<PAGE>
Filed pursuant to Rule 424(b)(1)
Registration No. 333-3980
PROSPECTUS
ECHOSTAR SATELLITE BROADCASTING CORPORATION
OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF ITS
13 1/8% SENIOR SECURED DISCOUNT NOTES DUE 2004
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR EACH $1,000 IN PRINCIPAL AMOUNT OF ITS
OUTSTANDING 13 1/8% SENIOR SECURED DISCOUNT NOTES DUE 2004
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON JULY 26, 1996, UNLESS EXTENDED.
------------------------
EchoStar Satellite Broadcasting Corporation, a Colorado corporation (the
"Issuer"), hereby offers to exchange (the "Exchange Offer") up to $580,000,000
in aggregate principal amount of its new 13 1/8% Senior Secured Discount Notes
due 2004 (the "Exchange Notes") for up to $580,000,000 in aggregate principal
amount of its outstanding 13 1/8% Senior Secured Discount Notes due 2004 (the
"Old Notes" and, together with the Exchange Notes, the "Notes") that were issued
and sold in a transaction exempt from registration under the Securities Act of
1933, as amended (the "Securities Act").
The terms of the Exchange Notes are substantially identical (including
principal amount, interest rate, maturity, security and ranking) to the terms of
the Old Notes for which they may be exchanged pursuant to the Exchange Offer,
except that the Exchange Notes: (i) are freely transferable by holders thereof
(except as provided below); and (ii) are not entitled to certain registration
rights and certain liquidated damages which are applicable to the Old Notes
under the Registration Rights Agreement (as defined). The Exchange Notes will be
issued under the indenture governing the Old Notes. The Notes rank PARI PASSU in
right of payment with all senior indebtedness of the Issuer. The Notes are
guaranteed on a subordinated basis by EchoStar Communications Corporation
("EchoStar"), the Issuer's parent, and are or will be secured by liens on
certain assets of the Issuer, EchoStar and certain of EchoStar's subsidiaries,
including all of the outstanding capital stock of Dish, Ltd. ("Dish, Ltd.")
which currently owns substantially all of EchoStar's operating subsidiaries. See
"Description of Exchange Notes -- Security." Although the Notes are titled
"Senior": (i) the Issuer has not issued, and does not have any plans to issue,
any indebtedness to which the Notes would be senior; and (ii) the Notes are
effectively subordinated to all liabilities of EchoStar (except liabilities to
general creditors) and its other subsidiaries (except liabilities of the
Issuer), including liabilities to general creditors. As of March 31, 1996,
including the effect of the offering of the Old Notes (the "Old Notes
Offering"), the liabilities of EchoStar and its subsidiaries aggregated
approximately $815.3 million. In addition, the cash flow generated by the assets
and operations of the Issuer's subsidiaries will only be available to satisfy
the Issuer's obligations on the Notes at any time after payment of all amounts
due and payable at such time under the 1994 Notes by Dish, Ltd. -- See
"Description of Certain Indebtedness -- 1994 Notes." Concurrently with the
closing of the Old Notes Offering, approximately $177.3 million of the net
proceeds of the Old Notes Offering were placed in the Escrow Account. Funds may
be disbursed from the Escrow Account only upon satisfaction of the Escrow and
Disbursement Agreement. The Escrow Account serves as collateral for the Notes.
For a complete description of the terms of the Exchange Notes, see "Description
of Exchange Notes." There will be no cash proceeds to the Issuer from the
Exchange Offer.
(CONTINUED ON NEXT PAGE)
------------------------
HOLDERS OF OLD NOTES SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH IN
"RISK FACTORS" COMMENCING ON PAGE 20 OF THIS PROSPECTUS PRIOR TO MAKING A
DECISION WITH RESPECT TO THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is June 28, 1996.
<PAGE>
(COVER PAGE CONTINUED)
Interest on the Exchange Notes will accrete from March 25, 1996, but will
not be payable prior to March 15, 2000. Thereafter, interest on the Exchange
Notes will be payable semi-annually on March 15 and September 15 of each year,
commencing September 15, 2000. Holders of the Old Notes whose Old Notes are
accepted for exchange will be deemed to have waived the right to have interest
accrete, or to receive any payment in respect of interest on the Old Notes
accreted, from March 25, 1996, to the date of issuance of the Exchange Notes.
Except as set forth below, the Notes are not redeemable at the Issuer's
option prior to March 15, 2000. Thereafter, the Notes are subject to redemption,
at the option of the Issuer, in whole or in part, at the redemption prices set
forth herein. In addition, at any time prior to March 15, 1999, the Issuer may
redeem up to one-third of the Notes at a redemption price equal to 112.125% of
the Accreted Value thereof on the repurchase date with the net proceeds of one
public or private sale of certain Equity Interests of EchoStar. In the event of
a Change of Control, the Issuer is required to make an offer to repurchase all
of the Exchange Notes at a purchase price equal to 101% of the Accreted Value
thereof on the date of purchase (if prior to March 15, 2000) or 101% of the
aggregate principal amount thereof, together with accrued and unpaid interest
thereon to the date of purchase (if on or after March 15, 2000).
The Old Notes were originally issued and sold on March 25, 1996 in a
transaction not registered under the Securities Act, in reliance upon the
exemption provided in Section 4(2) of the Securities Act and Rule 144A
promulgated under the Securities Act. Accordingly, the Old Notes may not be
reoffered, resold or otherwise pledged, hypothecated or transferred in the
United States unless so registered or unless an applicable exemption from the
registration requirements of the Securities Act is available. Based upon its
view of interpretations provided to third parties by the Staff (the "Staff") of
the Securities and Exchange Commission (the "Commission"), the Issuer believes
that the Exchange Notes issued pursuant to the Exchange Offer in exchange for
the Old Notes may be offered for resale, resold and otherwise transferred by
holders thereof (other than any holder which is : (i) an "affiliate" of the
Issuer within the meaning of Rule 405 under the Securities Act (an "Affiliate");
(ii) a broker-dealer who acquired Old Notes directly from the Issuer; or (iii) a
broker-dealer who acquired Old Notes as a result of market making or other
trading activities) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such holders' business and such holders are
not engaged in, and do not intend to engage in, and have no arrangement or
understanding with any person to participate in, a distribution of such Exchange
Notes. Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of Exchange Notes. The Letter of
Transmittal that is filed as an exhibit to the Registration Statement of which
this Prospectus is a part (the "Letter of Transmittal") states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Broker-dealers who acquired Old Notes as a result of market making or other
trading activities may use this Prospectus, as supplemented or amended, in
connection with resales of the Exchange Notes. The Issuer has agreed that, for a
period of 180 days after the Registration Statement of which this Prospectus is
a part is declared effective by the Commission, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. Any
holder who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes and any other holder that cannot rely upon
interpretations must comply with the registration and prospectus requirements of
the Securities Act in connection with a secondary resale transaction.
Old Notes initially purchased by qualified institutional buyers were
initially represented by three global Notes in registered form, deposited with,
or on behalf of, The Depository Trust Company (the "Depositary"), and registered
in the name of Cede & Co., as nominee of the Depositary. The Exchange Notes
exchanged for Old Notes represented by the global Notes will be represented by
one or more global Exchange Notes in registered form, registered in the name of
the nominee of the Depositary.
2
<PAGE>
(COVER PAGE CONTINUED)
See "Description of Exchange Notes -- Book-entry, Delivery and Form." Exchange
Notes issued to non-qualified institutional buyers in exchange for Old Notes
held by such investors will be issued only in certificated, fully registered,
definitive form. Except as described herein, Exchange Notes in definitive
certificated form will not be issued in exchange for the global Note(s) or
interests therein.
The Old Notes and the Exchange Notes constitute new issues of securities
with no established public trading market. Any Old Notes not tendered and
accepted in the Exchange Offer will remain outstanding. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, a holder's ability to
sell untendered and tendered, but unaccepted, Old Notes are likely to be
adversely affected. Following consummation of the Exchange Offer, the holders of
any remaining Old Notes will continue to be subject to the existing restrictions
on transfer thereof and the Issuer will have no further obligation to such
holders to provide for the registration under the Securities Act of the Old
Notes except under certain very limited circumstances. See "Description of
Exchange Notes -- Old Notes' Registration Rights; Liquidated Damages." No
assurance can be given as to the liquidity of the trading market for either the
Old Notes or the Exchange Notes.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered or accepted for exchange. The Exchange Offer
will expire at 5:00 p.m., New York City time, on Friday, July 26, 1996, unless
extended (the "Expiration Date"). The date of acceptance for exchange of the Old
Notes (the "Exchange Date") will be the first business day following the
Expiration Date, upon surrender of the Old Note. Old Notes tendered pursuant to
the Exchange Offer may be withdrawn at any time prior to the Expiration Date;
otherwise such tenders are irrevocable.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information...................................................................................... 5
Prospectus Summary......................................................................................... 7
Risk Factors............................................................................................... 20
Use of Proceeds............................................................................................ 34
The Exchange Offer......................................................................................... 35
Capitalization............................................................................................. 43
Selected Financial Data.................................................................................... 44
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 46
Business................................................................................................... 59
Management................................................................................................. 89
Certain Relationships and Related Transactions............................................................. 95
Security Ownership of Certain Beneficial Owners and Management............................................. 96
Description of Certain Indebtedness........................................................................ 98
Description of Exchange Notes.............................................................................. 100
Certain United States Federal Income Tax Considerations.................................................... 132
Plan of Distribution....................................................................................... 134
Notice to Investors........................................................................................ 135
Experts.................................................................................................... 138
Legal Matters.............................................................................................. 138
</TABLE>
4
<PAGE>
AVAILABLE INFORMATION
The Issuer and the Guarantors have filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-1 (together
with all amendments, exhibits, schedules and supplements thereto, the
"Registration Statement") under the Securities Act with respect to the Exchange
Notes being offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are omitted as permitted by the
rules and regulations of the Commission. For further information with respect to
the Issuer, the Guarantors and the Exchange Notes, reference is hereby made to
the Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete and,
where such contract or other document is an exhibit to the Registration
Statement, each such statement is qualified in all respects by the provisions in
such exhibit, to which reference is hereby made.
The Issuer, Dish, Ltd. and Direct Broadcasting Satellite Corporation ("New
DBSC") are not currently subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). However, Dish,
Ltd. is required by the indenture (the "1994 Indenture") under which Dish, Ltd.
issued its 12 7/8 Senior Secured Discount Notes due 2004 (the "1994 Notes"),
whether or not it is then subject to Section 13 or 15(d) of the Exchange Act, to
file with the Commission and furnish to holders of the 1994 Notes and the
trustee under the 1994 Indenture copies of the annual reports, quarterly reports
and other periodic reports which Dish, Ltd. would have been required to file
with the Commission pursuant to Section 13 or 15(d) of the Exchange Act if Dish,
Ltd. were subject to such Sections. EchoStar Communications Corporation is
subject to the informational requirements of the Exchange Act. Upon the
effectiveness of the Registration Statement or, if earlier, the Shelf
Registration Statement (as defined herein), pursuant to the 1996 Indenture, the
Issuer, Dish, Ltd. and New DBSC will file all reports and other information
required by the Exchange Act. The Registration Statement, as well as periodic
reports, proxy statements and other information filed by the Issuer with the
Commission, may be inspected at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street, N.W, Washington, D.C. 20549, or
at its regional offices located at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300,
New York, New York 10048. Copies of such material can be obtained from the
Issuer upon request. Any such request should be addressed to the Issuer's
principal offices at 90 Inverness Circle East, Englewood, Colorado 80112-5300
(telephone (303) 799-8222).
The Issuer's, Dish, Ltd.'s and New DBSC's obligation to file periodic
reports with the Commission pursuant to the Exchange Act may be suspended if the
Notes are held of record by fewer than 300 holders at the beginning of any
fiscal year of the Issuer, other than the fiscal year in which the Registration
Statement or the Shelf Registration Statement becomes effective. However, the
Issuer has agreed, pursuant to the indenture dated as of March 25, 1996 (the
"1996 Indenture") governing the Notes, that, whether or not it is then subject
to Section 13 or 15(d) of the Exchange Act, it will file with the Commission and
furnish to the holders of the Notes and the Trustee under the 1996 Indenture
(and, if filing such documents with the Commission is prohibited, to prospective
holders of the Notes upon request) copies of the annual reports, quarterly
reports and other periodic reports which the Issuer would have been required to
file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act if
the Issuer were subject to such Sections, and in addition, the Issuer and New
DBSC have agreed to also provide all of the foregoing information for the Issuer
and New DBSC taken as a single entity. In addition, the Issuer will furnish,
upon the request of any holder of a Note, such information as is specified in
paragraph (d)(4) of Rule 144A, to the holder or to a prospective purchaser of
such Note who the holder reasonably believes is a qualified institutional buyer
within the meaning of Rule 144A, in order to permit compliance by such holder
with Rule 144A in connection with the resale of such Note by such holder unless,
at the time of the request, the Issuer is subject to the reporting requirements
of Section 13 or 15(d) of the Exchange Act.
5
<PAGE>
UNTIL SEPTEMBER 26, 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
NOTICE TO INVESTORS
THIS PROSPECTUS (THE "PROSPECTUS") DOES NOT CONSTITUTE AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, ANY NOTES BY ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFERING OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
6
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING THE FINANCIAL STATEMENTS AND THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. ECHOSTAR SATELLITE BROADCASTING CORPORATION, A
COLORADO CORPORATION, WAS FORMED FOR THE PURPOSE OF THE OFFERING OF THE OLD
NOTES (THE "OLD NOTES OFFERING") BY ITS PARENT, ECHOSTAR COMMUNICATIONS
CORPORATION, A NEVADA CORPORATION, THE CLASS A COMMON STOCK OF WHICH IS QUOTED
ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "DISH." AS USED IN THIS
PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, "ECHOSTAR" REFERS TO ECHOSTAR
COMMUNICATIONS CORPORATION AND ITS SUBSIDIARIES AND "ISSUER" REFERS TO ECHOSTAR
SATELLITE BROADCASTING CORPORATION AND ITS SUBSIDIARIES.
ECHOSTAR COMMUNICATIONS CORPORATION
EchoStar, which successfully launched its first direct broadcast satellite
("DBS"), EchoStar I, in December 1995, is one of only two companies with United
States licensed operational capacity sufficient to provide comprehensive
nationwide DBS programming service in 1996. Currently, EchoStar offers over 100
channels of high quality digital video and audio programming. Additionally, on
March 1, 1996, EchoStar received short-term authority from the Federal
Communications Commission ("FCC") to operate approximately 30 additional video
channels on EchoStar I for approximately 180 days (the "STA"). The STA expires
August 31, 1996 unless extended. EchoStar's DBS service (the "DISH Network-SM-")
is expected to expand to approximately 200 digital video and audio channels
following the successful launch of a second DBS satellite this fall. However,
there can be no assurance that the launch of EchoStar's second DBS satellite
this fall will be successful. See "Risk Factors -- Risk of Satellite Defect,
Loss or Reduced Performance."
EchoStar will target approximately 110 million potential subscribers in the
continental United States, including approximately 96 million television
households. DISH Network-SM- subscribers can choose from a variety of
programming packages which EchoStar believes have a better price-to-value
relationship than packages currently offered by most pay television providers.
For example, the entry level DISH Network-SM- programming package ("America's
Top 40-SM-") is priced at $19.99 per month and consists of 40 of the top
"expanded basic cable" channels, including a conventional premium service, The
Disney Channel-Registered Trademark-. EchoStar will also offer various regional
sports networks, numerous premium services, pay-per-view programming and,
following the launch of a second satellite, additional premium services and
expanded pay-per-view offerings. EchoStar has negotiated affiliation agreements
with major content providers, giving it the right to broadcast substantially all
of the most popular programming, including ESPN-Registered Trademark-,
MTV-Registered Trademark-, Nickelodeon-Registered Trademark-,
VH-1-Registered Trademark-, Showtime Network-Registered Trademark-, The Disney
Channel-Registered Trademark-, USA Network-Registered Trademark-,
CNN-Registered Trademark-, Headline News-Registered Trademark-, TNT-SM-, CNN
International-SM-, Turner Classic Movies-Registered Trademark-, The Discovery
Channel-Registered Trademark-, A&E-SM-, HBO-Registered Trademark-,
Cinemax-Registered Trademark-, Lifetime Television-SM-, The Family
Channel-Registered Trademark-, C-Span-Registered Trademark-,
CNBC-Registered Trademark- and many other programming services.
EchoStar believes that it will have access to more U.S. licensed DBS
frequencies than any of its competitors. EchoStar controls, or will control
(subject to certain FCC approvals and findings), as many as 90 such frequencies,
including 21 frequencies at one of the three U.S. licensed orbital slots
currently capable of providing nationwide DBS service. See "Business -- Industry
Overview -- DBS Industry." EchoStar believes that access to this substantial
amount of DBS spectrum will enable it to achieve higher subscriber penetration
and higher revenue per subscriber than it would otherwise attain with its 200
channel service. EchoStar currently plans to use this spectrum to offer a
substantial number of additional video channels, including alternate time zone
feeds of popular expanded basic cable programming, multiplexed premium movie
services, frequent start pay-per-view, local programming for the largest U.S.
television markets, niche and foreign language programming, professional and
college sporting events, high definition television ("HDTV"), business and
educational programming and high-speed transmission of Internet data.
