoStar III, this
additional anomaly has not yet resulted in a loss of operational satellite
capacity and Lockheed Martin advises that no such loss is expected. In
September 1998, we filed a $219.3 million insurance claim for a constructive
total loss, as defined in the launch insurance policy, related to EchoStar IV.
However, if we received $219.3 million for a constructive total loss on the
satellite, the insurers would obtain the sole right to the benefits of salvage
from EchoStar IV under the terms of the launch insurance policy. Although we
believe we have suffered a constructive total loss of EchoStar IV in accordance
with that definition in the launch insurance policy, we presently intend to
negotiate a settlement with the insurers that will compensate us for the reduced
satellite transmission capacity and allow us to retain title to the asset.
During the third quarter of 1998, we recorded a $106 million impairment
provision related to the solar array anomaly that represents our best estimate
of the amount of capacity we lost as a result of the solar array not properly
deploying. We also recorded a $106 million insurance receivable. That amount
reflects our judgment that it is probable the insurance recovery will be at
least equal to the amount of the impairment loss.
We will acquire two additional DBS satellites if we consummate the 110
acquisition. EchoStar V will have 32 transponders that will operate at
approximately 110 watts per channel, switchable to 16 transponders operating at
approximately 220 watts per channel. EchoStar VI would also be equipped with 32
transponders that would operate at approximately 120 watts per channel,
switchable to 16 transponders operating at approximately 240 watts per channel.
EchoStar V and EchoStar VI would each have a minimum design life of 12 years. We
would not incur any costs in connection with the launch and first year of
in-orbit insurance for EchoStar V and EchoStar VI. Notwithstanding FCC approval
of the 110 acquisition and successful launch of EchoStar V and VI, we would only
be able to exploit 29 of the 32 frequencies at 110DEG. WL.
SATELLITE LAUNCHES
We expect to launch EchoStar V this summer and EchoStar VI during the
fourth quarter of 1999. The launches could include any combination of United
States Atlas launches, Ariane launches through the European Space Agency and
Proton launches from Russia.
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SATELLITE INSURANCE
We have procured in-orbit insurance for EchoStar I, EchoStar II and
EchoStar III through June 25, 1999. We may not be able to renew these policies
or, if we do, that renewals will be at rates or on terms favorable to us. For
example, if EchoStar I, EchoStar II, EchoStar III or other similar satellites
experience anomalies while in orbit, the cost to renew in-orbit insurance could
increase significantly or coverage exclusions for similar anomalies could be
required. Further, although we have in-orbit coverage for 365 days after launch
of EchoStar IV, we do not know if we will be able to obtain in-orbit insurance
for EchoStar IV thereafter as a result of the anomalies experienced by the
satellite. The in-orbit insurance policies for EchoStar I, EchoStar II and
EchoStar III and the launch insurance policy for EchoStar IV include standard
commercial satellite insurance provisions. These provisions include, among other
things, a material change in underwriting information clause that requires us to
notify our insurers of any material change in the written underwriting
information provided to the insurers or any change in any material fact or
circumstance concerning our satellites insured under the policy. A notification
permits the insurers to renegotiate the terms and conditions if the result is a
material change in risk of loss or insurable interest. A change in the health
status of an insured satellite or any loss occurring after risk has attached
does not entitle the insurers to renegotiate the policy terms.
The satellite insurance policies for EchoStar I, EchoStar II, EchoStar III
and EchoStar IV contain customary exclusions, including:
- acts of war or similar actions;
- loss or damage caused by anti-satellite devices;
- insurrection and similar acts;
- governmental confiscation;
- nuclear reaction or radioactive contamination;
- willful or intentional acts by us or our contractors designed to cause
loss or failure of a satellite;
- claims for lost revenue and incidental and consequential damages;
- third-party claims against us; and
- business interruption, loss of business and similar losses that might
arise from delay in the launch of any satellite.
In addition to the above exclusions, the current insurance policy for
EchoStar III also excludes additional occurrences of the same or similar
anomalies. If one of our satellites does not perform to specifications following
launch, there may be circumstances in which insurance will not fully reimburse
us for any loss.
COMPETITION FOR OUR DISH NETWORK BUSINESS
Our industry is highly competitive. Our competition includes companies that
offer video, audio, data, programming and other entertainment services,
including cable television, wireless cable, direct-to-home satellite, other DBS
companies and companies that are developing new technologies. Many of our
competitors have access to substantially greater financial and marketing
resources than we have. We believe that quality and variety of programming,
quality of picture and service, and cost are the key bases of competition.
CABLE TELEVISION. The United States cable television industry currently
serves over 65 million subscribers. As an established provider of subscription
television services, cable television is a formidable competitor in the overall
market for television households. Cable television systems generally offer 30 to
80 analog channels of video programming. Cable television operators currently
have a competitive advantage over us because they can provide local programming
and service to multiple television sets within the same household without using
another receiver. Many cable television operators are in the process of
upgrading their distribution systems to expand their existing channel capacity
for purposes of providing digital product offerings similar to those offered by
DBS providers. In addition, such expanded capacity may be used to provide
interactive and other new services.
Many of the largest cable systems in the United States have announced plans
to offer access to telephony services through their existing cable equipment,
and have entered into agreements with major telephony providers to further these
efforts. In some cases, certain cable systems have actually commenced commercial
offerings of such
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services, the expansion of which could have a negative impact on the demand for
DBS services. If such trials are successful, many consumers may find cable
service to be more attractive than DBS service.
Since a subscriber needs to have direct line of sight to the satellite to
receive DBS service, some households may not be able to receive DISH Network
programming. Additionally, the initial cost required to receive DISH Network
programming may deter some potential customers from switching to DISH Network
service. Additionally, a subscriber must buy an EchoStar receiver system to
receive DISH Network programming. Cable operators lease their equipment to the
consumer with little, if any, initial hardware payment required. This also may
deter some potential customers from switching to DISH Network service.
Additionally, cable operators pay substantially lower royalty rates for the
retransmission of distant network and superstation signals than we do.
OTHER DBS AND DIRECT-TO-HOME SATELLITE SYSTEM OPERATORS. Several other
companies have DBS licenses and are positioned to compete with us for home
satellite subscribers. DIRECTV, Inc. operates three DBS satellites and has 27
channel assignments at an orbital slot that provides coverage to the entire
continental United States. United States Satellite Broadcasting Corporation, or
USSB, owns and operates an additional five transponders on one of DIRECTV's
satellites and presently offers a programming service complementary to DIRECTV's
service. DIRECTV and USSB together offer more than 200 channels of DBS video
programming. As of December 31, 1998, DIRECTV had approximately 4.5 million
subscribers, approximately one-half of whom also subscribed to USSB programming.
In December 1998, DIRECTV's parent executed a definitive merger agreement to
acquire the business and assets of USSB in a transaction expected to be
completed in mid-1999, subject to obtaining regulatory and shareholder
approvals. This transaction will give DIRECTV access to additional DBS
frequencies which will enable them to further expand their service offering.
We also compete with PrimeStar, Inc. As of December 31, 1998, PrimeStar
had approximately 2.3 million subscribers. PrimeStar offers approximately 150
channels of medium power satellite service. In January 1999, DIRECTV's
parent announced an agreement to purchase the satellite television business
of PrimeStar, which is comprised of a medium power satellite business and
their rights to acquire Tele-Communications, Inc.'s DBS assets, subject in
each case to regulatory approvals and customary conditions.
Two other satellite companies have conditional permits for a comparatively
small number of DBS frequency assignments that could be used to provide service
to portions of the United States. If the number of DBS operators increases in
the future, DISH Network subscriber growth could be adversely affected.
TELEPHONE COMPANIES. Certain telecommunications carriers, including long
distance telephone companies, could become significant competitors in the future
as they have expressed an interest in, and in some instances made substantial
investments to become, subscription television and information providers. For
instance, AT&T recently acquired Tele-Communications, Inc. Other telephone
companies are also actively engaged in the video programming distribution
business.
VHF/UHF BROADCASTERS. Most areas of the United States can receive
traditional terrestrial VHF/UHF television broadcasts of between three and ten
channels. These broadcasters are often low to medium power operators with a
limited coverage area and provide local, network and syndicated programming. The
local content nature of the programming may be important to the consumer, and
VHF/UHF programming is typically provided free of charge. The FCC has allocated
additional digital spectrum to licensed broadcasters. At least during a
transition period, each existing television station will be able to retain its
present analog frequencies and also transmit programming on a digital channel
that may permit multiple programming services per channel.
ECHOSTAR TECHNOLOGIES CORPORATION
Employees of EchoStar Technologies Corporation, one of our wholly-owned
subsidiaries, internally design and engineer EchoStar receiver systems. Our
satellite receivers have won numerous awards from dealers, retailers and
industry trade publications. We outsource the manufacture of EchoStar receiver
systems to third parties who manufacture the receivers in accordance with our
specifications. In addition to supplying EchoStar receiver systems for the DISH
Network, ETC supplies similar digital satellite receivers to international
satellite TV service operators. We also offer consulting and integration
services to development stage, international direct-to-home satellite
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operators. We are actively soliciting new business for ETC and, while we are
optimistic about future growth opportunities, we can not provide any assurance
in that regard.
Our ETC division resulted from the development of the DISH Network. We
believe that we have an opportunity to grow this business in the future. The
employees who design EchoStar receiver systems for the DISH Network are the same
as those who design the set-top boxes sold to international direct-to-home
satellite TV customers. Consequently, international ETC projects may result in
improvements in design and economies of scale in the production of EchoStar
receiver systems for the DISH Network.
Currently, we provide digital set-top boxes to two international
direct-to-home satellite TV providers, one in Canada and one in Spain. A
substantial portion of our ETC revenue in 1997 and 1998 resulted from sales to
these two direct-to-home satellite TV providers. As a result, our ETC business
currently is economically dependent upon these two providers. If we are able to
consummate the 110 acquisition, we would receive a minimum order from a
subsidiary of News Corporation for 500,000 set-top boxes. Although we continue
to actively pursue other similar distribution and integration service
opportunities, we have not executed additional agreements. Our future revenue in
this area depends largely on the success of the direct-to-home satellite TV
operators we supply in Canada and Spain, which in turn, depends on other
factors, such as the level of consumer acceptance of direct-to-home satellite TV
products and the intensity of competition for international subscription
television subscribers.
COMPETITION FOR OUR ETC BUSINESS
We compete with a substantial number of foreign and domestic companies,
many of which have significantly greater resources, financial or otherwise, than
we have. We expect new competitors to enter this market because of rapidly
changing technology. Our ability to anticipate these technological changes and
introduce enhanced products expeditiously will be a significant factor in our
ability to remain competitive. Existing competitors' actions and new entrants
may have a material adverse impact on our revenues. We do not know if we will be
able to successfully introduce new products and technologies on a timely basis
in order to remain competitive.
SATELLITE SERVICES
Our Satellite Services division primarily leases capacity on our satellites
to customers on either a monthly or hourly basis. Full-time customers tend to be
international services that broadcast foreign language programming to DISH
Network subscribers. Part-time customers are typically Fortune 1000 companies
that use our satellite network for business television service to communicate
with employees, customers and suppliers located around the United States. In
addition, we are developing a wide range of Internet and high-speed data
services that we expect to offer to consumers beginning in mid-1999.
COMPETITION FOR OUR SATELLITE SERVICES BUSINESS
We compete with a number of other companies, including those using similar
and different technologies, to provide Satellite Services. Many of these
competitors have substantially greater financial and other resources than we
have. Our principal competitors include, other satellite system operators, cable
television system operators, Internet service providers, and telephone
companies. We believe that we can compete with these other companies based on
our knowledge and experience in the direct-to-home satellite TV and DBS
industry, our technological leadership and new product capabilities, the quality
of our video, audio and data transmissions, the quality of service provided, and
cost.
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GOVERNMENT REGULATION
THE FOLLOWING SUMMARY OF REGULATORY DEVELOPMENTS AND LEGISLATION IS NOT
INTENDED TO DESCRIBE ALL PRESENT AND PROPOSED GOVERNMENT REGULATION AND
LEGISLATION AFFECTING THE VIDEO PROGRAMMING DISTRIBUTION INDUSTRY. GOVERNMENT
REGULATIONS THAT ARE CURRENTLY THE SUBJECT OF JUDICIAL OR ADMINISTRATIVE
PROCEEDINGS, LEGISLATIVE HEARINGS OR ADMINISTRATIVE PROPOSALS COULD CHANGE OUR
INDUSTRY, IN VARYING DEGREES. WE CAN NOT PREDICT EITHER THE OUTCOME OF THESE
PROCEEDINGS OR ANY POTENTIAL IMPACT THEY MIGHT HAVE ON THE INDUSTRY OR ON OUR
OPERATIONS. THIS SECTION SETS FORTH A BRIEF SUMMARY OF REGULATORY ISSUES
PERTAINING TO OUR OPERATIONS.
We are required to obtain authorizations and permits from the FCC and other
similar foreign regulatory agencies to construct, launch and operate our
satellites and other components of our DBS system. Additionally, as a private
operator of a United States satellite system, we are subject to the regulatory
authority of the FCC and the Radio Regulations promulgated by the International
Telecommunication Union. We also have to obtain import and general destination
export licenses from the United States Department of Commerce to deliver
products to overseas destinations. Finally, we must abide by United States
export control regulations when we choose to launch our satellites outside the
United States.
FCC PERMITS AND LICENSES
The FCC has jurisdiction and review power over the following general areas:
- assigning frequencies and authorizations;
- ensuring compliance with the terms and conditions of such assignments
and authorizations, including required timetables for construction and
operation of satellites and other due diligence requirements;
- authorizing individual satellites and earth stations;
- avoiding interference with other radio frequency emitters;
- ensuring compliance with applicable provisions of the Communications
Act.
Like other DBS operators, we received our FCC authorizations conditioned on
satisfaction of ongoing due diligence, construction, reporting and other
obligations. We cannot be certain that we will be able to comply with all of the
FCC's due diligence obligations. Moreover, the FCC could determine we have not
complied with such due diligence obligations. The FCC has declared that it will
carefully monitor the reports required to be filed by satellite service
permitees. If we do not file adequate reports or are not able to demonstrate
timely progress in the construction of our satellite service system, we could
lose our authorizations. We have not filed, or not timely filed, all required
reports or filings with the FCC. Therefore, there is a risk that the FCC could
determine that we have not complied fully with due diligence requirements and
could revoke or place conditions on our current licenses.
Some of our permits and extension requests have been, and may continue to
be, contested in FCC proceedings and in court by several companies with adverse
interests. Those companies include Dominion Video Satellite, Inc., PrimeStar,
Tempo Satellite Inc., DIRECTV, GE American Communications, Inc. and others.
The FCC issues DBS licenses for ten year periods, which is less than the
useful life of a healthy DBS satellite. Upon expiration of the initial license
term, the FCC has the option to renew the satellite operator's license or
authorize the operator to operate for a period of time on special temporary
authority, or decline to renew the license. If the FCC declined to renew the
operator's license, the operator would be required to cease operations and the
frequencies would revert to the FCC. The FCC usually grants special temporary
authorizations for periods of up to 180 days. These authorizations are usually
subject to several other conditions. We also must obtain FCC authorization to
operate our earth stations, including the earth stations necessary to uplink
programming to our satellites.
Our licenses to operate EchoStar I and EchoStar II both will expire in
2006. Our license to operate EchoStar III over 11 channels at 61.5DEG. WL
will expire in 2008. EchoStar IV was originally licensed to operate at our
119DEG. WL orbital location, however, that satellite experienced
malfunctions, as discussed above, that required us to change our plans. We
currently operate EchoStar IV at the 148DEG. WL orbital location under a
special temporary authorization until permanent authority can be obtained to
operate that satellite at the 148DEG. WL orbital location. Our authorization
at 148DEG. WL requires us to utilize all of our FCC-allocated frequencies at
that location by December 20, 2002, or risk
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losing those frequencies that we are not using. As a result of the anomalies
previously discussed, EchoStar IV can not exploit all of our frequencies at the
148DEG. WL orbital location.
APPROVALS RELATED TO THE 110 ACQUISITION
We are required to obtain FCC approval before we can consummate the 110
acquisition. We have requested FCC approval for the assignment of all FCC
authorizations involved in the transaction. The FCC has placed these
applications on public notice. The comment cycle ended February 4, 1999.
Several parties have opposed the application on various grounds or have
requested conditions, including, without limitation the following:
- arguing that alien ownership limitations and other broadcast
qualification requirements apply;
- requesting program access conditions for News Corporation's
programming; and
- requesting conditions in connection with service to Alaska and Hawaii.
Our applications are still pending and we cannot be sure how the FCC
might rule on any of these oppositions or requests. Although we have
requested expedited action on the applications, we cannot be sure that the
FCC will grant them or that it will grant them expeditiously.
In 1995, the FCC imposed a one-time rule that applied only to those DBS
operators that purchased DBS satellite frequencies at an auction in January
1996. The rule effectively prevented a DBS operator from using channels at
more than one location from which it is possible to serve the entire
continental United States. If the FCC re-imposed this rule, we would not be
able to obtain the frequencies from News Corporation and MCI because it would
give us two locations from which we could provide service to the entire
continental United States. Although we believe the application that we filed
with the FCC includes compelling reasons that this rule should not be
re-imposed, we do not know how the FCC will rule. Furthermore, MCI's
authorization is subject to still pending challenges before the full FCC, and
we do not know how the FCC will rule on these challenges. Moreover, if the
FCC approves the 110 acquisition, we may be required to obtain further FCC
approval to transmit programming from both locations to a single consumer
satellite dish.
Furthermore, the FCC is still reviewing an application for minor
modifications to MCI's authorization. The FCC must approve all of these
modifications prior to the deployment of satellites to that location. We do not
know whether the FCC will approve these modifications or that it will do so
timely. Moreover, MCI has not yet received FCC authorization in connection with
certain types of telemetry, tracking and control operations of its proposed
system.
The state of Hawaii has requested the FCC to condition the assignment of
the MCI license on our ability to provide service to 18-24 inch satellite
dishes. The two satellites that we will acquire if we consummate the 110
acquisition will have spot beams to enable us to provide service to Alaska
and Hawaii. However, these satellites probably will not be able to provide
service to substantial portions of Hawaii and Alaska with a dish as small as
requested by Hawaii with the same degree of reliability as exists for our
service generally, particularly in areas with heavy and consistent
precipitation.
IN-ORBIT AUTHORIZATIONS
We use specific C-band frequencies to control EchoStar I. The FCC
conditionally approved the use of these frequencies to control EchoStar I in
1995. The condition stated that the coordination process with Canada and Mexico
had not been completed. In January 1996, the Ministry of Communications and
Transportation of Mexico notified the FCC that EchoStar I's telemetry, tracking
and control operations could cause unacceptable interference to Mexican
satellites. Although it is unlikely, the FCC could subsequently require us to
relinquish the use of such C-band frequencies for telemetry, tracking and
control purposes. If that happened, we might not be able to control the
satellite, which could result in a total loss of the satellite unless we were
able to move it to another location.
We use "extended" C-band frequencies to control EchoStar II. In 1996, we
received conditional authority from the FCC to use these frequencies. The
condition stated that we could use those frequencies until January 1, 1999
provided that their use would not cause harmful interference. The FCC indicated
it would review the suitability of
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those frequencies for telemetry, tracking and control operations in January
1999. We have timely filed a request to extend the authorization to November
2006. We do not know whether the FCC will extend that authorization. If the FCC
refuses to extend our authorization, we might not be able to control EchoStar
II, which could result in a total loss of the satellite unless we were able to
move it to another location. Recently, the FCC released a notice of proposed
rulemaking that may inhibit future satellite operations in the "extended" C-band
frequencies. The FCC also is no longer accepting earth station applications in
that band. These recent developments might have negative implications for us.
INTERNATIONAL TELECOMMUNICATION UNION STANDARDS
Our DBS system also must conform to the ITU broadcasting satellite service
plan. If any of our operations are not consistent with this plan, the ITU will
only provide authorization on a non-interference basis pending successful
modification of the plan or the agreement of all affected administrations to the
non-conforming operations. Accordingly, unless and until the ITU modifies its
broadcasting satellite service plan to include the technical parameters of DBS
applicants' operations, our satellites, along with those of other DBS operators,
must not cause harmful electrical interference to other assignments that are in
conformance with the plan. Further, DBS satellites are not presently entitled to
any protection from other satellites that are in conformance with the plan. To
our knowledge, the United States government has filed modification requests with
the ITU for EchoStar I, II and III. The ITU has requested certain technical
information in order to process the requested modifications. We have cooperated,
and continue to cooperate, with the FCC in the preparation of its responses to
the ITU requests. We cannot predict when the ITU will act upon these requests
for modification or if they will be granted.
AUTHORIZATIONS AND FREQUENCIES THAT WE COULD LOSE
We also have conditional authorizations for several other DBS and fixed
service satellites that are not operational. One permit for 10 unspecified
western frequencies was set to expire on August 15, 1995. Although we filed a
timely extension request, the FCC has deferred a decision on that request
pending the FCC's analysis of our due diligence for that permit. The FCC has not
yet assigned the frequencies related to that permit because in 1992 it held that
we had not completed contracting for these western assignments - the first prong
of the required diligence - and asked us to submit amended contract
documentation. Although we submitted such documentation, the FCC has not yet
ruled on this matter, and we cannot be sure that the FCC will rule in our
favor.
We also have a conditional permit for one frequency at the 110DEG.
WL orbital location and a total of 11 western frequencies at the 175DEG. WL
orbital location that is set to expire on August 15, 1999. That expiration
date is pursuant to an extension granted by the FCC's International Bureau in
1996. That extension was subject to the condition that we make significant
progress toward construction and operation of a DBS system substantially in
compliance with, or ahead of, the most recent timetable that we submitted to
the FCC. The FCC's International Bureau also urged us to expedite
construction and launch of additional satellites for our DBS system at these
frequencies. PrimeStar filed a request with the FCC that is still pending
requesting that the FCC reverse the International Bureau's grant of an
extension.
We also have a conditional permit for 11 additional frequencies at 175DEG.
WL, which was set to expire on November 30, 1998. That expiration date was
pursuant to an extension granted by the FCC's International Bureau in 1995. When
it granted the extension, the FCC reserved the right to cancel the permit if
we failed to progress toward operation of the DBS system in accordance with the
timetable that we submitted to the FCC. That extension also is subject to a
still pending challenge by PrimeStar.
While we have timely filed requests for extension of all the western
permits, we cannot be sure how the FCC will act with respect to these
requests.
OTHER LICENSES AND CONDITIONAL AUTHORIZATIONS
We also have received licenses and conditional authorizations from the FCC
to operate satellites in the Ka-band, Ku-band and extended Ku-band frequencies.
Use of those licenses and conditional authorizations are subject to certain due
technical and due diligence requirements, including the requirement to construct
and launch additional satellites. The granting of those licenses has been
challenged by parties with interests that are adverse to ours. If we
successfully construct and launch Ku-band, extended Ku-band, Ka-band and/or low
earth orbit satellites, we might be
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able to use those satellites to complement the DISH Network, or for a variety of
other uses. It is possible that the Ku-band and Ka-band orbital locations
requested by us and others could permit construction of satellites with
sufficient power to allow reception of satellite signals by relatively small
dishes. As these projects are in the early stages of development and are
currently being challenged by several companies with interests adverse to ours,
there can be no assurance that the FCC will sustain these licenses, or grant the
pending applications, or that we will be able to successfully capitalize on any
resulting business opportunities.
REGULATIONS
DBS RULES. Once the FCC grants a conditional construction permit, the
permittee must proceed with due diligence in constructing the system. The FCC
has adopted specific milestones that must be met in order to retain the permit,
unless the FCC determines that an extension or waiver is appropriate. Permittees
must file semi-annual reports on the status of their due diligence efforts. The
due diligence milestones require holders of conditional permits to complete
contracting for construction of their systems within one year of grant of the
permit. Additionally, the satellites must be operational within six years of
grant. For permits issued after January 19, 1996, permittees must complete
construction of the first satellite in their system within four years of grant
of the permit. The FCC also may impose other conditions on the grant of the
permit. The holders of new DBS authorizations issued on or after January 19,
1996 must also provide DBS service to Alaska and Hawaii. We are presently not
able to satisfy this requirement with EchoStar IV. Accordingly, we have
requested a waiver of that requirement. The state of Hawaii has requested many
conditions to such a waiver, and we have opposed several of these conditions.
Those holding DBS permits as of January 1996 must provide DBS service to Hawaii
or Alaska from at least one of their DBS satellites or they will have to
relinquish their western assignments.
Subject to applicable regulations governing non-DBS operations, a licensee
may make unrestricted use of its assigned frequencies for non-DBS purposes
during the first five years of the ten-year license term. After the first five
years, the licensee may continue to provide non-DBS service as long as at it
dedicates at least one-half of its total capacity at a given orbital location to
providing DBS service. Further, the FCC indicated its desire to streamline and
revise its rules governing DBS satellites. We cannot be sure about the content
and effect any new DBS rules might have on our business.
CERTAIN OTHER COMMUNICATIONS ACT PROVISIONS. As a distributor of
television programming, we are also affected by numerous laws and regulations,
including the Communications Act.
We believe that we remain free to set prices and serve customers according
to our business judgment, without rate regulation or the statutory obligation
under Title II of the Communications Act to avoid undue discrimination among
customers. Even if, under a future interpretation of the 1996 Act, we were
classified as a telecommunications carrier subject to Title II, we believe that
such reclassification would not likely increase substantially the regulatory
burdens imposed on us or have an adverse impact on our DBS operations, although
we can not be certain.
We believe that, because we are engaged in a subscription television
programming service, we are not subject to many of the regulatory obligations
imposed upon broadcast licensees. However, the FCC could determine in the future
that we should be treated as a broadcast licensee. In fact, certain parties have
requested such treatment. If the FCC determined that we are a broadcast
licensee, we could be required to comply with all regulatory obligations imposed
upon broadcast licensees.
The Communications Act, and the FCC's implementing regulations, provide
that when subsidiaries of a holding company hold certain types of FCC
licenses, foreign nationals or their representatives may not own in excess of
25% of the total votes or equity of record of the holding company, considered
on a fully-diluted basis, except after an FCC public interest determination.
Although the FCC's International Bureau has ruled that these limitations do
not apply to providers of DBS services, certain parties have challenged that
ruling. The FCC has not acted on that challenge. These foreign ownership
limitations would apply to our fixed satellite service authorizations if we
call ourselves a common carrier, or if the FCC decides to treat us as such a
carrier. The FCC has noted that we propose to operate one of our proposed
satellite systems on both a common and non-common carrier basis.
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A recent survey of our equity owners disclosed that our foreign
ownership was less than 5%, which is well below these limitations, if they
applied. However, the 110 acquisition contemplates the issuance of common
stock to an Australian corporation that would exceed the alien ownership
limitations if they applied. We filed a petition for a declaratory ruling
that it is in the public interest to waive any applicable limitations to
allow this issuance. Under currently effective precedent, that type of waiver
is only required if we propose to conduct common carrier or broadcast
operations. After coordination with the FCC staff and in the interest of
expediting consideration of our application before the full FCC, we withdrew
the petition. We may need to re-file that petition for consideration by the
FCC's International Bureau under delegated authority to be able to consumate
the 110 acquisition. We do not know how the FCC will rule with respect to
this petition, if re-filed. The FCC could grant our waiver, deny the waiver,
or impose adverse conditions on the waiver.
If we do not comply with applicable Communications Act requirements and FCC
rules, regulations, policies, and orders, the FCC could revoke, condition, or
decline to review or decline to extend an authorization.
THE TELECOMMUNICATIONS ACT OF 1996. The 1996 Act clarifies that the FCC
has exclusive jurisdiction over direct-to-home satellite services. It further
clarifies that criminal penalties may be imposed for piracy of direct-to-home
satellite services. The 1996 Act also offers DBS operators relief from
private and local government-imposed restrictions on the placement of
receiving antennas. In some instances, DBS operators have been unable to
serve areas due to laws, zoning ordinances, homeowner association rules, or
restrictive property covenants banning the installation of antennas on or
near homes. The FCC recently announced rules designed to implement Congress'
intent. The FCC's rules prohibit most organizations from imposing
restrictions on the installation of antennas, including DBS satellite dishes
smaller than one meter, on or near homes, unless the restriction is necessary
for safety or preservation of a recognized historic district. Local
governments and associations can apply to the FCC for a waiver of this rule
based on local concerns of a highly specialized or unusual nature. In
November 1998, the FCC extended these rules to allow renters to install
antennas within their leaseholds (i.e., homes, gardens, patios, terraces and
balconies). The FCC declined to extend the rules to permit the installation
of antennas on common property or on property to which a viewer was not
permitted access, such as the locked roof of an apartment building. Several
groups have filed appeals against the November order. The 1996 Act also
pre-empted local governments from imposing taxes or fees on direct-to-home
satellite services, including DBS. Finally, the 1996 Act required that
multi-channel video programming distributors, including DBS operators, fully
scramble or block channels providing indecent or sexually explicit adult
programming. If a multi-channel video programming distributor cannot fully
scramble or block such programming, it must restrict transmission to those
hours of the day when minors are unlikely to view the programming.
THE CABLE ACT. In addition to regulating pricing practices and competition
within the franchise cable television industry, the Cable Act was intended to
establish and support existing and new multi-channel video service providers,
such as wireless cable and DBS. We have benefited from the programming access
provisions of the Cable Act and implementing rules, in that we have been able to
gain access to previously unavailable programming services and, in some
circumstances, have obtained certain programming services at reduced cost. Our
business and future results of operations could suffer if the Cable Act or any
of the related rules are amended, or interpreted differently in the future. For
example, if cable companies, or any affiliated entities, could discriminate
against competitors like us with regard to programming access, or the terms on
which such programming was available, our ability to acquire programming on a
cost-effective basis would be impaired. Certain of the restrictions on
cable-affiliated programmers will expire in 2002 unless the FCC extends such
restrictions.
On May 19, 1998, we filed a complaint against Comcast Corporation, a major
cable provider, seeking access to the sports programming controlled by Comcast
in the Philadelphia area. On January 22, 1999, the FCC denied this complaint,
partly on the basis that Comcast's programming is delivered terrestrially and
therefore is not subject to the program access prohibitions. We cannot be
certain whether or not other cable operators that control production or
distribution of their own programming would switch to terrestrial transmission
of their programming and seek to rely on the FCC's denial of our complaint
against Comcast in order to deny us access to their programming. We also cannot
be certain whether or not these companies would seek to acquire sports
franchises and exclusively distribute the corresponding programming, which could
possibly limit our access to popular sports programming.
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On January 14, 1999, we filed a program access complaint with the FCC
against Speedvision Network, L.L.C. and Outdoor Life Network, L.L.C. seeking
access to the programming controlled by these two networks. Our program
access complaint alleges that the conduct of Speedvision and Outdoor Life
Network in cutting off our access to programming after five days of carriage
constitutes an unreasonable refusal to deal and a prohibited unfair practice
under the Communications Act and the FCC's rules. Speedvision and Outdoor
Life Network have answered and moved to dismiss that complaint, and we cannot
be sure how the FCC will act on our complaint. Speedvision has cut off the
service allegedly based on its view that we breached a November 1998 contract
between the parties and has sued us in federal district court in Connecticut
requesting several remedies. We cannot be sure how the court will rule on
Speedvision's and Outdoor Life Network's complaint.
Pursuant to the Cable Act, the FCC recently imposed public interest
requirements upon DBS licensees that include the obligation to set aside four
percent of the licensee's channel capacity exclusively for non-commercial
programming of an educational or informational nature provided by national
educational programming suppliers. Among other constraints, the FCC defined
relatively narrowly the type of suppliers for which this capacity must be
reserved. They also required that the capacity be made available at
substantially below cost rates. The FCC also applied to DBS service providers
the requirement of providing reasonable access to air-time at favored low rates,
and equal opportunity, for certain qualified candidates for public office.
Although DBS operators are not currently subject to the "must carry"
requirements of the Cable Act, the cable industry and broadcast interests
have argued that DBS operators should be subject to these requirements. The
"must carry" rules generally require cable operators to carry all the local
broadcast stations in areas they serve, not just the four major networks. The
broadcasters also argue that satellite companies should not be allowed to
provide local-into-local network service unless they also become subject to
these requirements. If the "must carry" requirements of the Cable Act are
revised to include DBS operators, or if Congress enacts new legislation of a
similar nature, our plans to provide local programming will be adversely
affected.
CERTAIN OTHER RULEMAKINGS. The FCC recently proposed to allocate
additional "expansion" spectrum for DBS operators starting in 2007. DIRECTV has
filed an application for a satellite system using those expansion frequencies.
Foreign satellite systems also are potential providers of DBS service
within the United States. In May 1996, in its DISCO II proceeding, the FCC
proposed permitting non-U.S. satellite systems to serve the United States if the
home country of the foreign-licensed satellite offers open "effective
competitive opportunities" in the same satellite service to U.S. licensed
satellites. In the February 1997 World Trade Organization Agreement, the United
States offer contained an exemption from market opening commitments for, among
other things, DBS and direct-to-home satellite services. In November 1997, the
FCC released new rules that maintained the effective competitive opportunities
test with respect to foreign-licensed satellites seeking to provide DBS and
direct-to-home satellite services in the United States. The FCC also established
a strong presumption in favor of authorizing foreign-licensed satellites to
provide services other than DBS and direct-to-home satellite in the United
States.
The FCC has proposed allowing non-geostationary orbit fixed satellite
services to operate on a co-primary basis in the same frequency as DBS and
Ku-band FSS services. If the proposal is adopted, these satellite operations
could provide global high-speed data services. This would, among other
things, create additional competition for satellite and other services. The
FCC has also requested comment on a request that would allow a terrestrial
service proposed by Northpoint Communications, Inc. to retransmit local
television signals and provide data services to DBS subscribers. Both of
these proposed operations, if authorized and implemented, may cause
interference in the DBS spectrum.
LOCAL NETWORK SIGNALS. We believe that our ability to deliver local
programming via satellite into the markets from which the programming originates
might help us attract subscribers who would not otherwise be willing to purchase
satellite systems. Although we have commenced providing local network service to
eligible subscribers in various metropolitan centers, subject to certain
conditions, our ability to provide such a service is limited as detailed below.
SATELLITE HOME VIEWER ACT AND RETRANSMISSION CONSENT. In order to
retransmit network station programming, satellite companies, including us, must
have a copyright license and must obtain the retransmission consent of the
station concerned, subject to certain exceptions. Through our agreement with
News Corporation,
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<PAGE>
we will receive the right to retransmit programming from local FOX Network-owned
and operated stations. However, we have not yet consummated and we can not
provide any assurance that we will be able to consummate the transaction.
Likewise, we may not be able to obtain the retransmission consents from any
other network station.
The Satellite Home Viewer Act establishes a "statutory" or compulsory
copyright license that generally allows a DBS operator, for a
statutorily-established fee, to retransmit local network signals to
subscribers for private home viewing so long as that retransmission is
limited to those persons in "unserved households." An "unserved household,"
with respect to a particular television network, is defined as one that
cannot receive a specified quality over-the-air network signal of a primary
network station affiliated with that network with a conventional outdoor
rooftop antenna. That household must not, during the 90 days prior to
subscribing to the DBS service, have subscribed to a cable service that
provides the signal of an affiliate of that network. While we believe that
the Satellite Home Viewer Act could be interpreted in a way that would allow
us to retransmit local programming to certain local markets via satellite, we
also believe that the compulsory copyright license under the Satellite Home
Viewer Act may not be sufficient to permit us to implement our strategy to
retransmit such programming in the most efficient and comprehensive manner.
In the process of setting royalty rates for broadcast signal
retransmissions, the Librarian of Congress published a final ruling (on
review from a Copyright Arbitration Royalty Panel's recommendation) in
October 1997. With respect to "local-into-local" retransmissions, the
Librarian affirmed the zero rate for satellite retransmission of a
superstation signal within the station's local market - a recommendation that
we had supported. The Librarian modified the panel's recommendation by also
establishing a zero rate for secondary transmissions of a network station's
signal to "unserved households" within the station's local market. The
Librarian also reviewed the panel's recommendation on the meaning of
"unserved households." The panel had determined that the statutory license
does not cover such retransmissions and the panel did not have jurisdiction
to recommend a rate for them. The Librarian decided that the law is silent on
the issue. Accordingly, he could not definitively say that the panel's
decision is arbitrary or contrary to law. At the same time, the Librarian
determined that the Copyright Office retains the authority to rule on the
permissibility of secondary transmissions of a network station's signal to
households within that station's local market.
In December 1997, we petitioned the Copyright Office to issue a rule
confirming that the statutory license provided by the Satellite Home Viewer Act
and related copyright law allow a satellite carrier to retransmit the local
network signals of the respective local network affiliates. In January 1998, the
Copyright Office initiated a rulemaking proceeding to determine whether the
copyright law permits such "local-into-local" retransmissions. Our petition and
subsequent comments have been opposed by, among others, certain sports leagues,
representatives of the cable industry, several television networks and their
broadcast affiliates, and the Motion Picture Association of America. The staffs
of the San Francisco Regional Office and the Bureau of Economics of the Federal
Trade Commission supported our position. We do not know if these proceedings
will result in a favorable ruling for us.
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<PAGE>
In case the Copyright Office does not conduct a rulemaking proceeding or
that any such rulemaking may not provide a favorable result to us, we are
continuing to pursue the passage of legislation that would clarify and extend
current laws with respect to local network signals. We do not know whether we
will be successful in this effort. Further, if a court or administrative agency
rejected our interpretation of "unserved household" and legislation does not
pass that clarifies and extends the scope of the compulsory license, we may have
to engage in the relatively cumbersome process of obtaining copyright licenses
from all individual copyright holders instead. Without new legislation in this
area or a favorable outcome in the rulemaking, we do not know whether we would
be successful in any copyright infringement or FCC litigation with copyright
owners or broadcasters regarding the legality of certain local-into-local
network retransmissions. The same is true if we were unable to successfully
negotiate individual copyright licenses and retransmission consent agreements,
if necessary.
DISTANT SIGNALS. The national networks and local affiliate stations
have recently sued PrimeTime 24 Joint Venture, a satellite company that
provides certain network programming to satellite companies. Until July
1998, we obtained network programming through PrimeTime 24 also. The lawsuit
challenges PrimeTime 24's methods of selling network programming to consumers
based upon infringement of copyright. The United States District Court for
the Southern District of Florida has entered nationwide preliminary and
permanent injunctions preventing PrimeTime 24 from selling its programming to
consumers unless the programming was sold in accordance with certain
stipulations in the injunction. The preliminary injunction took effect on
February 28, 1999, and the permanent injuction is set to take effect on April
30, 1999. The injunctions cover PrimeTime 24's "distributors" as well. The
plaintiff in the Florida litigation informed us that it considered us a
"distributor" for purposes of that injunction. A federal district court in
North Carolina has also issued an injunction against PrimeTime 24 prohibiting
certain distant signal retransmission to homes delineated by a contour in the
Raleigh area.
During July 1998, we ceased delivering PrimeTime 24 programming. Instead,
we began to uplink and distribute network signals directly. We have also
implemented specific compliance procedures that materially restrict the market
in which we can sell and deliver those network signals. CBS and other broadcast
networks have informed us that they believe our method of providing distant
network programming violates the Satellite Home Viewer Act and hence infringes
their copyright.
In October 1998, we filed a declaratory judgment action in the United
States District Court for the District of Colorado against the four major
networks. In the future, we might attempt to certify a class including the
networks as well as any and all owned and operated stations and any independent
affiliates. We have asked the court to enter a judgment declaring that our
method of providing distant network programming does not violate the Satellite
Home Viewer Act and hence does not infringe the networks' copyrights.
In November 1998, the CBS, ABC, NBC and FOX networks and their affiliate
groups filed a complaint in the federal district court in Miami against us
alleging copyright infringement. They have also requested the issuance of a
preliminary injunction against us. The networks also filed a counter claim
containing similar allegations against us in the Colorado litigation. We could
incur significant damages and have additional material restrictions imposed
against the sale of network signals if we were to lose in this litigation. Among
other things, we could be required to terminate delivery of distant network
signals to a material portion of our subscriber base. Further restrictions on
the sale of network channels imposed in the future could result in decreases in
subscriber activations and subscription television services revenue and an
increase in subscriber turnover.
The Satellite Home Viewer Act permits satellite retransmission of distant
network signals only to "unserved households." The determination of whether a
household qualifies as "unserved" for the purpose of being eligible to receive a
distant network signal depends, in part, on whether that household can receive a
signal of "Grade B intensity" as defined by the FCC. On November 17, 1998, in
response to petitions for rulemaking that we and the National Rural
Telecommunications Cooperative filed, the FCC released a notice of proposed
rulemaking concerning the term "Grade B intensity" as used in the Satellite Home
Viewer Act. The notice of proposed rulemaking requested comment and/or made
tentative proposals, on among other things:
- the extent of the FCC's authority in connection with the definition,
prediction, and measurement of Grade B intensity;
- changing the definition of Grade B intensity so that truly unserved
households can be better identified;
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<PAGE>
- endorsing or developing a methodology for accurately predicting whether
an individual household is able to receive a signal of Grade B
intensity; and
- developing an easy-to-use and inexpensive method for testing the
strength of a broadcast network signal at an individual household.
The FCC also noted that it does not "appear to have the statutory authority
to prevent most of PrimeTime 24's subscribers from losing their network service
under the Miami injunction. The notice of proposed rulemaking was the subject of
extensive comments by, among others, the satellite industry (including us), the
networks and broadcast affiliates, and several sports leagues.
In February 1999, the FCC released its report and order on the
proceeding. Although the FCC declined to change the values of Grade B
intensity, it adopted a method for measuring it at particular households. The
FCC also endorsed a method for predicting Grade B intensity at particular
households. We cannot be sure whether these methods are favorable to us or
what weight, if any, the courts will give to the FCC's decision. We also
cannot be certain whether the application of these methods by the courts will
result in termination of distant signal delivery to a material portion of our
subscribers and decreases in future subscriber activations. See "LEGAL
PROCEEDINGS" for additional information regarding specific proceedings we are
involved in.
With respect to the royalty rate for retransmission of distant network
and superstation signals, the Librarian of Congress set the rate at 27 cents
per subscriber per month - a significant increase over the previously
applicable rates. While judicial review of this ruling is pending, the new
rate became effective on January 1, 1998.
EXPORT REGULATION. From time to time, we require import licenses and
general destination export licenses to receive and deliver components of
direct-to-home satellite TV systems. In addition, the delivery of satellites
and related technical information for the purpose of launch by a non-U.S.
launch services provider is subject to strict export control and prior
approval requirements. We have contemplated the possibility of satellite
launches by such non-U.S. providers for our next planned satellites, and
cannot be sure that the requisite approvals will be received.
PATENTS AND TRADEMARKS
We use a number of trademarks for our products and services, including
"EchoStar," "DISH Network," "America's Top 40," and others. We have registered
some of these trademarks. We believe that those trademarks that we have not
registered are generally protected by common law and state unfair competition
laws. Although we believe that these trademarks are not essential to our
business, we have taken affirmative legal steps to protect those trademarks in
the past and intend to actively protect these trademarks in the future.
We have been assigned certain patents for products and product components
that we sell. We do not consider any of these to be significant to our
continuing operations. In addition, we have obtained and, although no assurances
can be given, expect to obtain licenses for certain patents necessary to the
manufacture and sale of DBS receivers and related components. We have been
notified that certain features of the EchoStar receiver system allegedly
infringe on patents held by others, and that we therefore owe royalties. We are
investigating these allegations of infringement and, if appropriate, we would
vigorously defend against any suit filed by the parties. We do not know whether
we would be able to successfully defend any suit, if brought, or if we would be
able to obtain a license for any patent that might be required.
EMPLOYEES
We had 3,815 employees at December 31, 1998, of which 3,750 worked in our
domestic operations and 65 worked in our international operations. We are not a
party to any collective bargaining agreement and generally consider relations
with our employees to be good.
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EXECUTIVE OFFICERS OF THE REGISTRANT
(FURNISHED IN ACCORDANCE WITH ITEM 401 (b) OF REGULATION S-K, PURSUANT TO
GENERAL INSTRUCTION G(3) OF FORM 10-K)
The following table sets forth the name, age and offices with EchoStar of
each of our executive officers, the period during which each executive officer
has served as such, and each executive officer's business experience during the
past five years:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------------------ --- ---------------------------------------------------
<S> <C> <C>
Charles W. Ergen.......................... 46 Chairman, Chief Executive Officer and President
James DeFranco............................ 46 Executive Vice President and Director
Michael T. Dugan.......................... 50 President, EchoStar Technologies Corporation
Steven B. Schaver......................... 45 Chief Operating and Financial Officer
David K. Moskowitz........................ 40 Senior Vice President, General Counsel, Secretary
and Director
Mark W. Jackson........................... 38 Senior Vice President, Satellite Services
Soraya Hesabi-Cartwright.................. 38 Senior Vice President, Human Resources and Customer
Service
</TABLE>
CHARLES W. ERGEN. Mr. Ergen has been Chairman of the Board of Directors,
President and Chief Executive Officer of EchoStar since its formation and,
during the past five years, has held various executive officer positions with
EchoStar's subsidiaries. Mr. Ergen, along with his spouse and James DeFranco,
was a co-founder of EchoStar in 1980.
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 executive officer
positions with EchoStar's subsidiaries. Mr. DeFranco, along with Mr. Ergen and
Mr. Ergen's spouse, was a co-founder of EchoStar in 1980.
MICHAEL T. DUGAN. Mr. Dugan is the President of EchoStar Technologies
Corporation (formerly Houston Tracker Systems, Inc). In that capacity, Mr.
Dugan is responsible for, among other things, all engineering operations at
EchoStar. Previously he was the Senior Vice President of the Consumer Products
Division of EchoStar. Mr. Dugan has been with EchoStar since 1990.
STEVEN B. SCHAVER. Mr. Schaver was named EchoStar's Chief Financial
Officer 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.
DAVID K. MOSKOWITZ. Mr. Moskowitz is the Senior Vice President, Secretary
and General Counsel of EchoStar. Mr. Moskowitz joined EchoStar in March 1990.
He was elected to our Board of Directors during 1998. Mr. Moskowitz is
responsible for all legal affairs of EchoStar and its subsidiaries.
MARK W. JACKSON. Mr. Jackson was named Senior Vice President, Satellite
Services, in December 1997. From April 1993 until December 1997 Mr. Jackson
served as Vice President, Engineering at EchoStar.
SORAYA HESABI-CARTWRIGHT. Ms. Hesabi-Cartwright was named Senior Vice
President, Human Resources and Customer Service in November 1998. Ms.
Hesabi-Cartwright joined EchoStar in 1994 as Director of Human Resources and was
promoted to Vice President of Human Resources in 1996. During 1996, Ms.
Hesabi-Cartwright transferred to EchoStar's Customer Service Center as Vice
President of Customer Service, where she served until her promotion in 1998.
Prior to joining EchoStar in 1994, Ms. Hesabi-Cartwright was employed at Pace
Membership Warehouse, most recently as Director of Human Resources and
Development. Pace Membership Warehouse is a consumer products wholesale
membership warehouse.
There are no family relationships among the executive officers and
directors of EchoStar or arrangements or understandings between any executive
officer and any other person pursuant to which any executive officer was
selected as such. Pursuant to the Bylaws of EchoStar, executive officers serve
at the discretion of the Board of Directors.
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ITEM 2. PROPERTIES
The following table sets forth certain information concerning our
material properties:
<TABLE>
<CAPTION>
Approximate Owned or
Description/Use Location Square Footage Leased
- ----------------------------------------------- ------------------------ ------------------ --------------
<S> <C> <C> <C>
Corporate headquarters and customer service
center................................... Littleton, Colorado 156,000 Owned
EchoStar Technologies Corporation office and
distribution center...................... Englewood, Colorado 155,000 Owned
Warehouse and distribution center........... Denver, Colorado 132,800 Leased
Customer service center..................... McKeesport, Pennsylvania 100,000 Leased
Office and distribution center.............. Sacramento, California 78,500 Owned
Digital broadcast operations center......... Cheyenne, Wyoming 55,000 Owned
Customer service center..................... Thornton, Colorado 55,000 Owned
European headquarters and warehouse......... Almelo, The Netherlands 53,800 Owned
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
THE NEWS CORPORATION LIMITED
During February 1997, EchoStar and News Corporation announced an
agreement pursuant to which, among other things, News Corporation agreed to
acquire approximately 50% of the outstanding capital stock of EchoStar. News
Corporation also agreed to make available for use by EchoStar the DBS permit for
28 frequencies at the 110DEG. WL orbital slot purchased by MCI for more than
$682 million following a 1996 FCC auction. During late April 1997, substantial
disagreements arose between the parties regarding their obligations under this
agreement. Those substantial disagreements led the parties to litigation. In
mid-1997, EchoStar filed a complaint seeking specific performance of this
agreement and damages, including lost profits. News Corporation filed an answer
and counterclaims seeking unspecified damages, denying all of the material
allegations and asserting numerous defenses. Discovery commenced in July 1997,
and the case was set for trial commencing March 1999. In connection with the
pending 110 acquisition, the litigation between EchoStar and News Corporation
will be stayed and will be dismissed with prejudice upon closing or if the
transaction is terminated for reasons other than the breach by, or failure to
fill a condition within the control of, News Corporation or MCI.
In connection with the News Corporation litigation that arose in 1997,
EchoStar has a contingent fee arrangement with its lawyers, which provides for
the lawyers to be paid a percentage of any net recovery obtained in its dispute
with News Corporation. Although they have not been specific, the lawyers have
asserted that they may be entitled to receive payments in excess of $80 million
to $100 million under this fee arrangement in connection with the settlement of
the dispute with News Corporation. EchoStar intends to vigorously contest the
lawyers' interpretation of the fee arrangement, which it believes significantly
overstates the magnitude of its liability thereunder. If the lawyers and
EchoStar are unable to resolve this fee dispute under the fee arrangement, the
fee dispute would be resolved under arbitration. It is too early to determine
the outcome of negotiations or arbitration regarding this fee dispute.
WIC PREMIUM TELEVISION LTD.
On July 28, 1998, a lawsuit was filed by WIC Premium Television Ltd.
("WIC"), an Alberta corporation, in the Federal Court of Canada Trial Division,
against certain defendants which include: General Instrument Corporation, HBO,
Warner Communications, Inc., John Doe, Showtime, USSB, ECC and two of ECC's
wholly-owned subsidiaries, Dish, Ltd. and Echosphere. The lawsuit seeks, among
other things, an interim and permanent injunction prohibiting the defendants
from activating receivers in Canada and from infringing any copyrights held by
WIC. It is too early to determine whether or when any other lawsuits and/or
claims will be filed. It is also too early to make an assessment of the
probable outcome of the litigation or to determine the extent of any potential
liability or damages.
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<PAGE>
On September 28, 1998, WIC filed another lawsuit in the Court of Queen's
Bench of Alberta Judicial District of Edmonton against certain defendants, which
also include ECC, Dish, and Echosphere. WIC is a company authorized to
broadcast certain copyrighted work, such as movies and concerts, to residents of
Canada. WIC alleges that the defendants engaged in, promoted, and/or allowed
satellite dish equipment from the United States to be sold in Canada and to
Canadian residents and that some of the defendants allowed and profited from
Canadian residents purchasing and viewing subscription television programming
that is only authorized for viewing in the United States. The lawsuit seeks,
among other things, interim and permanent injunction prohibiting the defendants
from importing hardware into Canada and from activating receivers in Canada and
damages in excess of the equivalent of US $175 million. It is too early to
determine whether or when any other lawsuits and/or claims will be filed. It is
also too early to make an assessment of the probable outcome of the litigation
or to determine the extent of any potential liability or damages.
BROADCAST NETWORK PROGRAMMING
Section 119 of the Satellite Home Viewer Act authorizes EchoStar to
substitute satellite-delivered network signals its subscribers, but only if
those subscribers qualify as "unserved" households, defined in the Satellite
Home Viewer Act, those that, among other things, "cannot receive, through the
use of a conventional outdoor rooftop receiving antenna, an over-the-air signal
of Grade B intensity (as defined by the FCC) of a primary network station
affiliated with that network." Historically, EchoStar obtained distant
broadcast network signals for distribution to its subscribers through
PrimeTime 24, Joint Venture ("PrimeTime 24"). PrimeTime 24 also distributes
network signals to certain of EchoStar's competitors in the satellite industry.
The national networks and local affiliate stations have recently
challenged PrimeTime 24's methods of selling network programming (national
and local) to consumers based upon infringement of copyright. The United
States District Court for the Southern District of Florida has entered
nationwide preliminary and permanent injunctions preventing PrimeTime 24 from
selling its programming to consumers unless the programming was sold in
accordance with certain stipulations in the injunction. The preliminary
injunction took effect on February 28, 1999, and the permanent injunction is
set to take effect on April 30, 1999. The injunctions cover "distributors" as
well. The plaintiff in the Florida litigation informed EchoStar that it
considered EchoStar a "distributor" for purposes of that injunction. A
federal district court in North Carolina has also issued an injunction
against PrimeTime 24 prohibiting certain distant signal retransmissions to
homes delineated by a contour in the Raleigh area. Other copyright litigation
against PrimeTime 24 is pending.
EchoStar ceased delivering PrimeTime 24 programming in July 1998, and
began uplinking and distributing network signals directly. EchoStar has also
implemented Satellite Home Viewer Act Section 119 compliance procedures which
will materially restrict the market for the sale of network signals by
EchoStar. CBS and other broadcast networks have informed EchoStar that they
believe EchoStar's method of providing distant network programming violates the
SHVA and hence infringes their copyright.
On October 19, 1998, EchoStar filed a declaratory judgment action in the
United States District Court for the District of Colorado against the four major
networks. In the future, EchoStar may attempt to certify a class including the
networks as well as any and all owned and operated stations and any independent
affiliates. EchoStar has asked the court to enter a judgment declaring that its
method of providing distant network programming does not violate the Satellite
Home Viewer Act and hence does not infringe the networks' copyrights.
On November 5, 1998, several broadcast parties, acting on prior threats
filed a complaint alleging, among other things, copyright infringement against
EchoStar in federal district court in Miami. The plaintiffs in that action have
also requested the issuance of a preliminary injunction against EchoStar. The
networks also filed a counter claim containing similar allegations against us in
the Colorado litigation.
On February 24, 1999, CBS, NBC, Fox, and ABC filed with the court a "Motion
for Temporary Restraining Order, Preliminary Injunction, and Contempt Finding"
against DIRECTV in response to an announcement by DIRECTV that it was
discontinuing retransmission of the programming of the four networks received
from PrimeTime 24 and would instead distribute its own package of network
affiliates to its existing subscribers. On February 25, 1999, the court granted
CBS and Fox a temporary restraining order requiring DIRECTV and its agents and
those who act in active concert or participation with DIRECTV, not to deliver
CBS or Fox programming to subscribers who do not live in "unserved households."
For purposes of determining whether a subscriber is "unserved," the court
referred to a modified version of the Longley-Rice signal propagation model. The
modifications
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<PAGE>
in some respects reflect an order adopted by the FCC on February 2, 1999. On
March 12, 1999, DIRECTV and the four major broadcast networks and their
affiliates announced that they have reached a settlement of that dispute.
Under the terms of the settlement, DIRECTV, stations and networks have agreed
on a timeframe to disconnect distant broadcast network signals from
subscribers predicted to be ineligible based on a modified version of the
Longley-Rice signal propagation model. Subscribers predicted to be ineligible
who obtain consent from the affected affiliate stations to receive their
signals via satellite will not lose receipt of their distant network signals.
We are not sure what effect this development will have on our business.
On March 24, 1999, we have a hearing scheduled in a Denver court on similar
matters with similar parties. If we were to lose that hearing, it is likely
that the broadcasters would move forward on their lawsuit filed in Miami and
would seek similar remedies against us, including a temporary restraining order
requiring us to stop delivering network signals to subscribers who do not live
in "unserved households." Depending upon the terms, a restraining order could
result in us having to terminate delivery of network signals to a material
portion of our subscriber base, which could result in decreases in subscriber
activations and subscription television services revenue and an increase in
subscriber turnover.
We are subject to various other legal proceedings and claims which
arise in the ordinary course of our business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect the our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted to a vote of security holders during the
fourth quarter of 1998.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Class A common stock is quoted on the Nasdaq Stock Market under
the symbol "DISH." The high and low closing sale prices of the Class A common
stock during 1997 and 1998 on the Nasdaq Stock Market (as reported by Nasdaq)
are set forth below:
<TABLE>
<CAPTION>
1997 High Low
---- -------- -------
<S> <C> <C>
First Quarter 26 3/4 15
Second Quarter 21 3/8 11 3/8
Third Quarter 24 1/4 13 1/2
Fourth Quarter 25 15/16 14 1/2
<CAPTION>
1998
----
<S> <C> <C>
First Quarter 23 1/8 16 5/8
Second Quarter 31 22 1/2
Third Quarter 29 5/8 17 5/8
Fourth Quarter 48 3/8 20 1/4
</TABLE>
As of March 5, 1999, there were approximately 2,279 holders of record
of our Class A common stock, not including stockholders who beneficially own
Class A common stock held in nominee or street name. As of March 5, 1999, all
29,804,401 outstanding shares of our Class B common stock were held by Charles
W. Ergen, our Chief Executive Officer. There is currently no trading market
for our Class B common stock.
We have never declared or paid any cash dividends on any class of
our common stock and do not expect to declare dividends on our common stock
in the foreseeable future. Payment of any future dividends will depend upon
our earnings and capital requirements, restrictions in our debt facilities,
and other factors the Board of Directors considers appropriate. We currently
intend to retain our earnings, if any, to support future growth and
expansion. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES."
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of and for each of the
five years ended December 31, 1998 have been derived from, and are qualified by
reference to, our, and our predecessor entities, Consolidated Financial
Statements which have been audited by Arthur Andersen LLP, independent public
accountants. This data should be read in conjunction with our Consolidated
Financial Statements and related Notes thereto for the three years ended
December 31, 1998, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------- ----------- ----------- ---------- ------------
STATEMENTS OF OPERATIONS DATA (IN THOUSANDS, EXCEPT SUBSCRIBERS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
REVENUE:
DISH Network ................................ $ -- $ -- $ 60,132 $ 344,250 $ 683,032
DTH equipment sales and integration services -- 35,816 78,062 91,637 256,193
Satellite services .......................... -- -- 5,822 11,135 22,366
C-band and other ............................ 179,313 112,704 54,885 30,396 21,075
----------- ----------- ----------- ----------- -----------
Total revenue ................................ 179,313 148,520 198,901 477,418 982,666
COSTS AND EXPENSES:
DISH Network operating expenses ............. -- -- 42,456 193,274 395,411
Cost of sales - DTH equipment and integration
services ................................... -- 30,404 76,384 61,992 173,388
Cost of sales - C-band and other ............ 133,635 84,846 42,349 23,909 16,496
Marketing expenses .......................... 2,346 1,786 51,520 179,923 320,521
General and administrative .................. 27,873 36,397 52,123 69,315 97,105
Depreciation and amortization ............... 2,243 3,114 43,414 173,276 102,636
----------- ----------- ----------- ----------- -----------
Total costs and expenses ..................... 166,097 156,547 308,246 701,689 1,105,557
----------- ----------- ----------- ----------- -----------
Operating income (loss) ...................... $ 13,216 $ (8,027) $ (109,345) $ (224,271) $ (122,891)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income (loss) ............................ $ 90 $ (11,486) $ (100,986) $ (312,825) $ (260,882)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net loss attributable to common shares ....... $ (849) $ (12,690) $ (102,190) $ (321,267) $ (296,097)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted-average common shares outstanding ... 32,442 35,562 40,548 41,918 44,982
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Basic and diluted loss per share (1) ......... $ (0.03) $ (0.36) $ (2.52) $ (7.66) $ (6.58)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------
1994 1995 1996 1997
------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE SHEETS DATA
Cash, cash equivalents and
marketable investment
securities ......................... $ 48,544 $ 37,424 $ 58,038 $ 420,514
Restricted cash and marketable
investment securities (4) .......... 196,831 99,691 79,291 187,762
Total assets ........................ 472,492 623,091 1,141,380 1,805,646
Long-term obligations (less current
portion):
1994 Notes .......................... 334,206 382,218 437,127 499,863
1996 Notes .......................... -- -- 386,165 438,512
1997 Notes .......................... -- -- -- 375,000
Senior Exchange Notes ............... -- -- -- --
9 1/4% Senior Notes due 2006 ........ -- -- -- --
9 3/8% Senior Notes due 2009 ........ -- -- -- --
Mortgages and other notes payable,
net of current portion ............. 5,393 33,444 51,428 51,846
Series B Preferred Stock .............. -- -- -- 199,164
Total stockholders' equity (deficit) .. 103,808 156,686 61,197 (88,961)
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------
AS ADJUSTED
AS AND PRO
ACTUAL ADJUSTED (2) FORMA (3)
-------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEETS DATA
Cash, cash equivalents and
marketable investment
securities ......................... $ 324,100 $ 353,699 $ 353,699
Restricted cash and marketable
investment securities (4) .......... 77,657 -- --
Total assets ........................ 1,806,852 1,762,883 2,932,883(5)
Long-term obligations (less current
portion):
1994 Notes .......................... 571,674 1,390 1,390
1996 Notes .......................... 497,955 950 950
1997 Notes .......................... 375,000 15 15
Senior Exchange Notes ............... -- 5 5
9 1/4% Senior Notes due 2006 ........ -- 375,000 375,000
9 3/8% Senior Notes due 2009 ........ -- 1,625,000 1,625,000
Mortgages and other notes payable,
net of current portion ............. 43,450 43,450 43,450
Series B Preferred Stock .............. 226,038 -- --
Total stockholders' equity (deficit) .. (371,540) (747,202) 422,798
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
OTHER DATA
DISH Network subscribers ..................... -- -- 350,000 1,040,000 1,940,000
Average monthly revenue per subscriber ....... $ -- $ -- $ 35.50 $ 38.50 $ 39.25
EBITDA(6) .................................... 15,459 (4,193) (65,931) (50,995) (20,255)
Less amortization of subscriber acquisition
costs ....................................... -- -- (16,073) (121,735) (18,869)
------------ ------------ ----------- ----------- -------------
EBITDA, as adjusted to exclude amortization of
subscriber acquisition costs ................ 15,459 (4,193) (82,004) (172,730) (39,124)
Net cash flows from:
Operating activities ....................... 24,205 (20,328) (27,425) 43 (16,890)
Investing activities ....................... (338,565) (38,119) (287,642) (597,249) (8,048)
Financing activities ....................... 325,011 62,695 332,544 703,182 (13,722)
</TABLE>
- ---------------
(1) The earnings (loss) per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards ("FAS")
No. 128, "Earnings Per Share." For further discussion of earnings (loss)
per share and the impact of FAS No. 128, see Note 2 to our Consolidated
Financial Statements.
(2) Balance sheet data as of December 31, 1998 as adjusted to give effect to
the consummation of the tender offers, the concurrent issuance of the Seven
and Ten Year notes, and the repurchase of the 8% Series A Cumulative
Preferred Stock. See "-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-LIQUIDITY AND CAPITAL RESOURCES."
(3) Balance sheet data as of December 31, 1998 further adjusted for the pro
forma effects assuming consummation of the 110 acquisition. See
"-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-LIQUIDITY AND CAPITAL RESOURCES" AND "-BUSINESS-AGREEMENT
WITH NEWS CORPORATION AND MCI."
(4) Restrictions on cash held in escrow under the terms of indentures were
removed as a result of the tender offers. The restricted cash balances as
of December 31, 1998 have been reclassified and included in the "as
adjusted" amount of cash, cash equivalents and marketable investment
securities. The restriction on the insurance receivable of $106 million
(not shown) was also removed. See "-MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-LIQUIDITY AND CAPITAL
RESOURCES."
(5) The increase in total assets includes $1.17 billion of assets to be
acquired by us pursuant to the 110 acquisition offset by an approximately
$48.1 million decrease in total cash, cash equivalents and marketable
investment securities as a result of the tender offers and the redemption
on February 8, 1999, of all of our outstanding Series A Preferred Stock and
related accumulated dividends (approximately $91 million). See
"-BUSINESS-AGREEMENT WITH NEWS CORPORATION AND MCI."
(6) We believe it is common practice in the telecommunications industry for
investment bankers and others to use various multiples of current or
projected EBITDA (earnings before interest, taxes, depreciation and
amortization) for purposes of estimating current or prospective enterprise
value and as one of many measures of operating performance. Conceptually,
EBITDA measures the amount of income generated each period that could be
used to service debt, because EBITDA is independent of the actual leverage
employed by the business; but EBITDA ignores funds needed for capital
expenditures and expansion. Some investment analysts track the
relationship of EBITDA to total debt as one measure of financial strength.
However, EBITDA does not purport to represent cash provided or used by
operating activities and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
EBITDA differs significantly from cash flows from operating activities
reflected in the consolidated statement of cash flows. Cash from operating
activities is net of interest and taxes paid and is a more comprehensive
determination of periodic income on a cash (vs. accrual) basis, exclusive
of non-cash items of income and expenses such as depreciation and
amortization. In contrast, EBITDA is derived from accrual basis income and
is not reduced for cash invested in working capital. Consequently, EBITDA
is not affected by the timing of receivable collections or when accrued
expenses are paid. We are not aware of any uniform standards for
determining EBITDA and believes presentations of EBITDA may not be
calculated consistently by different entities in the same or similar
businesses. EBITDA is shown before and after amortization of subscriber
acquisition costs, which were deferred through September 1997 and amortized
over one year.
25
<PAGE>
Item 7. 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 US OR BY OFFICERS, DIRECTORS OR
EMPLOYEES ACTING ON OUR BEHALF, THAT ARE NOT STATEMENTS OF HISTORICAL FACT
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT COULD
CAUSE OUR ACTUAL RESULTS TO BE MATERIALLY DIFFERENT FROM HISTORICAL RESULTS OR
FROM ANY FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
AMONG THE FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY ARE
THE FOLLOWING: A TOTAL OR PARTIAL LOSS OF A SATELLITE DUE TO OPERATIONAL
FAILURES, SPACE DEBRIS OR OTHERWISE; A DECREASE IN SALES OF DIGITAL EQUIPMENT
AND RELATED SERVICES TO INTERNATIONAL DIRECT-TO-HOME SERVICE PROVIDERS; A
DECREASE IN DISH NETWORK SUBSCRIBER GROWTH; AN INCREASE IN SUBSCRIBER
ACQUISITION COSTS; IMPEDIMENTS TO THE RETRANSMISSION OF LOCAL OR DISTANT
BROADCAST NETWORK SIGNALS WHICH COULD RESULT FROM PENDING LITIGATION OR
LEGISLATION; LOWER THAN EXPECTED DEMAND FOR OUR DELIVERY OF LOCAL BROADCAST
NETWORK SIGNALS; AN UNEXPECTED BUSINESS INTERRUPTION DUE TO THE FAILURE OF
THIRD-PARTIES TO REMEDIATE YEAR 2000 ISSUES; OUR INABILITY TO RETAIN NECESSARY
AUTHORIZATIONS FROM THE FCC; AN INCREASE IN COMPETITION FROM CABLE, DIRECT
BROADCAST SATELLITE, OTHER SATELLITE SYSTEM OPERATORS, AND OTHER PROVIDERS OF
SUBSCRIPTION TELEVISION SERVICES; THE INTRODUCTION OF NEW TECHNOLOGIES AND
COMPETITORS INTO THE SUBSCRIPTION TELEVISION BUSINESS; A MERGER OF EXISTING DBS
COMPETITORS; A CHANGE IN THE REGULATIONS GOVERNING THE SUBSCRIPTION TELEVISION
SERVICE INDUSTRY; THE OUTCOME OF ANY LITIGATION IN WHICH WE MAY BE INVOLVED;
FAILURE TO CONSUMMATE THE 110 ACQUISITION; GENERAL BUSINESS AND ECONOMIC
CONDITIONS; AND OTHER RISK FACTORS DESCRIBED FROM TIME TO TIME IN OUR REPORTS
FILED WITH THE SECURITIES AND EXCHANGE 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 AND SHOULD NOT
PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997.
REVENUE. Total revenue for the year ended December 31, 1998 was
$983 million, an increase of $506 million compared to total revenue for the year
ended December 31, 1997 of $477 million. The increase in total revenue was
primarily attributable to DISH Network subscriber growth combined with increased
revenue from our ETC and Satellite Services business units. We expect that our
revenues will continue to increase as the number of DISH Network subscribers
increases.
DISH Network subscription television services revenue totaled
$669 million for the year ended December 31, 1998, an increase of $370 million
or 124% compared to 1997. This increase was directly attributable to the
increase in the number of DISH Network subscribers. Average DISH Network
subscribers for the year ended December 31, 1998 increased approximately 120%
compared to 1997. As of December 31, 1998, we had approximately 1.9 million
DISH Network subscribers compared to 1.04 million at December 31, 1997. Monthly
revenue per subscriber approximated $39.25 and $38.50 during the years ended
December 31, 1998 and 1997, respectively. DISH Network subscription television
services revenue principally consists of revenue from basic, premium and
pay-per-view subscription television services. DISH Network subscription
television services will continue to increase to the extent we are successful in
increasing the number of DISH Network subscribers and maintaining or increasing
revenue per subscriber.
For the year ended December 31, 1998, DTH equipment sales and
integration services totaled $256 million, an increase of $164 million compared
to 1997. DTH equipment sales consist of sales of digital set-top boxes and
other digital satellite broadcasting equipment by us to international DTH
service operators. We currently have agreements to provide equipment to DTH
service operators in Spain and Canada. The increase in DTH equipment sales and
integration services revenue was primarily attributable to an increase in the
volume of set-top boxes sold.
Substantially all of our ETC revenues have resulted from sales to two
international DTH providers. As a result, our ETC business currently is
economically dependent on these two DTH providers. Our future revenue from
26
<PAGE>
the sale of DTH equipment and integration services in international markets
depends largely on the success of these DTH operators and continued demand for
our digital set-top boxes. Due to an expected decrease in demand combined with
a decrease in the sales price of digital set-top boxes attributable to increased
competition, we expect that our DTH equipment and integration services revenue
will decline during 1999 as compared to 1998. Such revenue may decline in 1999
by as much as 50% as compared to 1998.
During July 1998, Telefonica, one of the two DTH service providers
described above, announced its intention to merge with Sogecable (Canal Plus
Satellite), one of its primary competitors. In October 1998, Telefonica
announced that the merger negotiations had been suspended. Subsequently,
negotiations between Telefonica and Canal Plus Satellite have resumed. Although
we have binding purchase orders from Telefonica for 1999 deliveries of DTH
equipment, we cannot yet predict what impact, if any, consummation of this
merger might have on our future sales to Telefonica. As part of the 110
acquisition, we received a minimum order from a subsidiary of News Corporation
for 500,000 set-top boxes. Although we continue to actively pursue additional
distribution and integration service opportunities internationally, no assurance
can be given that any such additional negotiations will be successful.