The introduction of DBS receivers is widely regarded as the most successful
introduction of a consumer electronics product in U.S. history, surpassing the
rollout of color televisions, VCRs and
7
<PAGE>
compact disc players. During the 18 months ended December 31, 1995,
approximately 2.2 million U.S. households subscribed to digital direct-to-home
("DTH") satellite service. According to industry estimates, 85% of all consumers
are satisfied with DBS picture quality, compared to a consumer satisfaction
level of approximately 47% for cable.
Of the approximately 96 million television households in the United States,
it is estimated that approximately 60 million subscribers pay an average of $33
per month for multichannel programming services. EchoStar believes that there is
significant unsatisfied demand for high quality, reasonably priced television
programming. Although primary markets for the EchoStar DBS System are likely to
include the approximately 11.0 million households not passed by cable television
systems and the approximately 20.4 million households currently passed by cable
television systems with relatively limited channel capacity, EchoStar also
expects to target cable subscribers in urban and suburban areas who are
dissatisfied with the quality or price of their cable programming.
DISH Network-SM- programming is available to any subscriber who purchases or
leases an EchoStar receiver system, which consists of an 18-inch satellite dish,
a digital satellite receiver, a user-friendly remote control and related
components (an "EchoStar Receiver System"). The suggested retail price of an
EchoStar Receiver System is currently between approximately $499 and $599,
depending on the model selected by the customer, among other factors. Dealer
incentives and EchoStar sponsored promotions may reduce the actual cost of an
EchoStar Receiver System below the suggested retail price. The initial capital
cost required to receive DISH Network-SM- programming may reduce the demand for
EchoStar Receiver Systems, since EchoStar Receiver Systems must be purchased,
while cable and certain of EchoStar's satellite competitors lease their
equipment to the consumers with little if any initial hardware payment required.
EchoStar is currently test marketing a special promotion in a limited number of
markets pursuant to which customers are able to purchase a discounted package,
including an annual programming package for $300 (which is comparable to the
price for a similar package of cable programming), and an EchoStar Receiver
System for $199. If EchoStar elects to expand the promotion nationwide for an
extended period, or if market conditions force it to do so, the initial capital
investment relative to cable will be greatly reduced. In this event, EchoStar's
subscriber acquisition costs will increase substantially, potentially resulting
in a significant negative impact on EchoStar's liquidity and net income.
The EchoStar Receiver System is fully compatible with MPEG-2, the world
digital standard for computers and consumer electronics products, and provides
image and sound quality superior to current analog cable or MMDS television
services. EchoStar intends to market EchoStar Receiver Systems through its
nationwide network of approximately 3,000 independent distributors and
retailers. EchoStar is also currently engaged in discussions with brand name
consumer electronics equipment manufacturers for the production and distribution
of EchoStar Receiver Systems through national consumer electronics retailer
networks. EchoStar is also negotiating with a number of mass merchandisers,
direct sales organizations and consumer electronics retailers for other
distribution paths for EchoStar Receiver Systems.
EchoStar's primary objective is to become one of the leading providers of
pay television services in the United States. EchoStar's strategy to achieve
this objective is to:
- Provide subscribers with more quality programming at lower price points
than other pay television providers.
- Utilize its large and established independent retail network to obtain
substantial market share in rural areas and areas served by cable systems
with relatively limited channel capacity.
- Employ world standard MPEG-2 digital technology to achieve lower
manufacturing costs and assure superior product capability, including
compatibility with other consumer electronics products.
- Expand consumer electronics retail distribution through relationships with
major retailers or through licensing arrangements with brand name consumer
electronics manufacturers.
8
<PAGE>
- Provide superior customer service by furnishing a single source to
purchase DISH Network-SM- hardware and programming and to obtain
financing, installation and customer care.
- Deploy satellites at additional DBS orbital slots to expand EchoStar's
product offerings with complementary video, data and interactive products.
DBS is the most efficient, least capital intensive means of reaching the
largest number of U.S. television households. EchoStar's first two satellites
will transmit high quality, digital television to the entire continental United
States for a capital cost of less than $500 million, or approximately $5 per
television household, permitting profitability with relatively low market
penetration. EchoStar believes that its strategy, together with the ability to
exploit the more favorable cost structure and the lower invested capital
requirements of DBS relative to other pay television providers, will enable
EchoStar to achieve its objectives.
In addition to the DBS business, EchoStar is engaged in the design,
manufacture, distribution and installation of DTH products, domestic
distribution of DTH programming and consumer financing of EchoStar's domestic
DTH products and services. During the six years ended December 31, 1995,
EchoStar sold over 1.7 million DTH receivers worldwide.
EchoStar's principal offices are located at 90 Inverness Circle East,
Englewood, Colorado 80112-5300, and its telephone number is (303) 799-8222.
SUMMARY OF RISK FACTORS
The deployment and operation of the EchoStar DBS System is highly complex
and involves substantial risks. These risks include the competition from DBS and
other satellite system operators and cable television, EchoStar's ability to
integrate advanced and unproven technologies, the potential loss or damage to
EchoStar's satellites during launch or while in orbit, the potential for
impaired commercial operation resulting from incorrect orbital placement, affect
on cash flow resulting from subscriber acquisition costs, EchoStar's ability to
obtain insurance on favorable terms, the potential for delay and cost overruns
and effects of government regulation on the communications industry generally.
The inability of EchoStar to successfully deploy the EchoStar DBS System would
adversely affect EchoStar's operations and would impair EchoStar's ability to
make payments with respect to the Exchange Notes. Risks related to the Exchange
Notes include the fact that there may be an absence of a public market for the
Exchange Notes. Risks related to EchoStar include the fact that EchoStar is
highly leveraged, which leverage makes EchoStar vulnerable to adverse changes in
the economy generally which could adversely affect EchoStar's ability to make
payments with respect to the Exchange Notes. These and certain other risks are
described in more detail under "Risk Factors" commencing on page 20.
RECENT DEVELOPMENTS
During January 1996, the FCC held an auction for 28 frequencies at the
110 DEG. WL orbital slot and 24 frequencies at the 148 DEG. WL orbital slot (the
"FCC Auction"). At the FCC Auction, EchoStar entered the winning bid of
approximately $52.3 million for 24 frequencies at the 148 DEG. WL orbital slot.
EchoStar has made the required 20% down payment for these frequencies, and will
be required to remit the remaining $41.8 million upon grant of the construction
permit, which could occur as early as June 1996. Also, at the FCC Auction MCI
Communications Corp. ("MCI") entered the winning bid of $682.5 million for 28 of
32 frequencies at the 110 DEG. WL orbital slot. EchoStar's license for
frequencies at 119 DEG. WL, which were obtained at minimal cost, provides
comprehensive nationwide DBS coverage similar to that available from the
110 DEG. WL orbital slot.
On March 1, 1996, EchoStar received the STA from the FCC to operate the
remaining five frequencies (approximately 30 additional video channels for a
total of approximately 100 video channels) on EchoStar I until August 31, 1996.
There can be no assurance the STA will be extended.
9
<PAGE>
EchoStar has entered into a contract for the launch of DirectSat I
("EchoStar II") with Arianespace, Inc. ("Arianespace") during September 1996,
and a contract with Lockheed Martin Commercial Launch Services, Inc.
("Lockheed") for the launch of DBSC I ("EchoStar III") during the period from
September 1997 through November 1997. Pursuant to the Arianespace contract, as
of June 7, 1996, EchoStar has paid approximately $43.4 million to Arianespace.
Pursuant to the Lockheed contract, as of June 7, 1996, EchoStar has paid $5.0
million to Lockheed. Substantial additional payments are expected to be expended
in 1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
EchoStar owns approximately 40% of the outstanding common stock of Direct
Broadcasting Satellite Corporation, a Delaware corporation ("DBSC"), whose
stockholders have approved a merger of DBSC with a subsidiary of EchoStar (the
"DBSC Merger"). DBSC holds a conditional construction permit for 11 DBS
frequencies at 61.5 DEG. WL and 11 DBS frequencies at 175 DEG. WL. EchoStar has
filed an application with the FCC for approval of the DBSC Merger. The deadline
for filing petitions and oppositions regarding approval by the FCC of the DBSC
Merger passed on March 15, 1996, and EchoStar is aware of only one opposition,
which was filed by the Consumer Project on Technology ("CPT"). EchoStar believes
that the FCC has previously considered and rejected issues similar to the
arguments made in this opposition, and that filing of the CPT opposition does
not materially decrease the likelihood that the FCC will approve the DBSC
Merger.
10
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THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer................ The Issuer is offering to exchange (the "Exchange
Offer") up to $580,000,000 aggregate principal amount of
its new 13 1/8% Senior Secured Discount Notes due 2004
(the "Exchange Notes") for up to $580,000,000 aggregate
principal amount of its outstanding 13 1/8% Senior
Secured Discount Notes due 2004 that were issued and
sold in a transaction exempt from registration under the
Securities Act (the "Old Notes" and, together with the
Exchange Notes, the "Notes"). The form and terms of the
Exchange Notes are substantially identical (including
principal amount, interest rate, maturity, security and
ranking) to the form and terms of the Old Notes for
which they may be exchanged pursuant to the Exchange
Offer, except that the Exchange Notes are freely
transferable by holders thereof except as provided
herein (see "The Exchange Offer -- Terms of the
Exchange" and "-- Terms and Conditions of the Letter of
Transmittal") and are not entitled to certain
registration rights and certain liquidated damages which
are applicable to the Old Notes under a registration
rights agreement dated as of March 25, 1996 (the
"Registration Rights Agreement") among the Issuer,
EchoStar, Dish, Ltd. ("Dish, Ltd."), and Direct
Broadcasting Satellite Corporation ("New DBSC") and
Donaldson, Lufkin & Jenrette Securities Corporation and
Smith Barney Inc., as initial purchasers (collectively,
the "Initial Purchasers"). See Description of Exchange
Notes -- Old Notes' Registration Rights; Liquidated
Damages.
Exchange Notes issued pursuant to the Exchange Offer in
exchange for the Old Notes may be offered for resale,
resold and otherwise transferred by holders thereof
(other than any holder which is: (i) an Affiliate of the
Issuer; (ii) a broker-dealer who acquired Old Notes
directly from the Issuer; or (iii) a broker-dealer who
acquired Old Notes as a result of market-making or other
trading activities), without compliance with the
registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such holders'
business and such holders are not engaged in, do not
intend to engage in, and have no arrangement or
understanding with any person to participate in, a
distribution of such Exchange Notes.
Minimum Condition................. The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Notes being tendered
or accepted for exchange.
Expiration Date................... The Exchange Offer will expire at 5:00 p.m., New York
City time, on Friday, July 26, 1996, unless extended
(the "Expiration Date").
Exchange Date..................... The first date of acceptance for exchange of the Old
Notes will be the first business day following the
Expiration Date.
Conditions to the Exchange The obligation of the Issuer to consummate the Exchange
Offer............................. Offer is subject to certain conditions. See "The
Exchange Offer -- Conditions to the Exchange Offer." The
Issuer
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
reserves the right to terminate or amend the Exchange
Offer at any time prior to the Expiration Date upon the
occurrence of any of those conditions.
Withdrawal Rights................. Tenders of Old Notes pursuant to the Exchange Offer may
be withdrawn at any time prior to the Expiration Date.
Any Old Notes not accepted for any reason will be
returned without expense to the tendering holders
thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
Procedures for Tendering Old See "The Exchange Offer -- How to Tender."
Notes.............................
Federal Income Tax Consequences... The exchange of Old Notes for Exchange Notes by
tendering holders will not be a taxable exchange for
federal income tax purposes, and such holders should not
recognize any taxable gain or loss or any interest
income as a result of such exchange. See "Certain United
States Federal Income Tax Considerations."
Use of Proceeds................... There will be no cash proceeds to the Issuer from the
exchange pursuant to the Exchange Offer.
Effect on Holders of Old Notes.... As a result of the making of this Exchange Offer, and
upon acceptance for exchange of all validly tendered Old
Notes pursuant to the terms of this Exchange Offer, the
Issuer will have fulfilled a covenant contained in the
terms of the Old Notes and the Registration Rights
Agreement, and, accordingly, the holders of the Old
Notes will have no further registration or other rights
under the Registration Rights Agreement, except under
certain limited circumstances. See "Description of
Exchange Notes -- Old Notes' Registration Rights;
Liquidated Damages." Holders of the Old Notes who do not
tender their Old Notes in the Exchange Offer will
continue to hold such Old Notes and will be entitled to
all the rights and limitations applicable thereto under
the 1996 Indenture. All untendered, and tendered but
unaccepted, Old Notes will continue to be subject to the
restrictions on transfer provided for in the Old Notes
and the 1996 Indenture. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading
market, if any, for the Old Notes not so tendered is
likely to be adversely affected. See "Risk Factors --
Consequences of Failure to Exchange Old Notes."
</TABLE>
TERMS OF THE EXCHANGE NOTES
The Exchange Offer applies to $580,000,000 aggregate principal amount of Old
Notes. The form and terms of the Exchange Notes are substantially identical to
the form and terms of the Old Notes, except that the Exchange Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. The Exchange Notes will evidence the same debt
as the Old Notes and will be entitled to the benefits of the 1996 Indenture. See
"Description of Exchange Notes."
<TABLE>
<S> <C>
Securities Offered................ $580,000,000 principal amount of 13 1/8% Senior Secured
Discount Notes due 2004 (the "Exchange Notes").
Maturity Date..................... March 15, 2004.
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
Interest Payment Dates............ Interest will accrete from March 25, 1996, the date of
issuance of the Old Notes, at the rate per annum set
forth on the cover page of this Prospectus but will not
be payable prior to March 15, 2000. Thereafter, interest
will be payable semi-annually in cash on March 15 and
September 15 of each year, commencing September 15,
2000.
Ranking........................... The Notes will rank senior in right of payment to all
subordinated indebtedness of the Issuer and PARI PASSU
in right of payment with all senior indebtedness of the
Issuer. See "Description of Exchange Notes -- Security."
Optional Redemption............... Except as set forth below, the Notes will not be
redeemable at the Issuer's option prior to March 15,
2000. Thereafter, the Notes will be subject to
redemption at the option of the Issuer, in whole or in
part, at the redemption prices set forth herein. In
addition, at any time prior to March 15, 1999, the
Issuer may redeem Notes at a redemption price equal to
112.125% of the Accreted Value (as defined herein) on
the repurchase date with the net proceeds of one public
or private sale of certain Equity Interests (as defined
herein) of EchoStar, provided that: (a) at least
two-thirds in aggregate principal amount of Notes
originally issued remain outstanding immediately after
the occurrence of such redemption; and (b) such
redemption occurs within 120 days of the date of the
closing of any such sale.
Change of Control................. Upon the occurrence of a Change of Control (as defined
herein), the Issuer will be required to make an offer to
each holder of Exchange Notes to repurchase all or any
part of such holder's Notes at a purchase price equal to
101% of the Accreted Value thereof on the date of
purchase (if prior to March 15, 2000) or 101% of the
principal amount thereof, together with accrued and
unpaid interest thereon to the date of purchase (if on
or after March 15, 2000).
Offer to Purchase................. Upon the occurrence of certain events described under
"Description of Exchange Notes -- Offer to Purchase upon
the Occurrence of Certain Events," the Issuer will be
required to offer to repurchase a specified amount of
Notes at a purchase price equal to 101% of the Accreted
Value thereof on the date of purchase (if prior to March
15, 2000) or 101% of the principal amount thereof,
together with accrued and unpaid interest thereon to the
date of purchase (if on or after March 15, 2000).
Significant Transactions.......... EchoStar and its subsidiaries will be permitted to
engage in certain transactions, notwithstanding the fact
that such transactions would otherwise be prohibited,
PROVIDED that: (i) such transactions are for fair market
value in the opinion of an investment banking firm of
national standing and the Board of Directors; and (ii)
prior to consummation of such transactions, the Issuer
makes an offer to each holder of Notes to repurchase all
or any part of such holder's Notes at a purchase price
equal to 101% of the Accreted Value thereof on the date
of purchase (if prior to March 15, 2000) or 101% of
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
the principal amount thereof, together with accrued and
unpaid interest thereon to the date of purchase (if on
or after March 15, 2000). See "Description of Exchange
Notes -- Significant Transactions."
Escrow Account.................... The Issuer has placed the portion (approximately $177.3
million) of the net proceeds of the Old Notes Offering
related to the purchase of frequencies at 148 DEG. WL
and satellite construction, launch and insurance for
EchoStar III and EchoStar IV in the Escrow Account.
Funds may be disbursed from the Escrow Account only upon
satisfaction of certain conditions set forth in the
Escrow and Disbursement Agreement (as defined herein).
The Escrow Account serves as collateral for the Notes.
See "Description of Exchange Notes -- Disbursement of
Funds -- Escrow Account."