Satellite services revenue totaled $22 million during 1998, an
increase of $11 million as compared to 1997. These revenues principally include
fees charged to content providers for signal carriage and revenues earned from
business television, or BTV customers. The increase in satellite services
revenue was primarily attributable to increased BTV revenue due to the addition
of new full-time BTV customers. Satellite services revenue is expected to
increase during 1999 to the extent we are successful in increasing the number of
our BTV customers and developing and implementing new services.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses
totaled $395 million during 1998, an increase of $202 million or 105%, compared
to 1997. The increase in DISH Network operating expenses was consistent with,
and primarily attributable to, the increase in the number of DISH Network
subscribers. DISH Network operating expenses represented 59% and 65% of
subscription television services revenue during 1998 and 1997, respectively.
Although we expect DISH Network operating expenses as a percentage of
subscription television services revenue to decline modestly from 1998 levels in
future periods, this expense to revenue ratio could increase.
Subscriber-related expenses totaled $297 million during 1998, an
increase of $153 million compared to 1997. Such expenses, which include
programming expenses, copyright royalties, residuals payable to retailers and
distributors, and billing, lockbox and other variable subscriber expenses,
represented 44% of subscription television services revenues during 1998
compared to 48% during 1997. The decrease in subscriber-related expenses as a
percentage of subscription television services revenue resulted primarily from a
decrease in programming expenses on a per subscriber basis, which resulted from
a change in product mix combined with price discounts received from certain
content providers.
Customer service center and other expenses principally consist of
costs incurred in the operation of our DISH Network customer service centers,
such as personnel and telephone expenses, as well as subscriber equipment
installation and other operating expenses. Customer service center and other
expenses totaled $72 million during 1998, an increase of $37 million as compared
to 1997. The increase in customer service center and other expenses resulted
from increased personnel and telephone expenses to support the growth of the
DISH Network. Customer service center and other expenses totaled 11% of
subscription television services revenue during 1998 compared to 12% of
subscription television services revenue during 1997. Although we expect
customer service center and other expenses as a percentage of subscription
television services revenue to remain near 1998 levels in the future, this
expense to revenue ratio could increase.
Satellite and transmission expenses include expenses associated with
the operation of our digital broadcast center, contracted satellite telemetry,
tracking and control services, and satellite in-orbit insurance. Satellite and
transmission expenses totaled $26 million during 1998, an $11 million increase
compared to 1997. This increase resulted from higher satellite and other
digital broadcast center operating expenses due to an increase in the number of
operational satellites. We expect satellite and transmission expenses to
continue to increase in the future as additional satellites are placed in
service.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales
- - DTH equipment and integration services totaled $173 million during 1998, an
increase of $111 million compared to 1997. This increase is consistent
27
<PAGE>
with the increase in DTH equipment revenue. Cost of sales - DTH equipment and
integration services principally includes costs associated with digital set-top
boxes and related components sold to international DTH operators. As a
percentage of DTH equipment revenue, cost of sales represented 68% during each
of 1998 and 1997. We expect that cost of sales may increase as a percentage of
DTH equipment revenue in the future, due to price pressure resulting from
increased competition from other providers of DTH equipment.
MARKETING EXPENSES. Marketing expenses totaled $321 million during
1998, an increase of $141 million or 78%, compared to 1997. The increase in
marketing expenses was primarily attributable to the increase in subscriber
promotion subsidies. Subscriber promotion subsidies include the excess of
transaction costs over transaction proceeds at the time of sale of EchoStar
receiver systems, activation allowances paid to retailers, and other promotional
incentives. During all of 1998 we recognized subscriber promotion subsidies as
incurred. These expenses totaled $273 million during 1998, an increase of
$128 million over 1997. This increase resulted from increased subscriber
activations and the immediate recognition of all subscriber promotion subsidies
incurred in 1998, due to the removal of any prepaid subscription requirement.
During 1997, a portion of such expenses were initially deferred and amortized
over the related prepaid subscription term, generally one year. Advertising and
other expenses totaled $48 million during 1998, an increase of $13 million over
1997.
During 1998, our subscriber acquisition costs, inclusive of
acquisition marketing expenses, totaled $314 million, or approximately $285 per
new subscriber activation. Comparatively, our 1997 subscriber acquisition
costs, inclusive of acquisition marketing expenses and deferred subscriber
acquisition costs, totaled $252 million, or approximately $340 per new
subscriber activation. The decrease in our subscriber acquisition costs, on a
per new subscriber activation basis, principally resulted from decreases in the
manufactured cost of EchoStar receiver systems. We expect that our subscriber
acquisition costs, on a per new subscriber activation basis, will increase in
the near-term as we introduce aggressive marketing promotions to acquire new
subscribers. For example, during 1999 we introduced the PrimeStar bounty
program. Our subscriber acquisition costs under this program are significantly
higher than those under our other marketing programs. To the extent that we
either extend the duration of the PrimeStar bounty program or begin to offer
similar bounty programs for other competitors' subscribers, our subscriber
acquisition costs, both in the aggregate and on a per new subscriber activation
basis, will materially increase.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses totaled $97 million during 1998, an increase of $28 million as compared
to 1997. The increase in G&A expenses was principally attributable to increased
personnel expenses to support the growth of the DISH Network. G&A expenses as a
percentage of total revenue decreased to 10% during 1998 compared to 15% during
1997. Although we expect that G&A expenses as a percentage of total revenue
will approximate 1998 levels or decline modestly in the future, this expense to
revenue ratio could increase.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
("EBITDA"). EBITDA was negative $20 million and negative $51 million, during
1998 and 1997, respectively. EBITDA, as adjusted to exclude amortization of
subscriber acquisition costs, was negative $39 million for 1998 compared to
negative $173 million for 1997. This improvement in EBITDA principally resulted
from increases in our ETC and DISH Network revenues. We believe our ability to
repay our existing debt will be significantly influenced by our ability to
continue to improve reported EBITDA. However, EBITDA does not purport to
represent cash provided or used by operating activities and should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with generally accepted accounting principles.
During the fourth quarter of 1998, we introduced the DISH Network
One-Rate Plan. Under the DISH Network One-Rate Plan, consumers are eligible to
receive a rebate of up to $299 on the purchase of certain EchoStar receiver
systems. Consequently, the costs of acquiring subscribers who qualify for the
DISH Network One-Rate Plan are materially higher than for other DISH Network
subscribers. The rebate is contingent upon the subscriber's one-year commitment
to subscribe to the America's Top 100 CD programming package and two premium
channel packages, committing the subscriber to a monthly programming payment of
at least $48.98. The consumer must pay the entire sales price of the system at
the time of purchase, but is not required to prepay for the programming. After
receiving the subscriber's first full programming payment (equal to $97.96 for
two months of programming), we issue a rebate of up to $299 to the subscriber.
Although subscriber acquisition costs are materially higher under the DISH
Network One-Rate Plan, we believe that these customers are more profitable
because of the higher average revenue per
28
<PAGE>
subscriber. In addition, we believe that these customers represent lower credit
risk and therefore may be marginally less likely to churn than other DISH
Network subscribers. Although there can be no assurance as to the ultimate
duration of the DISH Network One-Rate Plan, it will continue through at least
April 1999.
Our subscriber acquisition costs, both in the aggregate and on a per
subscriber basis, will increase in direct relation to the participation rate in
the DISH Network One-Rate Plan. While we presently expect approximately
one-third of our new subscriber activations to result from the DISH Network
One-Rate Plan during the duration of the promotion, the actual consumer
participation level could be significantly higher. To the extent that actual
consumer participation levels exceed present expectations and subscriber
acquisition costs materially increase, our EBITDA results will be negatively
impacted because subscriber acquisition costs are expensed as incurred.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
during 1998, including amortization of subscriber acquisition costs of
$19 million, aggregated $103 million, a $70 million decrease compared to 1997.
The decrease in depreciation and amortization expenses principally resulted from
a decrease in amortization of subscriber acquisition costs of $103 million,
partially offset by an increase in depreciation related to the commencement of
operation of EchoStar III, EchoStar IV and other depreciable assets placed in
service during 1998. Promotional programs changed in October 1997 and we ceased
deferral of subscriber acquisition costs after that date. All previously
deferred costs were fully amortized during 1998
OTHER INCOME AND EXPENSE. Other expense, net totaled $138 million
during 1998, an increase of $50 million as compared to 1997. The increase in
other expense resulted primarily from interest expense associated with our
12 1/2% Senior Secured Notes due 2002 issued in June 1997, combined with
increased interest expense resulting from increased accreted balances on our 12
7/8% Senior Secured Discount Notes due 2004 issued in 1994 and our 13 1/8%
Senior Secured Discount Notes due 2004 issued in 1996.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996.
REVENUE. Total revenue in 1997 was $477 million, an increase of 140%,
or $278 million, as compared to total revenue of $199 million in 1996. The
increase in total revenue in 1997 was primarily attributable to the operation of
the DISH Network during the entirety of 1997, combined with DISH Network
subscriber growth.
DISH Network subscription television services revenue totaled $299
million during 1997, an increase of $249 million compared to 1996. This
increase was directly attributable to the operation of the DISH Network during
the entirety of 1997, combined with the increase in the number of DISH Network
subscribers. Average monthly revenue per subscriber approximated $38.50 during
1997 compared to approximately $35.50 in 1996. The increase in monthly revenue
per subscriber was primarily due to additional channels added upon commencement
of operations of EchoStar II.
Other DISH Network revenue totaled $45 million in 1997, an increase of
$35 million compared to 1996. Other DISH Network revenue primarily consists of
incremental revenues over advertised subscription rates realized from our 1996
Promotion, whereby consumers were able to purchase a standard EchoStar receiver
system for $199, conditioned upon the consumer's prepaid one-year subscription
to a programming package for approximately $300, as well as installation revenue
and loan origination and participation income. In 1997, we recognized
incremental revenues related to our 1996 Promotion of approximately $40 million,
an increase of $35 million over 1996.
During 1997, DTH equipment sales and integration services totaled $92
million. We sold digital satellite broadcasting equipment using our proprietary
technology to two international DTH service operators. We realized revenues of
$74 million related to these agreements during 1997. Of this amount, $59
million related to sales of digital set-top boxes and other DTH equipment while
$15 million resulted from the provision of integration services, such as revenue
from uplink center design, construction oversight, and other project integration
services. DBS accessory sales totaled $11 million during 1997, an $8 million
increase compared to 1996.
DTH equipment sales and integration services revenue totaled $78
million during 1996. These revenues consisted primarily of sales of EchoStar
receiver systems and related accessories prior to the August 1996 nationwide
rollout of our 1996 Promotion.
29
<PAGE>
Satellite services revenue totaled $11 million during 1997, an
increase of $5 million, or 91%, compared to 1996. The increase in satellite
services revenue was primarily attributable to an increase in the number of
content providers, increased usage by our BTV customers, and an entire year of
operation in 1997.
C-band and other revenue totaled $30 million for 1997, a decrease of
$25 million compared to $55 million in 1996. Other revenue principally related
to domestic and international sales of C-band products and net domestic C-band
programming revenues. This decrease resulted from the world-wide decrease in
demand for C-band products and services. Effective January 1, 1998, we ceased
operation of our C-band programming.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses
totaled $193 million during 1997, an increase of $151 million as compared to
1996. The increase in DISH Network operating expenses was primarily
attributable to operation of the DISH Network during the entirety of 1997 and
the increase in the number of DISH Network subscribers. Subscriber-related
expenses totaled $144 million in 1997, an increase of $121 million compared to
1996. Such expenses totaled 48% of subscription television services revenues,
compared to 46% of subscription television services revenues during 1996.
Satellite and transmission expenses increased $8 million in 1997 compared to
1996 primarily as a result of the operation of the DISH Network, including
EchoStar II, during the entirety of 1997. Customer service center and other
operating expenses totaled $35 million in 1997, an increase of $22 million as
compared to 1996. The increase in customer service center and other operating
expenses was directly attributable to the operation of the DISH Network during
the entirety of 1997, combined with the increase in the number of DISH Network
subscribers.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales
- - DTH equipment and integration services totaled $62 million during 1997, a
decrease of $14 million, or 19%, as compared to 1996. During 1997, cost of
sales - DTH equipment and integration services principally represented costs
associated with set-top boxes and related components sold to international DTH
operators. For 1996, cost of sales - DTH equipment and integration services
totaled $76 million and represented costs of EchoStar receiver systems sold
prior to the August 1996 rollout of our 1996 Promotion.
COST OF SALES - C-BAND AND OTHER. Cost of sales - C-band and other
totaled $24 million during 1997, a decrease of $18 million compared to 1996.
This decrease was consistent with the decrease in related revenues and resulted
from the world-wide decrease in the demand for C-band products and services.
MARKETING EXPENSES. Marketing expenses totaled $180 million for 1997,
an increase of $128 million as compared to 1996. The increase in marketing
expenses was primarily attributable to the increase in subscriber promotion
subsidies. These costs totaled $145 million during 1997, an increase of $111
million over 1996. This increase resulted from the commencement of the 1997
Promotion, a marketing promotion that maintained the suggested retail price for
a standard EchoStar receiver system at $199, but eliminated the requirement for
the coincident purchase of an extended subscription commitment, and the increase
in the number of EchoStar receiver systems sold during 1997. Advertising and
other expenses increased $17 million to $35 million during 1997 as a result of
increased marketing activity and operation of the DISH Network during the
entirety of 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. G&A expenses totaled $69 million
for 1997, an increase of $17 million as compared to 1996. The increase in G&A
expenses was principally attributable to increased personnel expenses to support
the growth of the DISH Network. G&A expenses as a percentage of total revenue
decreased to 15% during 1997 as compared to 26% during 1996.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION.
EBITDA was negative $51 million for 1997, as compared to EBITDA of negative $66
million for 1996. EBITDA, as adjusted to exclude amortization of subscriber
acquisition costs, was negative $173 million for 1997 as compared to negative
$82 million for 1996. This improvement in EBITDA resulted from the factors
affecting revenue and expenses discussed above. EBITDA does not purport to
represent cash provided by or used by operating activities and should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with generally accepted accounting principles.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for 1997, including amortization of subscriber acquisition costs of $122
million, aggregated $173 million in 1997, an increase of $130 million, as
compared to 1996. The increase in depreciation and amortization expenses
principally resulted from amortization of
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subscriber acquisition costs, an increase of $106 million, and depreciation of
EchoStar II, which was placed in service during the fourth quarter of 1996.
OTHER INCOME AND EXPENSE. Other expense, net totaled $88 million
during 1997, an increase of $42 million as compared to 1996. The 1997 increase
in other expense resulted primarily from interest expense associated with the
1997 notes which were issued in June 1997, and increases in interest expense
associated with the 1994 notes and the 1996 notes due to higher accreted
balances thereon. These increases in interest expense were partially offset by
increases in capitalized interest. Capitalized interest, primarily related to
satellite construction, totaled $43 million during 1997, compared to $32 million
during 1996.
INCOME TAX BENEFIT. The $55 million decrease in the income tax
benefit during 1997 principally resulted from our decision to increase our
valuation allowance sufficient to fully offset net deferred tax assets arising
during the year. Realization of these assets is dependent on us generating
sufficient taxable income prior to the expiration of the net operating loss
carryforwards. Our net deferred tax assets, $67 million at each of December 31,
1996 and 1997, principally relate to temporary differences for amortization of
original issue discount on the 1994 notes and 1996 notes, net operating loss
carryforwards, and various accrued expenses which are not deductible until paid.
LIQUIDITY AND CAPITAL RESOURCES
CASH SOURCES
Since inception, we have financed the development of our EchoStar DBS
system and the related commercial introduction of the DISH Network service
primarily through the sale of equity and debt securities. From May 1994 through
December 31, 1998, we have raised total gross cash proceeds of approximately
$249 million from the sale of our equity securities and approximately $1.3
billion from the sale of certain debt securities. The following summarizes the
net proceeds we have raised from sales of our equity and debt securities:
- our 1994 notes offering in June 1994 of 12 7/8% Senior Secured
Discount Notes and 3.7 million Common Stock Warrants resulting in
net proceeds of approximately $323 million;
- our initial public offering of 4.0 million shares of our Class A
common stock in June 1995, resulting in net proceeds of
approximately $63 million;
- our 1996 notes offering in March 1996 13 1/8% Senior Secured
Discount Notes resulting in aggregate net proceeds of
approximately $337 million;
- our 1997 notes offering in June 1997 of 12 1/2% Senior Secured
Notes resulting in net proceeds of approximately $363 million;
- our October 1997 offering of 12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock resulting in net proceeds of
approximately $193 million;
- our November 1997 offering of 6 3/4% Series C Cumulative
Convertible Preferred Stock resulting in net proceeds of
approximately $97 million; and
- our November 1997 offering of 3.4 million shares of Class A
Common Stock resulting in net proceeds of approximately $63
million.
As of December 31, 1998, our unrestricted cash, cash equivalents and
marketable investment securities totaled $324 million compared to $421 million
as of December 31, 1997. For the years ended December 31, 1996, 1997 and 1998,
we reported net cash flows from operating activities of ($27 million), $43,000,
and ($17 million), respectively.
Our working capital and capital expenditure requirements were
substantial during the three-year period ended December 31, 1998. Such
expenditures principally related to the ongoing development of the EchoStar DBS
system and the related commercial introduction of the DISH Network service in
March 1996. Capital expenditures, including expenditures for satellite systems
under construction and FCC authorizations, totaled $277 million, $232 million
and $161 million during 1996, 1997 and 1998, respectively.
We expect that our future working capital, capital expenditure and
debt service requirements will be satisfied from existing cash and investment
balances and cash generated from operations. Our ability to generate positive
future operating and net cash flows is dependent upon our ability to continue to
rapidly expand our DISH Network subscriber
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base, retain existing DISH Network subscribers and our ability to grow our ETC
and Satellite Services businesses. There can be no assurance that we will be
successful in achieving our goals. The amount of capital required to fund our
1999 working capital and capital expenditure needs will vary, dependent upon the
level of success we experience relative to our goals. Our working capital and
capital expenditure requirements could increase materially in the event of
increased competition for subscription television customers, significant
satellite failures, or in the event of a general economic downturn, among other
factors.
SUBSCRIBER ACQUISITION COSTS
As previously described, we subsidize the cost of EchoStar receiver
systems in order to attract new DISH Network subscribers. Consequently, our
subscriber acquisition costs are significant. During 1998, our aggregate
subscriber acquisition costs, which include subscriber promotion subsidies and
acquisition marketing expenses, approximated $285 per new subscriber activation.
We expect that our future subscriber acquisition costs will increase as a result
of promotions such as the DISH Network One-Rate Plan and other promotional
programs including bounty promotions that target the subscribers of other
satellite television providers. To the extent that we either extend the
duration of the PrimeStar bounty program or begin to offer similar bounty
programs for other competitors' subscribers, our subscriber acquisition costs,
both in the aggregate and on a per new subscriber activation basis, will
materially increase. Funds necessary to meet these subscriber acquisition costs
will be satisfied from existing cash and investment balances to the extent
available. We may, however, be required to raise additional capital in the
future to meet these requirements. There can be no assurance that additional
financing will be available on acceptable terms, or at all.
OBLIGATIONS
On December 23, 1998, we commenced cash tender offers as part of a
plan to refinance our indebtedness at more favorable interest rates and terms.
We offered to purchase for cash any and all of the outstanding 1994 notes, 1996
notes and 1997 notes.
We also announced that we had sent to all holders of our issued and
outstanding Series B preferred stock a notice to exchange all of the outstanding
shares of Series B preferred stock into 12 1/8% Senior Exchange Notes due 2004
on the terms and conditions set forth in the certificate of designation relating
to the Series B preferred stock. The senior exchange notes were issued on
January 4, 1999. Immediately following the exchange, we commenced an offer to
purchase any and all outstanding senior exchange notes.
The tender offers for the 1994 notes, 1996 notes and 1997 notes were
consummated on January 25, 1999, concurrently with the offering of both the 9
1/4% Senior Notes due 2006 and the 9 3/8% Senior Notes due 2009 with holders of
more than 99% of each issue of debt securities tendering their notes and
consenting to certain amendments to the indentures governing the notes that
eliminated substantially all of the restrictive covenants and amended certain
other provisions. The tender offer for the senior exchange notes expired on
February 1, 1999, with more than 99% of the outstanding senior exchange notes
being validly tendered. During the first quarter of 1999, we will record an
extraordinary loss of approximately $269 million (approximately $236 million of
tender premiums and consent fees and approximately $33 million associated with
the write-off of unamortized deferred financing costs and other
transaction-related costs) resulting from the early retirement of the notes
pursuant to the tender offers.
Interest accrues at a rate of 9 1/4% and 9 3/8% on the seven and ten
year notes, respectively. Interest on the seven and ten year notes is payable
semi-annually in cash in arrears on February 1 and August 1 of each year,
commencing August 1, 1999. Although the seven and ten year notes have lower
interest rates than our previous debt securities, because of tender premiums and
consent and other fees that we incurred to retire our previous debt, it will be
several years before we reach break-even from an economic perspective.
RETIREMENT OF SERIES A PREFERRED STOCK
On February 8, 1999, we repurchased all outstanding shares of Series A
preferred stock, at $52.611 per share (the average of the preceding 20 trading
day closing price of our Class A common stock). The total repurchase price was
approximately $91 million, including accrued dividends of approximately $6
million. The carrying value
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of the Series A preferred stock, including accrued dividends, as of the date of
repurchase was approximately $21 million. All of the shares of Series A
preferred stock were owned by Charles W. Ergen, President and CEO, and James
DeFranco, Executive Vice President.
FUTURE CAPITAL REQUIREMENTS
As of December 31, 1998, we had approximately $1.5 billion of
outstanding long-term debt, substantially all of which was retired upon
consummation of the tender offers and the concurrent sale of the seven and ten
year notes. At December 31, 1998, on a pro forma basis after giving effect to
consummation of the tender offers, the concurrent issuance of the notes, the
retirement of the Series A preferred stock and the consummation of the 110
acquisition, our unrestricted cash and outstanding long-term debt (including
both the current and long-term portions) would have been approximately $354
million and $2.07 billion, respectively. Beginning in 1999, we will have
semi-annual cash debt service requirements of approximately $94 million related
to the notes. There will be no scheduled principal payment or sinking fund
requirements prior to maturity of the notes.
We utilized $91 million of satellite vendor financing for our first
four satellites. As of December 31, 1998, approximately $60 million of such
satellite vendor financing was outstanding. The satellite vendor financing
bears interest at 8 1/4% and is payable in equal monthly installments over five
years following launch of the respective satellite.
On February 26, 1999, we announced that we had sent a letter to the
Board of Directors of PrimeStar expressing our desire and willingness to make an
offer to purchase PrimeStar's high-powered DBS assets. These assets consist of
two high-powered DBS satellites, Tempo I and Tempo II, and 11 of the 32 DBS
frequencies at the 119DEG. WL orbital position, the same location as EchoStar I
and EchoStar II. Our letter stated that we are ready, willing and able to make
an offer to pay $600 million of total consideration (including assumed
liabilities) for these assets. The deadline for a response to this letter has
since expired. If we were able to reach an agreement to acquire the PrimeStar
high-powered DBS assets in the future, we believe that we would be able to
procure additional financing to complete the transaction.
As a result of the 110 acquisition, we expect to incur approximately
$35 million during 1999 for capital expenditures related to digital encoders
required by the Cheyenne digital broadcast center to accommodate the expansion
to approximately 500 video and audio channels. In addition, we expect to expend
over $100 million, and perhaps more than $125 million, during 1999 and 2000 in
one-time expenses associated with repositioning subscriber satellite dishes
toward the 110DEG. WL orbital location. If we were able to acquire the
high-powered assets of PrimeStar described above, we may not be required to
reposition subscriber satellite dishes.
As a result of the anomalies experienced by EchoStar III and EchoStar
IV (see "Notes to Consolidated Financial Statements" and "Business -
Satellites"), and in order to fully exploit certain of our remaining
FCC-allocated DBS frequencies, we intend to deploy one or more additional DBS
satellites. If the 110 acquisition is consummated, it would provide for the
deployment of two additional DBS satellites at 110DEG. WL. We are also
evaluating other contingency plans. All of these possible deployments are
subject to several FCC approvals. There can be no assurance that net insurance
proceeds will be sufficient to fully cover the costs to deploy replacement DBS
satellites.
In addition to our DBS business plan, we have licenses, or
applications pending with the FCC, for a two satellite FSS Ku-band satellite
system, a two satellite FSS Ka-band satellite system, and a proposed
modification thereof and a Low Earth Orbit Mobile-Satellite Service G-satellite
system. We would need to raise additional capital for the foregoing purposes.
Further, there may be a number of factors, some of which are beyond our control
or ability to predict, that could require us to raise additional capital. These
factors include unexpected increases in operating costs and expenses, a defect
in or the loss of any satellite, or an increase in the cost of acquiring
subscribers due to additional competition, among other things. There can be no
assurance that additional debt, equity or other financing, if required, will be
available on terms acceptable to us, or at all.
If cash generated from our operations is not sufficient to meet our
debt service requirements or other obligations, we would be required to obtain
cash from other financing sources. There can be no assurance that such
financing would be available on terms acceptable to us, or if available, that
the proceeds of such financing would be sufficient to enable us to meet all of
our obligations. We are required to retire the remaining 1994 notes, 1996
notes,
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1997 notes and senior exchange notes when they mature, and the indentures
governing the 1994, 1996 and 1997 notes will remain outstanding (although with
substantially all of the restrictive covenants having been eliminated) until
such time.
YEAR 2000 READINESS DISCLOSURE
We have assessed and continue to assess the impact of the Year 2000
issue on our computer systems and operations. The Year 2000 issue exists
because many computer systems and applications currently use two-digit date
fields to designate a year. Thus, as the century date approaches, date
sensitive systems may recognize the year 2000 as 1900 or not at all. The
inability to recognize or properly treat the year 2000 may cause computer
systems to process critical financial and operational information incorrectly.
If our Year 2000 remediation plan is not successful or is not completed in a
timely manner, the Year 2000 issue could significantly disrupt our ability to
transact business with our customers and suppliers, and could have a material
impact on our operations. Even if our Year 2000 remediation plan is successful
or completed on time, there can be no assurance that the systems of other
companies with which our systems interact will be timely converted, or that any
such failure to convert by another company would not have an adverse effect on
our business or operations.
We have established a five-phase plan to address potential Year 2000
issues:
- INVENTORY - the identification of all relevant hardware, embedded
software, system software and application software to establish
the scope of subsequent phases;
- ASSESSMENT - the process of evaluating the current level of Year
2000 readiness of all components identified in the inventory
phase, defining actions necessary to retire, replace or otherwise
correct all non-conforming components and estimating resources
and timelines required by action plans;
- REMEDIATION - the correction of previously identified Year 2000
issues;
- VALIDATION/TESTING - the evaluation of each component's
performance as the date is rolled forward to January 1, 2000 and
other dates and times relating to the Year 2000 issue; and
- IMPLEMENTATION - the process of updating components and
correcting Year 2000 issues in the production operating
environment of a system.
In connection with this effort, we have segregated our computer
systems and corresponding Year 2000 readiness risk into three categories:
internal financial and administrative systems, service-delivery systems, and
third-party systems.
INTERNAL FINANCIAL AND ADMINISTRATIVE SYSTEMS
With respect to our internal financial and administrative systems, we
have completed the inventory phase of the Year 2000 readiness plan by
identifying all systems with potential Year 2000 problems. We are currently in
the process of assessing these systems by communicating with our outside
software and hardware vendors and reviewing their certifications of Year 2000
readiness, as well as reviewing internal custom programming codes. We expect to
have the assessment phase substantially completed by April 1999.
Upon completion of the assessment phase, we will begin the remediation
and validation/testing phases. During the remediation phase, we will attempt to
correct all problems detected while performing the assessment phase. During the
validation/testing phase, we will create a parallel environment of all internal
and administrative systems. We will run tests on the parallel environment to
assess its reaction to changes in dates and times relating to the Year 2000
issue. We currently expect the remediation and validation/testing phases to be
complete by June 1999.
Once all known problems are corrected within the parallel environment,
we will make changes to the actual operating environment of our internal
financial and administrative systems during the implementation phase. We
currently expect to complete the implementation phase by August 1999. Upon
successful completion of the implementation phase we will be able to certify our
Year 2000 readiness. While there can be no assurance, we currently believe that
our internal financial and administrative systems are Year 2000 ready.
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SERVICE-DELIVERY SYSTEMS
We have defined service-delivery systems as all internal systems
necessary to deliver DISH Network programming to our subscribers. During the
inventory phase we initially identified our set-top boxes, compression and
conditional access systems at our digital broadcast center, DBS satellites and
third-party billing system as systems with potential Year 2000 issues.
Given the interdependent nature of the receiver and broadcast systems
used to deliver our service, we previously implemented a smaller, offline
version of our overall system to aid in the evaluation and test of hardware and
software changes that normally occur over time. This system gives us the
ability to perform "real-time" testing of the various elements of the system by
simulating the year 2000 rollover, and confirming system operation. This
ability to perform accurate offline simulations has provided a tremendous
benefit to our Year 2000 test process.
We have completed initial testing of our set-top receivers. During
these tests, the dates in the broadcast system, and hence the set-top receivers
were rolled forward to each of the dates and times affected by the Year 2000
issue. We deemed these initial tests successful, as no problems were detected
during thorough testing of the set-top receivers when the dates were rolled
forward. These tests also affirm the integrity of the broadcast systems
supplying the set-top receivers with critical operational system information.
As new technology and software are integrated into our set-top receivers, we
will perform additional testing to attempt to ensure continued Year 2000
readiness.
In addition to the practical testing performed above, we have
completed an independent inventory and assessment of the systems at our digital
broadcast center and are currently in the remediation phase of our Year 2000
readiness plan. The remediation phase of the plan is expected to be complete by
April 1999. We expect to perform validation and testing of communications
between our digital broadcast center and our DBS satellites during the third
quarter of 1999. The validation and testing of our digital broadcast center is
not expected to cause interruption of programming to DISH Network subscribers.
During the assessment of our DBS satellites, we determined that our
satellites do not operate under a calendar-driven system. Therefore, we do not
expect changes in dates and times to affect the operation of our DBS satellites.
We are currently working with the vendor of our third-party billing
system to attempt to ensure its Year 2000 readiness. This vendor has indicated
it has completed all remediation activities and is currently in the final stages
of testing/validation. Subsequent to completion of its testing/validation
activities, the vendor has indicated it will contractually certify its Year 2000
readiness during the second quarter of 1999, however we can not provide any
assurance in this regard.
THIRD-PARTY SYSTEMS
We also are currently assessing our vulnerability to unexpected
business interruptions due to the failure of third-parties to remediate Year
2000 readiness issues associated with products or services on which our business
relies. In connection with this assessment, we sent letters to third-party
business partners, suppliers and vendors which we deemed significant requesting
that they certify their Year 2000 readiness. To date, we have received
responses from approximately 70% of these vendors. We are presently in the
process of contacting our critical suppliers and vendors who have either not
responded or have not responded adequately to our requests for proof of
certification. We presently expect to complete this process by April 1999 and
will continue to follow-up on unresolved issues thereafter. There can be no
assurance that third-parties who have responded, or will respond, to our request
regarding Year 2000 readiness have responded, or will respond, accurately or
satisfactorily, or that anticipated Year 2000 actions set forth in their
responses will be properly conducted.
CONTINGENCY PLANNING
We also are involved in limited contingency planning. In the event
that previously undetected Year 2000 issues arise, contingency plans will be
used to try to mitigate potential system problems. Our internal financial and
administrative and service-delivery contingency plan includes making back-up
copies of certain systems as well as using standby power generators at our
digital broadcasting center. With respect to other third-party systems, we will
continue to contact our critical vendors in order to obtain certification of
their Year 2000 readiness. However, no
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assurance can be made that such contingency plans will resolve any Year 2000
problems that may occur, in a manner which is satisfactory or desirable to us.
COSTS
We have not yet determined the full cost of our Year 2000 readiness
plan and its related impact on our financial condition. In the ordinary course
of business, we have made capital expenditures over the past few years to
improve our systems, for reasons other than Year 2000 remediation. Because
these upgrades also resulted in improved Year 2000 readiness, replacement and
remediation costs have not been material. We currently have budgeted $300,000
for the completion of our Year 2000 readiness plan. While there can be no
assurance, we believe our costs to successfully mitigate the Year 2000 issue
will not be material to our operations. No assurance can be made, however, as
to the total cost for the Year 2000 plan until the plan has been completed.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides
guidance that requires capitalization of certain costs incurred during an
internal-use software development project. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998. We do not expect that adoption of SOP
98-1 will materially affect our consolidated financial statements.
INFLATION
Inflation has not materially affected our operations during the
past three years. We believe that our ability to increase the prices charged
for our products and services in future periods will depend primarily on
competitive pressures. We do not have any material backlog of our products.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
INTEREST RATE RISK. Our exposure to market risk for changes in
interest rates relates to our debt obligations, redeemable preferred stock
and cash and marketable investment securities (unrestricted and restricted)
portfolio.
As of December 31, 1998 we estimated the fair value of our fixed-rate
debt and mortgages and other notes payable to be approximately $1.9 billion
using quoted market prices where available, or discounted cash flow analyses.
We estimated the fair value of our redeemable preferred stock (based on quoted
market prices) to be approximately $259.9 million on December 31, 1998. The
market risk associated with our debt and redeemable preferred stock is the
potential increase in fair value resulting from a decrease in interest rates. A
10% decrease in assumed interest rates would increase the fair value of our debt
and redeemable preferred stock by approximately $50.8 million and $8.5 million,
respectively.
Based on our average balance of cash and cash equivalents and
restricted and unrestricted marketable investment securities during 1998, a 10%
decrease in the average interest rate experienced in 1998 would not materially
impact our annual interest income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements are included in this report
beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the identity and
business experience of our directors is set forth in our Proxy Statement for the
Annual Meeting of Shareholders to be held on April 16, 1999, under the caption
"Election of Directors," which information is hereby incorporated herein by
reference.
The information required by this Item with respect to the identity and
business experience of our executive officers is set forth on page 19 of this
report under the caption "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on April 16, 1999,
under the caption "Executive Compensation and Other Information," which
information is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on April 16, 1999,
under the captions "Election of Directors" and "Equity Security Ownership,"
which information is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in our Proxy
Statement for the Annual Meeting of Shareholders to be held on April 16, 1999,
under the caption "Certain Relationships and Related Transactions," which
information is hereby incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
(1) FINANCIAL STATEMENTS PAGE
<S> <C>
Report of Independent Public Accountants............................ F-2
Consolidated Balance Sheets at December 31, 1997 and 1998........... F-3
Consolidated Statements of Operations and Comprehensive Loss
for the years ended December 31, 1996, 1997 and 1998............... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1997 and 1998............... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.................................... F-6
Notes to Consolidated Financial Statements........................... F-7
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULES
None. All schedules have been included in the Consolidated
Financial Statements or Notes thereto.
(3) EXHIBITS
<TABLE>
<S> <C>
2.1* Amended and Restated Agreement for Exchange of Stock and
Merger, dated as of May 31, 1995, by and among EchoStar
Communications Corporation, a Nevada corporation formed
in April 1995 ("EchoStar"), Charles W. Ergen and Dish,
Ltd. (formerly EchoStar Communications Corporation, a
Nevada corporation formed in December 1993) ("Dish")
(incorporated by reference to Exhibit 2.2 to the
Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
2.2* Plan and Agreement of Merger made as of December 21,
1995 by and among EchoStar, Direct Broadcasting
Satellite Corporation, a Colorado Corporation
("MergerCo") and Direct Broadcasting Satellite
Corporation, a Delaware Corporation ("DBSC")
(incorporated by reference to Exhibit 2.3 to the
Registration Statement on Form S-4 of EchoStar,
Registration No. 333-03584).
2.3* Merger Trigger Agreement entered into as of December 21,
1995 by and among EchoStar, MergerCo and DBSC
(incorporated by reference to Exhibit 2.4 to the
Registration Statement on Form S-4 of EchoStar,
Registration No. 333-03584).
3.1(a)* Amended and Restated Articles of Incorporation of
EchoStar (incorporated by reference to Exhibit 3.1(a) to
the Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
3.1(b)* Bylaws of EchoStar (incorporated by reference to Exhibit
3.1(b) to the Registration Statement on Form S-1 of
EchoStar, Registration No. 33-91276).
3.2(a)* Articles of Incorporation of EchoStar Satellite
Broadcasting Corporation (formerly EchoStar Bridge
Corporation, a Colorado corporation) ("ESBC")
(incorporated by reference to Exhibit 3.1(e) to the
Registration Statement on Form S-1 of ESBC, Registration
No. 333-3980).
3.2(b)* Bylaws of ESBC (incorporated by reference to Exhibit
3.1(f) to the Registration Statement on Form S-1 of
ESBC, Registration No. 333-3980).
3.3(a)* Amended and Restated Articles of Incorporation of Dish
(incorporated by reference to Exhibit 3.1(a) to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
3.3(b)* Bylaws of Dish (incorporated by reference to Exhibit
3.1(b) to the Registration Statement on Form S-1 of
Dish, Registration No. 33-76450).
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3.4(a)* Articles of Incorporation of EchoStar DBS Corporation, a
Colorado corporation ("DBS Corp.") (incorporated by
reference to Exhibit 3.4(a) to the Registration
Statement on Form S-4 of DBS Corp., Registration No.
333-31929).
3.4(b)* Bylaws of DBS Corp. (incorporated by reference to
Exhibit 3.4(b) to the Registration Statement on Form S-4
of DBS Corp., Registration No. 333-31929).
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 Disbursement 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 on 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).
39
<PAGE>
4.14* Registration Rights Agreement by and between ESBC,
EchoStar, Dish, MergerCo 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 DBS Corp., EchoStar Communications
Corporation, a Nevada corporation formed in April 1995
("EchoStar"), EchoStar Satellite Broadcasting
Corporation, a Colorado corporation, Dish, Ltd.
(formerly EchoStar Communications Corporation, a Nevada
corporation formed in December 1993), Donaldson, Lufkin
& Jenrette Securities Corporation ("DLJ") and Lehman
Brothers Inc. ("Lehman Brothers") (incorporated by
reference to Exhibit 4.15 to the Registration Statement
on Form S-4 of DBS Corp., Registration No. 333-31929).
4.16* Indenture of Trust, dated as of June 25, 1997, between
DBS Corp. and First Trust National Association ("First
Trust"), as trustee (incorporated by reference to
Exhibit 4.16 to Amendment No. 1 to the Registration
Statement on Form S-4 of DBS Corp., Registration No.
333-31929).
4.17* 12 1/8% Series B Senior Redeemable Exchangeable
Preferred Stock Certificate of Correction for the
Certificate of Designation of EchoStar (incorporated by
reference to Exhibit 4.17 to Amendment No. 1 to the
Registration Statement on Form S-3 of EchoStar,
Registration No. 333-37683).
4.18* Registration Rights Agreement, dated as of October 2,
1997, by and among EchoStar, DLJ and Lehman Brothers
(incorporated by reference to Exhibit 4.18 to Amendment
No. 1 to the Registration Statement on Form S-3 of
EchoStar, Registration No. 333-37683).
4.19* 6 3/4% Series C Cumulative Convertible Preferred Stock
Certificate of Designation of EchoStar (incorporated by
reference to Exhibit 4.19 to the Registration Statement
on Form S-4 of EchoStar, Registration No. 333-39901).
4.20* Form of Deposit Agreement between EchoStar and American
Securities Transfer & Trust, Inc. (incorporated by
reference to Exhibit 4.20 to Amendment No. 1 to the
Registration Statement on Form S-3 of EchoStar,
Registration No. 333-37683).
4.21(a)* Form of Underwriting Agreement for 6 3/4% Series C
Cumulative Convertible Preferred Stock by and between
EchoStar, DLJ and Lehman Brothers (incorporated by
reference to Exhibit 1.1 to Amendment No. 1 to the
Registration Statement on Form S-3 of EchoStar,
Registration No. 333-37683).
4.21(b)* Form of Underwriting Agreement for Class A Common Stock
by and between EchoStar, DLJ, BT Alex. Brown
Incorporated and Unterberg Harris (incorporated by
reference to Exhibit 1.1 to Amendment No. 1 to the
Registration Statement on Form S-3 of EchoStar,
Registration No. 333-37683).
4.22* Form of Indenture for EchoStar's 12 1/8% Senior Exchange
Notes due 2004 (incorporated by reference to Exhibit 4.8
to the Quarterly Report on Form 10-Q of EchoStar for the
quarterly period ended September 30, 1997, Commission
File No. 0-26176).
4.23* Indenture of Trust, relating to DBS Corp.'s 12 1/4%
Senior Notes due 2006 ( the "Seven Year Notes"), dated
as of January 25, 1999, among DBS Corp., the Guarantors
(as defined therein) and U.S. Bank Trust National
Association ("U.S. Bank"), as trustee (incorporated by
reference to Exhibit 4.1 to the Registration Statement
on Form S-4 of DBS Corp., Registration No. 333-71345).
4.24* Indenture of Trust, relating to DBS Corp.'s 12 3/8%
Senior Notes due 2009 ( the "Ten Year Notes"), dated as
of January 25, 1999, among DBS Corp., the Guarantors (as
defined therein) and U.S. Bank, as trustee (incorporated
by reference to Exhibit 4.3 to the Registration
Statement on Form S-4 of DBS Corp., Registration No.
333-71345).
40
<PAGE>
4.25* Registration Rights Agreement, relating to the Seven
Year Notes, dated as of January 25, 1999, by and among
DBS Corp., the Guarantors and the Initial Purchasers (as
defined therein) (incorporated by reference to Exhibit
4.5 to the Registration Statement on Form S-4 of DBS
Corp., Registration No. 333-71345).
4.26* Registration Rights Agreement, relating to the Ten Year
Notes, dated as of January 25, 1999, by and among DBS
Corp., the Guarantors and the Initial Purchasers (as
defined therein) (incorporated by reference to Exhibit
4.6 to the Registration Statement on Form S-4 of DBS
Corp., Registration No. 333-71345).
10.1(a)* Satellite Construction Contract, dated as of February 6,
1990, between EchoStar Satellite Corporation ("ESC") and
Martin Marietta as successor to General Electric
Company, Astro-Space Division ("General Electric")
(incorporated by reference to Exhibit 10.1(a) to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
10.1(b)* First Amendment to the Satellite Construction Contract,
dated as of October 2, 1992, between ESC and Martin
Marietta as successor to General Electric (incorporated
by reference to Exhibit 10.1(b) to the Registration
Statement on Form S-1 of Dish, Registration No. 33-
76450).
10.1(c)* Second Amendment to the Satellite Construction Contract,
dated as of October 30, 1992, between ESC and Martin
Marietta as successor to General Electric (incorporated
by reference to Exhibit 10.1(c) to the Registration
Statement on Form S-1 of Dish, Registration No. 33-
76450).
10.1(d)* Third Amendment to the Satellite Construction Contract,
dated as of April 1, 1993, between ESC and Martin
Marietta (incorporated by reference to Exhibit 10.1(d)
to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
10.1(e)* Fourth Amendment to the Satellite Construction Contract,
dated as of August 19, 1993, between ESC and Martin
Marietta (incorporated by reference to Exhibit 10.1(e)
to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
10.1(f)* Form of Fifth Amendment to the Satellite Construction
Contract, between ESC and Martin Marietta (incorporated
by reference to Exhibit 10.1(f) to the Registration
Statement on Form S-1 of Dish, Registration No. 33-
81234).
10.1(g)* Sixth Amendment to the Satellite Construction Contract,
dated as of June 7, 1994, between ESC and Martin
Marietta (incorporated by reference to Exhibit 10.1(g)
to the Registration Statement on Form S-1 of Dish,
Registration No. 33-81234).
10.1(h)* Eighth Amendment to the Satellite Construction Contract,
dated as of July 18, 1996, between ESC and Martin
Marietta (incorporated by reference to Exhibit 10.1(h)
to the Quarterly Report on Form 10-Q of EchoStar for the
quarter ended June 30, 1996, Commission File No. 0-
26176).
10.2* Master Purchase and License Agreement, dated as of
August 12, 1986, between Houston Tracker Systems, Inc.
("HTS") and Cable/Home Communications Corp. (a
subsidiary of General Instruments Corporation)
(incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
10.3* Master Purchase and License Agreement, dated as of June
18, 1986, between Echosphere Corporation and Cable/Home
Communications Corp. (a subsidiary of General
Instruments Corporation) (incorporated by reference to
Exhibit 10.5 to the Registration Statement on Form S-1
of Dish, Registration No. 33-76450).
10.4* Merchandising Financing Agreement, dated as of June 29,
1989, between Echo Acceptance Corporation and Household
Retail Services, Inc. (incorporated by reference to
Exhibit 10.6 to the Registration Statement on Form S-1
of Dish, Registration No. 33-76450).
41
<PAGE>
10.5* Key Employee Bonus Plan, dated as of January 1, 1994
(incorporated by reference to Exhibit 10.7 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450)**
10.6* Consulting Agreement, dated as of February 17, 1994,
between ESC and Telesat Canada (incorporated by
reference to Exhibit 10.8 to the Registration Statement
on Form S-1 of Dish, Registration No. 33-76450).
Form of Satellite Launch Insurance Declarations
10.7* (incorporated by reference to Exhibit 10.10 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-81234).
10.8* Dish 1994 Stock Incentive Plan (incorporated by
reference to Exhibit 10.11 to the Registration Statement
on Form S-1 of Dish, Registration No. 33-76450).**
10.9* Form of Tracking, Telemetry and Control Contract between
AT&T Corp. and ESC (incorporated by reference to Exhibit
10.12 to the Registration Statement on Form S-1 of Dish,
Registration No. 33-81234).
10.10* Manufacturing Agreement, dated as of March 22, 1995,
between HTS and SCI Technology, Inc. (incorporated by
reference to Exhibit 10.12 to the Registration Statement
on Form S-1 of Dish, Commission File No. 33-81234).
10.11* Manufacturing Agreement dated as of April 14, 1995 by
and between ESC and Sagem Group (incorporated by
reference to Exhibit 10.13 to the Registration Statement
on Form S-1 of EchoStar, Registration No. 33-91276).
10.12* Statement of Work, dated January 31, 1995 from ESC to
DiviCom, Inc. (incorporated by reference to Exhibit
10.14 to the Registration Statement on Form S-1 of
EchoStar, Registration No. 33-91276).
10.13* Launch Services Contract, dated as of June 2, 1995, by
and between EchoStar Space Corporation and Lockheed-
Khrunichev-Energia International, Inc. (incorporated by
reference to Exhibit 10.15 to the Registration Statement
on Form S-1 of EchoStar, Registration No. 33-91276).
10.14* EchoStar 1995 Stock Incentive Plan (incorporated by
reference to Exhibit 10.16 to the Registration Statement
on Form S-1 of EchoStar, Registration No. 33-91276)**
10.15(a)* Eighth Amendment to Satellite Construction Contract,
dated as of February 1, 1994, between DirectSat
Corporation and Martin Marietta (incorporated by
reference to Exhibit 10.17(a) to the Quarterly Report on
Form 10-Q of EchoStar for the quarter ended June 30,
1996, Commission File No. 0-26176).
10.15(b)* Ninth Amendment to Satellite Construction Contract,
dated as of February 1, 1994, between DirectSat
Corporation and Martin Marietta (incorporated by
reference to Exhibit 10.15 to the Registration Statement
of Form S-4 of EchoStar, Registration No. 333-03584).
10.15(c)* Tenth Amendment to Satellite Construction Contract,
dated as of July 18, 1996, between DirectSat Corporation
and Martin Marietta (incorporated by reference to
Exhibit 10.17(b) to the Quarterly Report on Form 10-Q of
EchoStar for the quarter ended June 30, 1996, Commission
File No. 0-26176).
10.16* Satellite Construction Contract, dated as of July 18,
1996, between EDBS and Lockheed Martin Corporation
(incorporated by reference to Exhibit 10.18 to the
Quarterly Report on Form 10-Q of EchoStar for the
quarter ended June 30, 1996, Commission File No. 0-
26176).
10.17* Confidential Amendment to Satellite Construction
Contract between DBSC and Martin Marietta, dated as of
May 31, 1995 (incorporated by reference to Exhibit 10.14
to the Registration Statement of Form S-4 of EchoStar,
Registration No. 333-03584).
42
<PAGE>
10.18* Right and License Agreement by and among HTS and Asia
Broadcasting and Communications Network, Ltd., dated
December 19, 1996 (incorporated by reference to Exhibit
10.18 to the Annual Report on Form 10-K of EchoStar for
the year ended December 31, 1996, as amended, Commission
file No. 0-26176).
10.19* Agreement between HTS, ESC and ExpressVu Inc., dated
January 8, 1997, as amended (incorporated by reference
to Exhibit 10.18 to the Annual Report on Form 10-K of
EchoStar for the year ended December 31, 1996, as
amended, Commission File No. 0-26176).
10.20* Amendment No. 9 to Satellite Construction Contract,
effective as of July 18, 1996, between Direct Satellite
Broadcasting Corporation, a Delaware corporation
("DBSC") and Martin Marrieta Corporation (incorporated
by reference to Exhibit 10.1 to the Quarterly Report on
Form 10-Q of EchoStar for the quarterly period ended
June 30, 1997, Commission File No. 0-26176).
10.21* Amendment No. 10 to Satellite Construction Contract,
effective as of May 31, 1996, between DBSC and Lockheed
Martin Corporation (incorporated by reference to Exhibit
10.2 to the Quarterly Report on Form 10-Q of EchoStar
for the quarterly period ended June 30, 1997, Commission
File No. 0-26176).
10.22* Contract for Launch Services, dated April 5, 1996,
between Lockheed Martin Commercial Launch Services, Inc.
and EchoStar Space Corporation (incorporated by
reference to Exhibit 10.3 to the Quarterly Report on
Form 10-Q of EchoStar for the quarterly period ended
June 30, 1997, Commission File No. 0-26176).
10.23* OEM Manufacturing, Marketing and Licensing Agreement,
dated as of February 17, 1998, by and among HTS, ESC and
Philips Electronics North America Corporation
(incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of EchoStar for the
quarterly period ended March 31, 1998, Commission File
No. 0-26176).
10.24* Licensing Agreement, dated as of February 23, 1998, by
and among HTS, ESC and VTech Communications Ltd.
(incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of EchoStar for the
quarterly period ended March 31, 1998, Commission File
No. 0-26176).
10.25* Purchase Agreement, dated November 30, 1998, by and
among American Sky Broadcasting, LLC ("ASkyB"), The News
Corporation Limited ("News Corporation"), MCI
Telecommunications Corporation and EchoStar
(incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed by EchoStar on December
1, 1998, Commission File No. 0-26176).
10.26* Form of Registration Rights Agreement to be entered into
among EchoStar, MCI Telecommunications Corporation, and
a to-be-named wholly-owned subsidiary of MCI
Telecommunications Corporation, ASkyB, and a to-be-named
wholly-owned subsidiary of News Corporation
(incorporated by reference to Exhibit 10.2 to the
Current Report on Form 8-K of EchoStar, filed as of
December 1, 1998, Commission File No. 0-26176).
10.27* Voting Agreement, dated November 30, 1998, among
EchoStar, AskyB, News Corporation and MCI
Telecommunications Corporation (incorporated by
reference to Exhibit 10.3 to the Current Report on Form
8-K of EchoStar, filed as of December 1, 1998).
10.28+ Agreement to Form NagraStar LLC, dated as of June 23,
1998, by and between Kudelski S.A., EchoStar and ESC.
21++ Subsidiaries of EchoStar Communications Corporation.
24.1++ Powers of Attorney authorizing signature of James
DeFranco, O. Nolan Daines and Raymond L. Friedlob.
43
<PAGE>
27++ Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference.
** Constitutes a management contract or compensatory plan or arrangement.
+ Certain provisions have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment. A confirming electronic copy is being filed herewith.
++ Filed herewith.
(b) Reports on Form 8-K
On December 1, 1998, we filed a Current Report on Form 8-K to report
that we had entered into an agreement with News Corporation and MCI providing
for the transfer to us of the license to operate a high-powered DBS business at
the 110DEG. WL orbital location consisting of 28 frequencies and the sale of two
satellites that are currently under construction in exchange for certain
newly-issued shares of our Class A common stock.
On December 24, 1998, we filed a Current Report on Form 8-K to report
that we had commenced cash tender offers to purchase any and all of our 1994
notes, 1996 notes, 1997 notes and Series B Preferred Stock as part of a plan to
refinance our existing indebtedness at more favorable interest rates and terms.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, EchoStar has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ STEVEN B. SCHAVER
-------------------------------------
Steven B. Schaver
Chief Financial Officer
Date: March 17, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of EchoStar
and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ CHARLES W. ERGEN Chief Executive Officer, President and Director March 17, 1999
- ------------------------ (PRINCIPAL EXECUTIVE OFFICER)
Charles W. Ergen
/s/ STEVEN B. SCHAVER Chief Financial Officer March 17, 1999
- ------------------------ (PRINCIPAL FINANCIAL OFFICER)
Steven B. Schaver
* Director March 17, 1999
- ------------------------
James DeFranco
/s/ DAVID K. MOSKOWITZ Director March 17, 1999
- ------------------------
David K. Moskowitz
* Director March 17, 1999
- ------------------------
Raymond L. Friedlob
* Director March 17, 1999
- ------------------------
O. Nolan Daines
</TABLE>
* By: /s/ DAVID K. MOSKOWITZ
-------------------------
David K. Moskowitz
Attorney-in-Fact
45
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants.................................................................. F-2
Consolidated Balance Sheets at December 31, 1997 and 1998................................................. F-3
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 1996,
1997 and 1998.......................................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996, 1997
and 1998............................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998................ 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, 1997 and 1998, and the related
consolidated statements of operations and comprehensive loss, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1997 and
1998, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 2, 1999.
F-2
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998
----------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................. $ 145,207 $ 106,547
Marketable investment securities.......................................... 275,307 217,553
Trade accounts receivable, net of allowance for uncollectible accounts of
$1,347 and $2,996, respectively........................................ 66,074 107,233
Inventories............................................................... 22,993 76,708
Other current assets...................................................... 34,524 29,804
----------------------------
Total current assets......................................................... 544,105 537,845
Restricted Assets:
Insurance receivable (Note 3)............................................. - 106,000
Interest escrow........................................................... 112,284 69,129
Satellite escrow and other restricted cash and marketable investment
securities............................................................. 75,478 8,528
----------------------------
Total restricted assets...................................................... 187,762 183,657
Property and equipment, net.................................................. 874,859 876,914
FCC authorizations, net...................................................... 99,388 103,434
Other noncurrent assets...................................................... 99,532 105,002
----------------------------
Total assets............................................................ $ 1,805,646 $ 1,806,852
----------------------------
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable.................................................... $ 68,510 $ 90,646
Deferred revenue.......................................................... 122,707 132,982
Accrued expenses.......................................................... 101,478 184,470
Current portion of long-term debt......................................... 17,885 22,679
----------------------------
Total current liabilities.................................................... 310,580 430,777
Long-term obligations, net of current portion:
1994 Notes................................................................ 499,863 571,674
1996 Notes................................................................ 438,512 497,955
1997 Notes................................................................ 375,000 375,000
Mortgages and other notes payable, net of current portion................. 51,846 43,450
Long-term deferred satellite services revenue and other long-term
liabilities............................................................. 19,642 33,498
----------------------------
Total long-term obligations, net of current portion.......................... 1,384,863 1,521,577
----------------------------
Total liabilities....................................................... 1,695,443 1,952,354
12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock, $.01 par
value, 900,000 shares authorized; 200,000 and 225,301 shares issued and
outstanding, respectively; subject to mandatory redemption on July 1, 2004
at a price of $1,000 per share plus all accumulated and unpaid dividends.. 199,164 226,038
Commitments and Contingencies (Note 10)
Stockholders' Equity (Deficit):
Preferred Stock (Note 7).................................................. 121,132 129,473
Class A Common Stock, $.01 par value, 200,000,000 shares authorized,
15,005,670 and 15,317,380 shares issued and outstanding, respectively... 150 153
Class B Common Stock, $.01 par value, 100,000,000 shares authorized,
29,804,401 shares issued and outstanding................................ 298 298
Class C Common Stock, $.01 par value, 100,000,000 shares authorized, none
outstanding............................................................. - -
Common Stock Warrants..................................................... 12 12
Additional paid-in capital................................................ 226,462 231,617
Accumulated other comprehensive loss...................................... (19) -
Accumulated deficit....................................................... (436,996) (733,093)
----------------------------
Total stockholders' equity (deficit)......................................... (88,961) (371,540)
----------------------------
Total liabilities and stockholders' equity (deficit).................... $ 1,805,646 $ 1,806,852
----------------------------
----------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1997 1998
-------------------------------------------------
<S> <C> <C> <C>
REVENUE:
DISH Network:
Subscription television services..................... $ 49,650 $ 298,883 $ 669,310
Other................................................ 10,482 45,367 13,722
-------------------------------------------------
Total DISH Network..................................... 60,132 344,250 683,032
DTH equipment sales and integration services........... 78,062 91,637 256,193
Satellite services..................................... 5,822 11,135 22,366
C-band and other....................................... 54,885 30,396 21,075
-------------------------------------------------
Total revenue............................................. 198,901 477,418 982,666
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses.......................... 22,840 143,574 296,923
Customer service center and other.................... 13,043 35,137 72,496
Satellite and transmission........................... 6,573 14,563 25,992
-------------------------------------------------
Total DISH Network operating expenses.................. 42,456 193,274 395,411
Cost of sales - DTH equipment and integration services. 76,384 61,992 173,388
Cost of sales - C-band and other....................... 42,349 23,909 16,496
Marketing:
Subscriber promotion subsidies....................... 33,591 145,061 272,523
Advertising and other................................ 17,929 34,862 47,998
-------------------------------------------------
Total marketing expenses............................... 51,520 179,923 320,521
General and administrative............................. 52,123 69,315 97,105
Amortization of subscriber acquisition costs........... 16,073 121,735 18,869
Depreciation and amortization.......................... 27,341 51,541 83,767
-------------------------------------------------
Total costs and expenses.................................. 308,246 701,689 1,105,557
-------------------------------------------------
Operating loss............................................ (109,345) (224,271) (122,891)
Other Income (Expense):
Interest income........................................ 15,630 17,251 30,286
Interest expense, net of amounts capitalized........... (61,487) (104,192) (167,529)
Other.................................................. (477) (1,467) (704)
-------------------------------------------------
Total other income (expense).............................. (46,334) (88,408) (137,947)
-------------------------------------------------
Loss before income taxes.................................. (155,679) (312,679) (260,838)
Income tax benefit (provision), net....................... 54,693 (146) (44)
-------------------------------------------------
Net loss.................................................. $(100,986) $ (312,825) $ (260,882)
-------------------------------------------------
-------------------------------------------------
Change in unrealized gain (loss) on available-for-sale
securities, net of tax ................................ (250) (8) 19
-------------------------------------------------
-------------------------------------------------
Comprehensive loss........................................ $(101,236) $ (312,833) $ (260,863)
-------------------------------------------------
-------------------------------------------------
Net loss attributable to common shareholders (Note 2)..... $(102,190) $ (321,267) $ (296,097)
-------------------------------------------------
-------------------------------------------------
Weighted-average common shares outstanding................ 40,548 41,918 44,982
-------------------------------------------------
-------------------------------------------------
Basic and diluted loss per share.......................... $ (2.52) $ (7.66) $ (6.58)
-------------------------------------------------
-------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT AND
COMMON STOCK SERIES A SERIES C COMMON ADDITIONAL UNREALIZED
-------------------- PREFERRED PREFERRED STOCK PAID-IN HOLDING GAINS
SHARES AMOUNT STOCK STOCK WARRANTS CAPITAL (LOSSES) TOTAL
------------------------------------------------------------------------------------------
(Notes 1 and 7)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995............ 40,339 $ 403 $ 17,195 $ - $ 714 $ 151,674 $ (13,300) $ 156,686
8% Series A Cumulative Preferred
Stock dividends (at $0.75 per
share)........................... - - 1,204 - - - (1,204) -
Exercise of Class A Common Stock
options and warrants............. 517 5 - - (698) 2,952 - 2,259
Income tax benefit of deduction for
income tax purposes on exercise of
Class A Common Stock options..... - - - - - 2,372 - 2,372
Employee benefits funded by issuance
of Class A Common Stock.......... 64 1 - - - 1,115 - 1,116
Unrealized holding losses on
available-for-sale securities, net - - - - - - (250) (250)
Net loss........................... - - - - - - (100,986) (100,986)
------------------------------------------------------------------------------------------
Balance, December 31, 1996............ 40,920 409 18,399 - 16 158,113 (115,740) 61,197
8% Series A Cumulative Preferred
Stock dividends (at $0.75 per
share)........................... - - 1,204 - - - (1,204) -
12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock
dividends payable in-kind........ - - - - - - (6,164) (6,164)
Issuance of Class A Common Stock:
Acquisition of DBSC.............. 649 7 - - - 12,024 - 12,031
Exercise of stock options and
warrants....................... 98 1 - - (4) 948 - 945
Secondary public offering, net of
stock issuance costs of $2,648. 3,395 34 - - - 63,216 - 63,250
Employee benefits................ 14 - - - - 352 - 352
Employee Stock Purchase Plan..... 4 - - - - 63 - 63
Cancellation of Class A Common Stock
to foreclose on convertible
subordinated debentures from DBSI (270) (3) - - - (4,476) - (4,479)
Issuance of 6 3/4% Series C
Cumulative Convertible Preferred
Stock, net of issuance costs of
$3,778........................... - - - 100,455 - (3,778) - 96,677
Accretion of 6 3/4% Series C
Cumulative Convertible Preferred
Stock............................ - - - 1,074 - - (1,074) -
Unrealized holding losses on
available-for-sale securities, net - - - - - - (8) (8)
Net loss........................... - - - - - - (312,825) (312,825)
------------------------------------------------------------------------------------------
Balance, December 31, 1997............ 44,810 448 19,603 101,529 12 226,462 (437,015) (88,961)
8% Series A Cumulative Preferred
Stock dividends (at $0.75 per
share)........................... - - 1,204 - - - (1,204) -
12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock
dividends payable in-kind........ - - - - - - (26,874) (26,874)
Issuance of Class A Common Stock:
Exercise of stock options........ 196 2 - - - 2,494 - 2,496
Employee benefits................ 100 1 - - - 2,290 - 2,291
Employee Stock Purchase Plan..... 16 - - - - 371 - 371
Accretion of 6 3/4% Series C
Cumulative Convertible Preferred
Stock............................ - - - 7,137 - - (7,137) -
Unrealized holding gains on
available-for-sale securities, net - - - - - - 19 19
Net loss........................... - - - - - - (260,882) (260,882)
------------------------------------------------------------------------------------------
Balance, December 31, 1998............ 45,122 $ 451 $ 20,807 $ 108,666 $ 12 $ 231,617 $ (733,093) $ (371,540)
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
--------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................................... $(100,986) $(312,825) $(260,882)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization............................................. 27,341 51,541 83,767
Amortization of subscriber acquisition costs.............................. 16,073 121,735 18,869
Deferred income tax benefit............................................... (50,365) (373) -
Amortization of debt discount and deferred financing costs................ 61,695 83,221 125,724
Employee benefits funded by issuance of Class A Common Stock.............. 1,116 352 2,291
Change in reserve for excess and obsolete inventory....................... 2,866 (1,823) 1,341
Change in long-term deferred satellite services revenue and other
long-term liabilities................................................... 7,152 12,056 13,856
Other, net................................................................ (3,854) 442 -
Changes in current assets and current liabilities:
Trade accounts receivable, net.......................................... (4,337) (52,558) (41,159)
Inventories............................................................. (36,864) 51,597 (55,056)
Subscriber acquisition costs............................................ (84,202) (72,475) -
Other current assets.................................................... (6,513) 10,969 (10,264)
Trade accounts payable.................................................. 21,756 26,708 22,136
Deferred revenue........................................................ 103,511 18,612 10,275
Accrued expenses........................................................ 18,186 62,864 72,212
--------------------------------------
Net cash flows from operating activities..................................... (27,425) 43 (16,890)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities................................ (138,295) (308,006) (570,096)
Sales of marketable investment securities.................................... 135,176 51,513 627,860
Purchases of restricted marketable investment securities..................... (21,100) (1,145) -
Funds released from escrow and restricted cash and marketable investment
securities................................................................. 235,052 120,215 116,468
Offering proceeds and investment earnings placed in escrow................... (193,972) (227,561) (6,343)
Purchases of property and equipment.......................................... (221,889) (232,058) (161,140)
Issuance of notes receivable................................................. (30,000) - (17,666)
Payments received on note receivable......................................... - - 3,170
Expenditures for FCC authorizations.......................................... (55,419) - -
Other........................................................................ 2,805 (207) (301)
--------------------------------------
Net cash flows from investing activities..................................... (287,642) (597,249) (8,048)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Class A Common Stock........................... - 63,250 -
Net proceeds from issuance of 1996 Notes..................................... 336,916 - -
Net proceeds from issuance of 1997 Notes..................................... - 362,500 -
Net proceeds from issuance of 12 1/8% Series B Senior Redeemable Exchangeable
Preferred Stock............................................................ - 193,000 -
Net proceeds from issuance of 6 3/4% Series C Cumulative Convertible
Preferred Stock............................................................ - 96,677 -
Repayments of mortgage indebtedness and other notes payable.................. (6,631) (13,253) (16,552)
Net proceeds from Class A Common Stock options exercised and Class A Common
Stock issued to Employee Stock Purchase Plan.............................. 2,259 1,008 2,830
--------------------------------------
Net cash flows from financing activities..................................... 332,544 703,182 (13,722)
--------------------------------------
Net increase (decrease) in cash and cash equivalents......................... 17,477 105,976 (38,660)
Cash and cash equivalents, beginning of year................................. 21,754 39,231 145,207
--------------------------------------
Cash and cash equivalents, end of year....................................... $ 39,231 $ 145,207 $ 106,547
--------------------------------------
--------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
The operations of EchoStar Communications Corporation ("ECC," and
together with its subsidiaries, or referring to particular subsidiaries in
certain circumstances, "EchoStar" or the "Company") include three interrelated
business units:
- THE DISH NETWORK - a direct broadcast satellite ("DBS")
subscription television service in the United States. As of
December 31, 1998, EchoStar had approximately 1.9 million DISH
Network subscribers.
- ECHOSTAR TECHNOLOGIES CORPORATION ("ETC") - engaged in the
design, distribution and sale of DBS set-top boxes, antennae and
other digital equipment for the DISH Network ("EchoStar receiver
systems"), and the design and distribution of similar equipment
for direct-to-home ("DTH") projects of others internationally,
together with the provision of uplink center design, construction
oversight and other project integration services for
international direct-to-home ventures.
- SATELLITE SERVICES - engaged in the delivery of video, audio and
data services to business television customers and other
satellite users. These services may include satellite uplink
services, satellite transponder space usage, billing, customer
service and other services.
Since 1994, EchoStar has deployed substantial resources to develop the
"EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-allocated DBS spectrum, DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," and "EchoStar IV"), digital satellite receivers, digital
broadcast operations center, customer service facilities, and other assets
utilized in its operations. EchoStar's principal business strategy is to
continue developing its subscription television service in the United States to
provide consumers with a fully competitive alternative to cable television
service.
AGREEMENT WITH NEWS CORPORATION LIMITED AND MCI TELECOMMUNICATIONS
CORPORATION/WORLDCOM
On November 30, 1998, EchoStar announced an agreement with MCI
Telecommunications Corporation/WorldCom ("MCI"), The News Corporation Limited
("News Corporation") and its American Sky Broadcasting, LLC subsidiary, pursuant
to which EchoStar would acquire or receive:
- the rights to 28 frequencies at the 110 DEG. West Longitude
("WL") orbital location from which EchoStar could transmit
programming to the entire continental United States;
- two DBS satellites constructed by Space Systems/Loral, delivered
in-orbit and currently expected to be launched during 1999;
- a recently-constructed digital broadcast operations center
located in Gilbert, Arizona;
- a worldwide license agreement to manufacture and distribute
set-top boxes internationally using News Data System, Limited's
encryption/decoding technology;
- a commitment by an affiliated entity of News Corporation to
purchase from ETC a minimum of 500,000 set-top boxes; and
- a three-year, no fee agreement for the DISH Network to
rebroadcast FOX Broadcasting Company owned-and-operated local
station signals to their respective markets.
EchoStar will not incur any costs associated with the construction,
launch or insurance (including launch insurance and one year of in-orbit
insurance) of the two DBS satellites. EchoStar and MCI also agreed that MCI will
have the non-exclusive right to bundle DISH Network service with MCI's telephony
service offerings on mutually agreeable terms. In addition, EchoStar agreed to
carry the FOX News Channel on the DISH Network. EchoStar received standard
program launch support payments in exchange for carrying the programming.
By combining the capacity of the two newly acquired satellites at the
110 DEG. WL orbital slot and EchoStar's current satellites at the 119(DEG.)
WL orbital slot (subject to FCC approval), EchoStar expects that the DISH
Network will have the capacity to provide more than 500 channels of programming,
Internet and high-speed data services
F-7
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and high definition television nationwide to a subscriber's single 18-inch
satellite dish, and would be positioned to offer a one-dish solution for
satellite-delivered local programming to major markets across the United States.
EchoStar also expects to be able to serve Alaska, Hawaii, Puerto Rico and the
United States territories in the Caribbean from the 110 DEG. WL orbital slot.
The transaction with News Corporation and MCI (the "110 Acquisition")
will result in the issuance of additional shares of EchoStar's Class A common
stock. The exact number of shares of Class A common stock to be issued as
consideration for the transaction will not be determinable until immediately
prior to closing of the transaction. The number of shares that will be issued is
based on the following formula. If the average closing price of EchoStar's Class
A common stock for the 20 trading days immediately prior to closing of the
transaction is between $15.00 per share and $39.00 per share, News Corporation
and MCI will receive 24,030,000 and 5,970,000 newly-issued shares of Class A
common stock, respectively, for a total of 30,000,000 shares. If the average
closing price of EchoStar's Class A common stock for the 20 trading days prior
to closing exceeds $39.00 per share, the number of the newly-issued shares will
be determined by dividing $1.17 billion by such average price. If the average
closing price of EchoStar's Class A common stock for the 20 trading days prior
to closing is less than $15.00 per share, the number of the newly-issued shares
will be determined by dividing $450 million by such average price. Consummation
of this transaction is subject to approval by the FCC and EchoStar's
shareholders. Charles W. Ergen, President and Chief Executive Officer of
EchoStar and its controlling shareholder, has agreed to vote in favor of the
transaction.