Security.......................... Initially, the Notes are secured by: (i) a pledge of all
of the issued and outstanding capital stock of EchoStar
DBS Corporation (which pledge will be released following
consummation of the DBSC Merger (as defined herein) or
the Substitute DBSC Transaction (as defined herein) and
Dish, Ltd.; (ii) a pledge of all of the stock of DBSC
held by EchoStar; (iii) a pledge of certain notes of
DBSC held by EchoStar; and (iv) a first priority
security interest in the Escrow Account. In addition,
upon consummation of the DBSC Merger, the Notes will be
secured by: (i) a first priority security interest, when
launched, in EchoStar III; (ii) a collateral assignment
of all contracts relating to the construction, launch
(other than with Great Wall), insurance and TT&C of
EchoStar III; and (iii) a pledge of all of the issued
and outstanding capital stock of DBSC. If the DBSC
Merger is not consummated but the Substitute DBSC
Transaction is consummated, the Notes will be secured by
a collateral assignment of all contracts and agreements
relating to the Substitute DBSC Transaction. See
"Description of Exchange Notes -- Security."
Guarantees........................ The Notes are guaranteed by EchoStar on a subordinated
basis. On and after the Dish Guarantee Date (as defined
herein), the Notes will be guaranteed by Dish, Ltd.,
which guarantee will rank PARI PASSU with all senior
unsecured indebtedness of Dish, Ltd. On and after the
date upon which the DBSC Merger is consummated, the
Notes will be guaranteed by DBSC, which guarantee will
RANK PARI passu with all senior unsecured indebtedness
of DBSC. See "Description of Exchange Notes -- Affiliate
Guarantees."
Maintenance of Insurance.......... The Indenture relating to the Notes (the "1996
Indenture") requires the Issuer to obtain Launch
Insurance (as defined herein) for EchoStar III (or any
replacement thereof) in an amount equal to or greater
than the cost of construction and launch of and
insurance on EchoStar III (or any replacement thereof).
The 1996 Indenture also requires the Issuer to maintain
In-orbit Insurance (as defined herein) for EchoStar III
(or any replacement thereof) in an amount equal to or
greater than the cost of construction, launch and
insurance of EchoStar III (or any replacement thereof).
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
Certain Other Covenants........... The 1996 Indenture restricts, among other things, the
payment of dividends, the repurchase of stock and
subordinated indebtedness of the Issuer and the making
of certain other Restricted Payments (as defined
herein), the incurrence of indebtedness and the issuance
of preferred stock, certain asset sales, the creation of
certain liens, certain mergers and consolidations, and
transactions with Affiliates (as defined herein).
Registration Rights; Liquidated
Damages........................... Pursuant to the Registration Rights Agreement, the
Issuer and the Guarantors agreed: (i) to file the
Registration Statement on or prior to April 24, 1996,
with respect to the Exchange Offer; and (ii) to use
their best efforts to cause the Registration Statement
to be declared effective by the Commission on or prior
to June 23, 1996. In certain very limited circumstances,
the Issuer and the Guarantors will be required to
provide a shelf registration statement (the "Shelf
Registration Statement") to cover resales of the Old
Notes by the holders thereof. If the Issuer and the
Guarantors do not comply with their obligations under
the Registration Rights Agreement, they will be required
to pay Liquidated Damages to holders of the Notes under
certain circumstances. See "Description of Exchange
Notes -- Old Notes' Registration Rights; Liquidated
Damages."
Transfer Restrictions............. The Old Notes have not been registered under the
Securities Act and are subject to certain restrictions
on transfer. The Exchange Notes and Old Notes registered
pursuant to an effective registration statement will
generally be freely transferable. See "Notice to
Investors." The Issuer does not intend to apply for
listing of the Notes on any securities exchange or for
quotation through the National Association of Securities
Dealers Automated Quotation System.
</TABLE>
15
<PAGE>
SUMMARY FINANCIAL DATA
The Issuer was formed in January 1996 for the purpose of the Old Notes
Offering. EchoStar contributed all of the outstanding capital stock of its
wholly owned subsidiary, Dish, Ltd., to the Issuer. This transaction has been
accounted for as a reorganization of entities under common control. Accordingly,
Dish, Ltd. has been treated as the predecessor to the Issuer and the historical
financial statements of the Issuer are those of Dish, Ltd. The following summary
financial data and the selected financial data presented elsewhere in this
Prospectus for the five years ended December 31, 1995, are derived from the
Combined and Consolidated Financial Statements of Dish, Ltd. The data provided
for the three months ended March 31, 1995 and 1996 are derived from the
supplemental quarterly financial statements and condensed notes thereto of the
Issuer, which includes the consolidated accounts of Dish, Ltd. Combined and
Consolidated Financial Statements of EchoStar and the Notes thereto are included
elsewhere in this Prospectus. In addition, condensed parent only financial
statements and financial data of EchoStar are also included elsewhere in this
Prospectus, (see Note 16 of Notes to Combined and Consolidated Financial
Statements of Dish, Ltd. as of December 31, 1995). See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- ----------- --------- -----------
(IN THOUSANDS, EXCEPT RATIOS AND SATELLITE RECEIVERS (UNAUDITED)
SOLD)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue...................... $ 139,613 $ 165,088 $ 220,941 $ 190,983 $ 163,890 $ 40,413 $ 41,026
Operating income (loss)...... 5,406 11,286 18,204 13,216 (7,949) (698) (8,908)
Net income (loss)............ 6,192 10,833 20,118 90 (12,361) (2,240) (7,654)
Ratio of earnings to fixed
charges (1)................. 4.36x 7.32x 9.63x 1.02x 0.64x 0.70x 0.15x
Pro forma net income (2)..... 4,468 7,529 12,272
OTHER DATA:
EBITDA (3)................... $ 12,818(4) $ 12,329 $ 19,881 $ 15,459 $ (4,891) $ (335) $ (5,578)
Cumulative investment in the
EchoStar DBS System......... 114 3,345 21,796 139,500 341,232(5) 181,573 368,749(5)
Satellite receivers sold (in
units):
Domestic................... 113,000 116,000 132,000 114,000 131,000 27,000 45,000
International.............. 45,000 85,000 203,000 289,000 331,000 85,000 76,000
--------- --------- --------- --------- ----------- --------- -----------
Total.................. 158,000 201,000 335,000 403,000 462,000 112,000 121,000
--------- --------- --------- --------- ----------- --------- -----------
--------- --------- --------- --------- ----------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
-------------------------
ACTUAL AS ADJUSTED(6)
--------- -------------- MARCH 31,
1996
------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable investment securities............ $ 113,850(7) $ 450,896 $ 438,350(13)
Working capital........................................................ 31,115 368,161 200,577
Total assets........................................................... 559,295 896,341 899,357
Long-term debt (less current portion).................................. 415,662 765,709 778,644
Total stockholders' equity............................................. 92,890 92,891 85,007
</TABLE>
16
<PAGE>
SUMMARY SATELLITE DATA
<TABLE>
<CAPTION>
ECHOSTAR II ECHOSTAR III
ECHOSTAR I (8) (9)(10) ECHOSTAR IV (10)
------------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Expected launch date....................... Launched Fall 1996 Fall 1997 Spring 1998
Orbital slot............................... 119 DEG. WL 119 DEG. WL 61.5 DEG. WL 148 DEG. or
175 DEG. WL
Transponders (11).......................... 16 @ 24 Mhz 16 @ 24 Mhz 16/32 @ 24MHz 16/32 @ 24MHz
Approximate channel capacity (11).......... 100 channels 100 channels 100/200 channels 100/200 channels
Output power............................... 130 Watts 130 Watts 240/120 Watts 240/120 Watts
Expected end of commercial life (12)....... 2011 2011 2012 2013
Satellite coverage area.................... Continental U.S. and certain Eastern and Western and
regions of Central U.S. Central U.S.
Canada and Mexico Alaska and
Hawaii
</TABLE>
- ------------------------------
(1) For purposes of the ratio of earnings to fixed charges, earnings consist of
earnings from continuing operations before income taxes, plus fixed charges.
Fixed charges consist of interest incurred on all indebtedness and rental
expense under non-cancelable operating leases.
(2) Dish, Ltd.'s subsidiaries operated under Subchapter S of the Code, and
comparable provisions of applicable state income tax laws, until December
31, 1993. The amounts shown reflect net income as if Dish, Ltd. had been
subject to corporate federal and state income taxes during such periods. See
Notes 2 and 7 of Notes to Dish, Ltd.'s Financial Statements.
(3) EBITDA represents earnings before interest income, interest expense, net of
other income and expenses, income taxes, depreciation and amortization.
EBITDA is commonly used in the telecommunications industry to analyze
companies on the basis of operating performance, leverage and liquidity.
EBITDA is not intended to represent cash flows for the period, nor has it
been presented as an alternative to operating income as an indicator of
operating performance and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles. See Dish, Ltd.'s Financial Statements
contained elsewhere in this Prospectus.
(4) Excludes $6.3 million in non-recurring charges.
(5) Includes approximately $20.8 million and $26.6 million paid by EchoStar
towards the launch of EchoStar III and EchoStar IV and capitalized interest
on these payments as of December 31, 1995 and March 31, 1996, respectively.
(6) Gives effect to the Old Notes less underwriting discounts and commissions
and estimated offering expenses, including approximately $177.3 million
initially placed in the Escrow Account.
(7) Includes $84.7 million of cash restricted under the 1994 Indenture pursuant
to which Dish, Ltd. issued the 1994 Notes and $15.0 million of restricted
cash in an escrow account related to the manufacture of EchoStar Receiver
Systems.
(8) The conditional permit for this satellite ("DirectSat I") is held by
DirectSat Corporation, a wholly-owned subsidiary of Dish, Ltd. The DirectSat
I satellite is referred to hereinafter in this Prospectus as EchoStar II.
(9) The conditional permit for this satellite ("DBSC I") is held by DBSC.
EchoStar owns approximately 40% of the outstanding common stock of DBSC,
whose shareholders have approved a merger of DBSC with a subsidiary of
EchoStar. Assuming approval of this merger by the FCC, EchoStar will be the
parent of DBSC. The DBSC I satellite is referred to in this Prospectus as
EchoStar III.
(10) The transponders on each of these satellites can be independently switched
to provide a range from 16 transponders operating at 240 Watts each to 32
transponders operating at 120 Watts each.
(11) EchoStar's DBS permits cover: (i) 11 of the 16 transponders (approximately
65 of 100 channels) on EchoStar I; and (ii) 10 of the 16 transponders
(approximately 60 of 100 channels) on EchoStar II. EchoStar also expects to
receive FCC authority for: (iii) 11 of the 16 transponders (approximately 65
of 100 channels) on EchoStar III; and (iv) 24 of the 32 transponders
(approximately 150 of 200 channels) on EchoStar IV (or 32 transponders if
the satellite is positioned at 175 DEG. WL and certain approvals are
obtained). See "Business -- Operation of the EchoStar DBS System -- DBS and
Other Permits." EchoStar has also received an STA from the FCC to operate
the remaining five frequencies (approximately 30 additional video channels)
on EchoStar I for approximately 180 days. There can be no assurance the STA
will be extended.
(12) The expected end of commercial life of each satellite has been estimated by
EchoStar based on each satellite's actual or expected launch date and the
terms of the construction and launch contracts. The minimum design life is
12 years.
(13) Includes $245.0 million of cash restricted under the 1994 and 1996
Indentures pursuant to which Dish, Ltd. and the Issuer issued the 1994 Notes
and the Old Notes, respectively. Also included is $15.0 million and $15.5
million of restricted cash in escrow accounts related to the manufacture of
EchoStar Receiver Systems and for the purpose of cash collateralizing
certain standby letters of credit, respectively.
17
<PAGE>
THE ECHOSTAR ORGANIZATION
The following chart illustrates where significant DBS assets and rights are,
or are expected to be, held:
[CHART]
The Old Notes are, and the Exchange Notes will be, secured by:
- A pledge of the capital stock of EchoStar DBS Corporation (which pledge
will be released following consummation of the DBSC Merger) and Dish,
Ltd., and in the event the DBSC Merger is not consummated, a substitute
transaction which provides similar benefits to EchoStar (the "Substitute
DBSC Transaction").
- A pledge of the stock of DBSC held by EchoStar.
- A pledge of certain notes of DBSC held by EchoStar.
- A first priority security interest in the Escrow Account.
Additionally, following consummation of the DBSC Merger, the Notes will be
secured by:
- A first priority security interest, when launched, in EchoStar III.
- A collateral assignment of certain construction, launch and insurance
contracts relating to EchoStar III.
18
<PAGE>
- A pledge of all of the issued and outstanding capital stock of DBSC.
In the event that the DBSC Merger is not consummated, following consummation
of the Substitute DBSC Transaction, the Notes will be secured by:
- A collateral assignment of all contracts and agreements relating to the
Substitute DBSC Transaction.
- ------------------------
* Subject to FCC approvals and findings (see "Summary Satellite Data" and
"Prospectus Summary -- Recent Developments").
** EchoStar has also received an STA for the remaining five frequencies on
EchoStar I for approximately 180 days. There can be no assurance that the
STA will be extended.
19
<PAGE>
RISK FACTORS
HOLDERS OF THE OLD NOTES SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS
WHICH MAY BE GENERALLY APPLICABLE TO THE OLD NOTES AS WELL AS TO THE EXCHANGE
NOTES BEFORE DECIDING WHETHER TO TENDER THEIR OLD NOTES FOR THE EXCHANGE NOTES
OFFERED HEREBY:
COMPETITION FROM DBS AND OTHER SATELLITE SYSTEM OPERATORS. The pay
television provider industry is highly competitive. EchoStar faces competition
from companies offering video, audio, data, programming and entertainment
services. Many of these competitors have substantially greater financial and
marketing resources than EchoStar. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
EchoStar competes with companies offering programming through various
satellite broadcasting systems. One competitor, DirecTv, Inc. ("DirecTv") has
launched three DBS satellites. DirecTv and United States Satellite Broadcasting
Corporation ("USSB"), which owns five transponders on one of DirecTv's
satellites, currently offer over 150 channels of combined DBS video programming.
As of December 31, 1995, DirecTv had approximately 1.2 million subscribers,
approximately one-half of which also subscribed to USSB programming, and expects
to have 2.5 million subscribers by the end of 1996. EchoStar's first DBS
satellite, which was launched in December 1995, has the capacity to provide
approximately 100 channels of video programming. However, EchoStar's authority
to provide 30 of those channels expires approximately October 1, 1996 unless the
STA is extended, of which there can be no assurance. As a result, EchoStar is
currently at a competitive disadvantage to DirecTv and USSB with regard to
market entry, programming and, possibly, volume discounts for programming
offerings. In addition, in the event desirable pay-per-view or other popular
programming is secured by competitors of EchoStar on an exclusive basis, it will
be unavailable to EchoStar's DISH Network-SM-. Currently, DirecTv offers
subscribers the NFL Sunday Ticket-TM- and USSB offers Flix-TM-, both of which
are available to those service providers on an exclusive basis. There may be
additional sports and other programming offered by other pay television
providers that will not be available on the DISH Network-SM-. See "Business --
Competition -- DBS Industry -- Other DBS Operators."
AT&T Corporation ("AT&T") and DirecTv have an exclusive agreement for AT&T
to market and distribute DirecTv's DBS service and related equipment to AT&T's
customer base. As part of the agreement, AT&T made an initial investment of
approximately $137.5 million to acquire 2.5% of the equity of DirecTv with an
option to increase its investment to up to 30% over five years. This agreement
provides a significant base of potential customers for the DirecTv DBS system
and allows AT&T and DirecTv to offer customers a package of entertainment and
communications services. As a result, EchoStar will be at a competitive
disadvantage marketing to these customers. AT&T and DirecTv also announced plans
to jointly develop new multi-media services for DirecTv under the agreement. The
AT&T and DirecTv agreement will increase the competition EchoStar encounters in
the overall market for pay television customers.
In the FCC Auction, MCI entered the winning bid of $682.5 million to acquire
the permit for 28 of 32 frequencies at the 110 DEG. WL orbital slot. MCI and
News Corp. ("News") have formed a joint venture to build and operate a DBS
system at the 110 WL orbital location offering television programming and
business communications services. The license will give MCI and News the
capacity to offer over 200 channels of digital video programming. MCI and News
reportedly expect that building and launching the satellites for their system
will cost approximately an additional $1 billion and that DBS services will be
offered to consumers and businesses in approximately two years. However, if MCI
and News acquire satellites which have already been constructed, service could
begin sooner. MCI and News have substantially greater resources than EchoStar
and their joint venture will increase the competition EchoStar encounters in the
market for pay television customers.
PrimeStar Partners ("PrimeStar"), owned by a consortium of several cable
companies, including Tele-Communications, Inc. ("TCI"), currently offers medium
power Ku-band programming service to customers using dishes which are generally
three feet in diameter. PrimeStar's earlier entry into the market, its
relationship with cable programmers and its substantial resources provide
PrimeStar with
20
<PAGE>
certain competitive advantages. PrimeStar currently has approximately one
million subscribers and is expected to offer medium power programming services
to customers using smaller dishes (approximately two feet in diameter) upon the
successful launch of a GE American Communications Inc. ("GE Americom") satellite
later this year. TCI, which is the largest cable television company in the
United States, owns two satellites that will be ready for launch in 1996. A TCI
subsidiary has a DBS construction permit for 11 frequencies at each of 119 DEG.