TENDER OFFERS
On December 23, 1998, EchoStar commenced cash tender offers ("Tender
Offers") as part of a plan to refinance its indebtedness at more favorable
interest rates and terms. EchoStar offered to purchase any and all of the
following debt securities issued by its direct and indirect subsidiaries:
- the 12 7/8% Senior Secured Discount Notes due June 1, 2004 issued
by Dish, Ltd. (the "1994 Notes");
- the 13 1/8% Senior Secured Discount Notes due 2004 issued by
EchoStar Satellite Broadcasting Corporation (the "1996 Notes");
and
- the 12 1/2% Senior Secured Notes due 2002 issued by EchoStar DBS
Corporation (the "1997 Notes").
EchoStar also announced that it had sent to all holders of its issued
and outstanding 12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock
due 2004 (the "Series B Preferred Stock") a notice to exchange all of the
outstanding shares of Series B Preferred Stock into 12 1/8% Senior Preferred
Exchange Notes due 2004 (the "Senior Exchange Notes") on the terms and
conditions set forth in the certificate of designation relating to the Series B
Preferred Stock. The Senior Exchange Notes were issued on January 4, 1999.
Immediately following the exchange, EchoStar commenced an offer to purchase any
and all outstanding Senior Exchange Notes.
The Tender Offers for the first three issues of notes were consummated
on January 25, 1999. The Tender Offers were funded with proceeds from the
offering of the 9 1/4% Senior Notes due 2006 (the "Seven Year Notes") and the 9
3/8% Senior Notes due 2009 (the "Ten Year Notes," and together with the Seven
Year Notes, the "Notes") described at Note 4, with holders of more than 99% of
each issue of debt securities tendering their notes and consenting to certain
amendments to the indentures governing the notes that eliminated substantially
all of the restrictive covenants and amended certain other provisions. The
Tender Offer for the Senior Exchange Notes expired on February 1, 1999, with
more than 99% of the outstanding Senior Exchange Notes being validly tendered.
RETIREMENT OF SERIES A PREFERRED STOCK
On February 8, 1999, EchoStar repurchased all outstanding shares of its
Series A Preferred Stock at $52.611 per share (the average of the preceding 20
trading day closing price of EchoStar's Class A common stock). The total
repurchase price was approximately $91 million, including accrued dividends of
approximately $6 million. The carrying value of the Series A Preferred Stock,
including accrued dividends, as of the date of repurchase was approximately $21
million. All of the shares of Series A Preferred Stock were owned by Charles W.
Ergen, President and CEO, and James DeFranco, Executive Vice President.
F-8
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA FINANCIAL INFORMATION
The following table sets forth: (i) certain historical balance sheet
data as of December 31, 1998, (ii) a balance sheet as of December 31, 1998 as
adjusted to give effect to the consummation of the Tender Offers, the concurrent
issuance of the Notes, and the repurchase of the 8% Series A Cumulative
Preferred Stock, and (iii) a balance sheet as of December 31, 1998 as further
adjusted for the pro forma effects assuming consummation of the 110 Acquisition.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
------------------------------------------
AS ADJUSTED
ACTUAL AS ADJUSTED AND PRO FORMA
------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Cash, cash equivalents, and marketable investment securities.... $ 324,100 $ 353,699 $ 353,699
Restricted cash and marketable investment securities............ 77,657 - -
------------------------------------------
Total cash, cash equivalents and marketable investment
securities................................................... 401,757 353,699 353,699
------------------------------------------
------------------------------------------
Total assets $ 1,806,852 $ 1,762,883 $ 2,932,883
------------------------------------------
------------------------------------------
Long-term debt (net of current portion):
Mortgages and notes payable.................................. $ 43,450 $ 43,450 $ 43,450
1994 Notes................................................... 571,674 1,390 1,390
1996 Notes................................................... 497,955 950 950
1997 Notes................................................... 375,000 15 15
Senior Exchange Notes........................................ - 5 5
9 1/4% Senior Notes due 2006................................. - 375,000 375,000
9 3/8% Senior Notes due 2009................................. - 1,625,000 1,625,000
------------------------------------------
Total long-term debt....................................... 1,488,079 2,045,810 2,045,810
12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock,
$.01 par value, 900,000 shares authorized, 225,301, and none
shares issued and outstanding, respectively; subject to
mandatory redemption on July 1, 2004 at a price of $1,000 per
share plus all accumulated and unpaid dividends.............. 226,038 - -
Stockholders' Equity (Deficit):
Preferred Stock, 20,000,000 shares authorized (inclusive of
900,000 shares designated as Series B Preferred Stock):
8% Series A Cumulative Preferred Stock, 1,616,681,
and none shares issued and outstanding,
including cumulative accrued dividends of
$5,755,000 and none, respectively..................... 20,807 - -
6 3/4% Series C Cumulative Convertible Preferred
Stock, 2,300,000 shares issued and outstanding........ 108,666 108,666 108,666
Class A Common Stock, $.01 par value, 200,000,000 shares
authorized, 15,317,380 and 38,236,087 shares issued and
outstanding, respectively.................................. 153 153 382
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........................................ 12 12 12
Additional paid-in capital................................... 231,617 231,617 1,401,388
Accumulated deficit.......................................... (733,093) (1,087,948) (1,087,948)
------------------------------------------
Total stockholders' equity (deficit)............................ (371,540) (747,202) 422,798
------------------------------------------
Total liabilities and stockholders' equity (deficit)............ $ 1,806,852 $ 1,762,883 $ 2,932,883
------------------------------------------
------------------------------------------
</TABLE>
F-9
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restrictions on cash held in escrow under the terms of indentures were
removed as a result of the Tender Offers. The restricted cash balances as of
December 31, 1998 have been reclassified and included in the "as adjusted"
amount of cash, cash equivalents and marketable investment securities. The
restriction on the insurance receivable of $106 million (not shown) was also
removed.
The increase in as adjusted and pro forma total assets includes $1.17
billion of assets to be acquired by EchoStar pursuant to the 110 Acquisition
offset by an approximately $48.1 million decrease in total cash, cash
equivalents and marketable investment securities as a result of the Tender
Offers and EchoStar's redemption on February 8, 1999, of all of its outstanding
Series A Preferred Stock and related accumulated dividends (approximately $91
million).
The increase in additional paid-in capital consists of the additional
assets valued at $1.17 billion, to be acquired by EchoStar in the 110
Acquisition. Based on the 20 trading day average closing price of EchoStar's
Class A Shares of $51.05 as of March 11, 1999, EchoStar would have issued
22,918,707 shares to consummate the 110 Acquisition.
The increase in accumulated deficit results from (a) interest expense
of approximately $13.3 million from December 31, 1998 through January 25, 1999,
the date of consummation of the Tender Offers (other than with respect to the
Senior Exchange Notes) on debt repurchased and paid, (b) dividends on the Series
B Preferred Stock for the period between January 1, 1999 and January 4, 1999
(the date on which the Series B Preferred Stock was exchanged into Senior
Exchange Notes) and interest expense on the Senior Exchange Notes for the period
between January 4, 1999 and February 2, 1999 (the closing date of that Tender
Offer) totaling approximately $2.5 million, (c) approximately $70 million
representing the excess of the $91 million redemption price for the Series A
Preferred Stock over its carrying value at December 31, 1998 and (d) the
estimated extraordinary loss upon the early retirement of the notes pursuant to
the Tender Offers of approximately $269 million (approximately $236 million of
tender premiums and consent fees and approximately $33 million associated with
the write-off of unamortized deferred financing costs and other
transaction-related costs) that EchoStar will report in 1999.
ORGANIZATION AND LEGAL STRUCTURE
Certain companies principally owned and controlled by Mr. Charles W.
Ergen were reorganized in 1993 into Dish, Ltd. (together with its subsidiaries,
"Dish, Ltd."). In April 1995, ECC was formed to complete an initial public
offering of its Class A common stock. Concurrently, Mr. Ergen exchanged all of
his then outstanding shares of Class B common stock and 8% Series A Cumulative
Preferred Stock of Dish, Ltd. for like shares of ECC. In December 1995, ECC
merged Dish, Ltd. with a wholly-owned subsidiary of ECC (the "Merger").
Substantially all of EchoStar's operations are conducted by subsidiaries of
Dish, Ltd. The following table summarizes the organizational structure of
EchoStar and its principal subsidiaries as of December 31, 1998:
<TABLE>
<CAPTION>
REFERRED TO
LEGAL ENTITY HEREIN AS PARENT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
EchoStar Communications Corporation ECC Publicly owned
EchoStar DBS Corporation DBS Corp ECC
EchoStar Space Corporation Space ECC
Direct Broadcasting Satellite Corporation DBSC ECC
EchoStar Satellite Broadcasting Corporation ESBC DBS Corp
Dish, Ltd. Dish, Ltd. ESBC
EchoStar Satellite Corporation ESC Dish, Ltd.
Echosphere Corporation Echosphere Dish, Ltd.
EchoStar Technologies Corporation (formerly HTS, a Texas
Corporation) ETC Dish, Ltd.
Houston Tracker Systems, Inc., a Colorado Corporation formed in
1998 HTS Dish, Ltd.
DirectSat Corporation DirectSat Dish, Ltd.
EchoStar International Corporation EIC Dish, Ltd.
</TABLE>
F-10
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
During March 1999, EchoStar received FCC approval to implement a
reorganization in order to streamline its organization and operations. EchoStar
intends to place ownership of all of its direct broadcast satellites and related
FCC licenses into ESC during the first quarter of 1999. DirectSat and DBSC,
which currently own EchoStar II and EchoStar III, respectively, will both be
merged into ESC. Dish, Ltd. and ESBC will be merged into DBS Corp. EchoStar IV
and the related FCC licenses, which are currently owned by DBS Corp, and those
satellites and FCC licenses to be acquired in the 110 Acquisition, also will be
transferred to ESC.
SIGNIFICANT RISKS AND UNCERTAINTIES
SUBSTANTIAL LEVERAGE. EchoStar is highly leveraged, which makes it
vulnerable to changes in general economic conditions. At December 31, 1998,
on a pro forma basis after giving effect to consummation of the Tender Offers
and the concurrent issuance of the Notes, EchoStar's outstanding long-term
debt (including both the current and long-term portions) would have been
approximately $2.07 billion. Beginning in 1999, EchoStar will have
semi-annual cash debt service requirements of approximately $94 million
related to the Notes. EchoStar's ability to meet its debt service obligations
will depend on, among other factors, the successful execution of its business
strategy, which is subject to uncertainties and contingencies beyond
EchoStar's control.
EXPECTED OPERATING LOSSES. Since 1996, EchoStar has reported
significant operating and net losses. Improvements in EchoStar's future
results of operations are largely dependent upon its ability to increase its
customer base while maintaining its overall cost structure, controlling
subscriber turnover and effectively managing its subscriber acquisition
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
EchoStar accounts for investments in 50% or less owned entities using
the equity method. At December 31, 1996, 1997 and 1998, these investments were
not material to EchoStar's consolidated financial statements. All significant
intercompany accounts and transactions have been eliminated.
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 EchoStar'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
1996, 1997 and 1998 were not material to EchoStar's results of operations.
CASH AND CASH EQUIVALENTS
EchoStar considers all liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents. Cash equivalents as of
December 31, 1997 and 1998 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
STATEMENTS OF CASH FLOWS DATA
The following presents EchoStar's supplemental cash flow statement
disclosure (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
--------------------------------------
<S> <C> <C> <C>
Cash paid for interest....................................................... $ 3,007 $ 5,073 $52,293
Cash paid for income taxes................................................... 383 209 83
Capitalized interest......................................................... 31,818 43,169 21,678
8% Series A Cumulative Preferred Stock dividends............................. 1,204 1,204 1,204
12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock dividends
payable in-kind........................................................... - 6,164 26,874
Accretion of 6 3/4% Series C Cumulative Convertible Preferred Stock.......... - 1,074 7,137
Class A Common Stock cancelled to foreclose on convertible subordinated
debentures from DBSI...................................................... - 4,479 -
Satellite launch payment for EchoStar II applied to EchoStar I launch........ 15,000 - -
Satellite vendor financing................................................... 31,167 14,400 12,950
Other notes payable.......................................................... - 5,322 -
The purchase price of DBSC was allocated as follows in the related purchase
accounting:
EchoStar III satellite under construction................................. - 51,241 -
FCC authorizations........................................................ - 16,243 -
Notes receivable from DBSC, including accrued interest of $3,382.......... - (49,369) -
Investment in DBSC........................................................ - (4,044) -
Accounts payable and accrued expenses..................................... - (1,540) -
Other notes payable....................................................... - (500) -
Common stock and additional paid-in capital............................... - (12,031) -
</TABLE>
MARKETABLE INVESTMENT SECURITIES AND RESTRICTED CASH AND MARKETABLE INVESTMENT
SECURITIES
As of December 31, 1997 and 1998, EchoStar has classified all
marketable investment securities as available-for-sale. The fair market value of
marketable investment securities approximates the carrying value and represents
the quoted market prices at the balance sheet dates. Related unrealized gains
and losses, if material, are reported as a separate component of stockholders'
equity, net of related deferred income taxes, if applicable. The specific
identification method is used to determine cost in computing realized gains and
losses.
Restricted cash and marketable investment securities held in escrow
accounts, as reflected in the accompanying consolidated balance sheets, include
cash restricted as of December 1997 and 1998 by the indenture related to the
1997 Notes, plus investment earnings thereon. Restricted cash and marketable
investment securities are invested in certain permitted debt and other
marketable investment securities until disbursed for the express purposes
identified in the applicable indenture. The major components of marketable
investment securities and restricted cash and marketable investment securities
are as follows (in thousands):
<TABLE>
<CAPTION>
RESTRICTED CASH AND MARKETABLE
MARKETABLE INVESTMENT SECURITIES INVESTMENT SECURITIES
DECEMBER 31, DECEMBER 31,
---------------------------------- -----------------------------------
1997 1998 1997 1998
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Commercial paper....................... $ 166,779 $ 87,099 $ 128,734 $ 8,424
Corporate notes........................ 78,238 84,520 38,093 54,360
Government bonds....................... 30,290 45,934 16,695 14,517
Certificates of deposit................ - - 2,245 -
Accrued interest....................... - - 1,995 356
---------------------------------- -----------------------------------
$ 275,307 $ 217,553 $ 187,762 $ 77,657
---------------------------------- -----------------------------------
---------------------------------- -----------------------------------
</TABLE>
F-12
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Marketable investment securities and restricted cash and marketable
investment securities include debt securities of $293 million with contractual
maturities of one year or less and $2 million with contractual maturities
between one and five years. As of December 31, 1998 EchoStar did not hold any
debt securities with contractual maturities of more than five years. Actual
maturities may differ from contractual maturities as a result of EchoStar's
ability to sell these securities prior to maturity. Subsequent to December 31,
1998, EchoStar has purchased, in open market transactions, a significant portion
of PrimeStar, Inc.'s ("PrimeStar") 10 7/8% Senior Subordinated Notes and 12 1/4%
Senior Subordinated Discount Notes, both of which have contractual maturities of
ten years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values for EchoStar's 1994 Notes, 1996 Notes, 1997 Notes and
Series B Preferred Stock are based on quoted market prices. The fair values of
EchoStar's mortgages and other notes payable are estimated using discounted cash
flow analyses. The interest rates assumed in such discounted cash flow analyses
reflect interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The following table summarizes the book and
fair values of EchoStar's debt facilities and Series B Preferred Stock at
December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------------- -------------------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
1994 Notes................................ $ 499,863 $ 570,960 $ 571,674 $ 636,480
1996 Notes................................ 438,512 488,650 497,955 580,000
1997 Notes................................ 375,000 406,875 375,000 431,250
Mortgages and other notes payable......... 69,731 69,127 66,129 61,975
12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock........... 199,164 209,000 226,038 259,944
</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 EchoStar's specifications. Manufactured
inventories include materials, labor and manufacturing overhead. Cost of other
inventories includes parts, contract manufacturers' delivered price, assembly
and testing labor, and related overhead, including handling and storage costs.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1998
------------------------------
<S> <C> <C>
EchoStar receiver systems.................................. $ 7,649 $ 45,025
DBS receiver components.................................... 12,506 27,050
Consigned DBS receiver components.......................... 3,122 6,073
Finished goods - analog DTH equipment...................... 2,116 2,656
Spare parts and other...................................... 1,440 1,085
Reserve for excess and obsolete inventory.................. (3,840) (5,181)
------------------------------
$ 22,993 $ 76,708
------------------------------
------------------------------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Cost includes interest
capitalized of $26 million, $32 million and $16 million during the years ended
December 31, 1996, 1997 and 1998, respectively. The costs of satellites under
construction are capitalized during the construction phase, assuming the
eventual successful launch and in-orbit operation of the satellite. If a
satellite were to fail during launch or while in-orbit, the resultant loss would
be charged to expense in the period such loss was incurred. The amount of any
such loss would be reduced to the extent of insurance proceeds received as a
result of the launch or in-orbit failure. Depreciation is recorded on a
straight-line basis for
F-13
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
financial reporting purposes. Repair and maintenance costs are charged to
expense when incurred. Renewals and betterments are capitalized.
EchoStar reviews its long-lived assets and identifiable intangible
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. For assets which are
held and used in operations, the asset would be impaired if the book value of
the asset exceeded the undiscounted future net cash flows related to the asset.
For those assets which are to be disposed of, the assets would be impaired to
the extent the fair value does not exceed the book value. EchoStar considers
relevant cash flow, estimated future operating results, trends and other
available information including the fair value of frequency rights owned, in
assessing whether the carrying value of assets are recoverable.
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 $6 million, $11 million and $6
million during the years ended December 31, 1996, 1997 and 1998, respectively.
REVENUE RECOGNITION
Revenue from the provision of DISH Network subscription television
services and satellite services is recognized as revenue in the period such
services are provided. Revenue from sales of digital set-top boxes and related
accessories is recognized upon shipment to customers. Revenue from the provision
of integration services is recognized as revenue in the period the services are
performed.
SUBSCRIBER PROMOTION SUBSIDIES AND SUBSCRIBER ACQUISITION COSTS
In August 1996, EchoStar began selling its EchoStar receiver systems
below its manufactured cost to consumers conditioned upon the consumer's
one-year prepaid subscription to the DISH Network's America's Top 50 CD
programming package. From August 1996 through September 1997, the excess of
EchoStar's aggregate costs (equipment, programming and other) over proceeds from
equipment sales and prepaid programming was expensed ("subscriber promotion
subsidies") upon shipment of the equipment. Remaining costs were deferred
("subscriber acquisition costs") and amortized over the term of the prepaid
subscription (normally one year). Effective October 1997, promotional programs
changed and new subscribers were not required to prepay for a year of
programming. Consequently, EchoStar began expensing subscriber acquisition costs
as incurred. As of December 31, 1998, all previously deferred costs were fully
amortized.
DEFERRED DEBT ISSUANCE COSTS AND DEBT DISCOUNT
Costs of issuing the 1994 Notes, the 1996 Notes and the 1997 Notes were
deferred and are being amortized to interest expense over the terms of the
respective notes. The original issue discounts related to the 1994 Notes and the
1996 Notes are being accreted to interest expense so as to reflect a constant
rate of interest on the accreted balance of the 1994 Notes and the 1996 Notes.
DEFERRED REVENUE
Deferred revenue principally consists of prepayments received from
subscribers for DISH Network programming. Such amounts are recognized as revenue
in the period the programming is provided to the subscriber.
LONG-TERM DEFERRED SATELLITE SERVICES REVENUE
Long-term deferred satellite services revenue consists of advance
payments from certain content providers for carriage of their signal on the DISH
Network. Such amounts are deferred and recognized as revenue on a straight-line
basis over the related contract terms (up to ten years).
F-14
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1998
---------------------------
<S> <C> <C>
Royalties and copyright fees................................ $ 21,573 $ 53,746
Programming................................................. 20,018 35,472
Marketing................................................... 4,660 33,463
Interest.................................................... 24,621 24,918
Other....................................................... 30,606 36,871
---------------------------
$ 101,478 $ 184,470
---------------------------
---------------------------
</TABLE>
ADVERTISING COSTS
Advertising costs, exclusive of subscriber promotion subsidies, are
expensed as incurred and totaled $18 million, $35 million and $48 million for
the years ended December 31, 1996, 1997 and 1998, respectively.
COMPREHENSIVE LOSS
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 130, "Reporting Comprehensive Income" ("FAS No. 130"),
which establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. EchoStar adopted FAS No. 130 effective as
of the first quarter of 1998. FAS No. 130 establishes new rules for the
reporting and display of comprehensive loss and its components, however it has
no impact on EchoStar's net loss or stockholders' equity. The change in
unrealized gain (loss) on available-for-sale securities is the only component of
EchoStar's other comprehensive loss. Accumulated other comprehensive loss
presented on the accompanying consolidated balance sheets consists of the
accumulated net unrealized loss on available-for-sale securities, net of
deferred taxes.
BASIC AND DILUTED LOSS PER SHARE
Earnings per share amounts for all periods are presented below in
accordance with the requirements of FAS No. 128.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1997 1998
-------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Numerator:
Net loss................................................... $ (100,986) $ (312,825) $ (260,882)
8% Series A Cumulative Preferred Stock dividends........... (1,204) (1,204) (1,204)
12 1/8% Series B Senior Redeemable Exchangeable Preferred
Stock dividends payable in-kind.......................... - (6,164) (26,874)
Accretion of 6 3/4% Series C Cumulative Convertible Preferred
Stock.................................................... - (1,074) (7,137)
-------------------------------------------------
Numerator for basic and diluted loss per share - loss
attributable to common shareholders........................ (102,190) (321,267) (296,097)
Denominator:
Denominator for basic and diluted loss per share -
weighted-average common shares outstanding............... 40,548 41,918 44,982
-------------------------------------------------
Basic and diluted loss per share.............................. $ (2.52) $ (7.66) $ (6.58)
-------------------------------------------------
-------------------------------------------------
Shares of Class A Common Stock issuable upon conversion of:
8% Series A Cumulative Preferred Stock..................... 1,617 1,617 1,617
6 3/4% Series C Cumulative Convertible Preferred Stock..... - 4,715 4,715
</TABLE>
F-15
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
As of December 31, 1996, 1997 and 1998, options to purchase
approximately 1,025,000, 1,525,000 and 1,447,000 shares of Class A common stock
were outstanding, respectively. Common stock equivalents (employee stock options
and warrants) are excluded from the calculation of diluted loss per share as
they are antidilutive. Securities that are convertible into shares of Class A
common stock (8% Series A Cumulative Preferred Stock and 6 3/4% Series C
Cumulative Convertible Preferred Stock) also are excluded from the calculation
of diluted loss per share as they are antidilutive.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides
guidance that requires capitalization of certain costs incurred during an
internal-use software development project. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998. EchoStar does not expect that adoption
of SOP 98-1 will materially affect EchoStar's consolidated financial statements.
RECLASSIFICATIONS
Certain prior year balances in the consolidated financial statements
have been reclassified to conform with the 1998 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998
------------------------------
<S> <C> <C>
EchoStar I....................................... $ 201,607 $ 201,607
EchoStar II...................................... 228,694 228,694
EchoStar III..................................... - 234,083
EchoStar IV...................................... - 105,005
Furniture, fixtures and equipment................ 92,264 182,747
Buildings and improvements....................... 28,101 60,867
Land............................................. 6,356 6,563
Tooling and other................................ 4,336 5,552
Vehicles......................................... 1,320 1,288
Construction in progress......................... 398,142 18,329
------------------------------
Total property and equipment................. 960,820 1,044,735
Accumulated depreciation......................... (85,961) (167,821)
------------------------------
Property and equipment, net.................. $ 874,859 $ 876,914
------------------------------
------------------------------
</TABLE>
EchoStar III, which was launched in October 1997, commenced commercial
operation in January 1998. EchoStar IV, which was launched in May 1998,
commenced commercial operation in August 1998. As of December 31, 1997
construction in progress primarily consisted of EchoStar III ($234 million) and
EchoStar IV ($120 million).
ECHOSTAR IV IMPAIRMENT
As previously announced, the south solar array on EchoStar IV did not
properly deploy subsequent to the launch of EchoStar IV on May 8, 1998. This
anomaly has resulted in a reduction of power available to operate the satellite.
In addition, an unrelated anomaly discovered during the third quarter of 1998
resulted in the failure of six transponders. The satellite is equipped with a
total of 44 transponders. Only 24 transponders are necessary to fully utilize
EchoStar's 24 frequencies at 148(degree) WL, where the satellite is located.
F-16
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
EchoStar is currently able to use a maximum of only 20 transponders as
a result of the solar array anomaly described above. The number of available
transponders will decrease over time, but based on existing data, EchoStar
expects that approximately 16 transponders will probably be available over the
entire expected 12 year life of the satellite, absent significant additional
transponder or other failures. In September 1998, EchoStar filed a $219.3
million insurance claim for a total constructive loss (as defined in the launch
insurance policy) related to EchoStar IV. However, if EchoStar were to receive
$219.3 million for a total constructive loss on the satellite, the insurers
would obtain the sole right to the benefits of salvage from EchoStar IV under
the terms of the launch insurance policy. While EchoStar believes it has
suffered a total constructive loss of EchoStar IV in accordance with that
definition in the launch insurance policy, EchoStar presently intends to
negotiate a settlement with the insurers that will compensate EchoStar for the
reduced satellite transmission capacity and allow EchoStar to retain title to
the asset.
During the third quarter of 1998, EchoStar recorded a $106 million
provision for loss in connection with the estimated reduced operational capacity
of EchoStar IV. This loss provision represents EchoStar's present estimate of
the asset impairment attributable to lost transmission capacity on EchoStar IV
resulting from the solar array anomaly described above. EchoStar also recorded a
$106 million gain attributable to an anticipated insurance claim receivable that
it believes is probable of receipt. While there can be no assurance as to the
amount of the final insurance settlement, EchoStar believes that it will receive
insurance proceeds related to EchoStar IV that will be sufficient to at least
fully offset its asset impairment attributable to the reduction in capacity
sustained by EchoStar IV. While EchoStar believes it has sustained a total
constructive loss, insurers have requested additional information and may
contest the claim. To the extent that it appears probable that EchoStar will
receive insurance proceeds in excess of the $106 million currently recorded and
that no further provision for loss is necessary, a gain will be recognized for
the incremental amount in the period that the amount of the final settlement can
be reasonably estimated. Likewise, if the satellite insurers obtain the right to
salvage from EchoStar IV by payment to EchoStar of the $219.3 million insured
amount, EchoStar will record an additional loss for the remaining carrying value
of EchoStar IV.
ECHOSTAR III ANOMALY
During 1998, three transponders on EchoStar III malfunctioned,
resulting in the failure of a total of six transponders on the satellite.
While a maximum of 32 transponders can be operated at any time, the satellite
was equipped with a total of 44 transponders to provide redundancy. As a
result of this redundancy and because EchoStar is only licensed by the FCC to
operate 11 transponders at 61.5 DEG. WL, where the satellite is located, the
transponder anomaly has not resulted in a loss of service to date. The
satellite manufacturer, Lockheed Martin, has advised EchoStar that it
believes it has identified the root cause of the failures, and that while
further transponder failures are possible, Lockheed Martin does not believe
it is likely that the operational capacity of EchoStar III will be reduced
below 32 transponders. Lockheed Martin also believes it is unlikely that
EchoStar's ability to operate at least the 11 licensed transponders on the
satellite will be affected. EchoStar will continue to evaluate the
performance of EchoStar III and may be required to modify its loss assessment
as new events or circumstances develop.
The time for filing a claim for a loss under the satellite insurance
policy that covered EchoStar III at the time of the transponder failures has
passed. While the insurance carriers were notified of the anomaly, as a result
of the built-in redundancy on the satellite and Lockheed Martin's conclusions
with respect to further failures, no claim for loss was filed. During the
anomaly investigation, EchoStar obtained a $200 million in-orbit insurance
policy on EchoStar III at standard industry rates, which was renewed through
June 25, 1999. However, the policy contains a three-transponder deductible if
the satellite is operating at 120 watts per transponder, or a six-transponder
deductible if the satellite is operating at 230 watts per transponder. As such,
the policy would not cover transponder failures unless transponder capacity is
reduced to less than 26 transponders in the 120 watt mode or 13 transponders in
the 230 watt mode, during the coverage period. As a result of the deductible,
EchoStar could potentially experience uninsured losses of capacity on EchoStar
III. Although there can be no assurance, EchoStar expects that in-orbit
insurance can be procured on more traditional terms in the future if no further
failures occur in the interim. If further failures do occur, EchoStar may not be
able to obtain additional insurance on EchoStar III on commercially reasonable
terms. EchoStar does not maintain insurance for lost profit opportunity.
F-17
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. LONG-TERM DEBT
As described in Note 1, except for residual aggregate non-tendered debt
of approximately $2.4 million, the 1994 Notes, 1996 Notes and the 1997 Notes
that were outstanding at December 31, 1998 were retired in connection with
closing of the Tender Offers and the concurrent sale of the Seven and Ten Year
Notes. Additionally, substantially all of the restrictive covenants contained in
each of the respective indentures were removed upon closing of the Tender
Offers. A brief summary of the terms of the residual notes outstanding follows.
1994 NOTES
In June 1994, Dish, Ltd. issued the 1994 Notes, which consisted of 12
7/8% Senior Secured Discount Notes due June 1, 2004 and Common Stock Warrants
(the "Warrants") (collectively, the "1994 Notes Offering"). The 1994 Notes
Offering resulted in net proceeds to Dish, Ltd. of $323 million. 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
$1,000 per bond (an aggregate of approximately $1.5 million for the bonds not
tendered) by that date. Commencing in December 1999, interest on the 1994 Notes
will be payable in cash on December 1 and June 1 of each year. The remaining
balance of 1994 Notes matures on June 1, 2004.
1996 NOTES
In March 1996, ESBC issued the 1996 Notes which consisted of 13 1/8%
Senior Secured Discount Notes due 2004 (the "1996 Notes Offering"). The 1996
Notes Offering resulted in net proceeds to ESBC of approximately $337 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 $1,000 per bond (an aggregate of approximately $1.1 million
for the bonds not tendered) by that date. Commencing in September 2000, interest
on the 1996 Notes will be payable in cash on September 15 and March 15 of each
year. The 1996 Notes that remain outstanding following the Tender Offers mature
on March 15, 2004.
1997 NOTES
In June 1997, DBS Corp issued the 1997 Notes which consisted of 12 1/2%
Senior Secured Notes due 2002 (the "1997 Notes Offering"). The 1997 Notes
Offering resulted in net proceeds to DBS Corp of approximately $363 million.
Interest accrues on the 1997 Notes at a rate of 12 1/2% and is payable in cash
semi-annually on January 1 and July 1 of each year, commencing January 1, 1998.
Approximately $109 million of the net proceeds of the 1997 Notes Offering was
placed in the Interest Escrow to fund the first five semi-annual interest
payments (through January 1, 2000). Additionally, approximately $112 million of
the net proceeds of the 1997 Notes Offering was placed in the Satellite Escrow
to fund the construction, launch and insurance of EchoStar IV. The 1997 Notes
that remain outstanding following the Tender Offers mature on July 1, 2002.
SEVEN AND TEN YEAR NOTES
On January 25, 1999, DBS Corp sold $375 million principal amount of
9 1/4% Senior Notes due 2006 (the Seven Year Notes) and $1.625 billion principal
amount of 9 3/8% Senior Notes due 2009 (the Ten Year Notes). Interest accrues at
annual rates of 9 1/4% and 9 3/8% on the Seven Year and Ten Year Notes,
respectively. Interest on the Seven and Ten Year Notes is payable semi-annually
in cash in arrears on February 1 and August 1 of each year, commencing August 1,
1999.
F-18
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Concurrently with the closing of the Notes offering, EchoStar used
approximately $1.658 billion of net proceeds received from the sale of the Notes
to complete the Tender Offers for its outstanding 1994 Notes, 1996 Notes and
1997 Notes. In February 1999, EchoStar used approximately $268 million of net
proceeds received from the sale of the Notes to complete the Tender Offers
related to the Senior Exchange Notes issued on January 4, 1999, in exchange for
all issued and outstanding 12 1/8% Series B Senior Redeemable Exchangeable
Preferred Stock. Following expiration of the Tender Offers, an aggregate of
approximately $2.4 million of 1994 Notes, 1996 Notes, 1997 Notes and Senior
Exchange Notes remain outstanding.
The Notes are general senior unsecured obligations, which (i) rank
PARI PASSU in right of payment to each other and to all existing and future
senior unsecured obligations, (ii) rank senior to all existing and future
junior obligations, and (iii) are effectively junior to secured obligations
to the extent of the collateral securing such obligations, including any
borrowings under future secured credit facilities. With the exception of
certain de minimis domestic and foreign subsidiaries, the Notes are fully,
unconditionally and jointly and severally guaranteed by all subsidiaries of
DBS Corp, (collectively, the "Notes Guarantors").
Except under certain circumstances requiring prepayment premiums, and
in other limited circumstances, the Seven and Ten Year Notes are not redeemable
at DBS Corp's option prior to February 1, 2003 and February 1, 2004,
respectively. Thereafter, the Seven Year Notes will be subject to redemption, at
the option of DBS Corp, in whole or in part, at redemption prices decreasing
from 104.625% during the year commencing February 1, 2003 to 100% on or after
February 1, 2005, together with accrued and unpaid interest thereon to the
redemption date. The Ten Year Notes will be subject to redemption, at the option
of DBS Corp, in whole or in part, at redemption prices decreasing from 104.688%
during the year commencing February 1, 2004 to 100% on or after February 1,
2008, together with accrued and unpaid interest thereon to the redemption date.
The indentures related to the Notes (the "Indentures") contain
restrictive covenants that, among other things, impose limitations on the
ability of DBS Corp to: (i) incur additional indebtedness; (ii) apply the
proceeds of certain asset sales; (iii) create, incur or assume liens; (iv)
create dividend and other payment restrictions with respect to DBS Corp's
subsidiaries; (v) merge, consolidate or sell assets; and (vi) enter into
transactions with affiliates. In addition, DBS Corp may pay dividends on its
equity securities only if: (1) no default shall have occurred or is continuing
under the Indentures; 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 Indentures) would not exceed 8.0 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 Indentures) minus 120% of consolidated interest expense of DBS Corp
(calculated in accordance with the Indentures), in each case from April 1, 1999
plus an amount equal to 100% of the aggregate net cash proceeds received by DBS
Corp and its subsidiaries from the issuance or sale of certain equity interests
of DBS Corp or EchoStar.
In the event of a change of control, as defined in the Indentures, DBS
Corp will be required to make an offer to repurchase all of the Seven and Ten
Year 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-19
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MORTGAGES AND OTHER NOTES PAYABLE
Mortgages and other notes payable consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1998
---------------------------
<S> <C> <C>
8.25% note payable for satellite vendor financing for EchoStar I due in equal
monthly installments including interest, through February 2001............... $ 24,073 $ 17,137
8.25% note payable for satellite vendor financing for EchoStar II due in equal
monthly installments of $562, including interest, through November 2001...... 22,489 17,416
8.25% note payable for satellite vendor financing for EchoStar III due in
equal monthly installments of $294, including interest, through October 2002. 13,812 12,183
8.25% note payable for satellite vendor financing for EchoStar IV due in equal
monthly installments of $264, including interest, through May 2003........... - 12,950
Mortgages and other unsecured notes payable due in installments through April
2009 with interest rates ranging from 8% to 10%.............................. 9,357 6,443
---------------------------
Total.......................................................................... 69,731 66,129
Less current portion........................................................... (17,885) (22,679)
---------------------------
Mortgages and other notes payable, net of current portion...................... $ 51,846 $ 43,450
---------------------------
---------------------------
</TABLE>
Future maturities of EchoStar's outstanding long-term debt, after
consummation of the Tender Offers and issuance of the Notes on January 25, 1999,
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
MORTGAGES
AND OTHER
SEVEN YEAR TEN YEAR NOTES
NOTES NOTES PAYABLE TOTAL
------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDING DECEMBER 31,
1999...................... $ - $ - $ 22,679 $ 22,679
2000...................... - - 20,314 20,314
2001...................... - - 13,560 13,560
2002...................... - - 5,855 5,855
2003...................... - - 1,675 1,675
Thereafter................ 375,000 1,625,000 4,405 2,004,405
------------------------------------------------------------------
Total........................ $ 375,000 $ 1,625,000 $ 68,488 $ 2,068,488
------------------------------------------------------------------
------------------------------------------------------------------
</TABLE>
SATELLITE VENDOR FINANCING
The purchase price for satellites is required to be paid in progress
payments, some of which are non-contingent payments that are deferred until
after the respective satellites are in orbit (satellite vendor financing).