WL and 166 DEG. WL. PrimeStar has the right to offer DBS programming services
from these satellites. If PrimeStar does not exercise its right, it is expected
that TCI will use these satellites to directly enter the DBS programming
business, and may launch satellites capable of providing service to the
continental United States during 1996. EchoStar is at a competitive disadvantage
to PrimeStar with regard to market entry, programming and, possibly, volume
discounts for programming offerings, particularly if PrimeStar aggregates its
DBS and cable affiliates' customers for volume discounts.
During March 1996, Tee-Comm Electronics, Inc. ("Tee-Comm"), a Canadian
company, through an affiliate, began offering digital video and audio DTH
programming in the United States on a limited basis and intends to expand to 120
channels later this year, and 200 channels by the end of 1997. The medium power
Ku-band satellite on which Tee-Comm is leasing transponders requires that
customers use dishes approximately 24 to 36 inches in diameter. See "Business --
Competition -- DBS Industry -- Other DBS Operators."
Certain of EchoStar's DBS competitors subsidize the price of their DBS
receiver systems to increase subscriber penetration. In connection with certain
special promotions currently offered by EchoStar in a limited number of test
markets, EchoStar is currently test marketing a special promotion in a limited
number of markets pursuant to which customers are able to purchase a discounted
package, including an EchoStar Receiver System and annual programming package
for as low as $499, which is approximately $300 below the suggested retail
price. If EchoStar elects to expand the promotion nationwide, subscriber
acquisition costs will increase substantially. EchoStar will therefore incur
significant additional costs in order to compete effectively.
There are a number of additional methods by which programming can be
delivered, including low power C-band satellite services, Ka-band, Ku-band and
high power extended Ku-band satellite services, wireless cable and fiber optic
cable and digital compression over existing telephone lines. Certain wireless
cable companies may become more competitive as a result of recently announced
affiliations with telephone companies. These developments, among others, will
provide additional competition to EchoStar. See "Business -- Competition."
The FCC has indicated that it intends to apply to the International
Telecommunication Union ("ITU"), which allocates spectrum worldwide, for the
allocation to the United States of additional orbital locations from which DBS
service could be provided to the entire continental United States. Further,
Canada, Mexico, and other countries hold the rights to DBS orbital slots which
are capable of providing service to the United States. If the FCC moves forward
with this initiative, or if other countries authorize DBS providers to utilize
their orbital slots to serve the United States and the FCC authorizes such
service to be received in the United States (which is likely to occur),
additional competition could be created, and EchoStar's frequencies could become
less valuable. TeleQuest, Inc., a joint venture including NYNEX and Bell
Atlantic, have applied to the FCC for authority to provide DBS service to the
United States from a Canadian DBS orbital location at 91 DEG. WL. TCI has made a
similar application to the FCC to provide DBS service to the United States from
the Canadian 82 DEG. WL orbital location. Both locations are capable of
providing DBS service to the entire continental United States. TCI has completed
construction of two DBS satellites which it intends to use to provide DBS
service to the United States from the 82 WL orbital slot. One of the satellites
is expected to be launched in November 1996 and the other is expected to be
launched early next year. The FCC has not acted on either of TCI's or
TeleQuest's applications but a decision could be made in the near future. See
"Business--Competition--DBS Industry--Other DBS Operators."
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COMPETITION FROM CABLE TELEVISION. The EchoStar DBS System will also
encounter substantial competition in the overall market for pay television
households, including cable television. Cable television operators have a large,
established customer base, and many cable operators have significant investments
in, and access to, programming. Cable television service is currently available
to approximately 90% of the approximately 96 million U.S. television households,
and approximately 64% of total television households currently subscribe to
cable. EchoStar's programming will not be available to households lacking a
clear line of sight to EchoStar's current orbital location, or to households in
apartment complexes or other multiple dwelling units that do not facilitate or
allow the installation of EchoStar Receiver Systems. In addition, subscribers to
the DISH Network-SM- will not have access to certain local broadcast channels
which are otherwise generally available from cable operators. DISH Network-SM-
subscribers desiring to access local broadcast channels may be required to
receive such channels via off-air antenna, the quality of which may be inferior
to the reception provided by cable operators. There can be no assurance that
EchoStar will be able to establish a substantial subscriber base. See "Business
- -- Competition--DBS Industry -- Cable Television."
LIMITATIONS ON INSURANCE AND WARRANTIES. Pursuant to satellite construction
contracts between Martin Marietta Corporation ("Martin Marietta") and each of
EchoStar, DirectSat Corporation ("DirectSat") and DBSC, (collectively the
"Satellite Contracts"), and EchoStar's launch services contracts (the "Launch
Contracts"), EchoStar, DirectSat and DBSC are the beneficiaries of certain
limited warranties on their satellites and launch vehicles. However, the limited
contractual warranties do not cover a substantial portion of the risk inherent
in satellite launches or satellite operations.
Although EchoStar has obtained launch insurance for EchoStar II, it is also
required under the indenture pursuant to which the 1994 Notes were issued (the
"1994 Indenture") to obtain in-orbit insurance for EchoStar I and EchoStar II,
and is required under the 1996 Indenture to obtain launch and in-orbit insurance
for EchoStar III. There can be no assurance that EchoStar will be able to obtain
launch and in-orbit insurance on terms favorable to EchoStar. The launch
insurance policies contain (or are expected to contain), and the insurance
policies with respect to in-orbit operation are expected to contain, standard
commercial satellite insurance provisions, including a material change
condition, which, if successfully invoked, will give carriers the ability to
increase the cost of the insurance (potentially to a commercially impracticable
level), require exclusions from coverage which would leave the risks uninsured,
or rescind their coverage commitment entirely. See "Business -- Operation of the
EchoStar DBS System -- Insurance."
If the launch of any EchoStar satellite is a full or partial failure or if,
following launch, any EchoStar satellite does not perform to specifications,
there may be circumstances in which insurance will not fully reimburse EchoStar
for its expenditures. In addition, insurance will not reimburse EchoStar for
business interruption, loss of business and similar losses which might arise
from delay in the launch of any EchoStar satellite. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
RISK OF SIGNAL THEFT. The delivery of subscription programming requires the
use of encryption technology. Historically, signal theft or "piracy" in the
C-band DTH, cable television and European DBS industries has been widely
reported. Recent published reports indicate that the DirecTv and USSB encryption
systems have been compromised. There can be no assurance that continued theft of
DirecTv programming will not adversely affect EchoStar's operations. Although
EchoStar has contracted with a vendor to provide an encryption system, there can
be no assurance that the encryption technology to be utilized in connection with
the EchoStar DBS System will be totally effective. If EchoStar's encryption
technology is compromised in a manner which is not promptly corrected,
EchoStar's revenue and its ability to contract for video and audio services
provided by programmers would be adversely affected.
EXPECTED OPERATING AND NET LOSSES. Due to the substantial expenditures
required to complete development, construction and deployment of the EchoStar
DBS System and the introduction of its DISH Network-SM- service to consumers,
EchoStar experienced operating and net losses in 1995 and
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anticipates that it will experience operating and net losses through at least
1997. There can be no assurance that losses will not continue or that EchoStar's
operations will generate sufficient cash flows to pay its obligations, including
its obligations on the 1994 Notes and the Notes. In addition, EchoStar recently
began test marketing a special promotion in a limited number of markets pursuant
to which customers are able to purchase a discounted package, including an
EchoStar Receiver System and annual programming package, for a low as $499,
which is currently approximately $300 below the suggested retail price. If
EchoStar elects to expand the promotion nationwide for an extended period, or if
market conditions force it to do so, EchoStar may experience additional losses
and its cash flow may similarly be affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
RISK OF SATELLITE DEFECT, LOSS OR REDUCED PERFORMANCE. Satellites are
subject to significant risks, including satellite defects, launch failure,
destruction and damage that may result in incorrect orbital placement or prevent
proper commercial operation. Approximately 15% of all commercial geosynchronous
satellite launches have resulted in a total or constructive total loss. The
failure rate varies by launch vehicle and manufacturer.
Launch delays could result from weather conditions or technical problems
with any EchoStar satellite or any launch vehicle utilized by the launch
providers for EchoStar II, EchoStar III, or EchoStar IV, or from other factors
beyond EchoStar's control.
EchoStar II will be launched on an Ariane-4 launch vehicle. This launch
vehicle has a success rate of over 90%. The first experimental launch of
Arianespace's new Ariane-5 launch vehicle, on June 4, 1996, was not successful.
The unsuccessful launch was the first experimental launch of the Ariane-5 launch
vehicle. The Ariane-5 launch vehicle is significantly different than the
Ariane-4 launch vehicle. The specific cause of the Ariane-5 launch failure has
not been determined. If the failure is determined to be potentially common to
Ariane-4 and Ariane-5 vehicles, the launch of EchoStar II could be delayed.
However, any significant delay in the launch of EchoStar II would have an
adverse affect on EchoStar. In the event of a launch failure involving EchoStar
II, EchoStar would be required to use the proceeds from any launch insurance
claims to make an offer to repurchase approximately one-half of the accreted
value of the 1994 Notes from the holders thereof. In the event that a
substantial number of holders of 1994 Notes accepted that offer, EchoStar's plan
of operations, including its liquidity, would be adversely affected and it would
not be possible to construct and launch a replacement satellite without
obtaining additional financing. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." In the event of a launch failure of EchoStar III, under the 1996
Indenture EchoStar would be required to use the proceeds from any launch
insurance to purchase satellites or, at the Issuer's option, to make an offer to
repurchase the maximum amount of Notes that can be purchased with those
proceeds.
In addition, a number of satellites constructed by Martin Marietta over the
past three years have experienced defects resulting in total or partial loss
following launch. The type of failures experienced have varied widely. Martin
Marietta is constructing EchoStar II and EchoStar III. No assurances can be
given that EchoStar I, EchoStar II or EchoStar III will perform according to
specifications.
FCC AUCTION RISKS. There can be no assurance that petitions to deny the
grant to EchoStar of the 148 DEG. WL orbital slot permit will not be filed with
the FCC during the period allowed by law or that such petitions to deny will not
delay or prevent the issuance of the FCC permit for this slot to EchoStar. Even
if the FCC grants a permit to EchoStar, there can be no assurance that
reconsideration or further FCC review will not be sought or that an appeal will
not be filed in the courts seeking to overturn the FCC's grant. There can be no
assurance that the FCC would not grant reconsideration or further review or that
the FCC would prevail in the event of an appeal. Further, appeals are currently
pending of the FCC's decision to revoke the construction permit of a former DBS
permittee which resulted in channels becoming available for auction. The FCC's
decision to auction those reclaimed
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channels has also been appealed by EchoStar, DirectSat, DBSC and DirecTv. There
can be no assurance that the FCC will prevail in those court actions. If the
FCC's actions are overturned, EchoStar's purchase of channels at 148 DEG. WL
would be voided.
RESTRICTIONS ON EXPORT OF TECHNOLOGY AFFECTING LAUNCH OF ECHOSTAR'S
SATELLITES. Martin Marietta must obtain from the United States government a
technical data exchange license and a satellite export license necessary for the
launch of EchoStar II by Arianespace from Korou, French Guiana. In addition,
EchoStar has contracted with LKE for the launch of a fourth satellite. LKE is a
joint venture between Lockheed Martin Corporation and two Russian Federation
state owned enterprises. The proposed launch site is located in the Kazakh
Republic in the former Soviet Union. In order for EchoStar satellites to be
launched from Kazakhstan, the satellite contractor will similarly need to obtain
a technical data exchange license and a satellite export license from the United
States government. In order to timely launch EchoStar II from French Guiana,
technical data exchange and hardware export licenses will need to be obtained on
an expedited basis. There can be no assurance those licenses can be obtained in
a timely manner to avoid a launch delay.
Given the potential instability of political, economic and social conditions
in the Russian Federation and Kazakhstan, and in light of certain demands by the
United States regarding human rights and arms proliferation, there can be no
assurance that the United States government will not at some future date impose
sanctions against Russia or Kazakhstan that would prevent issuance, or result in
revocation, of the technical data license and/or the export license with respect
to EchoStar IV. Any such action would prevent EchoStar from launching its
satellites as and when intended, resulting in significant delays that would
adversely affect expected operating results for the EchoStar DBS System. See
"Business -- Government Regulation -- Export Regulation."
RISKS OF ADVERSE EFFECTS OF GOVERNMENT REGULATION. EchoStar is subject to
the regulatory authority of the United States government and the national
communications authorities of the countries in which it operates. The business
prospects of EchoStar could be adversely affected by the adoption of new laws,
policies or regulations, or changes in the interpretation or application of
existing laws, policies and regulations, that modify the present regulatory
environment.
The FCC authorizations for all of EchoStar's satellites (including for
purposes of this paragraph, the satellites for which EchoStar Satellite
Corporation ("ESC"), DirectSat, EchoStar DBS Corporation ("EchoStar DBS") and
DBSC hold or are expected to hold authorizations) require EchoStar to comply
with all applicable Communications Act requirements and FCC regulations
including, specifically, compliance with construction and launch milestones and
periodic filing of progress reports. In the event EchoStar at any time fails to
comply with applicable Communications Act requirements and FCC regulations,
including the FCC schedule for construction and launch of any of EchoStar's
satellites ("Due Diligence Requirements"), the FCC has the authority to revoke,
condition, or decline to extend or renew the authorizations for that and any
subsequent satellites and, in connection with that action, could exercise its
authority to rescind these authorizations. The FCC has granted EchoStar
conditional authority to use C-band frequencies for telemetry, tracking and
control ("TT&C") functions for EchoStar I, stating that the required
coordination process with Canada and Mexico had been completed. However, the FCC
subsequently received a communication from an official of the Ministry of
Communications and Transportation of Mexico stating that EchoStar I's TT&C
operations could cause unacceptable interference to Mexican satellites. There
can be no assurance that such objections will not subsequently require EchoStar
to relinquish the use of such C-band frequencies for TT&C purposes. The
inability to control the satellite would result in a total loss of the
satellite. Further, EchoStar has filed a request with the FCC to change the
control frequency for TT&C of EchoStar II, and this request, which is pending,
has been opposed. If the FCC does not grant this request, EchoStar will incur
additional costs in obtaining TT&C services, and substantial delays in
completion of construction and launch of EchoStar II would result. In addition,
EchoStar will require further FCC authorization to operate, or launch and
operate, all of EchoStar's satellites. Certain of EchoStar's pending and future
requests to the FCC for extensions, waivers and approvals have been,
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and are expected to continue to be, opposed by third parties. There can be no
assurance that EchoStar's requests will be granted or, if granted, that they
will be granted on a timely basis or on terms favorable to EchoStar. The loss of
any of EchoStar's FCC authorizations, the failure to obtain requested extensions
or waivers or the imposition of conditions would adversely affect EchoStar's
plan of operations, and its current business plan could not be fully
implemented. See "Business -- Government Regulation--FCC Permits and Licenses."
The FCC Due Diligence Requirements require that DBS permittees proceed with
diligence to construct satellites and commence operations at their assigned
orbital locations. The FCC has indicated it may revoke DBS permits if there are
delays in the satellite construction schedule submitted by the permittee to the
FCC. The schedule submitted by DBSC calls for the completion of construction at
61.5 DEG. WL of EchoStar III by July 31, 1997, and a satellite at 175 DEG. WL by
July 31, 1998. Any delay in this schedule may cause total or partial revocation
of DBSC's permits. Likewise, DirectSat may risk loss of its permit for channels
at 175 DEG. WL if its satellite is not completed by mid-1998. Further, the FCC
has not yet completed its review to determine whether EchoStar's contract for
the construction of the western satellite of its system meets the FCC's Due
Diligence Requirements. Therefore, the FCC has not yet assigned to EchoStar
frequencies for that satellite. While it is possible that DBSC, DirectSat and
EchoStar may construct a satellite for joint use by all three at 175 DEG. WL
(provided that ESC is found to have a firm contract and receives frequency
assignments at 175 DEG. WL), EchoStar will still be required to construct and
launch two or more satellites in addition to EchoStar I, EchoStar II and
EchoStar III in order to preserve all of its DBS permits (plus additional
satellites for the single frequencies at each of the 110 DEG. WL and 166 DEG. WL
orbital slots in order to avoid loss of those frequencies). Finally, with
respect to the 24 orbital assignments at the 148 DEG. WL orbital slot, provided
that the FCC approves EchoStar's request for a one-satellite system at that slot
(as opposed to the two-satellite system currently contemplated by international
regulations), EchoStar must complete contracting for a satellite within one year
of receiving the permit, must complete construction within four years of
receiving the permit and must launch and operate a satellite within six years of
receiving the permit. Absent infusion of additional significant capital,
EchoStar will not be able to retain all of its assigned frequencies and orbital
slots. There can be no assurance that EchoStar will be able to comply with the
FCC's Due Diligence Requirements or that the FCC will determine that EchoStar
has complied with such Due Diligence Requirements.
OPPOSITION TO, AND RISK OF LOSS OF, DIRECTSAT AUTHORIZATION. In connection
with the merger of DirectSat with a subsidiary of EchoStar (which was approved
by the FCC in November 1994), DirectSat's authorization to utilize ten
frequencies at 119 DEG. WL, the same orbital location for which EchoStar has
received authorization, became integral to the EchoStar DBS System. DirectSat's
first satellite, EchoStar II, will be positioned at that location. Dominion
Video Satellite, Inc. ("Dominion"), the original permittee of DirectSat's
frequencies at 119 DEG. WL, has filed a petition with the FCC contesting the
revocation of Dominion's orbital slot assignment at 119 DEG. WL and the granting
of DirectSat's authorizations at the same location. Dominion and several other
parties have challenged DirectSat's diligence in meeting its required
construction schedule. Dominion has also challenged the merger of DirectSat and
EchoStar at the FCC, and has filed objections to the FCC's approval of the
merger. The FCC rejected Dominion's petition for reconsideration of that
revocation, and Dominion has appealed to the U.S. Court of Appeals for the
District of Columbia Circuit. If Dominion were to prevail in its appeal, and in
any subsequent FCC action or remand, EchoStar believes that DirectSat's easterly
orbital slot assignment would most likely be moved from 119 DEG. WL to 61.5 DEG.
WL, which would have an adverse effect on EchoStar's proposed DBS operations. By
order released January 11, 1996, the FCC's International Bureau extended the DBS
permit of DirectSat to 1999, subject to the condition that the FCC may
reconsider the extension and modify or cancel it, in whole or in part, if
DirectSat fails to make progress toward construction and operation of its DBS
system substantially in compliance with its promised timetable, or with any more
expedited timetable ordered by the FCC. In the same order the FCC denied
reconsideration of its earlier decision to assign channels and orbital locations
to DirectSat at 119 DEG. WL and 175 DEG. WL for its DBS system. PrimeStar has
applied for full FCC review of this order and other parties may seek
reconsideration, full FCC review, and/or judicial review
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of the FCC order. In addition, in the event that EchoStar loses the DirectSat
frequencies at 119 DEG. WL, EchoStar would be required to offer to repurchase
one-half of the 1994 Notes and the Notes. In the event that a substantial number
of holders of the 1994 Notes or the Notes accepted that offer, EchoStar's plan
of operations, including its liquidity, would be adversely affected and it might
not be possible to implement EchoStar's current business plan without obtaining
additional financing. See "Business -- Legal Proceedings."
OPPOSITION TO, AND RISK OF LOSS OF, DBSC AUTHORIZATIONS. DBSC's
authorization to construct and operate two DBS spacecraft initially expired on
August 15, 1995. Prior to that date, DBSC applied for an extension of time,
based upon a variety of factors, including its initiation of the construction
period for its first spacecraft in May 1995. DBSC indicated that it had signed
an amendment to the DBSC Satellite Contract, by which DBSC ordered a 32
transponder spacecraft in lieu of the previously contracted for 16 transponder
satellite. DBSC filed an application for FCC approval of this minor modification
in spacecraft design. In December 1995, the FCC staff approved DBSC's request
for an extension of time, giving it until 1998 to complete construction of its
satellites subject to continued compliance with the FCC's Due Diligence
Requirements. PrimeStar has sought full FCC review of this decision. The FCC has
not yet ruled on PrimeStar's petition and no assurances can be given that the
FCC will sustain the staff's determination. The FCC's staff has declined to rule
on DBSC's request for minor modification of its authorization pending the
submission to the FCC of interference data based on the proposed new spacecraft
design. DBSC has not prepared such data and there can be no assurance that upon
the submission of such data the FCC will grant the modification application.
OPPOSITION TO, AND RISK OF REJECTION OF, DBSC MERGER APPLICATION. In
February 1996, EchoStar and New DBSC filed an application with the FCC for
approval of the DBSC Merger. A timely objection to the DBSC Merger was filed by
CPT. CPT contended in its objection that the DBSC Merger would permit EchoStar
to acquire a dominant and anti-competitive position in the DBS marketplace by
aggregating an excessive number of DBS channels. A letter objecting to the DBSC
Merger was also filed subsequently by the CPT and another public interest group.
This letter raises the same issues as the CPT's earlier objection. No assurance
can be given that the FCC will reject these objections and grant the DBSC Merger
application. If the DBSC Merger application is granted, CPT may seek
reconsideration, full FCC review or judicial review of the grant of the DBSC
Merger application.
POLITICAL RISKS PERTAINING TO LAUNCH PROVIDERS. EchoStar has contracted
with LKE for a 1998 launch. LKE launches occur in the Kazakh Republic and
require coordination with the governments of Russia and Kazakhstan. Any
political or social instability, such as that currently being experienced in the
former Soviet block countries, could affect the cost, timing and overall
advisability of utilizing LKE as launch provider for EchoStar's satellites. See
"Business -- Operation of the EchoStar DBS System -- Satellite Launches."
POTENTIAL FOR DELAY AND COST OVERRUNS. Significant expenditures are
required to complete construction and deployment of the EchoStar DBS System.
Funds, in addition to existing cash balances, will be required in the event of
delays, cost overruns, increased costs associated with certain potential change
orders under the Satellite Contracts or the Launch Contracts, a change in launch
provider, material increases in estimated levels of operating cash requirements,
if increases in subscriber acquisition costs occur above current and anticipated
levels, or to meet other unanticipated expenses. There can be no assurance that
such financing will be available or that, if available, it will be available on
terms favorable to EchoStar. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
A significant delay in the delivery or launch of any EchoStar satellite
would adversely affect EchoStar's operations and may result in the cancellation
of any of the permits of ESC, DirectSat, EchoStar DBS and DBSC by the FCC. See
"-- Risk of Satellite Defect, Loss or Reduced Performance." In addition, any
material delay in the delivery of EchoStar's DBS receivers or related components
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would negatively affect EchoStar's financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
DEPENDENCE ON SINGLE MANUFACTURER. To date, only one of EchoStar's
manufacturers has produced a receiver acceptable to the EchoStar. No assurances
can be given that EchoStar's other current manufacturer will be able to produce
an acceptable receiver in the future. Until the other manufacturer produces a
receiver acceptable to EchoStar, EchoStar is dependent on one manufacturing
source for its receivers. To date, EchoStar has paid the nonperforming
manufacturer $10.0 million and has an additional $15.0 million in an escrow
account as security for EchoStar's payment obligations under that contract. If
that manufacturer does not produce an acceptable receiver in the near future,
EchoStar may terminate that contract, which would cause longer term dependence
on a single manufacturing source. If EchoStar's sole manufacturer is unable for
any reason to produce receivers in a quantity sufficient to meet demand,
EchoStar's liquidity and results of operations may be adversely affected. If the
contract with EchoStar's other manufacturer is terminated, there can be no
assurance EchoStar would be able to recover all amounts paid the manufacturer or
otherwise held in escrow.
SUBSTANTIAL LEVERAGE. The Issuer's direct subsidiary, Dish, Ltd., is highly
leveraged, and the Issuer, as a result of the issuance of the Notes, is also
highly leveraged. This degree of leverage could make EchoStar vulnerable to
changes in general economic conditions. Substantially all of the assets of Dish,
Ltd. and its subsidiaries are pledged as collateral for the 1994 Notes, and a
substantial portion of the assets of EchoStar's direct subsidiaries are and will
be pledged as collateral for the Notes. Thus it is, and will continue to be,
difficult to obtain additional debt if required or desired in order to implement
EchoStar's business strategy. Dish, Ltd. and certain of its subsidiaries are
also parties to several agreements (in addition to the 1994 Indenture) that
severely restrict their ability to obtain additional debt financing for working
capital, capital expenditures, and general corporate purposes. As security for
the performance of its obligations under these agreements, certain subsidiaries
of Dish, Ltd. have pledged substantial assets as collateral. The Issuer,
including Dish, Ltd. had outstanding approximately $783.4 million of long-term
debt (including both the current and long-term portion) (including the Notes,
the 1994 Notes, deferred satellite contract payments on EchoStar I and mortgage
debt) as of March 31, 1996 (excluding approximately $28.0 million of deferred
satellite contract payments to be incurred in connection with the manufacture of
EchoStar II). In addition, because interest on the 1994 Notes currently is not
payable in cash but accretes through June 1, 1999, liability with respect to the
1994 Notes will increase by approximately $241.8 million through that date to
$624.0 million. Similarly, interest on the Notes accretes through March 15,
2000, at which time liability with respect to those notes will increase to
$580.0 million. Additional debt may be incurred by Dish, Ltd. or the Issuer
(subject to limitations contained in the 1994 Indenture and 1996 Indenture,
respectively) if unanticipated costs or delays are experienced in the
construction and completion of the EchoStar DBS System. The ability of Dish,
Ltd. and the Issuer to meet their respective debt obligations will depend on the
success of EchoStar's business strategy, the success of which is subject to
uncertainties and contingencies beyond EchoStar's control.
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION. As of March 31, 1996,
the liabilities of EchoStar aggregated approximately $815.3 million. Although
the Notes are titled "Senior": (i) the Issuer has not issued, and does not have
any plans to issue, any indebtedness to which the Notes would be senior; and
(ii) the Notes are effectively subordinated to all liabilities of EchoStar
(except liabilities to general creditors) and its other subsidiaries (except
liabilities of the Issuer), including liabilities to general creditors.
Since all of the Issuer's and Dish, Ltd.'s operations are conducted through
subsidiaries, the cash flow of the Issuer and Dish, Ltd. and their ability to
service debt, including the 1994 Notes and the Notes, are dependent upon the
earnings of their subsidiaries and the payment of funds by those subsidiaries to
Dish, Ltd. and the Issuer in the form of loans, dividends or other payments. The
1994 Indenture contains restrictions on the ability of Dish, Ltd. to pay
dividends to the Issuer. See
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"Description of Certain Indebtedness -- 1994 Notes." Dish, Ltd. and its
subsidiaries have no current obligations, contingent or otherwise, to pay any
amounts due pursuant to the Notes or to make any funds available therefor,
whether by dividends, loans or other payments, other than the possible guarantee
of the Notes by Dish, Ltd. which will become effective when and if permitted by
the 1994 Indenture. The cash flow generated by Dish, Ltd.'s subsidiaries will
only be available to satisfy the Issuer's obligations on the Notes after payment
of all amounts then due and payable under the 1994 Notes and then only if and to
the extent that the 1994 Indenture permits Dish, Ltd. to make such cash
available to the Issuer in the form of dividends, loans or other payments. In
addition, Dish, Ltd. generally may pay dividends on its equity securities only
if: (i) no default exits under the 1994 Indenture; and (ii) after giving effect
to such dividends, Dish, Ltd.'s ratio of total indebtedness to cash flow would
not exceed 4.0 to 1. Moreover, the aggregate amount of such dividends generally
may not exceed the sum of 50% of Dish, Ltd.'s consolidated net income from the
date of the 1994 Indenture, plus 100% of the aggregate net proceeds to Dish,
Ltd. from the sale and issuance of certain equity interests of Dish, Ltd. If
available cash flows of Dish Ltd.'s subsidiaries are not sufficient to service
the Notes, the Issuer would be required to obtain cash from other sources, such
as sales of assets or equity or debt securities by EchoStar or capital
contributions or loans made by EchoStar from proceeds thereof or cash otherwise
available to EchoStar or its other direct subsidiaries. There can be no
assurance that those alternative sources would be sufficient to service the
Notes.
UNCERTAINTY OF SPRINGING GUARANTEES. Initially, the Issuer's payment
obligations under the Notes are only guaranteed (on a subordinated basis) by
EchoStar. On and after the Dish Guarantee Date, the Issuer's payment obligations
under the Notes will be guaranteed (on a PARI PASSU basis with all senior
unsecured debt of Dish, Ltd.) by Dish, Ltd. (the "Dish Guarantee"). The Dish
Guarantee will not be effected until the earlier of: (i) the first date upon
which Dish, Ltd. is permitted, pursuant to the terms of the 1994 Indenture, to
guarantee the Issuer's total payment obligations under all of the
then-outstanding Notes; and (ii) the first date upon which the 1994 Notes are no
longer outstanding or have been defeased. Dish, Ltd. may not incur or guarantee
debt, subject to certain limited exceptions, unless, giving effect to such debt
or guarantee, its Indebtedness to Cash Flow Ratio would be less than 5.0 to 1
(if prior to June 1, 1998) or 4.0 to 1 (if on or after June 1, 1998). For the
year ended December 31, 1995, Dish, Ltd. had negative cash flow. Therefore,
there can be no assurance that the Dish Guarantee will be effected at any time.
In addition, upon consummation of the DBSC Merger, the Issuer's payment
obligations under the Notes will be guaranteed (on a PARI PASSU basis with all
senior unsecured debt of DBSC) by DBSC. If the DBSC Merger is not consummated,
DBSC will not guarantee the Notes. There can be no assurance that the DBSC
Merger will be approved by the FCC or that it will be consummated. See
"Description of Exchange Notes -- Affiliate Guarantees."
CONTINGENT COLLATERAL. The Notes are expected to be secured by certain
Collateral relating to DBSC and EchoStar III. Following consummation of the DBSC
Merger (as defined in "Description of Exchange Notes") the Notes will be secured
by: (i) a first priority security interest, when launched, in EchoStar III; (ii)
a collateral assignment of all contracts relating to construction, launch (other
than the Launch Contract with Great Wall), insurance and TT&C of EchoStar III;
and (iii) a pledge of all of the issued and outstanding capital stock of DBSC.
In the event that the DBSC Merger is not consummated but the Substitute DBSC
Transaction (as defined in "Description of Exchange Notes") is consummated, the
Notes will be secured by a collateral assignment of all contracts and agreements
relating to the Substitute DBSC Transaction. The deadline for filing petitions
and oppositions regarding approval by the FCC of the DBSC Merger passed on March
15, 1996, and EchoStar is aware of only one opposition, which was filed by CPT.
EchoStar believes that the FCC has previously considered and rejected issues
similar to the arguments made in the opposition, and that filing of the CPT
opposition does not materially decrease the likelihood that the FCC will approve
the DBSC Merger. See "-- Opposition to, and Risk of Rejection of, DBSC Merger
Application." In the event neither the DBSC Merger nor the Substitute DBSC
Transaction is consummated, no additional Collateral will be provided to secure
the Notes, and the Issuer will be required to make an offer to each holder of
Notes to repurchase a portion of the holder's Notes. See "Description of
Exchange Notes -- Security" and
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<PAGE>
"Description of Exchange Notes -- Offer to Purchase upon the Occurrence of
Certain Events." There can be no assurance that the FCC will approve the DBSC
Merger or that the DBSC Merger or the Substitute DBSC Transaction will be
consummated.
NEED FOR ADDITIONAL CAPITAL. EchoStar will require additional funds for the
construction and launch of a third, fourth and fifth DBS satellite. In addition,
it will require additional funds for EchoStar Receiver System rebates and
subscriber acquisition costs which may be necessary to competitively market
programming packages offered on the DISH Network-SM-. Further, EchoStar has an
application pending with the FCC for a two satellite Ku-band system, a two
satellite extended Ku-band system and a six satellite low earth orbit ("LEO")
satellite system; and has been granted a conditional license for a two-satellite
fixed satellite service ("FSS") Ka-band system. EchoStar will need to raise
additional funds for the foregoing purposes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
RESTRICTIVE COVENANTS. The 1996 Indenture contains restrictive covenants
that, among other things, limit the ability of the Issuer and its subsidiaries
to: (i) incur additional indebtedness; (ii) issue preferred stock; (iii) sell
assets; (iv) create, incur or assume liens; (v) create dividend and other
repayment restrictions with respect to the Issuer's subsidiaries; (vi) merge,
consolidate or sell assets; (vii) incur subordinated or junior debt; (viii)
enter into transactions with affiliates; and (ix) pay dividends. The 1994
Indenture contains restrictive covenants that, among other things, limit the
ability of Dish, Ltd. and its subsidiaries to: (i) incur additional
indebtedness; (ii) issue preferred stock; (iii) sell assets; (iv) create, incur
or assume liens; (v) create dividend and other repayment restrictions with
respect to Dish, Ltd.'s subsidiaries; (vi) merge, consolidate or sell assets;
(vii) incur subordinated or junior debt; (viii) enter into transactions with
affiliates; and (ix) pay dividends. These restrictions may inhibit EchoStar's
ability to manage its business and to react to changing market conditions.
EchoStar does not intend to pay dividends in the near future. See "Description
of Certain Indebtedness -- 1994 Notes."
RESTRICTIONS IMPOSED BY AND EXPIRATION OF CREDIT FACILITY. Certain of Dish,
Ltd.'s operating subsidiaries entered into a credit facility which contains a
number of negative covenants that limit the ability of those subsidiaries to,
among other things: (i) incur indebtedness; (ii) create liens on assets; (iii)
provide guarantees; (iv) enter into merger or consolidation transactions; or (v)
dispose of any assets outside of the ordinary course of business. In addition,
except in certain circumstances, those subsidiaries are prohibited from paying
dividends to Dish, Ltd. in an amount exceeding 50% of excess cash flow. The
credit facility expired in May 1996 and EchoStar does not currently intend to
arrange a replacement credit facility. Instead, EchoStar is using available cash
to collateralize its letter of credit obligations, which historically was the
only significant use of the credit facility. At May 31, 1996, EchoStar had cash
collateralized $15.5 million of certain standby letters of credit for trade
purchases.
DECLINE IN DOMESTIC C-BAND DTH PRODUCT SALES. Historically, EchoStar has
sold C-band DTH products in the United States. The recent growth of DBS service
and equipment sales has and will continue to have a material negative impact on
EchoStar's domestic sales of C-band DTH products. The significant growth of DBS
is at least partially attributable to the lower cost to the consumer of DBS
systems compared to that for C-band DTH systems and the smaller size of the DBS
dish compared to the C-band dish. There can be no assurance that EchoStar will
not have to sell C-band DTH inventory at prices below cost.