EchoStar utilized $36 million, $28 million, $14 million and $13 million of
satellite vendor financing for EchoStar I, EchoStar II, EchoStar III and
EchoStar IV, respectively. The satellite vendor financing with respect to
EchoStar I and EchoStar II is secured by substantially all assets of Dish, Ltd.
and its subsidiaries (subject to certain restrictions) and a corporate guarantee
of ECC. The satellite vendor financings for both EchoStar III and EchoStar IV
are secured by an ECC corporate guarantee.
F-20
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. INCOME TAXES
As of December 31, 1998, EchoStar had net operating loss carryforwards
("NOLs") for Federal income tax purposes of approximately $401 million. The NOLs
expire beginning in the year 2011. The use of the NOLs is subject to statutory
and regulatory limitations regarding changes in ownership. Financial Accounting
Standard No. 109, "Accounting for Income Taxes," ("FAS No. 109") requires that
the potential future tax benefit of NOLs be recorded as an asset. FAS No. 109
also requires that deferred tax assets and liabilities be recorded for the
estimated future tax effects of temporary differences between the tax basis and
book value of assets and liabilities. Deferred tax assets are offset by a
valuation allowance to the extent deemed necessary.
In 1998, EchoStar increased its valuation allowance sufficient to fully
offset net deferred tax assets arising during the year. Realization of net
deferred tax assets is not assured and is principally dependent on generating
future taxable income prior to expiration of the NOLs. Management believes
existing net deferred tax assets in excess of the valuation allowance will, more
likely than not, be realized. EchoStar continuously reviews the adequacy of its
valuation allowance. Future decreases to the valuation allowance will be made
only as changed circumstances indicate that it is more likely that not the
additional benefits will be realized. Any future adjustments to the valuation
allowance will be recognized as a separate component of EchoStar's provision for
income taxes.
The temporary differences which give rise to deferred tax assets and
liabilities as of December 31, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998
----------------------------
<S> <C> <C>
Current deferred tax assets:
Accrued royalties............................................... $ 6,506 $ 15,971
Inventory reserves and cost methods............................. 1,180 1,759
Accrued expenses................................................ 7,136 9,976
Allowance for doubtful accounts................................. 954 1,945
Reserve for warranty costs...................................... 270 101
Unrealized holding loss on marketable investment securities..... 11 -
----------------------------
Total current deferred tax assets................................. 16,057 29,752
Current deferred tax liabilities:
Subscriber acquisition costs and other.......................... (6,846) -
----------------------------
Total current deferred tax liabilities............................ (6,846) -
----------------------------
Gross current deferred tax assets................................. 9,211 29,752
Valuation allowance............................................... (5,771) (22,429)
----------------------------
Net current deferred tax assets................................... 3,440 7,323
Noncurrent deferred tax assets:
General business and foreign tax credits........................ 2,224 2,072
Net operating loss carryforwards................................ 117,317 147,097
Amortization of original issue discount on 1994 Notes and 1996
Notes......................................................... 60,831 105,095
Other........................................................... 7,571 13,000
----------------------------
Total noncurrent deferred tax assets.............................. 187,943 267,264
Noncurrent deferred tax liabilities:
Depreciation.................................................... (17,271) (24,013)
Other........................................................... (255) (322)
----------------------------
Total noncurrent deferred tax liabilities......................... (17,526) (24,335)
----------------------------
Gross deferred tax assets......................................... 170,417 242,929
----------------------------
Valuation allowance............................................... (106,708) (183,117)
----------------------------
Net noncurrent deferred tax assets................................ 63,709 59,812
----------------------------
Net deferred tax assets........................................... $ 67,149 $ 67,135
----------------------------
----------------------------
</TABLE>
F-21
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The components of the (provision for) benefit from income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1997 1998
---------------------------------------------
<S> <C> <C> <C>
Current (provision) benefit:
Federal........................................ $ 4,586 $ (373) $ 15
State.......................................... (49) (9) 18
Foreign........................................ (209) (137) (77)
---------------------------------------------
4,328 (519) (44)
Deferred (provision) benefit:
Federal........................................ 47,902 104,992 86,604
State.......................................... 2,463 7,860 6,463
Increase in valuation allowance................ - (112,479) (93,067)
---------------------------------------------
50,365 373 -
---------------------------------------------
Total (provision) benefit................... $ 54,693 $ (146) $ (44)
---------------------------------------------
---------------------------------------------
</TABLE>
The actual tax (provision) benefit for 1996, 1997 and 1998 are
reconciled to the amounts computed by applying the statutory Federal tax rate to
income before taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1997 1998
---------------------------------------------
<S> <C> <C> <C>
Statutory rate..................................... 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit......... 1.8 1.6 1.6
Research and development and foreign tax credits... - 0.7 -
Non-deductible interest expense.................... (1.3) (0.5) (1.4)
Other.............................................. (0.4) (0.8) 0.5
Increase in valuation allowance.................... - (36.0) (35.7)
---------------------------------------------
Total benefit from income taxes................. 35.1% -% -%
---------------------------------------------
---------------------------------------------
</TABLE>
6. SERIES B PREFERRED STOCK
In October 1997, EchoStar consummated an offering (the "Series B
Preferred Offering") of 12 1/8% Series B Senior Redeemable Exchangeable
Preferred Stock due 2004, par value $0.01 per share. The Series B Preferred
Offering resulted in net proceeds to EchoStar of approximately $193 million.
Each share of Series B Preferred Stock has a liquidation preference of $1,000
per share ("liquidation preference"). Dividends on the Series B 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 Series B
Preferred Stock having an aggregate liquidation preference equal to the amount
of such dividends. EchoStar met all of its dividend obligations during 1998 by
issuing additional shares of Series B Preferred Stock. Accrued dividends at
December 31, 1998 totaled approximately $7 million.
On January 4, 1999, EchoStar exercised its option to exchange all, but
not less than all, of the shares of Series B Preferred Stock then outstanding
for 12 1/8% Senior Exchange Notes due 2004. As previously described in Note 4,
EchoStar closed its tender offer for the Senior Exchange Notes on February 2,
1999. The Senior Exchange Notes not tendered (approximately $5,000) continue to
bear interest at a rate of 12 1/8% per annum, payable semi-annually 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. The Senior Exchange Notes that remain outstanding following the Tender
Offers mature on July 1, 2004.
F-22
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
7. STOCKHOLDERS' EQUITY (DEFICIT)
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.
PREFERRED STOCK
Preferred Stock consists of the following (in thousands, except share
data):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998
----------------------------
<S> <C> <C>
Preferred Stock, 20,000,000 shares authorized (inclusive of 900,000 shares
designated as Series B Preferred Stock, see Note 6):
8% Series A Cumulative Preferred Stock, 1,616,681 shares issued and
outstanding, including cumulative accrued dividends of $4,551 and
$5,755, respectively................................................ $ 19,603 $ 20,807
6 3/4% Series C Cumulative Convertible Preferred Stock, 2,300,000
shares issued and outstanding....................................... 101,529 108,666
----------------------------
Total Preferred Stock...................................................... $ 121,132 $ 129,473
----------------------------
----------------------------
</TABLE>
8% SERIES A CUMULATIVE PREFERRED STOCK
Each share of 8% Series A Cumulative Preferred Stock ("Series A
Preferred Stock") is convertible, at the option of the holder, into one share of
Class A common stock. The Series A Preferred Stock is stated at the aggregate
liquidation preference for all outstanding shares, which is limited to the
original value of the Series A Preferred Stock issued, plus accrued and unpaid
dividends thereon. As of December 31, 1998, the aggregate liquidation preference
for all outstanding shares was $20.8 million. Each share of Series A Preferred
Stock is entitled to receive dividends equal to 8% per annum of the initial
liquidation preference for such share. Each share of Series A 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. 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. Except as otherwise
required by law, holders of Series A Preferred Stock vote together with the
holders of Class A and Class B common stock as a single class. As previously
noted, the Series A shares were redeemed by EchoStar on February 8, 1999.
SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK
In November 1997, EchoStar issued 2.3 million shares of 6 3/4% Series C
Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") which
resulted in net proceeds to EchoStar of approximately $97 million. Simultaneous
with the issuance of the Series C Preferred Stock, the purchasers of the Series
C Preferred Stock placed approximately $15 million into an account (the "Deposit
Account"). EchoStar recorded proceeds from the issuance of the Series C
Preferred Stock net of the amount placed in the Deposit Account. Between the
date of issuance and November 2, 1999 (the date dividends begin to accrue),
EchoStar is accreting the proceeds from the issuance of the Series C Preferred
Stock to the face amount of $115 million. The Deposit Account will provide a
quarterly cash payment of approximately $0.844 per share of Series C Preferred
Stock (the "Quarterly Return Amount"), commencing February 1, 1998 and
continuing until November 1, 1999. After that date, dividends on the Series C
Preferred Stock will begin to accrue. EchoStar may, prior to the date on which
any Quarterly Return Amount would otherwise be payable, deliver a notice
instructing the deposit agent: (i) to purchase from EchoStar, for transfer to
each holder of
F-23
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, including amounts which have previously been deferred,
will be (i) paid to the holders of Series C Preferred Stock; or (ii) at
EchoStar's option, used to purchase from EchoStar for delivery 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 date of
EchoStar's notice.
Each share of Series C Preferred Stock has a liquidation preference of
$50 per share. 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. Each
share of Series C Preferred Stock is convertible at any time, unless previously
redeemed, at the option of the holder thereof, into approximately 2.05 shares of
Class A common stock, subject to adjustment upon the occurrence of certain
events. 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 price of $51.929 per share and thereafter at
prices declining to $50.000 per share on or after November 1, 2004, plus in each
case all accumulated and unpaid dividends to the redemption date.
8. STOCK COMPENSATION PLANS
STOCK INCENTIVE PLAN
In April 1994, EchoStar adopted a stock incentive plan (the "Stock
Incentive Plan") to provide incentive to attract and retain officers, directors
and key employees. EchoStar has reserved up to 10 million shares of its Class A
common stock for granting awards under the Stock Incentive Plan. All stock
options granted through December 31, 1998 have included exercise prices not less
than the fair market value of EchoStar's Class A common stock at the date of
grant, and vest, as determined by EchoStar's Board of Directors, generally at
the rate of 20% per year.
During 1998, EchoStar adopted the 1998 Incentive Plan which provided
certain key employees a contingent incentive that would be paid, at the key
employee's election, in stock options, a cash award or a combination thereof.
The payment of these incentives was contingent upon the achievement of certain
financial and other goals of EchoStar. EchoStar did not meet any of the goals
during 1998. Accordingly, no cash incentives were paid, all stock options
granted pursuant to the Incentive Plan were cancelled and no compensation
expense was recognized related to 1998 Incentive Plan. The Board of Directors
has approved a similar plan for 1999. Any payments under this plan are
contingent upon the achievement of certain financial and other goals.
F-24
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
A summary of EchoStar's incentive stock option activity for the years
ended December 31, 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------ ------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------------------ ------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
year........................ 1,117,133 $ 12.23 1,025,273 $14.27 1,524,567 $14.99
Granted........................ 138,790 27.02 779,550 17.05 698,135 18.78
Repriced....................... - - 255,794 17.00 - -
Exercised...................... (103,766) 10.24 (98,158) 9.64 (188,182) 12.52
Forfeited...................... (126,884) 13.27 (437,892) 19.46 (587,505) 17.08
------------------------ ------------------------- ------------------------
Options outstanding, end of year 1,025,273 $ 14.27 1,524,567 $14.99 1,447,015 16.29
------------------------ ------------------------- ------------------------
Exercisable at end of year..... 258,368 $ 11.31 347,009 $12.15 482,303 13.83
------------------------ ------------------------- ------------------------
------------------------ ------------------------- ------------------------
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ -- -----------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE EXERCISABLE
AS OF REMAINING WEIGHTED- AS OF WEIGHTED-
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1998 LIFE EXERCISE PRICE 1998 EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$9.333 - $11.870 306,379 3.72 $ 9.61 212,536 $ 9.57
17.000 - 18.290 937,546 6.19 17.04 265,271 17.03
22.000 - 26.688 203,090 7.28 22.88 4,496 26.69
- ---------------------------------------------------------------------------------------------------------------------
$9.333 - $26.688 1,447,015 5.82 $16.29 482,303 $13.83
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
On July 1, 1997, the Board of Directors approved a repricing of
substantially all outstanding options with an exercise price greater than $17.00
per share of Class A common stock to $17.00 per share. The Board of Directors
would not typically consider reducing the exercise price of previously granted
options. However, these options were repriced due to the occurrence of certain
events beyond the reasonable control of the employees of EchoStar which
significantly reduced the incentive these options were intended to create. The
fair market value of the Class A common stock was $15.25 on the date of the
repricing. Options to purchase approximately 256,000 shares of Class A common
stock were affected by this repricing.
ACCOUNTING FOR STOCK-BASED COMPENSATION
EchoStar 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, EchoStar does not recognize compensation expense on the issuance of stock
under its Stock Incentive Plan because the option terms are fixed and the
exercise price equals the market price of the underlying stock on the date of
grant. In October 1995, the Financial Accounting Standards Board issued
Financial Accounting Standard No. 123, "Accounting and Disclosure of Stock-Based
Compensation," ("FAS No. 123") which established an alternative method of
expense recognition for stock-based compensation awards to employees based on
fair values. EchoStar elected to not adopt FAS No. 123 for expense recognition
purposes.
F-25
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Pro forma information regarding net income and earnings per share is
required by FAS No. 123 and has been determined as if EchoStar had accounted for
its stock-based compensation plans using the fair value method prescribed by
that statement. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period. All
options are initially assumed to vest. Compensation previously recognized is
reversed to the extent applicable to forfeitures of unvested options. EchoStar's
pro forma net loss attributable to common shares and pro forma basic and diluted
loss per common share were as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1997 1998
----------------------------------------------
<S> <C> <C> <C>
Net loss attributable to common shares................ $(103,120) $(323,371) $(297,197)
----------------------------------------------
----------------------------------------------
Basic and diluted loss per share...................... $ (2.54) $ (7.71) $ (6.61)
----------------------------------------------
----------------------------------------------
</TABLE>
The fair value of each option grant was estimated at the date of the
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1997 1998
--------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate..................... 6.80% 6.09% 5.64%
Volatility factor........................... 62% 68% 67%
Dividend yield.............................. 0.00% 0.00% 0.00%
Expected term of options.................... 6 years 6 years 6 years
Weighted-average fair value of options
granted.................................... $ 16.96 $ 10.38 $ 12.03
</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.
9. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK PURCHASE PLAN
During 1997, the Board of Directors and shareholders approved an
employee stock purchase plan (the "ESPP"), effective beginning October 1, 1997.
Under the ESPP, EchoStar is authorized to issue a total of 100,000 shares of
Class A common stock. Substantially all full-time employees who have been
employed by EchoStar for at least one calendar quarter are eligible to
participate in the ESPP. Employee stock purchases are made through payroll
deductions. Under the terms of the ESPP, employees may not deduct an amount
which would permit such employee to purchase capital stock of EchoStar under all
stock purchase plans of EchoStar at a rate which would exceed $25,000 in fair
market value of capital stock in any one year. The purchase price of the stock
is 85% of the closing price of the Class A common stock on the last business day
of each calendar quarter in which such shares of Class A common stock are deemed
sold to an employee under the ESPP. The ESPP shall terminate upon the first to
occur of (i) October 1, 2007 or (ii) the date on which the ESPP is terminated by
the Board of Directors. During 1997 and 1998, employees purchased 4,430 and
15,776 shares of Class A common stock through the ESPP, respectively.
F-26
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
401(k) EMPLOYEE SAVINGS PLAN
EchoStar sponsors a 401(k) Employee Savings Plan (the "401(k) Plan")
for eligible employees. Voluntary employee contributions to the 401(k) Plan may
be matched 50% by EchoStar, subject to a maximum annual contribution by EchoStar
of $1,000 per employee. EchoStar also may make an annual discretionary
contribution to the plan with approval by EchoStar's Board of Directors, subject
to the maximum deductible limit provided by the Internal Revenue Code of 1986,
as amended. EchoStar's cash contributions to the 401(k) Plan totaled $226,000,
$329,000 and $314,000 during 1996, 1997 and 1998, respectively. Additionally,
EchoStar contributed 55,000 shares of its Class A common stock in 1996 (fair
value of $935,000) to the 401(k) Plan as a discretionary contribution. During
1998, EchoStar contributed 80,000 shares of its Class A common stock (fair value
of approximately $2 million) to the 401(k) Plan related to its 1997
discretionary contribution. During 1999, EchoStar expects to contribute 65,000
shares of its Class A common stock (fair value of approximately $3 million) to
the 401(k) Plan related to its 1998 discretionary contribution.
10. OTHER COMMITMENTS AND CONTINGENCIES
LEASES
Future minimum lease payments under noncancelable operating leases as
of December 31, 1998, are as follows (in thousands):
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
1999..................................................... $ 2,067
2000..................................................... 1,795
2001..................................................... 1,590
2002..................................................... 1,305
2003..................................................... 1,240
Thereafter............................................... 3,874
------------
Total minimum lease payments.......................... $ 11,871
------------
------------
</TABLE>
Total rental expense for operating leases approximated $1 million in
1996, 1997 and 1998.
PURCHASE COMMITMENTS
As of December 31, 1998, EchoStar's purchase commitments totaled
approximately $59 million. The majority of these commitments relate to EchoStar
receiver systems and related components. All of the purchases related to these
commitments are expected to be made during 1999. EchoStar expects to finance
these purchases from existing unrestricted cash balances and future cash flows
generated from operations, if any.
THE NEWS CORPORATION LIMITED
During February 1997, EchoStar and News Corporation announced an
agreement pursuant to which, among other things, News Corporation agreed to
acquire approximately 50% of the outstanding capital stock of EchoStar. News
Corporation also agreed to make available for use by EchoStar the DBS permit for
28 frequencies at the 110 DEG. WL orbital slot purchased by MCI for more than
$682 million following a 1996 FCC auction. During late April 1997, substantial
disagreements arose between the parties regarding their obligations under this
agreement. Those substantial disagreements led the parties to litigation. In
mid-1997, EchoStar filed a complaint seeking specific performance of this
agreement and damages, including lost profits. News Corporation filed an answer
and counterclaims seeking unspecified damages, denying all of the material
allegations and asserting numerous defenses. Discovery commenced in July 1997,
and the case was set for trial commencing March 1999. In connection with the
pending 110 Acquisition, the litigation between EchoStar and News Corporation
will be stayed and will be dismissed with prejudice upon closing or if the
transaction is terminated for reasons other than the breach by, or failure to
fill a condition within the control of, News Corporation or MCI.
F-27
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In connection with the News Corporation litigation that arose in 1997,
EchoStar has a contingent fee arrangement with its lawyers, which provides for
the lawyers to be paid a percentage of any net recovery obtained in its dispute
with News Corporation. Although they have not been specific, the lawyers have
asserted that they may be entitled to receive payments in excess of $80 million
to $100 million under this fee arrangement in connection with the settlement of
the dispute with News Corporation. EchoStar intends to vigorously contest the
lawyers' interpretation of the fee arrangement, which it believes significantly
overstates the magnitude of its liability thereunder. If the lawyers and
EchoStar are unable to resolve this fee dispute under the fee arrangement, the
fee dispute would be resolved under arbitration. It is too early to determine
the outcome of negotiations or arbitration regarding this fee dispute.
WIC PREMIUM TELEVISION LTD.
On July 28, 1998, a lawsuit was filed by WIC Premium Television Ltd.
("WIC"), an Alberta corporation, in the Federal Court of Canada Trial Division,
against certain defendants which include: General Instrument Corporation, HBO,
Warner Communications, Inc., John Doe, Showtime, United States Satellite
Broadcasting Corporation, ECC and two of ECC's wholly-owned subsidiaries, Dish,
Ltd. and Echosphere. The lawsuit seeks, among other things, an interim and
permanent injunction prohibiting the defendants from activating receivers in
Canada and from infringing any copyrights held by WIC. It is too early to
determine whether or when any other lawsuits and/or claims will be filed. It is
also too early to make an assessment of the probable outcome of the litigation
or to determine the extent of any potential liability or damages.
On September 28, 1998, WIC filed another lawsuit in the Court of
Queen's Bench of Alberta Judicial District of Edmonton against certain
defendants, which also include ECC, Dish, and Echosphere. WIC is a company
authorized to broadcast certain copyrighted work, such as movies and concerts,
to residents of Canada. WIC alleges that the defendants engaged in, promoted,
and/or allowed satellite dish equipment from the United States to be sold in
Canada and to Canadian residents and that some of the defendants allowed and
profited from Canadian residents purchasing and viewing subscription television
programming that is only authorized for viewing in the United States. The
lawsuit seeks, among other things, interim and permanent injunction prohibiting
the defendants from importing hardware into Canada and from activating receivers
in Canada and damages in excess of the equivalent of US $175 million. It is too
early to determine whether or when any other lawsuits and/or claims will be
filed. It is also too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages.
BROADCAST NETWORK PROGRAMMING
Section 119 of the Satellite Home Viewer Act authorizes EchoStar to
substitute satellite-delivered network signals its subscribers, but only if
those subscribers qualify as "unserved" households, defined in the Satellite
Home Viewer Act, those that, among other things, "cannot receive, through the
use of a conventional outdoor rooftop receiving antenna, an over-the-air signal
of Grade B intensity (as defined by the FCC) of a primary network station
affiliated with that network." Historically, EchoStar obtained distant broadcast
network signals for distribution to its subscribers through PrimeTime 24, Joint
Venture ("PrimeTime 24"). PrimeTime 24 also distributes network signals to
certain of EchoStar's competitors in the satellite industry.
The national networks and local affiliate stations have recently
challenged PrimeTime 24's methods of selling network programming (national
and local) to consumers based upon infringement of copyright. The United
States District Court for the Southern District of Florida has entered
nationwide preliminary and permanent injunctions preventing PrimeTime 24 from
selling its programming to consumers unless the programming was sold
according to certain stipulations in the injunction. The preliminary
injunction took effect on February 28, 1999, and the permanent injunction is
set to take effect on April 30, 1999. The injunctions cover "distributors" as
well. The plaintiff in the Florida litigation informed EchoStar that it
considered EchoStar a "distributor" for purposes of that injunction. A
federal district court in North Carolina has also issued an injunction
against PrimeTime 24 prohibiting certain distant signal retransmissions to
homes delineated by a contour in the Raleigh area. Other copyright litigation
against PrimeTime 24 is pending.
F-28
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
EchoStar ceased delivering PrimeTime 24 programming in July 1998, and
began uplinking and distributing network signals directly. EchoStar has also
implemented Satellite Home Viewer Act Section 119 compliance procedures which
will materially restrict the market for the sale of network signals by EchoStar.
CBS and other broadcast networks have informed EchoStar that they believe
EchoStar's method of providing distant network programming violates the SHVA and
hence infringes their copyright.
On October 19, 1998, EchoStar filed a declaratory judgment action in
the United States District Court for the District of Colorado against the four
major networks. In the future, EchoStar may attempt to certify a class including
the networks as well as any and all owned and operated stations and any
independent affiliates. EchoStar has asked the court to enter a judgment
declaring that its method of providing distant network programming does not
violate the Satellite Home Viewer Act and hence does not infringe the networks'
copyrights.
On November 5, 1998, several broadcast parties, acting on prior threats
filed a complaint alleging, among other things, copyright infringement against
EchoStar in federal district court in Miami. The plaintiffs in that action have
also requested the issuance of a preliminary injunction against EchoStar. The
networks also filed a counter claim containing similar allegations against us in
the Colorado litigation.
On February 24, 1999, CBS, NBC, Fox, and ABC filed with the court a
"Motion for Temporary Restraining Order, Preliminary Injunction, and Contempt
Finding" against DIRECTV, Inc. ("DIRECTV") in response to an announcement by
DIRECTV that it was discontinuing retransmission of the programming of the
four networks received from PrimeTime 24 and would instead distribute its own
package of network affiliates to its existing subscribers. On February 25,
1999, the court granted CBS and Fox a temporary restraining order requiring
DIRECTV and its agents and those who act in active concert or participation
with DIRECTV, not to deliver CBS or Fox programming to subscribers who do not
live in "unserved households." For purposes of determining whether a
subscriber is "unserved," the court referred to a modified version of the
Longley-Rice signal propagation model. The modifications in some respects
reflect an order adopted by the FCC on February 2, 1999. On March 12, 1999,
DIRECTV and the four major broadcast networks and their affiliates announced
that they have reached a settlement of that dispute. Under the terms of the
settlement, DIRECTV, stations and networks have agreed on a timeframe to
disconnect distant broadcast network signals from subscribers predicted to be
ineligible based on a modified version of the Longley-Rice signal propagation
model. Subscribers predicted to be ineligible who obtain consent from the
affected affiliate stations to receive their signals via satellite will not
lose receipt of their distant network signals. Echostar is not sure what
effect this development will have on its business.
On March 24, 1999, we have a hearing scheduled in a Denver court on
similar matters with similar parties. If we were to lose that hearing, it is
likely that the broadcasters would move forward on their lawsuit filed in Miami
and would seek similar remedies against us, including a temporary restraining
order requiring us to stop delivering network signals to subscribers who do not
live in "unserved households." Depending upon the terms, a restraining order
could result in us having to terminate delivery of network signals to a material
portion of our subscriber base, which could result in decreases in subscriber
activations and subscription television services revenue and an increase in
subscriber turnover.
EchoStar is subject to various other legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect the financial position or results of operations of EchoStar.
METEOROID EVENTS
In November 1998 certain meteoroid events occurred as the earth's orbit
passed through the particulate trail of Comet 55P (Tempel-Tuttle). While there
can be no assurance, EchoStar believes that its DBS satellites did not incur any
significant damage as a result of these events. Similar meteoroid events are
expected to occur again in November 1999. These meteoroid events continue to
pose a potential threat to all in-orbit geosynchronous satellites, including
EchoStar's DBS satellites. While the probability that EchoStar's spacecraft will
be damaged by space debris is very small, that probability will increase by
several orders of magnitude during the November 1999 meteoroid events. EchoStar
is presently evaluating the potential effects that the November 1999 meteoroid
events may have on its DBS satellites. At this time, EchoStar has not finally
determined the impact, if any, these meteoroid events may have on EchoStar's DBS
satellites.
F-29
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11. SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
With the exception of certain de minimis domestic and foreign
subsidiaries (collectively, the "Non-Guarantors"), the Seven and Ten Year Notes
are fully, unconditionally and jointly and severally guaranteed by all
subsidiaries of DBS Corp.
The combined assets, stockholders' equity, net loss and operating cash
flows of the Non-Guarantors represent less than 1% of the combined and
consolidated assets, stockholders' equity, net loss and operating cash flows of
DBS Corp, including the non-guarantors during both 1997 and 1998. Summarized
combined and consolidated financial information for DBS Corp and the subsidiary
guarantors is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1997 1998
--------------------------------------------------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................... $ 196,988 $ 475,877 $ 985,909
Expenses.................................. 305,705 700,104 1,116,764
--------------------------------------------------------
Operating loss............................ (108,717) (224,227) (130,855)
Other income (expense).................... (47,640) (98,941) (163,449)
--------------------------------------------------------
Net loss before taxes..................... (156,357) (323,168) (294,304)
Income tax benefit (provision), net....... 54,849 (146) (72)
--------------------------------------------------------
Net loss.................................. $ (101,508) $ (323,314) $ (294,376)
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1997 1998
------------------------------------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets.................................................. $ 183,215 $ 241,582
Property and equipment, net..................................... 859,279 853,818
Other noncurrent assets......................................... 388,934 374,773
------------------------------------
Total assets.................................................... $ 1,431,428 $ 1,470,173
------------------------------------
------------------------------------
Current liabilities............................................. $ 305,656 $ 477,062
Long-term liabilities........................................... 1,439,318 1,581,249
Stockholder's equity (deficit).................................. (313,546) (588,138)
------------------------------------
Total liabilities and stockholder's equity (deficit)............ $ 1,431,428 $ 1,470,173
------------------------------------
------------------------------------
</TABLE>
12. SEGMENT REPORTING
EchoStar adopted Financial Accounting Standard No. 131, "Disclosures
About Segments of an Enterprise and Related Information" ("FAS No. 131")
effective as of the year ended December 31, 1998. FAS No. 131 establishes
standards for reporting information about operating segments in annual financial
statements of public business enterprises and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders and for related disclosures about products and
services, geographic areas, and major customers.
F-30
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
BUSINESS UNIT DESCRIPTIONS
The operations of EchoStar include three interrelated business units:
- THE DISH NETWORK - a DBS subscription television service in the
United States.
- ECHOSTAR TECHNOLOGIES CORPORATION - the design, distribution and
sale of EchoStar receiver systems for the DISH Network as well as
for direct-to-home projects of other internationally, together
with the provision of uplink center design, construction
oversight and other project integration services for
international direct-to-home ventures.
- SATELLITE SERVICES - engaged in the delivery of video, audio and
data services to business television customers and other
satellite users. These services my include satellite uplink
services, satellite transponder space usage, billing, customer
service and other services.
The accounting policies for the above business units are the same as
those described in the summary of significant accounting policies for the
consolidated entity. EchoStar accounts for intersegment sales and transfers at
cost. All other revenue and expenses from segments below the quantitative
thresholds are attributable to sales of C-band equipment and other corporate
administrative functions. Only those assets and measures of profit and loss that
are included in the measure of assets and profit and loss used by EchoStar's
chief operating decision maker are reported.
FINANCIAL DATA BY BUSINESS UNIT
<TABLE>
<CAPTION>
ECHOSTAR
DISH TECHNOLOGIES SATELLITE ELIMINATIONS CONSOLIDATED
NETWORK CORPORATION SERVICES AND OTHER TOTAL
------------ ---------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Revenue.......................... $ 142,913 $ 18,930 $ 2,542 $ 34,516 $ 198,901
Depreciation and amortization.... 2,356 1,143 - 39,915 43,414
Total expenses................... 161,404 26,007 1,724 119,111 308,246
EBITDA........................... (16,135) (7,685) 818 (42,929) (65,931)
Interest income.................. 1,894 730 - 13,006 15,630
Interest expense................. 2,015 3 - 59,469 61,487
Income tax benefit, net.......... 34,117 3,708 - 16,868 54,693
Net income (loss)................ 3,541 (6,187) 818 (99,158) (100,986)
YEAR ENDED DECEMBER 31, 1997
Revenue.......................... $ 378,377 $ 82,609 $ 3,458 $ 12,974 $ 477,418
Depreciation and amortization.... 158,992 1,659 - 12,625 173,276
Total expenses................... 569,998 73,081 329 58,281 701,689
EBITDA........................... (32,629) 11,186 3,129 (32,681) (50,995)
Interest income.................. 10,114 180 - 6,957 17,251
Interest expense................. 27,503 - - 76,689 104,192
Income tax provision, net........ (7) (32) - (107) (146)
Net income (loss)................ (231,223) 4,378 2,889 (88,869) (312,825)
YEAR ENDED DECEMBER 31, 1998
Revenue.......................... $ 733,382 $ 251,958 $ 23,442 $ (26,116) $ 982,666
Depreciation and amortization.... 85,107 2,097 26 15,406 102,636
Total expenses................... 871,269 193,852 3,495 36,941 1,105,557
EBITDA........................... (52,781) 60,202 19,973 (47,649) (20,255)
Interest income.................. 9,280 - 2 21,004 30,286
Interest expense................. 49,042 282 - 118,205 167,529
Income tax benefit (provision), net 17 (11) - (50) (44)
Net income (loss)................ (199,356) 30,333 18,409 (110,268) (260,882)
</TABLE>
F-31
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
OTHER
UNITED STATES EUROPE INTERNATIONAL TOTAL
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
1996
Total revenue*..................... $ 161,409 $ 26,984 $ 10,508 $ 198,901
Long-lived assets.................. 661,952 1,103 233 663,288
1997
Total revenue*..................... $ 447,977 $ 20,592 $ 8,849 $ 477,418
Long-lived assets.................. 972,909 1,217 121 974,247
1998
Total revenue*..................... $ 964,503 $ 18,163 $ - $ 982,666
Long-lived assets.................. 978,850 1,498 - 980,348
</TABLE>
* Revenues are attributed to geographic regions based upon the location from
which the sale originated.
TRANSACTIONS WITH MAJOR CUSTOMERS
During 1998, export sales to two customers together totaled $210
million and accounted for approximately 21% of EchoStar's total revenue.
Revenues for these customers are included within the EchoStar Technologies
Corporation business unit. Complete or partial loss of one or both of these
customers would have a material adverse effect on EchoStar's results of
operations.
13. VALUATION AND QUALIFYING ACCOUNTS
EchoStar's valuation and qualifying accounts as of December 31, 1996,
1997 and 1998 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, 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 and other.. 1,105 (342) - 763
YEAR ENDED DECEMBER 31, 1997:
Assets:
Allowance for doubtful accounts....... $ 1,494 $ 4,343 $ (4,490) $ 1,347
Loan loss reserve..................... 644 714 (104) 1,254
Reserve for inventory................. 5,663 1,650 (3,473) 3,840
Liabilities:
Reserve for warranty costs and other.. 763 - (53) 710
YEAR ENDED DECEMBER 31, 1998:
Assets:
Allowance for doubtful accounts....... $ 1,347 $ 10,692 $ (9,043) $ 2,996
Loan loss reserve..................... 1,254 858 (101) 2,011
Reserve for inventory................. 3,840 1,744 (403) 5,181
Liabilities:
Reserve for warranty costs and other.. 710 - (435) 275
</TABLE>
F-32
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
EchoStar's quarterly results of operations are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Total revenue................. $ 69,524 $ 98,691 $ 130,038 $ 179,165
Operating loss................ (44,596) (43,021) (88,725) (47,929)
Net loss...................... (62,866) (63,789) (115,157) (71,013)
Basic and diluted loss per share $ (1.54) $ (1.54) $ (2.78) $ (1.80)
Year Ended December 31, 1998:
Total revenue................. $ 214,439 $ 245,838 $ 235,407 $ 286,982
Operating loss................ (21,165) (16,244) (15,350) (70,132)
Net loss...................... (49,886) (45,717) (51,971) (113,308)
Basic and diluted loss per share $ (1.30) $ (1.21) $ (1.35) $ (2.72)
</TABLE>
15. SUBSEQUENT EVENTS
MEDIA4
On February 2, 1999, EchoStar consummated the acquisition of
privately-held Media4, Inc., ("Media4"), an Atlanta-based supplier of broadband
satellite networking equipment for personal computers. In connection with the
acquisition, EchoStar issued approximately 170,000 shares of its Class A common
stock valued at approximately $10 million for 100% ownership of Media4. The
acquisition of Media4 will be accounted for as a purchase transaction.