LIMITED LIFE OF SATELLITES. Each EchoStar satellite will have a limited
useful life. A number of factors will affect the useful lives of the satellites,
including the quality of their construction, the durability of their component
parts, the longevity of their orbits and the launch vehicle used. The minimum
design life of each of EchoStar I, EchoStar II and EchoStar III is 12 years.
There can be no assurance, however, as to the useful life of the satellites.
EchoStar's operating results would be adversely affected in the event the useful
life of any of these satellites were significantly shorter than
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<PAGE>
12 years. The Satellite Contracts contain no warranties in the event of a
failure of EchoStar I, EchoStar II or EchoStar III following launch. See
"Business -- Operation of the EchoStar DBS System -- The Satellites."
DEPENDENCE ON SATELLITES AND SINGLE DIGITAL BROADCAST CENTER. Prior to the
end of the anticipated useful lives of EchoStar satellites, EchoStar will need
to obtain replacement satellites. There can be no assurance that those
replacements will be available when required or, if available, that they will be
available on terms acceptable to EchoStar. Various FCC approvals would be
required with respect to replacement satellites, including but not limited to,
renewal of EchoStar's ten year license. There is no assurance that the FCC will
grant the approvals.
EchoStar also relies upon a single digital broadcast center, in Cheyenne,
Wyoming, for key operations such as reception of programming signals, encryption
and compression. If a natural or other disaster damaged the digital broadcast
center, there can be no assurance that EchoStar would be able to continue to
provide programming services to its customers.
RISKS OF FAILURE OF COMPLEX TECHNOLOGY. The EchoStar DBS System is highly
complex. Final development, manufacture and integration of technologically
diverse and advanced components is not yet complete. New applications and
adaptations of existing and new technology (including compression, conditional
access, on screen guides and other matters), and significant software
development, are integral to the EchoStar DBS System. As a result, the EchoStar
DBS System may not function as expected.
Technology in the satellite television industry is in a rapid and continuing
state of change as new technologies develop. Although the digital compression
technology utilized in connection with the EchoStar DBS System is the world
standard, the integration and implementation of that technology is also
undergoing rapid change. There can be no assurance that EchoStar and its
suppliers will be able to keep pace with technological developments. In
addition, delays in the delivery of components or other unforeseen problems in
the EchoStar DBS System may occur that could adversely affect performance, cost
or timely deployment and operation of the EchoStar DBS System and could have an
adverse affect on EchoStar. Further, in the event that a competitive satellite
receiver technology becomes commonly accepted as the standard for satellite
receivers in the United States, EchoStar would be at a significant technological
disadvantage. See "Business -- Operation of the EchoStar DBS System."
EFFECT OF LOSS OF KEY PERSONNEL. EchoStar believes that its future success
will depend to a significant extent upon the performance of certain individuals,
particularly Charles W. Ergen, Chairman, Chief Executive Officer and President
of EchoStar, R. Scott Zimmer, President of EIC, James DeFranco, President of HTS
and EAC, and Carl E. Vogel, EchoStar's Executive Vice President and Chief
Operating Officer and the President of ESC. The loss of any of these four
individuals could have an adverse affect on EchoStar's business. EchoStar does
not maintain "key man" insurance with respect to any such individuals and, other
than Mr. Vogel, it has not negotiated employment agreements with such
individuals.
CONTROL OF ECHOSTAR BY PRINCIPAL STOCKHOLDER. Although Charles W. Ergen,
the Chairman, Chief Executive Officer and President of EchoStar, currently owns
73.6% of the total equity securities of EchoStar (assuming exercise of employee
stock options), he currently possesses approximately 96.1% of the total voting
power. Thus, Mr. Ergen has, and after the Offering will continue to have, the
ability to elect a majority of the directors of EchoStar and to control all
other matters requiring the approval of EchoStar's stockholders. See "Security
Ownership of Certain Beneficial Owners and Management." For Mr. Ergen's total
voting power in EchoStar to be reduced to below 51%, his percentage ownership of
the equity securities of EchoStar would have to be reduced to below 10%.
DEPENDENCE ON THIRD PARTY PROGRAMMERS. EchoStar is dependent on third
parties to provide EchoStar with programming. EchoStar's programming agreements
have remaining terms ranging from one to ten years and contain various renewal
and cancellation provisions. There can be no
30
<PAGE>
assurance that any of these agreements will be renewed or will not be cancelled
prior to expiration of their original term. In the event that any such
agreements are not renewed or are cancelled, there is no assurance that EchoStar
would be able to obtain or develop substitute programming, or that such
substitute programming would be comparable in quality or cost to EchoStar's
existing programming. EchoStar's competitors currently offer substantially the
same programming as EchoStar. The ability of EchoStar to compete successfully
will depend on EchoStar's ability to continue to obtain desirable programming
and attractively package it to its customers at competitive prices. See
"Business -- Products and Services -- DBS and Related Services--Programming."
Pursuant to the Cable Television Consumer Protection and Competition Act of
1992 (the "Cable Act"), programming developed by vertically integrated
cable-affiliated programmers generally must be offered to all potential buyers
on fair and reasonable terms. EchoStar anticipates purchasing a substantial
percentage of its programming from cable-affiliated programmers. Certain of the
restrictions on cable-affiliated programmers will expire in 2002 unless the FCC
extends them. As a result, any expiration of, amendment to, or interpretation
of, the Cable Act that permits the cable industry to discriminate in the sale of
programming against competing businesses, such as that of EchoStar, could
adversely affect EchoStar's ability to acquire programming or acquire
programming on a cost-effective basis. Regulation and the need to obtain certain
retransmission consents and copyright licenses may limit the ability of EchoStar
to implement a local programming strategy in multiple markets.
RISK OF INABILITY TO MANAGE RAPIDLY EXPANDING OPERATIONS. EchoStar must
expand its operations rapidly to achieve its business objectives. Several of
EchoStar's key activities, including satellite in-orbit control, satellite
receiver manufacturing, billing and subscriber management are out-sourced to
third party vendors. To manage its growth effectively, EchoStar must continue to
develop, install and improve its operating and information systems and
coordinate efforts with its third party vendors. EchoStar will also need to
continue to expand, train and manage its employee base, and its management
personnel will be required to assume even greater levels of responsibility. If
EchoStar is unable to manage its growth effectively, EchoStar's business and
results of operations could be materially adversely affected.
RISKS OF INFRINGEMENT OF PATENTS AND PROPRIETARY RIGHTS. EchoStar does not
believe that patents and other intellectual property rights are material to its
business, although many of EchoStar's competitors have obtained, and may be
expected to obtain in the future, patents that cover or affect products or
services directly or indirectly related to those offered by EchoStar. There can
be no assurance that EchoStar is aware of all patents that may potentially be
infringed by its products. In addition, patent applications in the United States
are confidential until a patent is issued and, accordingly, EchoStar cannot
evaluate the extent to which its products may infringe claims contained in
pending patent applications. EchoStar has been notified that certain features of
the EchoStar Receiver System allegedly infringe on patents held by others, and
that royalties are therefore required to be paid. If it were determined that the
features at issue or any other EchoStar's products infringe on patents held by
others, EchoStar would be required to cease developing or marketing those
products, to obtain licenses to develop and market those products from the
holders of the patents or to redesign those products in such a way as to avoid
infringing the patent claims. The extent to which EchoStar may be required in
the future to obtain licenses with respect to patents held by others and the
availability and cost of any such licenses is currently unknown. There can be no
assurance that EchoStar would be able to obtain such licenses on commercially
reasonable terms or, if it were unable to obtain such licenses, that it would be
able to redesign its products to avoid infringement. In the event EchoStar was
not able to obtain such licenses on commercially reasonable terms, or if it was
unable to obtain such licenses and it could not otherwise redesign its products
to avoid infringement, EchoStar's business and results of operations could be
materially adversely affected.
RISK THAT INITIAL CAPITAL COSTS WILL LIMIT DEMAND OF DISH NETWORK-SM-
PROGRAMMING. The suggested retail price of an EchoStar Receiver System is
currently between approximately $499 and $599, depending on the model selected
by the customer, among other factors. Dealer incentives and
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<PAGE>
EchoStar sponsored promotions may reduce the actual cost of an EchoStar Receiver
System below the suggested retail price. The initial capital cost required to
receive DISH Network-SM- programming may reduce the demand for EchoStar Receiver
Systems.
CONSEQUENCE OF ORIGINAL ISSUE DISCOUNT. The Notes have been issued at a
substantial discount from their principal amount. Consequently, purchasers of
the Notes generally will be required to include amounts in gross income for
federal income tax purposes in advance of receipt of the cash payments to which
the income is attributable. See "Certain Federal Income Tax Considerations" for
a more detailed discussion of the federal income tax consequences to purchasers
of the Notes.
If a bankruptcy petition is filed by or against the Issuer under the United
States Bankruptcy Code after the issuance of the Notes, the claim of a holder of
Notes with respect to the principal amount thereof may be limited to an amount
equal to the sum of: (i) the initial offering price for the Notes; and (ii) that
portion of the original issue discount that is not deemed to constitute
"unmatured interest" within the meaning of the United States Bankruptcy Code.
Any original issue discount that was not amortized as of any such bankruptcy
filing would constitute "unmatured interest."
RISK OF INABILITY TO REALIZE UPON SECURITY INTERESTS. The Notes are
intended to be secured by liens on certain assets of EchoStar, collateral
assignments of certain contracts and insurance proceeds and, pending
disbursements of a portion of the proceeds of the Old Notes Offering, a pledge
of such proceeds. See "Description of Exchange Notes -- Security." The security
interests will be perfected in accordance with practices frequently utilized in
the satellite industry, and financing statements will be filed in jurisdictions
considered appropriate. The ability of the Trustee under the 1996 Indenture to
foreclose on such collateral upon the occurrence of an Event of Default (as
defined herein), however, will be subject to perfection and priority issues and
to practical problems associated with realization upon the security interest. In
particular, unlike most other forms of collateral, there is no clearly
established system for granting or perfecting security interests in satellites.
No assurance can be given that the holders of the Notes will obtain the benefit
of a valid or perfected security interest in the satellites.
If an Event of Default occurs with respect to the Notes, whether prior to or
after completion of the EchoStar DBS System, there can be no assurance that the
liquidation of the collateral securing the Notes would produce proceeds in an
amount sufficient to pay the principal, premium, if any, and accrued interest on
the Notes.
In any foreclosure sale of the assets of the Issuer, the purchaser of such
assets (including the Trustee if it purchased and chose not, or was unable, to
resell such assets) would need to be authorized by the FCC in advance to operate
the EchoStar DBS System. Since potential bidders who wish to operate the
EchoStar DBS System must be authorized in advance by the FCC (which, among other
things, may restrict foreign ownership), the number of potential bidders in a
foreclosure sale could be smaller than in foreclosures of other types of
facilities, and such requirements may delay the sale of, and may adversely
affect the sales price for, the EchoStar DBS System. The ability to take
possession and dispose of the collateral securing the Notes upon acceleration is
likely to be significantly impaired or delayed by applicable bankruptcy law if a
bankruptcy action were to be commenced by or against the Issuer.
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE NOTES; RESTRICTIONS ON
TRANSFERS. The Exchange Notes are being offered to the holders of the Old
Notes. The Old Notes were offered and sold in March 1996 to a small number of
institutional and accredited investors and are eligible for trading in the
Private offerings, Resale and Trading through Automatic Linkages (PORTAL)
Market.
The Exchange Notes will constitute a new issue of securities, and none of
the Exchange Notes has an established trading market. If a trading market does
not develop or is not maintained, holders of the Exchange Notes may experience
difficulty in reselling the Exchange Notes or may be unable to sell them at all.
If a market for the Exchange Notes develops, the Exchange Notes could trade at
prices that may be lower than the initial market values thereof, depending on
many factors, including
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<PAGE>
prevailing interest rates, the markets for similar services and the financial
performance of the Issuer, or any such market may be discontinued at any time.
The Initial Purchasers have made a market in the Old Notes. Although there is
currently no market for the Exchange Notes, the Initial Purchasers have advised
the Issuer that they currently intend to make a market in the Exchange Notes.
However, they are not obligated to do so, and any such market making with
respect to the Old Notes and the Exchange Notes may be discontinued at any time
without notice. In addition, such market making activity will be subject to the
limits imposed by the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and may be limited during the Exchange Offer and
the pendency of any applicable shelf registration statement. See "Description of
Exchange Notes -- Old Notes' Registration Rights; Liquidated Damages."
Accordingly, there can be no assurance as to the development or liquidity of any
market for the Old Notes and the Exchange Notes. The Issuer does not intend to
apply for listing of any of the Exchange Notes on any securities exchange or for
quotation through the National Association of Securities Dealers Automated
Quotation System.
The liquidity of, and trading market for, the Exchange Notes also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading market
independent of the financial performance of, and prospects for, the Issuer.
RISK OF SATELLITE DAMAGE OR LOSS FROM ACTS OF WAR, ELECTROSTATIC STORM AND
SPACE DEBRIS. The loss, damage or destruction of any EchoStar satellites as a
result of military actions or acts of war, anti-satellite devices, electrostatic
storm or collision with space debris would have a material adverse effect on
EchoStar. EchoStar's insurance policies include customary exclusions including:
(i) military or similar actions; (ii) laser, directed energy or nuclear
anti-satellite devices; and (iii) insurrection and similar acts or governmental
action.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES. Holders of Old Notes who do
not exchange their Old Notes for Exchange Notes pursuant to the Exchange Offer
will continue to be subject to the restrictions on transfer of such Old Notes,
as set forth in the legend thereon, as a consequence of the issuance of the Old
Notes pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, the Old Notes may not be offered, sold, pledged or otherwise
transferred, unless registered under the Securities Act and applicable state
securities laws, or pursuant to an exemption therefrom. Except under certain
limited circumstances, the Issuer does not intend to register the Old Notes
under the Securities Act. In addition, any holder of Old Notes who tenders in
the Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes may be deemed to have received restricted securities and, if so,
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction. To
the extent Old Notes are tendered and accepted in the Exchange Offer, the
trading market, if any, for the Old Notes not so tendered could be adversely
affected. See "The Exchange Offer" and "Description of Exchange Notes -- Old
Notes' Registration Rights; Liquidated Damages."
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<PAGE>
USE OF PROCEEDS
There will be no cash proceeds to the Issuer from the Exchange Offer. The
gross proceeds to the Issuer from the Old Notes Offering were approximately
$350.0 million. The net proceeds from the Old Notes Offering will be applied
toward the construction, launch and insurance of EchoStar III and EchoStar IV,
to marketing and operating expenses (including, but not limited to, a financing
program for EchoStar Receiver Systems), to fund the winning bid at the FCC
Auction and related expenses, to partially fund additional launch costs of
EchoStar II and for general corporate purposes. Pending these uses, the net
proceeds for the purchase of the frequencies at 148 DEG. WL, and for EchoStar
III and EchoStar IV construction, launch and insurance, will be maintained in
the Escrow Account and will serve as collateral for the Old Notes and the
Exchange Notes. See "Description of Exchange Notes -- Disbursement of Funds --
Escrow Account." Although the estimates set forth under "Uses" below represent
EchoStar's best estimate of the intended use of the proceeds from the Old Notes
Offering, the specific amounts allocated to each use may change depending on
such factors as unanticipated costs or requirements necessary for development
and operation of the EchoStar DBS System.
<TABLE>
<CAPTION>
(IN
MILLIONS)
<S> <C>
SOURCES:
Net proceeds from the Old Notes Offering (1)...................................................... $ 337.0
------------
------------
USES:
EchoStar III and IV construction, launch and insurance............................................ $ 125.0
Introduction, product marketing and operating expenses for the DISH Network-SM-................... 95.0
Purchase of 24 frequencies at 148 DEG. WL orbital slot............................................ 52.3
Additional EchoStar II launch costs............................................................... 35.0
General corporate purposes........................................................................ 29.7
------------
Total uses...................................................................................... $ 337.0
------------
------------
</TABLE>
- ------------------------
(1) Net proceeds from the Old Notes Offering are net of $13.0 million of
estimated transaction expenses.
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<PAGE>
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The sole purpose of the Exchange Offer is to fulfill the obligations of the
Issuer and the Guarantors with respect to the registration of the Old Notes.