PRIMESTAR
On February 26, 1999, EchoStar announced that it had sent a letter to
the Board of Directors of PrimeStar expressing its desire and willingness to
make an offer to purchase PrimeStar's high-powered DBS assets. These assets
consist of two high-powered DBS satellites, Tempo I and Tempo II, and 11 of the
32 DBS frequencies capable of coverage of the entire continental United States,
located at the 119 DEG. WL orbital position. EchoStar's letter stated that it
was ready, willing and able to make an offer to pay $600 million of total
consideration (including assumed liabilities) for these assets on terms, other
than price, substantially the same as those contained in an agreement among
PrimeStar, Hughes Electronics Corporation, and certain other persons dated
January 22, 1999. The deadline for a response to this letter has subsequently
expired. Finalization of a future offer would be conditioned on the ability of
PrimeStar to enter into and perform its obligations under a definitive agreement
with EchoStar without breaching any contract to which PrimeStar or any of its
affiliates is a party or by which they are otherwise bound.
F-33
<PAGE>
AGREEMENT TO FORM
NAGRASTAR LLC
BY AND BETWEEN
ECHOSTAR COMMUNICATIONS CORPORATION
AND
KUDELSKI S.A.
<PAGE>
SUMMARY OF CONTENTS
AGREEMENT TO FORM NAGRASTAR LLC
Article I -- Definitions
Article II -- Purpose and Scope
Article III -- Entity Formation
Article IV -- Representations and Warranties
Article V -- Closing and Conditions Thereof
Article VI -- Personnel
Article VII -- Commitments to NagraStar
Article VIII -- Termination
Article IX -- Miscellaneous
FURTHER AGREEMENTS ATTACHED AS APPENDICES
A NagraStar Articles of Organization
B NagraStar Operating Agreement
C Agreements between Kudelski and EchoStar
C-1 Residual Agreement
C-2 Escrow Agreement
D Agreements between Kudelski and NagraStar
D-1 Software License Agreement
D-2 Service Agreement
D-3 Smart Card Purchase Agreement
E Agreements between NagraStar and EchoStar
E-1 Software License Agreement
E-2 Service Agreement
E-3 Smart Card Purchase Agreement
ii
<PAGE>
AGREEMENT TO FORM NAGRASTAR LLC
THIS AGREEMENT TO FORM NAGRASTAR LLC ("Agreement"), made and entered
into as of the twenty-third day of June, 1998, by and between Kudelski S.A.
(hereinafter referred to as "Kudelski"), incorporated under the laws of
Switzerland with principal place of business at 1033 Cheseaux Switzerland,
and EchoStar Communications Corporation, a Nevada corporation with its
principal place of business at 5701 S. Santa Fe Drive, Littleton, Colorado
80120 USA (hereinafter referred to as "EchoStar") and EchoStar Satellite
Corporation, a Colorado corporation with its principal place of business at
5701 S. Santa Fe Drive, Littleton, Colorado 80120 USA (hereinafter referred
to as "ESC").
INTRODUCTION
A. ESC, EchoStar, and Kudelski have Pre-Existing Contracts for the
provision of certain services and products by Kudelski to ESC and EchoStar.
B. The parties desire to restructure their rights, duties, and obligations
under the Pre-existing Contracts, in the manner set forth in this Agreement.
C. Kudelski desires that upon completion of the transactions contemplated
by this Agreement: (i) Kudelski will be a party to certain agreements with
NagraStar and EchoStar; and (ii) except for all duties and obligations with
respect to indemnification and warranty, the Pre-existing Contracts shall
terminate and be null and void and Kudelski shall have no rights, duties, or
obligations under the Pre-existing Contracts.
D. ESC and EchoStar desire that upon completion of the transactions
contemplated by this Agreement: (i) EchoStar will be a party to certain
agreements with NagraStar and Kudelski; and (ii) except for all rights with
respect to indemnification and warranty, the Pre-existing Contracts shall
terminate and be null and void and ESC and EchoStar shall have no rights,
duties, or obligations under the Pre-existing Contracts.
NOW, THEREFORE, in consideration of the mutual agreements hereinafter
set forth, the Parties represent, warrant, covenant and agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, where written with an initial capital
letter, the following terms, words and phrases shall have the following
meanings:
1.1 AFFILIATE. The term "Affiliate" shall mean any person or entity directly
or indirectly controlling, controlled by or under common control with, a
specified person or entity.
1
<PAGE>
1.2 ANCILLARY AGREEMENT(S). The term "Ancillary Agreement(s)" shall mean the
EchoStar Agreements, the Kudelski Agreements, the Escrow Agreement, and
the Residual Agreement.
1.3 CLOSING. The term "Closing" shall mean the actions taken to effect the
transactions contemplated herein, all as more specifically described in
Article V hereof.
1.4 CLOSING DATE. The term "Closing Date" shall mean the date and time at
which the Closing is held.
1.5 ECHOSTAR AGREEMENT(S). The term "EchoStar Agreement(s)" shall mean the
following agreements, by and between EchoStar and NagraStar, to be agreed
upon by EchoStar and Kudelski prior to the Closing Date: the EchoStar
Software License Agreement (Appendix E-1 to this Agreement), the EchoStar
Service and Development Agreement (Appendix E-2), and the EchoStar Smart
Card Purchase Agreement (Appendix E-3).
1.6 [CONFIDENTIAL MATERIAL REDACTED]
1.7 [CONFIDENTIAL MATERIAL REDACTED]
1.8 [CONFIDENTIAL MATERIAL REDACTED]
1.9 [CONFIDENTIAL MATERIAL REDACTED]
1.10 KUDELSKI AGREEMENT(S). The term "Kudelski Agreement(s)" shall mean the
following agreements by and between Kudelski and NagraStar, to be agreed
upon by Kudelski and EchoStar prior to the Closing Date: the Kudelski
Software License Agreement (Appendix D-1 to this Agreement), the Kudelski
Service and Development Agreement (Appendix D-2), and the Kudelski Smart
Card Purchase Agreement (Appendix D-3).
2
<PAGE>
1.11 [CONFIDENTIAL MATERIAL REDACTED]
1.12 [CONFIDENTIAL MATERIAL REDACTED]
1.13 [CONFIDENTIAL MATERIAL REDACTED]
1.14 NAGRASTAR. The term "NagraStar" shall mean that certain limited
liability company formed by the Parties pursuant to Section 3.1 hereof,
which shall be named "NagraStar LLC".
1.15 OPERATING AGREEMENT. The term "Operating Agreement" shall mean those
policies, practices and procedures which shall govern the operation of
NagraStar, to be agreed upon by EchoStar and Kudelski prior to the
Closing Date and which at Closing shall be attached hereto as Appendix B.
1.16 PARTY, PARTIES. The terms "Party" or "Parties" shall mean Kudelski
and/or EchoStar as the context requires.
1.17 PRE-EXISTING CONTRACTS. The term "Pre-existing Contracts" shall mean:
(a) the Digital NASP Offer for EchoStar, by and between ESC and the Nagra
Kudelski Group, dated February 2, 1995; (b) the Information Management
System Offer for EchoStar, by and between EchoStar and the Nagra Kudelski
Group, dated April 7, 1995; and (c) the Nagravision Offer for Support of
EchoStar Operations, by and between Kudelski, and either EchoStar or ESC
(the agreement is not clear on the precise party), dated February 5,
1997.
1.18 PRODUCT(S). The term "Products" shall mean the Smart Cards, the decoder
conditional access task, uplink datastream management systems, and any
other products or services within the scope of NagraStar's general
purpose, which the Parties may agree that NagraStar shall design,
manufacture, or distribute in accordance with Section 2.2 hereof.
1.19 [CONFIDENTIAL MATERIAL REDACTED]
3
<PAGE>
[CONFIDENTIAL MATERIAL REDACTED]
1.20 SUBSIDIARY. The term "Subsidiary" shall mean any corporation more than
fifty percent (50%) of whose outstanding shares or stock representing the
right to vote (except by reason of the occurrence of a contingency) for
the election of directors or members of a similar managing body are owned
or controlled, directly or indirectly, by a specified party.
ARTICLE II
PURPOSE AND SCOPE
2.1 GENERAL PURPOSE AND INITIAL SCOPE. Subject to and upon the terms and
conditions hereinafter set out, the Parties shall take all necessary
steps required to cause the formation of a limited liability company,
pursuant to the Colorado Limited Liability Company Act, to be named
"NagraStar LLC". The purpose and initial scope of NagraStar,
notwithstanding the generality of the purposes enumerated in the Articles
of Organization of NagraStar, shall be as set forth in the Operating
Agreement.
2.2 FUTURE SCOPE. In general, the future scope of the Company shall be as
set forth in the Operating Agreement.
RTICLE III
ENTITY FORMATION
3.1 FORMATION. The Parties have agreed upon the form of NagraStar's Articles
of Organization and shall ensure that such Articles have been filed with
the appropriate authorities of the State of Colorado. Such Articles of
Organization shall, at Closing, be substantially in the form of the
attached Appendix A. In addition, the Parties shall adopt the Operating
Agreement of NagraStar, which shall be attached hereto at Closing as
Appendix B. No change shall be made in or to said Articles of
Organization or said Operating Agreement prior to the Closing Date,
except with the prior written consent of the Parties.
3.2 [CONFIDENTIAL MATERIAL REDACTED]
3.3 [CONFIDENTIAL MATERIAL REDACTED]
4
<PAGE>
[CONFIDENTIAL MATERIAL REDACTED]
ARTICLE IV
[CONFIDENTIAL MATERIAL REDACTED]
5
<PAGE>
ARTICLE V
CLOSING AND CONDITIONS THEREOF
5.1 DETERMINATION OF CLOSING DATE. The Closing of the transactions provided
for in this Agreement shall take place at 2:00 p.m. on June 23, 1998, at
EchoStar's main offices in Littleton, Colorado, or at such other time and
place as may be mutually agreed upon by the Parties.
5.2 EVENTS OF CLOSING. Subject to the fulfillment of the requirements of
each party set forth herein which are to be fulfilled on or before the
Closing Date, EchoStar and Kudelski shall take such action and execute
and deliver such certificates, documents and instruments as may be
reasonably required by counsel for either Party to complete the
transactions contemplated by this Agreement in accordance with its
purpose and intent including, but not limited to, the payment by each
Party of the consideration for, and the issuance of their respective
certificates representing membership interests in NagraStar as provided
for in Section 3.2 hereof.
5.3 CONDUCT OF BUSINESS PENDING CLOSING. Between the date hereof and the
Closing Date, except as otherwise consented to or approved in writing by
the other parties or provided for herein, each party shall: (a) conduct
its business with respect to the technology to be made available to
NagraStar pursuant to the Kudelski Agreements solely in a manner
consistent with the intent and purpose of this Agreement and shall
promptly notify the other parties in the event it has knowledge of any
facts which would adversely affect its ability to fulfill its obligations
hereunder; and (b) comply with all applicable laws and regulations.
6
<PAGE>
5.4 CONDITIONS PRECEDENT TO EACH PARTY'S OBLIGATIONS. All obligations of the
parties hereunder are subject to the fulfillment, prior to or at the
Closing, of each of the following conditions:
a Each party shall have obtained all requisite internal corporate
approvals and all consents which may be required from its shareholders
and/or board of directors in order to fully perform its obligations
hereunder;
b The representations, warranties and covenants of the parties contained
in this Agreement shall be true and correct in all material respects
at the Closing Date;
c Each party shall have performed and complied with all agreements and
conditions required by this Agreement to be performed or complied with
by it prior to or at Closing;
d Each party shall have been furnished with a certificate of the
appropriate officers of the other parties hereto, dated the Closing
Date, certifying to the best of their knowledge, in such detail as the
receiving Party may reasonably request, the fulfillment of the
conditions set forth in this Section 5.4;
e All of the agreements and other documents to be concluded and/or
delivered by the parties prior to the Closing Date and attached hereto
as appendices shall have been mutually agreed upon and shall have been
executed at Closing;
f Each party shall have been furnished with an opinion satisfactory to
it of counsel for the other parties hereto dated the Closing Date, and
addressed to the receiving party, to the effect that:
i The party is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction in which it
was organized and incorporated.
ii The execution, delivery and performance by such party of this
Agreement, and the sale, transfer, conveyance, assignment and
deliveries contemplated hereby, have been duly authorized by all
requisite corporate action; this Agreement constitutes the valid
and binding obligation of such party, enforceable in accordance
with its terms (subject to limitations as to enforceability which
might result from bankruptcy, insolvency or other similar laws
affecting creditors' rights generally); and all other actions
and proceedings required by law or by the provisions of this
Agreement to be taken by such party prior to the Closing Date in
connection with this Agreement have been duly and validly taken.
7
<PAGE>
iii Such Party's contribution to the share capital of NagraStar under
this Agreement does not require as of the Closing Date any action
by the stockholders of such Party and does not violate any of the
provisions of such Party's Articles of Incorporation, Statutes,
or By-laws;
g It shall have received from its counsel approval with respect to all
legal matters in connection with this Agreement, including
specifically assurances satisfactory to it that nothing contained
herein shall constitute a violation of any indenture agreement
pursuant to which it has issued publicly held bonds or any credit or
loan agreement, and there shall have been furnished to its counsel by
the other parties such corporate and other records and information as
they may reasonably have requested for such purposes;
h It shall have received from the other parties prior to the Closing
Date a list of all actions, suits or proceedings which are pending,
against or with respect to, or which may have a material adverse
effect upon, the technology to be made available to NagraStar pursuant
to the Kudelski Agreements; and no material suit, action or other
proceeding shall be pending before any court or governmental agency in
which it is sought to restrain or prohibit or to obtain damages or
other relief in connection with this Agreement or the consummation of
the transactions contemplated hereby;
i All authorizations, consents, waivers, approvals or other action
required in connection with the execution, delivery and performance of
this Agreement by the other parties and the consummation by the other
parties of the transactions contemplated hereby, shall have been duly
obtained and shall be in form and substance satisfactory to the
receiving party's counsel;
j All filings with any governmental department, agency or
instrumentality which are reasonably required in connection with the
transactions contemplated by this Agreement, and all required
governmental consents and approvals, including the expiration of any
notice periods or extensions thereof without objection by any
governmental department or agency to the transactions contemplated by
this Agreement, will have been at Closing completed or obtained by the
parties together or by the party obligated to complete such filing or
obtain such consent and written evidence thereof shall have been
delivered to such party; and
k Each party shall have conducted its business pending Closing strictly
in accordance with Section 5.3 hereof. No party hereto shall be
obligated, in the event it is advised by its counsel in accordance
with Subsection (g) above that any term of this Agreement constitutes
a violation of any of any indenture, credit or loan agreements, to
seek consents or waivers from any trustee or third party lender under
such agreements, and such party shall be entitled to terminate this
Agreement pursuant to Section 5.5 hereof.
8
<PAGE>
5.5 FAILURE TO CLOSE. In the event that any of the above conditions
precedent have not been fulfilled as of the scheduled date of Closing,
the Closing shall be postponed; provided, however, that if the Closing
does not, for any reason, occur within sixty days of execution of this
Agreement, unless otherwise agreed upon by the Parties in writing, any
party may, upon written notice to the other parties, terminate this
Agreement and no party shall be liable for damages to the other parties
or have the right to request specific performance of this Agreement or
any of the above conditions of Closing. Further, the Pre-existing
Contracts shall continue in full force and effect.
5.6 [CONFIDENTIAL MATERIAL REDACTED]
ARTICLE VI
PERSONNEL
9
<PAGE>
6.1 INITIAL PERSONNEL. Prior to the Closing Date and to the extent possible,
the Parties shall identify in the Operating Agreement those employees of
each Party if any, whose employment shall be initially transferred from
the Party to NagraStar. In addition, the Parties shall, to the extent
possible, make available those persons, if any, who, although remaining
in the employ of the Parties, shall become available to render services
to NagraStar. The Parties shall be reimbursed for the services rendered
to NagraStar by employees described in the preceding sentence in
accordance with the Operating Agreement.
6.2 BENEFIT PROGRAM. The benefits available to employees of NagraStar shall
be as set forth in the Operating Agreement.
ARTICLE VII
[CONFIDENTIAL MATERIAL REDACTED].
ARTICLE VIII
[CONFIDENTIAL MATERIAL REDACTED]
ARTICLE IX
MISCELLANEOUS
10
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9.1 NOTICES. The parties choose the following addresses as the addresses at
which they will accept service of all documents and notices relating to
this Agreement:
As to EchoStar and ESC: EchoStar Communications Corporation
5701 S. Santa Fe Drive
Littleton, CO 80120
USA
Attn: David Moskowitz
Fax: (303) 723-1699
As to Kudelski: Kudelski SA
1033 Cheseaux
SWITZERLAND
Attn: Nicolas Goetschmann
Fax: 41 21/732 0300
Any notice to be given by a party to the other parties pursuant to this
Agreement shall be given in writing in the English language by prepaid
registered post, by facsimile or shall be delivered by hand (delivery by
hand must be acknowledged by written receipt from a duly authorized
person at the office of the addressee), provided that:
a any notice given by prepaid registered post shall be deemed to have
been received by the addressee, in the absence of proof to the
contrary, 14 days after the date of postage;
b any notice delivered by hand during normal business hours shall be
deemed to have been received by the addressee, in the absence of proof
to the contrary, at the time of delivery; and
c any notice given by facsimile shall be deemed to have been received
by the addressee, in the absence of proof to the contrary, immediately
upon the issuance by the transmitting facsimile machine, of a report
confirming correct transmission of all the pages of the document
containing the notice or upon receipt by the transmitting facsimile
machine, at the end of the notice being transmitted, of the automatic
answer-back of the receiving facsimile machine.
9.2 [CONFIDENTIAL MATERIAL REDACTED]
9.3 ASSIGNMENT. This Agreement shall not be assigned by any party, except
upon the prior written consent of the other parties.
11
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9.4 CONFIDENTIALITY. The parties agree that this Agreement is confidential
and no party shall disclose any of the commercial, business, technical,
operational, or legal details of this Agreement (the "Confidential
Information") in any manner, including but not limited to press releases
or other publicity of any nature without the prior written approval of
the other parties. The obligations imposed upon the parties herein
shall survive termination of this Agreement indefinitely, but shall not
apply to Confidential Information which is:
a or becomes generally available to the public through no wrongful
act of the party receiving the Confidential Information (the
"Receiving Party");
b already lawfully in the possession of the Receiving Party and not
subject to an existing agreement of confidentiality between the
parties;
c received from a third party without restriction and without breach
of this Agreement;
d independently developed by the Receiving Party; or
e released pursuant to the requirements imposed on the party by U.S.
or Swiss securities laws, or the binding order of a government
agency or court, so long as prior to any such release the releasing
party provides the other parties with the greatest notice permitted
under the circumstances, so that the party disclosing the
Confidential Information may seek a protective order or other
appropriate remedy. In any such event, the releasing party will
disclose only such Confidential Information as is legally required
and will exercise reasonable efforts to obtain confidential
treatment for any Confidential Information being disclosed.
9.5 FURTHER ASSURANCES. The parties agree to execute such other instruments
and documents and to take such other action as may be necessary to
effect the purposes of this Agreement.
9.6 AMENDMENT. Any and all agreements by the parties to amend, change,
extend, review or discharge this Agreement, in whole or in part, shall
be binding on the parties only if such agreements are in writing and
executed by the party agreeing to be bound thereby.
9.7 HEADINGS, SECTIONS, ETC. The various headings in this Agreement are
inserted for convenience only and shall not affect the meaning or
interpretation of this Agreement or any Section or provision hereof.
References in this Agreement to any Section are to such Section of this
Agreement.
9.8 SUCCESSORS. All covenants, stipulations and promises in this Agreement
shall be binding upon and inure to the benefit of the parties and their
respective successors, assigns and legal representatives.
12
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9.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all
of which shall constitute together one and the same agreement. The
parties may each execute this Agreement by signing any such counterpart.
9.10 GOVERNING LAW; ARBITRATION. This Agreement, and the performances of the
parties hereunder, shall be governed by the laws of the State of New
York without giving effect to the principles of conflicts of laws that
would otherwise provide for the application of the substantive law of
another jurisdiction. Should any dispute between the parties arise, the
parties agree that the sole jurisdiction and venue for the resolution of
any such dispute shall be English language binding arbitration conducted
in the New York City metropolitan area in accordance with the Commercial
Rules of the American Arbitration Association, which rules shall include
the right to seek appropriate injunctive relief in such arbitration and
are deemed to be incorporated by reference into this clause. Unless the
arbitrators determine otherwise, the losing party in any arbitration
shall pay the costs of the prevailing party.
9.11 CONSTRUCTION. Wherever possible, each provision of this Agreement and
each related document shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of this
Agreement, or any related document, shall be prohibited by or invalid
under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity without invalidating the
remainder of such provision or the remaining provisions of this
Agreement or such related documents.
9.12 WAIVERS. No failure on the part of any party to exercise and no delay
in exercising, any right or remedy hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise or any right or remedy
hereunder preclude any other or further exercise thereof or the exercise
of any other right or remedy granted hereby or by any related document
or at law or in equity.
9.13 COMMITMENTS FROM SUBSIDIARIES. The parties agree that they will cause
their Subsidiaries to act in a manner as to effect the purposes,
provisions and obligations of such party under this Agreement.
9.14 ENTIRE AGREEMENT. This Agreement, including the appendices attached
hereto, constitute and express the entire agreement of the parties to
all the matters herein referred to, all previous discussions, promises,
representations and understandings relative thereto, including all
Pre-existing Contracts between the parties are herein merged and
superseded.
9.15 BROKERS. The parties acknowledge and agree that all negotiations
relative to this Agreement and to the transactions contemplated hereby
have been carried on without the intervention of any broker or finder,
and no such person or entity has any valid claim against it for a
brokerage commission or other like payment. Each party shall hold the
other parties and NagraStar harmless from any claim in respect thereto
arising out of its respective actions or
13
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conduct, but shall not be responsible for such claims arising with
respect to the conduct of the other parties and NagraStar.
9.16 SURVIVAL. Any provision of this Agreement which logically would be
expected to survive termination or expiration, shall survive for a time
period reasonable under the circumstances, whether or not specifically
provided in the Agreement.
9.17 [CONFIDENTIAL MATERIAL REDACTED]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ECHOSTAR COMMUNICATIONS CORPORATION KUDELSKI S.A.
By /s/ CHARLES W. ERGEN By /s/ ANDRE KUDELSKI
Title Title
Date Date
By signing below EchoStar Satellite Corporation hereby acknowledges its
acceptance of the provisions of Section 5.6 of this Agreement.
ECHOSTAR SATELLITE CORPORATION
By /s/ CHARLES W. ERGEN
Title
Date
14
<PAGE>
[Appendix A]
ARTICLES OF ORGANIZATION
NAGRASTAR LLC
I, the undersigned natural person of the age of eighteen years or more,
acting as organizer of a limited liability company under the Colorado Limited
Liability Company Act, adopt the following Articles of Organization for such
limited liability company:
FIRST: The name of the limited liability company is "NagraStar LLC".
SECOND: The principal place of business of the company is 90 Inverness Circle
East, Englewood, Colorado 80112.
THIRD: The street address of the initial registered office of the limited
liability company is NagraStar LLC, Legal Department, 5701 S. Santa Fe Drive,
Littleton, Colorado 80120.
The mailing address of the initial registered office of the limited liability
company is NagraStar LLC, Legal Department, 5701 S. Santa Fe, Littleton,
Colorado 80120. The name of its proposed registered agent in Colorado at
that address is David Moskowitz.
FOURTH: The management of the company is vested in the members.
FIFTH: The names and the business addresses of the members are:
EchoStar Satellite Corporation Kudelski SA
90 Inverness Circle East 1033 Cheseaux
Englewood, Colorado 80112 SWITZERLAND
SIXTH: The name and address of the organizer is:
Nicholas R. Sayeedi
90 Inverness Circle East
Englewood, Colorado 80112
/s/ NICHOLAS R. SAYEEDI Date: 12-31-97
- -----------------------------
Nicholas R. Sayeedi
I, David Moskowitz, hereby consent to the appointment as initial
registered agent for NagraStar LLC.
DAVID K. MOSKOWITZ Date: 12-31-97
- -----------------------------
David Moskowitz
[A]1
<PAGE>
[APPENDIX B]
OPERATING AGREEMENT
OF
NAGRASTAR LLC
This Operating Agreement is made and entered into as of the twenty-third
day of June, 1998 by and among NagraStar LLC, a Colorado limited liability
company organized under the Colorado Limited Liability Act (the "Company"),
EchoStar Communications Corporation, a Nevada corporation with principal
office at 5701 S. Santa Fe Drive, Littleton, Colorado 80120 ("EchoStar"), and
Kudelski SA, a Swiss corporation with principal office at 1033 Cheseaux,
Switzerland ("Kudelski").
Certain terms used in this Operating Agreement are defined in Article 11.
The parties agree as follows:
ARTICLE 1. FORMATION OF COMPANY
1.1. RECOGNITION OF ORGANIZATION OF COMPANY. The Company was organized as a
Colorado limited liability company upon the filing of the Articles of
Organization by the Colorado Secretary of State, effective as of the date of
the Articles of Organization.
1.2. NAME. The name of the Company is "NagraStar LLC".
1.3. PLACES OF BUSINESS. The Company may locate its business at such place
or places as the Members may from time to time deem advisable. The Company's
principal place of business shall initially be located at 90 Inverness Circle
East, Englewood, Colorado 80112, with a second office located in Cheseaux,
Switzerland.
1.4. REGISTERED OFFICES AND REGISTERED AGENTS. The Company's initial
registered office in the State of Colorado shall be at the office of its
registered agent at 5701 S. Santa Fe Drive, Littleton, Colorado 80120, and
the name of its initial registered agent at such address shall be David
Moskowitz. The registered office or registered agent, or both, in the State
of Colorado may be changed from time to time by filing the address of the new
registered office or the name of the new registered agent, as the case may
be, with the Colorado Secretary of State pursuant to the Colorado Act. The
Company shall appoint registered agents and maintain registered offices in
other jurisdictions as may be required by law.
ARTICLE 2. PURPOSES OF COMPANY
2.1 GENERAL PURPOSE AND INITIAL SCOPE. The purpose and initial scope of the
Company shall be: (i) to support EchoStar's satellite broadcast operations
through the ongoing maintenance and development of software and hardware for all
software and hardware systems provided to EchoStar
[B]1
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and its Affiliates by Kudelski and its Affiliates as of the date of this
Operating Agreement, by entering into the Kudelski Agreements, the EchoStar
Agreements, and the Escrow Agreement; and (ii) to pursue the development and
enhancement of existing and future uplink datastream management systems and
other systems to accommodate the future needs of EchoStar and its Affiliates
in cooperation with Kudelski.
2.2 [CONFIDENTIAL MATERIAL REDACTED]
ARTICLE 3. RIGHTS, DUTIES, AND AUTHORITY OF MEMBERS
3.1. MANAGEMENT. The business and affairs of the Company shall be managed
by its Members, who, together with the CEO, shall establish the priorities of
the Company. Each Member shall be entitled to participate in that
management, and shall be a Co-CEO of the Company. Except for cases in which
a Member is expressly permitted by this Operating Agreement or by
non-waivable provisions of applicable law to act alone, no action shall be
taken by any Member on behalf of the Company unless the action: (a) is
authorized by this Operating Agreement; (b) has been authorized by both
Members acting in agreement; or (c) is inherent in or reasonably implied by
authority granted by this Operating Agreement or by the Members acting
together.
3.2. CERTAIN AUTHORITY OF MEMBERS. Except as otherwise provided in this
Operating Agreement, no Member shall have, or delegate to any person, the
authority to do any of the following without unanimous consent of the Members:
(a) Perform any act in contravention of this Operating Agreement;
(b) Knowingly perform any act that would cause the Company to conduct
business in a state or other foreign jurisdiction which has not enacted
legislation permitting the Company to transact business in the state as a
foreign limited liability company with limited liability for its Members; or
(c) Cause the Company to admit any additional Members.
3.3. FURTHER RESTRICTIONS. Except as authorized pursuant to this Operating
Agreement (including the authority granted to the COO and CTO under Article 4)
or by written authorization of both Members, no attorney-in-fact, employee,
or other agent of the Company shall have any power or authority to bind the
Company in any way, to pledge its credit or to render it liable monetarily
for any purpose. Without limiting the generality of the foregoing, no debt
shall be contracted or liability incurred by or on behalf of the Company
except as provided in this Operating Agreement or as determined by the
[B]2
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Members, or, to the extent permitted under the Colorado Act, by agents or
employees of the Company expressly authorized by the Members to contract such
debt or incur such liability.
3.4. CONFLICTING INTEREST TRANSACTIONS.
(a) As used in this Section 3.4, "conflicting interest transaction"
means any of the following:
(1) A loan or other assistance by the Company to a Member or to a
Related Entity, other than loans provided in accordance with the provisions
of Section 5.3;
(2) A guaranty by the Company of an obligation of a Member or of
an obligation of a Related Entity; or
(3) A contract or transaction between the Company and a Member or
between the Company and a Related Entity.
(b) As used in this Section 3.4, "Related Entity" means, with respect
to a Member, an Entity that is an Affiliate of the Member or has a financial
interest therein.
(c) No conflicting interest transaction shall be void or voidable or be
enjoined, set aside, or give rise to an award of damages or other sanctions
in a proceeding by the Company or by any Member, directly or by or in the
right of the Company, solely because the conflicting interest transaction
involves a Member or a Related Entity or solely because the Member
participates in vote of the Members with respect to such conflicting interest
transaction, or solely because the Member's vote is counted for such purpose,
if:
(1) The material facts as to the Member's relationship or interest
and as to the conflicting interest transaction are disclosed or are known to
the other Member and the Members in good faith authorize, approve, or ratify
the conflicting interest transaction; or
(2) The conflicting interest transaction is fair as to the Company
as of the time it is undertaken by, or becomes binding upon, the Company.
3.5. [CONFIDENTIAL MATERIAL REDACTED]
3.6. [CONFIDENTIAL MATERIAL REDACTED]
[B]3
<PAGE>
[CONFIDENTIAL MATERIAL REDACTED]
3.7. COMPENSATION OF MEMBERS. No Member shall be entitled to compensation
for services rendered to the Company except as may be determined from time to
time by agreement of the Members.
3.8. RIGHT TO RELY ON CERTIFICATES OF MEMBERS. Any Person dealing with the
Company may rely, without duty of further inquiry, upon a certificate signed
by any Member as to:
(a) The identity of the Member;
(b) The existence or nonexistence of any fact or facts which constitute
a condition precedent to acts by any Member or which are in any other manner
germane to the business or affairs of the Company; or
(c) The identity and authority of Persons who are authorized to act
for, or to execute or deliver any instrument or document on behalf of, the
Company, and the scope of such authority.
3.9. MEMBER'S LIABILITY.
(a) No Member shall be liable under any judgment, decree, or order of a
court, or in any other manner, for any debt, obligation, or liability of the
Company.
(b) No Member shall be liable to the Company or to any Member for any
loss or damage sustained by the Company or by any Member, unless the loss or
damage is the result of fraud, deceit, gross negligence, willful misconduct,
breach of this Operating Agreement or a wrongful taking by the Member. It is
expressly recognized that no Member guarantees, in any way, the return of any
Member's Capital Contribution, a profit for any Member from the operations of
the Company, or any distribution from the Company.
3.10. MEMBERS HAVE NO EXCLUSIVE DUTY TO COMPANY. No Member shall be
required to manage the Company as a sole and exclusive function. Any Member
may have other business interests and may engage in other activities in
addition to those relating to the Company. Neither the Company nor any
Member shall have any right, by virtue of this Operating Agreement, to share
or participate in such other interests or activities of any Member or to the
income or proceeds derived therefrom.
3.11. COMPANY DOCUMENTS.
(a) The Recordkeeper shall maintain and preserve, until at least five
years after the dissolution of the Company and longer if necessary and
appropriate in connection with the winding up of its
[B]4
<PAGE>
business and affairs, all accounts, books, and other Company documents which
are reasonably necessary as a record of its business and affairs, in which
shall be entered fully and accurately all transactions and other matters
relating to the Company's business in such detail and completeness as is
customary and usual for businesses of the type engaged in by the Company.
Such documents shall be maintained at the principal executive office of the
Company.
(b) Without limiting the generality of Section 3.11(a), the
Recordkeeper shall maintain and preserve the following:
(1) A current list of the full name and last-known business,
residence, or mailing address of each Member, both past and present;
(2) A copy of the Articles of Organization and all amendments
thereto, together with executed copies of any powers of attorney pursuant to
which any amendment has been executed;
(3) A copy of this Operating Agreement, including Schedule A, as
in effect from time to time,
(4) Copies of all writings, if any, other than this Operating
Agreement, which obligate a Member to contribute cash, property or services
to the Company, and copies of all writings compromising the obligation of any
member to contribute cash, property, or services to the Company;
(5) Minutes of every meeting of the Members and copies of all
written consents by which Members take action;
(6) Copies of the Company's U.S. and foreign federal, state, and
local income tax returns and reports, if any, for the three most recent years;
(7) Copies of all financial statements of the Company for the
three most recent years; and
(8) Records and accounts of all operations and expenditures of the
Company.
(c) Upon request, each Member shall have the right to inspect and copy
such Company documents, at the requesting Member's expense; provided,
however, that access to any such documents may be restricted as the Members
determine in order to preserve intellectual property of the Company from
misuse.
(d) The initial Recordkeeper shall be Jason Kiser. The Members may by
agreement appoint a new Recordkeeper at any time. If a new Recordkeeper is
appointed by the Members, the former Recordkeeper shall transfer to the new
Recordkeeper all Company items set forth under this Article 3, together with
all other Company documents and data in the possession of, or under the
control of the former Recordkeeper. If the Members cannot agree on a
Recordkeeper at any time, each Member
[B]5
<PAGE>
may designate a separate Recordkeeper who shall have access to all records of
the Company specified in this Article 3.
3.12. ECONOMIC PRIORITY. Except as may be provided in this Operating
Agreement, no Member shall have priority over any other Member, whether as to
Net Profits, Net Losses, distributions, or other economic matters; provided,
however, that this Section 3.12 shall not apply to loans (as distinguished
from Capital Contributions) which a Member has made to the Company.
ARTICLE 4. [CONFIDENTIAL MATERIAL REDACTED]
[B]6
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[CONFIDENTIAL MATERIAL REDACTED]
[B]7
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[CONFIDENTIAL MATERIAL REDACTED]
[B]8
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[CONFIDENTIAL MATERIAL REDACTED]
ARTICLE 5. [CONFIDENTIAL MATERIAL REDACTED]
[B]9
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[CONFIDENTIAL MATERIAL REDACTED]
[B]10
<PAGE>
[CONFIDENTIAL MATERIAL REDACTED]
ARTICLE 6. [CONFIDENTIAL MATERIAL REDACTED]
[B]11
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[CONFIDENTIAL MATERIAL REDACTED]
[B]12
<PAGE>
[CONFIDENTIAL MATERIAL REDACTED]
[B]13
<PAGE>
[CONFIDENTIAL MATERIAL REDACTED]
ARTICLE 7. ADMINISTRATIVE
7.1. BUDGET. The operating budget for the first twelve months of the
Company's operation is attached as Schedule B to this Operating Agreement. A
thirty-six (36) month budget shall be prepared annually by the COO in
consultation with the Financial Review Committee and submitted to the Members
for approval together with a business plan for the corresponding time period.
If the Members cannot agree on the budget for any specified year, the total
budget for such year shall be the previous year's budget as adjusted by the
use of a Budget Escalator in the following manner: the index to be used shall
be the U.S. Department of Labor's Bureau of Labor Statistics Consumer Price
[B]14
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Index, Wage Rate, All Urban Consumers, U.S. City Average, 1997 = 100
(hereinafter referred to as the "CPI"). The base index shall be that
published nearest to the date hereof. The increase hereunder shall be
proportional to the increase in the CPI as above, over the base index,
provided however, that in no case shall any year's budget exceed the
projected revenues for the Company in such year.