The Old Notes were originally issued and sold on March 25, 1996 (the "Issue
Date"). Such sales were not registered under the Securities Act in reliance upon
the exemption provided by Section 4(2) of the Securities Act and Rule 144A
promulgated under the Securities Act. In connection with the sale of the Old
Notes, the Issuer agreed to file with the Commission a registration statement
relating to the Exchange Offer (the "Registration Statement"), pursuant to which
the Exchange Notes, consisting of another series of senior subordinated notes of
the Issuer covered by such Registration Statement and containing substantially
identical terms to the Old Notes, except as set forth in this Prospectus, would
be offered in exchange for Old Notes tendered at the option of the holders
thereof. If: (i) the Issuer is not required to file the Registration Statement
or permitted to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy; or (ii) any holder of Transfer
Restricted Notes notifies the Issuer within the specified time period that: (A)
it is prohibited by law or Commission policy from participating in the Exchange
Offer; (B) that it may not resell the Exchange Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and the prospectus
contained in the Registration Statement is not appropriate or available for such
resales; or (C) that it is a broker-dealer and owns Old Notes acquired directly
from the Issuer or an affiliate of the Issuer, the Issuer and the Guarantors
will file with the Commission a registration statement (the "Shelf Registration
Statement") to cover resales of the Old Notes by the holders thereof who satisfy
certain conditions relating to the provisions of information in connection with
the Shelf Registration Statement. For purposes of the foregoing, "Transfer
Restricted Notes" means each Old Note until: (i) the date on which such Old Note
has been exchanged by a person other than a broker-dealer for an Exchange Note
in the Exchange Offer; (ii) following the exchange by a broker-dealer in the
Exchange Offer of a Note for an Exchange Note, the date on which such Exchange
Note is sold to a purchaser who receives from such broker-dealer on or prior to
the date of such sale a copy of the prospectus contained in the Registration
Statement; (iii) the date on which such Old Note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement; or (iv) the date on which such Old Note is distributed
to the public pursuant to Rule 144 under the Act. If: (a) the Issuer and the
Guarantors fail to file any of the Registration Statements required by the
Registration Rights Agreement on or before the date specified for such filing;
(b) any of such Registration Statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"); (c) the Issuer and the Guarantors fail to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Registration Statement; or (d) the Shelf
Registration Statement or the Registration Statement is declared effective but
thereafter ceases to be effective or usable in connection with resales of
Transfer Restricted Notes during the periods specified in the Registration
Rights Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then the Issuer and the Guarantors jointly and
severally agree to pay liquidated damages to each holder of Old Notes, with
respect to the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $.05 per week per $1,000 principal
amount of Old Notes held by such holder ("Liquidated Damages"). The amount of
the Liquidated Damages will increase by an additional $.05 per week per $1,000
principal amount of Old Notes with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages of $.40 per week per $1,000 principal amount of Old Notes
constituting Transfer Restricted Notes. All accrued Liquidated Damages will be
paid by the Issuer on each damages payment date to the Global Note Holder (as
defined) by wire transfer to the accounts specified by them or by mailing checks
to their registered addresses if no such accounts have been specified. Following
the cure of all Registration Defaults, the accrual of Liquidated Damages will
cease. See "Description of Exchange Notes -- Old Notes' Registration Rights;
Liquidated Damages."
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<PAGE>
Holders of Old Notes will be required to make certain representations to the
Issuer (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Old Notes included
in the Shelf Registration Statement and benefit from the provisions regarding
Liquidated Damages set forth above.
TERMS OF THE EXCHANGE
The Issuer hereby offers to exchange, upon the terms and subject to the
conditions set forth herein and in the Letter of Transmittal accompanying this
Prospectus (the "Letter of Transmittal"), $1,000 in principal amount of Exchange
Notes for each $1,000 in principal amount of Old Notes. The terms of the
Exchange Notes are substantially identical to the terms of the Old Notes for
which they may be exchanged pursuant to this Exchange Offer, except that the
Exchange Notes will generally be freely transferable by holders thereof, and the
holders of the Exchange Notes (as well as remaining holders of any Old Notes)
are not entitled to certain registration rights and certain liquidated damages
provisions which are applicable to the Old Notes under the Registration Rights
Agreement. The Exchange Notes will evidence the same debt as the Old Notes and
will be entitled to the benefits of the 1996 Indenture. See "Description of
Exchange Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered or accepted for exchange.
Based on its view of interpretations set forth in no-action letters issued
by the Staff to third parties, the Issuer believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange for the Old Notes may be offered for
resale, resold and otherwise transferred by holders thereof (other than any
holder which is (i) an Affiliate of the Issuer, (ii) a broker-dealer who
acquired Old Notes directly from the Issuer or (iii) a broker-dealer who
acquired Old Notes as a result of market making or other trading activities)
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holders' business, and such holders are not engaged in,
and do not intend to engage in, and have no arrangement or understanding with
any person to participate in, a distribution of such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. Broker-dealers who acquired Old Notes as a result of market making or other
trading activities may use this Prospectus, as supplemented or amended, in
connection with resales of the Exchange Notes. The Issuer has agreed that, for a
period of 180 days after the Registration Statement is declared effective, they
will make this Prospectus available to any broker-dealer for use in connection
with any such resale. Any holder who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes or any other
holder that cannot rely upon such interpretations must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
Tendering holders of Old Notes will not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Old Notes
pursuant to the Exchange Offer.
The Exchange Notes will bear interest from March 25, 1996. Holders of Old
Notes whose Old Notes are accepted for exchange will be deemed to have waived
the right to have interest accrete, or to receive any payment in respect of
interest, on the Old Notes accreted from March 25, 1996 to the date of the
issuance of the Exchange Notes. Interest on the Exchange Notes is payable
semiannually in arrears on March 15 and September 15 of each year, commencing
September 15, 2000, accruing from March 25, 1996 at a rate of 13 1/8% per annum.
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<PAGE>
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer expires on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., New York City time, on July 26, 1996 unless the Issuer in
its sole discretion extends the period during which the Exchange Offer is open,
in which event the term "Expiration Date" means the latest time and date on
which the Exchange Offer, as so extended by the Issuer, expires. The Issuer
reserves the right to extend the Exchange Offer at any time and from time to
time prior to the Expiration Date by giving written notice to First Trust
National Association (the "Exchange Agent") and by timely public announcement
communicated by no later than 5:00 p.m. on the next business day following the
Expiration Date, unless otherwise required by applicable law or regulation, by
making a release to the Dow Jones News Service. During any extension of the
Exchange Offer, all Old Notes previously tendered pursuant to the Exchange Offer
will remain subject to the Exchange Offer.
The initial Exchange Date will be the first business day following the
Expiration Date. The Issuer expressly reserves the right to (i) terminate the
Exchange Offer and not accept for exchange any Old Notes for any reason,
including if any of the events set forth below under "Conditions to the Exchange
Offer" shall have occurred and shall not have been waived by the Issuer and (ii)
amend the terms of the Exchange Offer in any manner, whether before or after any
tender of the Old Notes. If any such termination or amendment occurs, the Issuer
will notify the Exchange Agent in writing and will either issue a press release
or give written notice to the holders of the Old Notes as promptly as
practicable. Unless the Issuer terminates the Exchange Offer prior to 5:00 p.m.,
New York City time, on the Expiration Date, the Issuer will exchange the
Exchange Notes for Old Notes on the Exchange Date.
This Prospectus and the related Letter of Transmittal and other relevant
materials will be mailed by the Issuer to record holders of Old Notes and will
be furnished to brokers, banks and similar persons whose names, or the names of
whose nominees, appear on the lists of holders for subsequent transmittal to
beneficial owners of Old Notes.
HOW TO TENDER
The tender to the Issuer of Old Notes by a holder thereof pursuant to one of
the procedures set forth below will constitute an agreement between such holder
and the Issuer in accordance with the terms and subject to the conditions set
forth herein and in the Letter of Transmittal.
GENERAL PROCEDURES
A holder of an Old Note may tender the same by (i) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees
(or a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation")
pursuant to the procedure described below), to the Exchange Agent at its address
set forth on the back cover of this Prospectus on or prior to the Expiration
Date or (ii) complying with the guaranteed delivery procedures described below.
If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the Exchange Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder, the signature of such signer need not be guaranteed. In any
other case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Issuer and duly executed by
the registered holder and the signature on the endorsement or instrument of
transfer must be guaranteed by a bank, broker, dealer, credit union, savings
association, clearing agency or other institution (each an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Exchange Act. If the
Exchange Notes and/or Old Notes not exchanged are to be delivered to an address
other than that of the registered holder appearing on the note register for the
Old Notes, the signature on the Letter of Transmittal must be guaranteed by an
Eligible Institution.
37
<PAGE>
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
Old Notes should contact such holder promptly and instruct such holder to tender
Old Notes on such beneficial owner's behalf. If such beneficial owner wishes to
tender such Old Notes himself, such beneficial owner must, prior to completing
and executing the Letter of Transmittal and delivering such Old Notes, either
make appropriate arrangements to register ownership of the Old Notes in such
beneficial owner's name or follow the procedures described in the immediately
preceding paragraph. The transfer of record ownership may take considerable
time.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at The Depository Trust Company (the "Book-Entry Transfer
Facility") for purposes of the Exchange Offer within two business days after
receipt of this Prospectus, and any financial institution that is a participant
in the Book-Entry Transfer Facility's systems may make book-entry delivery of
Old Notes by causing the Book-Entry Transfer Facility to transfer such Old Notes
into the Exchange Agent's account at the Book-Entry Transfer Facility in
accordance with the Book-Entry Transfer Facility's procedures for transfer.
However, although delivery of Old Notes may be effected through book-entry
transfer at the Book-Entry Transfer Facility, the Letter of Transmittal, with
any required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the Exchange Agent at the address
specified on the back cover of this Prospectus on or prior to the Expiration
Date or the guaranteed delivery procedures described below must be complied
with.
THE METHOD OF DELIVERY OF OLD NOTES AND ALL OTHER DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE BE
OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE
TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE.
Unless an exemption applies under the applicable law and regulations
concerning "backup withholding" of federal income tax, the Exchange Agent will
be required to withhold, and will withhold, 31% of the gross proceeds otherwise
payable to a holder pursuant to the Exchange Offer if the holder does not
provide his taxpayer identification number (social security number or employer
identification number, as applicable) and certify that such number is correct.
Each tendering holder should complete and sign the main signature form and the
Substitute Form W-9 included as part of the Letter of Transmittal, so as to
provide the information and certification necessary to avoid backup withholding,
unless an applicable exemption exists and is proved in a manner satisfactory to
the Issuer and the Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date, a tender may be effected if the Exchange Agent has received at
its office listed on the Letter of Transmittal on or prior to the Expiration
Date a letter, telegram or facsimile transmission from an Eligible Institution
setting forth the name and address of the tendering holder, the principal amount
of the Old Notes being tendered, the names in which the Old Notes are registered
and, if possible, the certificate numbers of the Old Notes to be tendered, and
stating that the tender is being made thereby and guaranteeing that within five
New York Stock Exchange trading days after the date of execution of such letter,
telegram or facsimile transmission by the Eligible Institution, the Old Notes,
in proper form for transfer, will be delivered by such Eligible Institution
together with a properly completed and duly executed Letter of Transmittal (and
any other required documents). Unless Old Notes being tendered by the above-
described method (or a timely Book-Entry Confirmation) are deposited with the
Exchange Agent within the time period set forth above (accompanied or preceded
by a properly completed Letter of Transmittal and any other required documents),
the Issuer may, at its option, reject the tender. Copies of a Notice of
Guaranteed Delivery which may be used by Eligible Institutions for the purposes
described in this paragraph are available from the Exchange Agent.
38
<PAGE>
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a timely Book-Entry Confirmation) is received
by the Exchange Agent. Issuances of Exchange Notes in exchange for Old Notes
tendered pursuant to a Notice of Guaranteed Delivery or letter, telegram or
facsimile transmission to similar effect (as provided above) by an Eligible
Institution will be made only against deposit of the Letter of Transmittal (and
any other required documents) and the tendered Old Notes (or a timely Book-Entry
Confirmation).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by the Issuer, whose determination will be final and binding. The
Issuer reserves the absolute right to reject any or all tenders not in proper
form or the acceptances for exchange of which may, in the opinion of counsel to
the Issuer, be unlawful. The Issuer also reserves the absolute right to waive
any of the conditions of the Exchange Offer or any defect or irregularities in
tenders of any particular holder whether or not similar defects or
irregularities are waived in the case of other holders. Neither the Issuer, the
Exchange Agent nor any other person will be under any duty to give notification
of any defects or irregularities in tenders or shall incur any liability for
failure to give any such notification. The Issuer's interpretation of the terms
and conditions of the Exchange Offer (including the Letter of Transmittal and
the instructions thereto) will be final and binding.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Old Notes for exchange (the "Transferor") exchanges,
assigns and transfers the Old Notes to the Issuer and irrevocably constitutes
and appoints the Exchange Agent as the Transferor's agent and attorney-in-fact
to cause the Old Notes to be assigned, transferred and exchanged. The Transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Old Notes and to acquire Exchange Notes
issuable upon the exchange of such tendered Old Notes, and that, when the same
are accepted for exchange, the Issuer will acquire good and unencumbered title
to the tendered Old Notes, free and clear of all liens, restrictions, charges
and encumbrances and not subject to any adverse claim. The Transferor also
warrants that it will, upon request, execute and deliver any additional
documents deemed by the Issuer to be necessary or desirable to complete the
exchange, assignment and transfer of tendered Old Notes. The Transferor further
agrees that acceptance of any tendered Old Notes by the Issuer and the issuance
of Exchange Notes in exchange therefor shall constitute performance in full by
the Issuer of its obligations under the Registration Rights Agreement and that
the Issuer shall have no further obligations or liabilities thereunder (except
in certain limited circumstances). All authority conferred by the Transferor
will survive the death or incapacity of the Transferor and every obligation of
the Transferor shall be binding upon the heirs, legal representatives,
successors, assigns, executors and administrators of such Transferor.
By tendering Old Notes and executing the Letter of Transmittal, the
Transferor certifies that (a) it is not an Affiliate of the Issuer, that it is
not a broker-dealer that owns Old Notes acquired directly from the Issuer or an
Affiliate of the Issuer, that it is acquiring the Exchange Notes offered hereby
in the ordinary course of such Transferor's business and that such transferor
has no arrangement with any person to participate in the distribution of such
Exchange Notes or (b) that it is an Affiliate of the Issuer or of the Initial
Purchasers of the Old Notes in the Old Notes Offering and that it will comply
with the registration and prospectus delivery requirements of the Securities Act
to the extent applicable to it.
WITHDRAWAL RIGHTS
Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date.
39
<PAGE>
For a withdrawal to be effective, a written or facsimile transmission notice
of withdrawal must be timely received by the Exchange Agent at its address set
forth on the back cover of this Prospectus prior to the Expiration Date. Any
such notice of withdrawal must specify the person named in the Letter of
Transmittal as having tendered Old Notes to be withdrawn, the certificate
numbers of Old Notes to be withdrawn, the principal amount of Old Notes to be
withdrawn, a statement that such holder is withdrawing his election to have such
Old Notes exchanged, and the name of the registered holder of such Old Notes,
and must be signed by the holder in the same manner as the original signature on
the Letter of Transmittal (including any required signature guarantees) or be
accompanied by evidence satisfactory to the Issuer that the person withdrawing
the tender has succeeded to the beneficial ownership of the Old Notes being
withdrawn. The Exchange Agent will return the properly withdrawn Old Notes
promptly following receipt of notice of withdrawal. All questions as to the
validity of notices of withdrawals, including time of receipt, will be
determined by the Issuer, and such determination will be final and binding on
all parties.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Old Notes validly tendered and not withdrawn and the
issuance of the Exchange Notes will be made on the Exchange Date.
The Exchange Agent will act as agent for the tendering holders of Old Notes
for the purposes of receiving Exchange Notes from the Issuer and causing the Old
Notes to be assigned, transferred and exchanged. Upon the terms and subject to
conditions of the Exchange Offer, delivery of Exchange Notes to be issued in
exchange for accepted Old Notes will be made by the Exchange Agent promptly
after acceptance of the tendered Old Notes. Old Notes not accepted for exchange
by the Issuer will be returned without expense to the tendering holders (or in
the case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the procedures described
above, such non-exchanged Old Notes will be credited to an account maintained
with such Book-Entry Transfer Facility) promptly following the Expiration Date
or, if the Issuer terminates the Exchange Offer prior to the Expiration Date,
promptly after the Exchange Offer is so terminated.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Issuer will not be required to issue Exchange Notes
in respect of any properly tendered Old Notes not previously accepted and may
terminate the Exchange Offer (by oral or written notice to the Exchange Agent
and by timely public announcement communicated by no later than 5:00 p.m. on the
next business day following the Expiration Date, unless otherwise required by
applicable law or regulation, by making a release to the Dow Jones News Service)
or, at its option, modify or otherwise amend the Exchange Offer, if: (a) there
shall be threatened, instituted or pending any action or proceeding before, or
any injunction, order or decree shall have been issued by, any court or
governmental agency or other governmental regulatory or administrative agency or
commission, (i) seeking to restrain or prohibit the making or consummation of
the Exchange Offer or any other transaction contemplated by the Exchange Offer,
(ii) assessing or seeking any damages as a result thereof or (iii) resulting in
a material delay in the ability of the Issuer to accept for exchange some or all
of the Old Notes pursuant to the Exchange Offer; (b) any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced, enacted,
promulgated or deemed applicable to the Exchange Offer or any of the
transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority, agency
or court, domestic or foreign, that in the sole judgment of the Issuer, might
directly or indirectly result in any of the consequences referred to in clauses
(a)(i) or (ii) above or, in the sole judgment of the Issuer, might result in the
holders of Exchange Notes having obligations with respect to resales and
transfers of Exchange Notes which are greater than those described in the
interpretations of the Staff referred to on the cover page of this Prospectus,
or
40
<PAGE>
would otherwise make it inadvisable to proceed with the Exchange Offer; or (c) a
material adverse change shall have occurred in the business, condition
(financial or otherwise), operations, or prospects of the Issuer.