7.2. [CONFIDENTIAL MATERIAL REDACTED]
7.3. [CONFIDENTIAL MATERIAL REDACTED]
7.4. FACILITIES, EQUIPMENT, AND PERSONNEL. The Members agree to procure and
make available to the Company during the term of this Operating Agreement,
for good and valuable consideration to be agreed upon by the parties, such
office equipment and facilities (including land, buildings, office equipment,
tools and fixtures) as may be necessary for the development and support
engineering of the Products, and such personnel, including payroll,
accounting, legal, and human resources professionals, as may be necessary for
the Company to properly function. The Company shall provide its own computer
equipment, software, and related accessories.
7.5. [CONFIDENTIAL MATERIAL REDACTED]
7.6. [CONFIDENTIAL MATERIAL REDACTED]
[B]15
<PAGE>
ARTICLE 8. RESTRICTIONS ON TRANSFERABILITY; ACQUISITION OF CONTROL
8.1. GENERAL. Except as provided in this Article 8, no Member shall have
the right to transfer or encumber any part of the Member's Membership
Interest, and any purported transfer or encumbrance (including the granting
of a security interest) of all or part of a Membership Interest, whether
voluntarily or involuntarily, shall be void. Each Member hereby acknowledges
the reasonableness of the restrictions on sale and gift of Membership
Interests imposed by this Operating Agreement, in view of the Company
purposes and the relationship of the Members, and agrees that such
restrictions shall be specifically enforceable. Special provisions relating
to security interests and other encumbrances are set forth in Section 8.2.
8.2. [CONFIDENTIAL MATERIAL REDACTED]
8.3. [CONFIDENTIAL MATERIAL REDACTED]
8.4. [CONFIDENTIAL MATERIAL REDACTED].
[B]16
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ARTICLE 9. [CONFIDENTIAL MATERIAL REDACTED]
[B]17
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[CONFIDENTIAL MATERIAL REDACTED]
[B]18
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[CONFIDENTIAL MATERIAL REDACTED]
ARTICLE 10. [CONFIDENTIAL MATERIAL REDACTED]
[B]19
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[CONFIDENTIAL MATERIAL REDACTED]
[B]20
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[CONFIDENTIAL MATERIAL REDACTED]
[B]21
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[CONFIDENTIAL MATERIAL REDACTED]
ARTICLE 11. DEFINITIONS
The following terms used in this Operating Agreement have the meanings
ascribed to them in this Article 11:
11.1. "Articles of Organization" means the Articles of Organization of the
Company as filed with the Secretary of State of Colorado, as the same may be
amended from time to time.
11.2. "Affiliate" means, with respect to any Person (such Person being
referred to in this Section 11.2 as the "Target Person"), (a) any Person
directly or indirectly controlling, controlled by, or under common control
with the Target Person, (b) any Person owning, of record or beneficially, ten
percent or more of the outstanding voting interests of the Target Person,
unless another Person owns, beneficially, a larger percentage of the
outstanding voting interests of the Target Person, (c) any
[B]22
<PAGE>
Person who is a director, officer, partner, or trustee of, or is in a similar
capacity with respect to, the Target Person, or (d) any Person who is a
director, officer, partner, or trustee of, or is in a similar capacity with
respect to, or is holder of ten percent or more of the voting interests of,
any Person described in clauses (a) through (c) of this sentence. For
purposes of this definition, the term "controls," "is controlled by," or "is
under common control with" shall refer to the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of the Target Person, whether through the ownership of voting
securities, by contract, or otherwise.
11.3. "Capital Account" of a Member, as of any given date, means the
Capital Contribution to the Company by the Member as adjusted to the date in
question pursuant to Article 5.
11.4. "Capital Contribution" means any contribution, whenever made, by a
Member to the capital of the Company, whether in cash or property. Whether a
payment of cash or a transfer of property is a contribution to the capital of
the Company, and, therefore, a Capital Contribution, shall be determined by
agreement of the Members.
11.5. "Capital Interest" means the proportion that a Member's positive
Capital Account balance, if any, bears to the aggregate Capital Accounts of
all Members whose Capital Accounts have positive balances, as such proportion
may change from time to time. Negative Capital Account balances are
disregarded in the determination of "Capital Interests."
11.6. "CEO" or "Co-CEO"means one of the two Members.
11.7. "Code" means the U.S. Internal Revenue Code of 1986 or corresponding
provisions of superseding Federal revenue laws.
11.8. "Colorado Act" means the Colorado Limited Liability Company Act or
any act that supersedes the Colorado Limited Liability Company Act, as the
same may be amended from time to time.
11.9. "Company" is defined in the first paragraph of this Operating
Agreement.
11.10 "Control" of a company means the ability to appoint a majority of
the directors on its governing board or the ability to exercise similar
operating control through other means.
11.11. "COO" means the Company's Chief Operating Officer, as appointed
pursuant to Section 4.2 hereof.
11.12. "CTO" means the Company's Chief Technical Officer, as appointed
pursuant to Section 4.3 hereof.
11.13. "Deficit Capital Account" means, with respect to any Member, the
deficit balance, if any, in the Member's Capital Account as of the end of the
taxable year, after giving effect to the following adjustments:
[B]23
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(a) Credit to such Capital Account of all amounts which the Member is
treated as being obligated to restore under Section 1.704-1(b)(2)(ii)(c) of
the Treasury Regulations, as well as any addition thereto pursuant to the
next to last sentence of Sections 1.704-2(g)(1) and (i)(5) of the Treasury
Regulations, after taking into account thereunder any changes during such
year in partnership minimum gain (as determined in accordance with Section
1.704-2(d) of the Treasury Regulations) and in the minimum gain attributable
to any partner nonrecourse debt (as determined under Section 1.704-2(i)(3) of
the Treasury Regulations); and
(b) Debit to such Capital Account the items described in Sections
1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Treasury Regulations.
This definition of Deficit Capital Account is intended to comply with the
provision of Treasury Regulations Sections 1.704-1(b)(2)(ii)(d) and 1.704-2,
and is to be interpreted consistently with those provisions.
11.14. "Depreciation" means, with respect to each asset, for each fiscal
year, an amount equal to the depreciation, amortization, or other cost
recovery deduction allowable with respect to the asset for such fiscal year;
provided, however, that, if the Gross Asset Value of the asset differs from
its adjusted basis for Federal income tax purposes at the beginning of such
fiscal year, "Depreciation" shall be an amount which bears the same ratio to
such beginning Gross Asset Value as the Federal income tax depreciation,
amortization, or other cost recovery deduction for such fiscal year bears to
such beginning adjusted tax basis; and provided, further, that, if the
adjusted basis for Federal income tax purposes of an asset at the beginning
of such fiscal year is zero, "Depreciation" shall be determined with
reference to such beginning Gross Asset Value using any reasonable method
selected by the Members.
11.15. "EchoStar Agreement(s)" means the following agreements of even date
herewith, by and between EchoStar and the Company: the EchoStar Software
License Agreement, the EchoStar Service and Development Agreement, and the
EchoStar Smart Card Purchase Agreement.
11.16. [CONFIDENTIAL MATERIAL REDACTED].
11.17. [CONFIDENTIAL MATERIAL REDACTED]
11.18. [CONFIDENTIAL MATERIAL REDACTED]
11.19 "Effective Date" means July 1, 1998.
[B]24
<PAGE>
11.20. "Entity" means a corporation, partnership, limited liability
company, trust, or any other legally recognized person other than a human
being.
11.21. [CONFIDENTIAL MATERIAL REDACTED]
11.22. "Financial Review Committee means a committee which shall provide
advice, review, and approval of the Company financial operating issues and
budgets. The committee shall consist of four persons, with each Member
having the right to appoint, remove, replace, and appoint temporary
substitutes or proxies for two members of the committee.
11.23. "Fiscal Year" means the Company's fiscal year, which shall be the
calendar year.
11.24. "Gross Asset Value" means, with respect to any asset, the asset's
adjusted basis for Federal income tax purposes; provided, however, that:
(a) The initial Gross Asset Value of an asset contributed by a Member
to the Company shall be the gross fair market value of the asset at the time
of such contribution, as determined by the Members; provided, however, that
the initial Gross Asset Values of the assets (other than cash) contributed to
the Company pursuant to Section 5.2 hereof shall be as set forth in Schedule
A.
(b) The Gross Asset Values of all assets shall be adjusted to equal
their respective gross fair market values, as determined by the Members, as
of the following times: (1) the acquisition of an interest (as that term is
used in Regulations Section 1.704-1(b)(2)(iv)(f)(5)(i)) by a Member in
exchange for more than a de minimis contribution of property (including
money); (2) the distribution by the Company to a Member of more than a de
minimis amount of property as consideration for a Membership Interest; and
(3) the liquidation of the Company within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses
(1) and (2) of this Section 11.24(b) shall be made only if the Members
reasonably determine that such adjustments are necessary or appropriate to
reflect the relative economic interests of the Members in the Company;
(c) The Gross Asset Value of an asset distributed to a Member shall be
adjusted to equal the gross fair market value of the asset on the date of
distribution as determined by the Members, and
(d) The Gross Asset Values of assets shall be increased (or decreased)
to reflect any adjustments to the adjusted basis of such assets pursuant to
Code Section 734(b) or Code Section 743(b), but only to the extent that such
adjustments are taken into account in determining Capital Accounts pursuant
to Regulation Section 1.704-1(b)(2)(iv)(m), Section 11.31(d) (relating to the
definition of Net Profits and Net Losses), and Section 5.4; provided,
however, that Gross Asset Values shall not be adjusted pursuant to this
definition to the extent the Members determine that an adjustment pursuant to
Section 11.24(b) is necessary or appropriate in connection with a transaction
that would otherwise result in an adjustment pursuant to this Section
11.24(d). If the Gross Asset
[B]25
<PAGE>
Value of an asset has been determined or adjusted pursuant to Section
11.24(a), 11.24(b), or 11.24(d), then such Gross Asset Value shall thereafter
be adjusted by the Depreciation taken into account with respect to such asset
for purposes of computing Net Profits and Net Losses.
11.25. "Kudelski Agreement(s)" means the following agreements of even date
herewith by and between Kudelski and the Company: the Kudelski Software
License Agreement, the Kudelski Service and Development Agreement, and the
Kudelski Smart Card Purchase Agreement
11.26. [CONFIDENTIAL MATERIAL REDACTED]
11.27. [CONFIDENTIAL MATERIAL REDACTED]
11.28. [CONFIDENTIAL MATERIAL REDACTED]
11.29. "Member" means EchoStar or Kudelski.
11.30. "Membership Interest" means a Member's entire interest in the
Company, and such other rights and privileges that the Member may enjoy by
virtue of being a Member.
11.31. "Net Profits" and "Net Losses" means for each taxable year of the
Company an amount equal to the Company's net taxable income or loss for such
year as determined for Federal income tax purposes (including separately
stated items) in accordance with the accounting method and rules used by the
Company and in accordance with Section 703 of the Code, subject to the
following provisions:
(a) Any item of income, gain, loss, or deduction allocated to Members
pursuant to Section 6.3 shall not be taken into account in computing Net
Profits or Net Losses;
(b) Any income of the Company that is exempt from Federal income tax
and is not otherwise taken into account in computing Net Profits and Net
Losses pursuant to this definition shall be added to such net taxable income
or loss;
(c) Any expenditure of the Company described in Section 705(a)(2)(B) of
the Code and not otherwise taken into account in computing Net Profits and
Net Losses shall be subtracted from such net taxable income or loss;
(d) In the event the Gross Asset Value of an asset is adjusted pursuant
to Section 11.24(b) or 11.24(c), the amount of such adjustment shall be taken
into account, as gain or loss from the disposition of such asset, in
computing Net Profits or Net Losses;
[B]26
<PAGE>
(e) Gain or loss resulting from the disposition of an asset with
respect to which gain or loss is recognized for Federal income tax purposes
shall be computed with reference to the Gross Asset Value of the asset,
notwithstanding that the adjusted tax basis of the asset differs from its
Gross Asset Value;
(f) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or loss, there
shall be taken into account, in computing Net Profits or Net Losses,
Depreciation for such fiscal year; and
(g) To the extent an adjustment to the adjusted tax basis of an asset
pursuant to Section 734(b) of the Code or Section 743(b) of the Code is
required pursuant to Section 1.704-1(b)(2)(iv)(m)(4) of the Treasury
Regulations to be taken into account in determining Capital Accounts as a
result of a distribution other than in liquidation of a Membership Interest,
the amount of such adjustment shall be treated as an item of gain (if the
adjustment decreases the basis of the asset) from the disposition of the
asset and shall be taken into account for purposes of computing Net Profits
or Net Losses.
11.32. "Operating Agreement" means this Operating Agreement, as amended
from time to time.
11.33. "Person" means a human being or an Entity and shall include the
heirs, executors, administrators, legal representatives, successors, and
assigns of a "Person" where the context permits or requires.
11.34 "Products" shall mean the Smart Cards and uplink datastream
management systems obtained from Kudelski, as well as any other products or
services within the scope of the Company's general purpose, which the Members
may agree that the Company shall design, manufacture, or distribute pursuant
to Section 2.2 hereof.
11.35. "Recordkeeper" means the Person appointed by the Members, pursuant
to Section 3.11, to keep the books and records of the Company and to perform
the other duties specified in this Operating Agreement as duties of the
Recordkeeper.
11.36. "Sale" and its derivatives means transfer for consideration.
11.37. "Schedule A" means Schedule A to this Operating Agreement
reflecting matters such as Members' identities and share of Net Profits and
Net Losses, which schedule bears the most recent date and is signed by the
Members. Schedule A is prima facie evidence of the agreement of the parties
hereto with respect to the matters reflected therein, but it is recognized
that, through inadvertence or otherwise, Schedule A may not be modified from
time to time as required to reflect the parties' agreement, or as
circumstances, change, and, accordingly, any party to this Operating
Agreement may, by a preponderance of the evidence, show that Schedule A is
not an accurate reflection of the parties' agreement.
[B]27
<PAGE>
11.38. "Securities Acts" means the Securities Act of 1933, the Colorado
Securities Act, or the securities laws of any other state or country.
11.39. [CONFIDENTIAL MATERIAL REDACTED]
11.40. [CONFIDENTIAL MATERIAL REDACTED]
11.41. [CONFIDENTIAL MATERIAL REDACTED]
11.42. "Subsidiary" means any corporation more than fifty percent (50%) of
whose outstanding shares or stock representing the right to vote (except by
reason of the occurrence of a contingency) for the election of directors or
Members of a similar managing body are owned or controlled, directly or
indirectly, by a specified party.
11.43. "Swiss Office" means a Company facility located in Switzerland,
selected by Kudelski pursuant to Section 7.5.
11.44. "Technical Review Committee" means a committee which shall provide
advice, review, and approval of the Company product and technical direction.
The committee shall consist of six persons, with each Member having the right
to appoint, remove, replace, and appoint temporary substitutes or proxies for
three members of the committee.
11.45. "Transfer" includes sale, bequest, assignment, and all other modes
of transfer including the creation of a security interest or encumbrance.
11.46. "Treasury Regulations" shall include temporary and final
regulations promulgated under the Code that are in effect as of the date of
the filing of the Articles of Organization and the corresponding sections of
any regulations subsequently promulgated that amend or supersede such
regulations. The term "Treasury Regulations" shall also include regulations
that have been proposed by the Internal Revenue Service under the Code at or
prior to the date of the filing of the Articles of Organization, and have not
been withdrawn at or prior to such date, as well as the corresponding
provisions of any regulations subsequently promulgated that, amend or
supersede such proposed regulations.
[B]28
<PAGE>
11.47. "Upgrades" are enhancements, modifications, updates, bug fixes, and
direct extensions to software.
11.48. [CONFIDENTIAL MATERIAL REDACTED]
11.49. "U.S. Office" means the Company's main facility located in the
Denver, Colorado metropolitan area, selected by EchoStar pursuant to Section
7.5.
ARTICLE 12. MISCELLANEOUS PROVISIONS
12.1. NOTICES. The parties choose the following addresses as the
addresses at which they will accept service of all documents and notices
relating to this Operating Agreement:
As to EchoStar: EchoStar Communications Corporation
5701 S. Santa Fe Drive
Littleton, CO 80120
USA
Attn: David Moskowitz
Fax: (303) 723-1699
As to Kudelski: Kudelski SA
1033 Cheseaux
SWITZERLAND
Attn: Nicolas Goetschmann
Fax: 41 21/732 0300
As to the Company: NagraStar LLC
90 Inverness Circle East
Englewood, CO 80112
USA
Attn: Joe Ferguson and Xavier Carrel
Fax: (303) 706-5719
With a copy to: Kudelski SA
1033 Cheseaux
SWITZERLAND
Attn: Nicolas Goetschmann
Fax: 41 21/732 0300
[B]29
<PAGE>
Any notice to be given by a party to the other parties pursuant to this
Operating Agreement shall be given in writing in the English language by
prepaid registered post, by facsimile or shall be delivered by hand (delivery
by hand must be acknowledged by written receipt from a duly authorized person
at the office of the addressee), provided that:
(a) any notice given by prepaid registered post shall be deemed to have
been received by the addressee, in the absence of proof to the contrary, 14
days after the date of postage;
(b) any notice delivered by hand during normal business hours shall be
deemed to have been received by the addressee, in the absence of proof to the
contrary, at the time of delivery; and
(c) any notice given by facsimile shall be deemed to have been received
by the addressee, in the absence of proof to the contrary, immediately upon
the issuance by the transmitting facsimile machine, of a report confirming
correct transmission of all the pages of the document containing the notice
or upon receipt by the transmitting facsimile machine, at the end of the
notice being transmitted, of the automatic answer-back of the receiving
facsimile machine.
12.2. GOVERNING LAW; ARBITRATION. This Operating Agreement, and the
performances of the parties hereunder, shall be governed by the laws of the
State of New York without giving effect to the principles of conflicts of
laws that would otherwise provide for the application of the substantive law
of another jurisdiction. Should any dispute among the parties arise, the
parties agree that the sole jurisdiction and venue for the resolution of any
such dispute shall be English language binding arbitration conducted in the
New York City metropolitan area, in accordance with the Commercial Rules of
the American Arbitration Association, which rules shall include the right to
seek appropriate injunctive relief in such arbitration and are deemed to be
incorporated by reference into this clause. Unless the arbitrators determine
otherwise, the losing party in any arbitration shall pay the costs of the
prevailing party.
12.3. [CONFIDENTIAL MATERIAL REDACTED]
[B]30
<PAGE>
[CONFIDENTIAL MATERIAL REDACTED]
12.4. AMENDMENTS. This Operating Agreement and the Articles of
Organization may be amended from time to time by a writing executed by the
Members.
12.5. EXECUTION OF ADDITIONAL INSTRUMENTS. Each Member hereby agrees to
execute such other and further statements of interest and holdings,
designations, powers of attorney, and other instruments necessary or
appropriate to comply with any laws, rules or regulations.
12.6. HEADINGS AND PRONOUNS. Headings and captions contained in this
Operating Agreement are solely for the convenience of the parties and are not
to be considered in interpreting or construing this Operating Agreement or
the parties' rights, remedies, and obligations hereunder. The words
"herein," "hereof," and "hereunder," when used in this Operating Agreement,
refer to this Operating Agreement in its entirety. The word "include" and
its derivatives mean by way of example and not by way of exclusion or
limitation. Words in the singular include the plural and words in the plural
include the singular, according to the requirements of the context. Words
importing a gender include all genders.
12.7. WAIVERS. No party shall be deemed to have waived any right or
remedy under or with respect to this Operating Agreement unless such waiver
is expressed in a writing signed by such party. No waiver of any right or
remedy under or with respect to this Operating Agreement by a party on any
occasion or in any circumstance shall be deemed to be a waiver of any other
right or remedy on that occasion or in that circumstance nor a waiver of the
same or of any other right or remedy on any other occasion or in any other
circumstance.
12.8. RIGHTS AND REMEDIES CUMULATIVE. The rights and remedies provided
by this Operating Agreement, the EchoStar Agreements, and the Kudelski
Agreements are cumulative and the use of any one right or remedy by any party
shall not preclude or waive the right to use any or all other remedies. Said
rights and remedies are given in addition to any other rights the parties may
have by law, statute, ordinance or otherwise.
12.9. SEVERABILITY. If any provision in this Operating Agreement is held
to be invalid or unenforceable on any occasion or in any circumstance, such
holding shall not be deemed to render the provision invalid or unenforceable
on any other occasion or in any other circumstance nor to render any other
provision hereof invalid or unenforceable, and to that extent the provisions
of this Operating Agreement are severable; provided, however, that this
provision shall not preclude a court
[B]31
<PAGE>
of competent jurisdiction from refusing so to sever any provision if
severance would be inequitable to one or more of the parties.
12.10. ASSIGNMENT. This Operating Agreement may not be assigned, in whole
or in part, by any party without the prior written consent of the other
parties, which consent may be withheld for any reason.
12.11. NO THIRD PARTY BENEFICIARIES; NO RIGHTS IN CREDITORS. This
Operating Agreement creates no rights benefitting third Persons and no third
Person shall have any right to enforce any provision hereof, except as may be
specifically provided herein. Without limiting the generality of the
preceding sentence, none of the provisions of this Operating Agreement shall
be for the benefit of or enforceable by any creditor of the Company.
12.12. INVESTMENT REPRESENTATIONS. The Members understand, acknowledge,
and agree:
(a) that no Membership Interest has been registered under the
Securities Acts because of the Company's reliance upon exemptions from the
registrations requirements of the Securities Acts;
(b) that the Company has relied upon the fact that the Membership
Interests are to be held by each Member for investment; and
(c) that exemption from registrations under the Securities Acts would
not be available if the Membership Interests were acquired by a Member with a
view to distribution. Accordingly, each Member hereby confirms to the
Company that the Member is acquiring the Membership Interest for the Member's
own account, for investment, and not with a view to the resale or
distribution thereof. Each Member agrees not to hypothecate or transfer or
offer to hypothecate or transfer any portion of the Membership Interests
unless there is an effective registration or other qualification relating
thereto under the Securities Act of 1933 and under all applicable state
securities laws or unless the holder of Membership Interests delivers to the
Company an opinion of counsel, reasonably satisfactory to the remaining
Members, that such registration or other qualification under such Act and
applicable state securities laws is not required in connection with such
hypothecation, transfer, or offer. Each Member understands that the Company
is under no obligation to register any Membership Interest or to assist the
Member in complying with any exemption from registration under the Securities
Acts if the Member should, at a later date, wish to dispose of the Membership
Interest. Furthermore, each Member realizes that the Membership Interests
are unlikely to qualify for disposition under Rule 144 of the Securities and
Exchange Commission unless the Member is not an "affiliate" of the Company
and the Membership Interest has been beneficially owned and fully paid for by
the Member for at least one year. Prior to acquiring any Membership
Interests, each Member has made an investigation of the Company and its
business and has had made available to the Member all information with
respect thereto which the Member needed to make an informed decision to
acquire the Membership Interest. Each Member considers itself to be a Person
possessing experience and sophistication as an investor which are adequate
for the evaluation of the merits and risks of the Member's investment in the
Membership Interest.
[B]32
<PAGE>
12.13. OTHER REPRESENTATIONS AND WARRANTIES. As of the date the Member
becomes a Member, each Member represents and warrants that:
(a) DUE INCORPORATION OR FORMATION; AUTHORIZATION OF AGREEMENT. The
Member is duly existing as an Entity and in good standing under the laws of
the jurisdiction of its formation and has the power and authority, as an
Entity, to own its property and carry on its business as owned and carried on
at the date hereof and as contemplated hereby. The Member is duly licensed
or qualified to do business and in good standing in each of the jurisdictions
in which the failure to be so licensed or qualified would have a material
adverse effect on its financial condition or its ability to perform its
obligations hereunder. The Member has the power and authority as an Entity to
execute and deliver this Operating Agreement and to perform its obligations
hereunder, and its execution, delivery, and performance of this Operating
Agreement has been duly authorized by all necessary action.
(b) VALID OBLIGATION. This Operating Agreement constitutes the legal,
valid, and binding obligation of the Member.
(c) NO CONFLICT WITH RESTRICTIONS; NO DEFAULT. Neither the execution,
delivery, and performance of this Operating Agreement nor the consummation by
the Member of the transactions contemplated hereby
(1) shall conflict with, violate, or result in a breach of any of
the terms, conditions, or provisions of any law, regulation, order, writ,
injunction, decree, determination, or award of any court, any governmental
department, board, agency, or instrumentality, domestic or foreign, or any
arbitrator, applicable to the Member or any of its Affiliates;
(2) shall conflict with, violate, result in a breach of, or
constitute a default under any of the terms, conditions, or provisions of the
articles of incorporation, bylaws, partnership agreement or operating
agreement (if any) of the Member or any of its Affiliates or of any material
agreement or instrument to which the Member or any of its Affiliates is a
party or by which the Member, or any of its Affiliates is or may be bound or
to which any of its material properties or assets is subject;
(3) shall conflict with, violate, result in a breach of,
constitute a default under (whether with notice or lapse of time or both),
accelerate or permit the acceleration of the performance required by, give to
others any material interests or rights, or require any consent,
authorization, or approval under any indenture, mortgage, lease agreement, or
instrument to which the Member or any of its Affiliates is a party or by
which the Member or any of its Affiliates is or may be bound; or
(4) shall result in the creation or imposition of any lien upon
any of the material properties or assets of the Member or any of its
Affiliates.
(d) GOVERNMENT AUTHORIZATIONS. Any registration, declaration, or
filing with, or consent, approval, license, permit, or other authorization or
order by, any government or regulatory authority, domestic or foreign, that
is required in connection with the valid execution, delivery, acceptance, and
[B]33
<PAGE>
performance by the Member under this Operating Agreement or the consummation
by the Member of any transaction contemplated hereby has been completed,
made, or obtained on or before the effective date of this Operating
Agreement.
(e) LITIGATION. Except as disclosed in EchoStar's annual, quarterly,
or current reports filed pursuant to the U.S. Securities Exchange Act of
1934, there are no actions, suits, proceedings, or investigations pending or,
to the knowledge of the Member or any of its Affiliates, threatened against
or affecting the Member or any of its Affiliates or any of their properties,
assets, or businesses in any court or before or by any governmental
department, board, agency, or instrumentality, domestic or foreign, or any
arbitrator which could, if adversely determined (or, in the case of an
investigation, could lead to any action, suit, or proceeding, which if
adversely determined could) reasonably be expected to materially impair the
Member's ability to perform its obligations under this Operating Agreement or
to have a material adverse effect on the consolidated financial condition of
the Member; and the Member or any of its Affiliates has not received any
currently effective notice of any default, and the Member or any of its
Affiliates is not in default, under any applicable order, writ, injunction,
decree, permit, determination, or award of any court, any governmental
department, board, agency, or instrumentality, domestic or foreign, or any
arbitrator which could reasonably be expected to materially impair the
Member's ability to perform its obligations under this Operating Agreement or
to have a material adverse effect on the consolidated financial condition of
the Member.
(f) INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT.
Neither the Member nor any of its Affiliates is, nor shall the Company as a
result of the Member holding an interest be, an "investment company" as
defined in, or subject to regulation under, the U.S. Investment Company Act
of 1940. Neither the Member nor any of its Affiliates is, nor shall the
Company as a result of the Member holding an interest be, a "holding
company," "an affiliate of a holding company," or a "subsidiary of a holding
company," as defined in, or subject to regulation under, the U.S. Public
Utility Holding Company Act of 1935.
(g) CONFIDENTIALITY.
(1) Except as contemplated hereby or required by a court of
competent authority, each Member shall keep confidential and shall not
disclose to others and shall use its reasonable efforts to prevent its
Affiliates and any of its, or its Affiliates', present or former employees,
agents, and representatives from disclosing to others without the prior
written consent of the Members any information which
(A) pertains to this Operating Agreement, any negotiations
pertaining thereto, any of the transactions contemplated hereby, or the
business of the Company; or
(B) pertains to written or oral confidential or proprietary
information of any Member or the Company or which any Member has labeled as
confidential or proprietary; provided, however, that the Company may disclose
to its Affiliates' employees, agents, and representatives any information
made available to the Member.
[B]34
<PAGE>
(2) No Member shall use, and each Member shall use its best
efforts to prevent any Affiliate of the Member from using, any information
which
(A) pertains to this Operating Agreement, any negotiations
pertaining hereto, any of the transactions contemplated hereby, or the
business of the Company; or
(B) pertains to the confidential or proprietary information
of any Member or the Company or which any Member has labeled in writing as
confidential or proprietary, except in connection with the transactions
contemplated hereby.
12.14. COUNTERPARTS. This Operating Agreement may be executed in
counterparts, each of which shall be deemed an original but all of which
shall constitute one and the same instrument.
12.15. WAIVER OF ACTION FOR PARTITION. Each Member irrevocably waives
any right that it may have to maintain any action for partition with respect
to the property of the Company; provided, however, that this provision shall
not apply to any asset that is distributed in kind to any Member.
CERTIFICATE
The undersigned, being NagraStar LLC and all of the initial Members of
NagraStar LLC, hereby agree, acknowledge, and certify that the foregoing
Operating Agreement constitutes the Operating Agreement of NagraStar LLC
adopted by the Members as of the date first stated in the Operating
Agreement.
NAGRASTAR LLC
By: /s/ CHARLES W. ERGEN /s/ ANDRE KUDELSKI
(A Member)
Initial Members:
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ CHARLES W. ERGEN
Its:
KUDELSKI SA
By: /s/ ANDRE KUDELSKI
Its:
[B]35
<PAGE>
SCHEDULE A
TO
NAGRASTAR LLC
OPERATING AGREEMENT
[CONFIDENTIAL MATERIAL REDACTED]
[B]36
<PAGE>
SCHEDULE B
TO
NAGRASTAR LLC
OPERATING AGREEMENT
[CONFIDENTIAL MATERIAL REDACTED]
[B]37
<PAGE>
SCHEDULE C
TO
NAGRASTAR LLC
OPERATING AGREEMENT
[CONFIDENTIAL MATERIAL REDACTED]
[B]38
<PAGE>
[APPENDIX C-1]
[CONFIDENTIAL MATERIAL REDACTED]
[C-1]1
<PAGE>
[APPENDIX C-2]
[CONFIDENTIAL MATERIAL REDACTED]
[C-2]1
<PAGE>
[APPENDIX D-1]
[CONFIDENTIAL MATERIAL REDACTED]
[D-1]1
<PAGE>
[APPENDIX D-2]
[CONFIDENTIAL MATERIAL REDACTED]
[D-2]1
<PAGE>
[EXHIBIT D-3]
[CONFIDENTIAL MATERIAL REDACTED]
[D-3]1
<PAGE>
[EXHIBIT E-1]
[CONFIDENTIAL MATERIAL REDACTED]
[E-1]1
<PAGE>
[APPENDIX E-2]
[CONFIDENTIAL MATERIAL REDACTED]
[E-2]1
<PAGE>
[EXHIBIT E-3]
[CONFIDENTIAL MATERIAL REDACTED]
[E-3]1
<PAGE>
EXHIBIT 21
PAGE 1 OF 1
ECHOSTAR COMMUNICATIONS CORPORATIONS AND SUBSIDIARIES
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
State or Country % of Name Doing Business
Subsidiary of Incorporation Ownership As
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dish Entertainment Corporation Colorado 100% Dish Entertainment
Dish Factory Direct Corporation Colorado 100% Dish Factory Direct
Dish Network Credit Corporation Colorado 100% DNCC
EchoStar DBS Corporation Colorado 100% EchoStar DBS
EchoStar Engineering Corporation Colorado 100% EchoStar Engineering
EchoStar KuX Corporation Colorado 100% KuX
EchoStar 110 Corporation Colorado 100% EchoStar 110
EchoStar PAC Corporation Colorado 100% EchoStar PAC
EchoStar Real Estate Corporation II Colorado 100% EREC II
Echo Acceptance Corporation Colorado 100%(1) EAC
Dish Installation Network Corporation f/k/a Colorado 100%(1) Dish Installation
Echonet Business Network, Inc.
Echosphere Corporation Colorado 100%(1) Echosphere
EchoStar International Corporation Colorado 100%(1) EchoStar International
EchoStar North America Corporation f/k/a Colorado 100%(2) EchoStar North America
EchoStar Licensee Corporation
EchoStar Real Estate Corporation Colorado 100%(1) EREC
EchoStar Satellite Corporation Colorado 100%(1) ESC
E-Sat, Inc. Colorado 80%(1) E-Sat
EchoStar Technologies Corporation f/k/a Texas 100%(1) EchoStar Technologies
Houston Tracker Systems, Inc.
Houston Tracker Systems, Inc. Colorado 100%(1) HTS
HT Ventures, Inc. Colorado 100%(1) HTV
Media4, Inc. Colorado 100% Media4
NagraStar LLC Colorado 50% NagraStar
Satellite Communications Operating Corporation Colorado 100% SCOC
Satellite Source, Inc. Colorado 100%(1) Satellite Source
Sky Vista Corporation Colorado 100%(1) Sky Vista
Transponder Encryption Services Corporation Colorado 100% TESC
</TABLE>
(1) This is a subsidiary of EchoStar DBS Corporation
(2) This is a subsidiary of EchoStar Satellite Corporation
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David K. Moskowitz as the true and
lawful attorney-in-fact and agent of the undersigned, with full power of
substitution and resubstitution, for and in the name, place and stead of the
undersigned, in any and all capacities, to sign the Annual Report on Form
10-K of EchoStar Communications Corporation, a Nevada corporation formed in
April 1995, for the year ended December 31, 1998, and any and all amendments
thereto and to file the same, with all exhibits thereto and other documents
in connection therewith, with the United States Securities and Exchange
Commission, and hereby grants to said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully as to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Power Attorney has been signed by the following persons in the
capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ JAMES DEFRANCO Director March 17, 1999
- ------------------------
James DeFranco
/s/ RAYMOND L. FRIEDLOB Director March 17, 1999
- ------------------------
Raymond L. Friedlob
/s/ O. NOLAN DAINES Director March 17, 1999
- ------------------------
O. Nolan Daines
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ECHOSTAR COMMUNICATIONS CORPORATION AS OF AND FOR THE
YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THOSE FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 106,547
<SECURITIES> 217,553
<RECEIVABLES> 110,229
<ALLOWANCES> 2,996
<INVENTORY> 76,708
<CURRENT-ASSETS> 537,845
<PP&E> 1,044,735
<DEPRECIATION> 167,821
<TOTAL-ASSETS> 1,806,852
<CURRENT-LIABILITIES> 430,777
<BONDS> 1,488,079
226,038
129,473
<COMMON> 451
<OTHER-SE> (501,464)
<TOTAL-LIABILITY-AND-EQUITY> 1,806,852
<SALES> 960,300<F1>
<TOTAL-REVENUES> 982,666
<CGS> 585,295<F2>
<TOTAL-COSTS> 1,105,557
<OTHER-EXPENSES> 137,947
<LOSS-PROVISION> 10,692
<INTEREST-EXPENSE> 167,529<F3>
<INCOME-PRETAX> (260,838)
<INCOME-TAX> 44
<INCOME-CONTINUING> (260,882)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (260,882)
<EPS-PRIMARY> (6.58)
<EPS-DILUTED> (6.58)
<FN>
<F1>INCLUDES SALES OF PROGRAMMING.
<F2>INCLUDES COSTS OF PROGRAMMING.
<F3>NET OF AMOUNTS CAPITALIZED.
</FN>
</TABLE>