The foregoing conditions are for the sole benefit of the Issuer and may be
asserted by it with respect to all or any portion of the Exchange Offer
regardless of the circumstances (including any action or inaction by the Issuer)
giving rise to such condition or may be waived by the Issuer in whole or in part
at any time or from time to time in its sole discretion. The failure by the
Issuer at any time to exercise any of the foregoing rights will not be deemed a
waiver of any such right, and each right will be deemed an ongoing right which
may be asserted at any time or from time to time. In addition, the Issuer has
reserved the right, notwithstanding the satisfaction of each of the foregoing
conditions, to terminate or amend the Exchange Offer.
Any determination by the Issuer concerning the fulfillment or nonfulfillment
of any conditions will be final and binding upon all parties.
In addition, the Issuer will not accept for exchange any Old Notes tendered,
and no Exchange Notes will be issued in exchange for any such Old Notes, if at
such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or
qualification of the 1996 Indenture under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act").
EXCHANGE AGENT
First Trust National Association (the "Exchange Agent") has been appointed
as the Exchange Agent for the Exchange Offer. Letters of Transmittal must be
addressed to the Exchange Agent at:
First Trust National Association
180 East Fifth Street
St. Paul, Minnesota 55101
Telephone: (612) 244-1197
Facsimile: (612) 244-1537
Attention: Phyllis Meath, Specialized Finance Group
Delivery to an address other than as set forth herein, or transmissions of
instructions via a facsimile or telex number other than the ones set forth
herein, will not constitute a valid delivery.
SOLICITATION OF TENDERS; EXPENSES
The Issuer has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The Issuer
will, however, pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for reasonable out-of-pocket expenses in
connection therewith. The Issuer will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding tenders for their customers. The expenses to be
incurred in connection with the Exchange Offer, including the fees and expenses
of the Exchange Agent and printing, accounting, investment banking and legal
fees, will be paid by the Issuer and are estimated to be approximately $250,000.
No person has been authorized to given any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Issuer. Neither the delivery
of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Issuer since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Issuer may, at its
discretion, take such action as it may deem necessary
41
<PAGE>
to make the Exchange Offer in any such jurisdiction and extend the Exchange
Offer to holders of Old Notes in such jurisdiction. In any jurisdiction the
securities laws or blue sky laws of which require the Exchange Offer to be made
by a licensed broker or dealer, the Exchange Offer is being made on behalf of
the Issuer by one or more registered brokers or dealers which are licensed under
the laws of such jurisdiction.
DISSENTER AND APPRAISAL RIGHTS
HOLDERS OF OLD NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS IN
CONNECTION WITH THE EXCHANGE OFFER.
FEDERAL INCOME TAX CONSEQUENCES
The exchange of Old Notes for Exchange Notes by tendering holders will not
be a taxable exchange for federal income tax purposes, and such holders should
not recognize any taxable gain or loss or any interest income as a result of
such exchange. See "Certain United States Federal Income Tax Considerations."
OTHER
Participation in the Exchange Offer is voluntary and holders of Old Notes
should carefully consider whether to accept the terms and conditions thereof.
Holders of the Old Notes are urged to consult their financial and tax advisors
in making their own decisions on what action to take with respect to the
Exchange Offer.
As a result of the making of and upon acceptance for exchange of all validly
tendered Old Notes pursuant to the terms of this Exchange Offer, the Issuer will
have fulfilled a covenant contained in the terms of the Old Notes and the
Registration Rights Agreement. Holders of the Old Notes who do not tender their
Old Notes in the Exchange Offer will continue to hold such Old Notes and will be
entitled to all the rights, and limitations applicable thereto under the 1996
Indenture, except for any such rights under the Registration Rights Agreement
which by their terms terminate or cease to have further effect as a result of
the making of this Exchange Offer. See "Description of Exchange Notes." All
untendered Old Notes will continue to be subject to the restriction on transfer
set forth in the 1996 Indenture. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market, if any, for any remaining
Old Notes could be adversely affected. See "Risk Factors -- Consequences of
Failure to Exchange Old Notes."
The Issuer may in the future seek to acquire untendered Old Notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Issuer has no present plan to acquire any Old Notes which are
not tendered in the Exchange Offer.
42
<PAGE>
CAPITALIZATION
The following table sets forth: (i) the consolidated capitalization of Dish,
Ltd., the Issuer's predecessor, on a historical basis as of December 31, 1995;
(ii) the pro forma consolidated capitalization of the Issuer after giving effect
to the Old Notes Offering and the contribution by EchoStar of all the capital
stock of Dish, Ltd. to the Issuer as of December 31, 1995; and (iii) the
unaudited consolidated capitalization of the Issuer as of March 31, 1996. The
historical information in this table as of December 31, 1995 is derived from the
Combined and Consolidated Financial Statements of Dish, Ltd., audited by Arthur
Andersen LLP, independent public accountants, and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Combined and Consolidated Financial Statements and the Notes
thereto included elsewhere in this Prospectus. The unaudited historical
information in this table as of March 31, 1996 is derived from the Consolidated
Financial Statements of the Issuer and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Supplemental Consolidated Financial Statements and the Notes
thereto included elsewhere in this Prospectus.
The total capitalization of the Issuer as of January 24, 1996 (the date of
formation of the Issuer) was $1,000.
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1995 1996
------------------------ -----------
ACTUAL AS ADJUSTED (UNAUDITED)
----------- ----------- -----------
<S> <C> <C> <C>
Cash, cash equivalents and marketable securities (1)...................... $ 113,850 $ 450,896 $ 438,350(2)
Long-term obligations (excluding current portion):
Mortgages and note payable.............................................. $ 33,444 $ 33,444 $ 32,421
1994 Notes, net......................................................... 382,218 382,218 395,333
Old Notes............................................................... -- 350,047 350,890
----------- ----------- -----------
Total long-term obligations........................................... 415,662 765,709 778,644
----------- ----------- -----------
Stockholders' equity: (3)
Preferred Stock of Dish, Ltd., including accrued dividends of
$1,555,000, $0 and $0, respectively.................................... 16,607 -- --
Class A Common Stock, Class B Common Stock, and additional paid-in
capital of Dish, Ltd. (4).............................................. 89,858 -- --
Common Stock of Issuer ($.01 par value) 1,000 shares authorized, 1,000
shares issued and outstanding.......................................... -- -- --
Additional paid-in capital.............................................. -- 106,466 106,466
Unrealized holding gains on available-for-sale securities, net........ 251 251 21
Retained earnings (deficit)............................................. (13,826) (13,826) (21,480)
----------- ----------- -----------
Total stockholders' equity............................................ 92,890 92,891 85,007
----------- ----------- -----------
Total capitalization................................................ $ 508,552 $ 858,600 $ 863,651
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
(1) Includes $84.7 million of cash restricted under the 1994 Indenture pursuant
to which Dish, Ltd. issued its 1994 Notes and $15.0 million of restricted
cash held in an escrow account related to the manufacture of EchoStar
Receiver Systems as of December 31, 1995.
(2) Includes $245.0 million of cash restricted under the 1994 and 1996
Indentures pursuant to which Dish, Ltd. and the Issuer issued the 1994 Notes
and the Old Notes, respectively. Also included is $15.0 million and $15.5
million of restricted cash in escrow accounts related to the manufacture of
EchoStar Receiver Systems and for the purpose of cash collateralizing
certain standby letters of credit, respectively.
(3) All outstanding preferred and common stock of Dish, Ltd. is owned by the
Issuer.
(4) Includes $26.1 million related to warrants for the purchase of Dish, Ltd.
Class A Common Stock which became exercisable for shares of EchoStar Class A
Common Stock effective with the merger of Dish, Ltd. with a wholly owned
subsidiary of EchoStar in December 1995 (see Note 1 to Combined and
Consolidated Financial Statements -- "Exchange and Merger").
43
<PAGE>
SELECTED FINANCIAL DATA
The Issuer was formed on January 24, 1996 for the purpose of the Old Notes
Offering. EchoStar contributed all of the outstanding capital stock of Dish,
Ltd. to the Issuer, thus making Dish, Ltd. a direct wholly owned subsidiary of
the Issuer. The following selected financial data as of and for the five years
ended December 31, 1995 are derived from the financial statements of Dish, Ltd.,
and the predecessor entities of Dish, Ltd., audited by Arthur Andersen LLP,
independent public accountants. The following selected financial data for the
three months ended March 31, 1995 and 1996 are derived from the unaudited
financial statements of the Issuer and, in the opinion of the Issuer, include
all adjustments necessary for a fair presentation of such information. Operating
results for the three months ended March 31, 1996 are not necessarily indicative
of the results that may be achieved for the year ended December 31, 1996. The
data set forth in this table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," Dish,
Ltd.'s Combined and Consolidated Financial Statements and the Notes thereto and
the other financial information included elsewhere in this Prospectus. The data
provided for the three months ended March 31, 1995 and 1996 are derived from the
supplemental quarterly financial statements and condensed Notes thereto of the
Issuer, which includes the consolidated accounts of Dish, Ltd.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------- ---------------------
1991 1992 1993 1994 1995 1995 1996
----------- --------- --------- --------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT RATIOS AND SATELLITE RECEIVERS (UNAUDITED)
SOLD)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
DTH products:
Domestic................... $ 103,510 $ 122,433 $ 152,818 $ 111,815 $ 87,274 $ 20,548 $ 23,968
International.............. 31,605 35,040 53,493 60,938 59,578 15,729 12,773
Programming.................. 3,890 6,436 10,770 14,540 15,096 3,871 3,913
Loan origination and
participation income........ 608 1,179 3,860 3,690 1,942 265 372
----------- --------- --------- --------- --------- ---------- ---------
Total revenue.............. 139,613 165,088 220,941 190,983 163,890 40,413 41,026
----------- --------- --------- --------- --------- ---------- ---------
Expenses:
DTH products................. 102,810 120,826 161,447 133,635 120,178 29,445 32,750
Programming.................. 3,549 6,225 9,378 11,670 13,610 3,432 3,283
Selling, general and
administrative.............. 26,736 25,708 30,235 30,219 34,993 7,871 10,571
Depreciation and
amortization................ 1,112 1,043 1,677 2,243 3,058 363 3,330
----------- --------- --------- --------- --------- ---------- ---------
Total expenses............. 134,207 153,802 202,737 177,767 171,839 41,111 49,934
----------- --------- --------- --------- --------- ---------- ---------
Operating income (loss)........ 5,406 11,286 18,204 13,216 (7,949) (698) (8,908)
Net income (loss).............. $ 6,192 $ 10,833 $ 20,118 $ 90 $ (12,361) $ (2,240) $ (7,654)
Ratio of earnings to fixed
charges (1)................... 4.36x 7.32x 9.63x 1.02x 0.64x 0.70x 0.15x
Pro forma (unaudited):
Pro forma net income (2)..... $ 4,468 $ 7,529 $ 12,272
OTHER DATA:
EBITDA (3)..................... $ 12,818 (4) $ 12,329 $ 19,881 $ 15,459 $ (4,891) $ (335) $ (5,578)
Satellite receivers sold (in
units):
Domestic..................... 113,000 116,000 132,000 114,000 131,000 27,000 45,000
International................ 45,000 85,000 203,000 289,000 331,000 85,000 76,000
----------- --------- --------- --------- --------- ---------- ---------
Total...................... 158,000 201,000 335,000 403,000 462,000 112,000 121,000
----------- --------- --------- --------- --------- ---------- ---------
----------- --------- --------- --------- --------- ---------- ---------
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AT MARCH
--------------------------------------------------------- 31,
1991 1992 1993 1994 1995 1996
--------- --------- --------- ----------- ----------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
investment securities.................. $ 20,359 $ 22,031 $ 27,232 $ 245,375(5) $ 113,850(5) $ 438,350(5)
Working capital......................... 38,597 44,268 35,563 52,711 31,115 200,577
Total assets............................ 72,547 88,529 106,476 472,492 559,295 899,357
Long-term obligations (less current
portion):
1994 Notes, net....................... -- -- -- 334,206 382,218 395,333
1996 Notes, net....................... -- -- -- -- -- 350,890
Notes payable to stockholder.......... 234 2,274 14,725 -- -- --
Other long-term debt.................. 5,028 4,876 4,702 5,393 33,444 32,421
</TABLE>
- ------------------------------
(1) For purposes of the ratio of earnings to fixed charges, earnings consist of
earnings from continuing operations before income taxes, plus fixed charges.
Fixed charges consist of interest incurred on all indebtedness and rental
expense under non-cancelable operating leases.
(2) Dish, Ltd.'s subsidiaries operated under Subchapter S of the Code and
comparable provisions of applicable state income tax laws until December 31,
1993. The amounts shown reflect net income as if Dish, Ltd. had been subject
to corporate federal and state income taxes during such periods. See Notes 2
and 7 of Notes to Dish, Ltd.'s Combined and Consolidated Financial
Statements as of December 31, 1995.
(3) EBITDA represents earnings before interest income, interest expense, net of
other income and expenses, income taxes, depreciation and amortization.
EBITDA is commonly used in the telecommunications industry to analyze
companies on the basis of operating performance, leverage and liquidity.
EBITDA is not intended to represent cash flows for the period, nor has it
been presented as an alternative to operating income as an indicator of
operating performance and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles. See Dish, Ltd.'s Combined and Consolidated
Statements of Cash Flows in Dish, Ltd.'s Combined and Consolidated Financial
Statements contained elsewhere in this Prospectus.
(4) Excludes $6.3 million in non-recurring charges.
(5) Includes Restricted Cash and Marketable Investment Securities.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS RELATES TO THE CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE ISSUER, INCLUDING ITS PREDECESSOR,
DISH, LTD., AND SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND
NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. ECHOSTAR CONTRIBUTED ALL OF
THE OUTSTANDING CAPITAL STOCK OF DISH, LTD. TO THE ISSUER PRIOR TO THE CLOSING
OF THE OLD NOTES OFFERING. THIS TRANSACTION HAS BEEN ACCOUNTED FOR AS A
REORGANIZATION OF ENTITIES UNDER COMMON CONTROL. ACCORDINGLY, DISH, LTD. HAS
BEEN TREATED AS THE PREDECESSOR TO THE ISSUER AND THE HISTORICAL FINANCIAL
STATEMENTS OF THE ISSUER ARE THOSE OF DISH, LTD.
OVERVIEW
The Issuer currently operates four related businesses: (i) operation of the
DISH Network-SM- and continued development of the EchoStar DBS System; (ii)
design, manufacture, marketing, installation and distribution of DTH products
worldwide; (iii) domestic distribution of DTH programming; and (iv) consumer
financing of the Issuer's domestic products and services. The growth of DBS
service and equipment sales has had and will continue to have a material
negative impact on the Issuer's international DTH products and domestic C-band
DTH products sales. On March 4, 1996 the Issuer began broadcasting and selling
programming packages available on the DISH Network-SM- service. The Issuer
expects to derive its revenue principally from monthly fees from subscribers for
DISH Network-SM- programming and, to a lesser extent, from the sale of EchoStar
Receiver Systems. As sales of EchoStar DBS programming and receivers increase,
the Issuer expects the decline in its sales of domestic C-band DTH products to
continue at an accelerated rate.
The Issuer will generally bill for DISH Network-SM- programming periodically
in advance and will recognize revenue as service is provided. Revenue will be a
function of the number of subscribers, the mix of programming packages selected
and the rates charged, and transaction fees for ancillary programming and
transponder leasing activities. From time to time the Issuer may engage in
promotional activities that include discounted rates for limited periods, which
will result in lower average revenue per subscriber for the applicable periods.
The Issuer is currently test marketing a special promotion in a limited number
of markets pursuant to which customers are able to purchase a discounted
package, including an EchoStar Receiver System and annual programming package,
for as low as $499, which is approximately $300 below the suggested retail
price. DBS programming costs will generally be based upon the number of
subscribers to each programming offering. Since the DISH Network-SM- did not
commence operations until March 1996, its operating activities had a minimal
effect on the Issuer's results of operations for the three month period ended
March 31, 1996.
46
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain revenue and expense items in the Issuer's
Statements of Income.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF INCOME DATA:
Revenue:
DTH products:
Domestic............................................. 69% 58% 54% 51% 58%
International........................................ 24 32 36 39 31
Programming.......................................... 5 8 9 9 10
Loan origination and participation income............ 2 2 1 1 1
----- ----- ----- ----- -----
Total revenue 100 100 100 100 100
----- ----- ----- ----- -----
Expenses:
DTH products........................................... 73 70 73 73 80
Programming............................................ 4 6 8 9 8
Selling, general and administrative.................... 14 16 22 19 26
Depreciation........................................... 1 1 2 1 8
----- ----- ----- ----- -----
Total expenses..................................... 92 93 105 102 122
----- ----- ----- ----- -----
Operating income (loss)................................ 8% 7% (5)% (2)% (22)%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Net income (loss)...................................... 9% 0% (8)% (6)% (19)%
OTHER DATA:
EBITDA................................................... 9% 8% (3)% (1)% (14)%
</TABLE>
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 1996 COMPARED TO THREE MONTH PERIOD ENDED
MARCH 31, 1995
REVENUE. Total revenue for the three month period ended March 31, 1996 was
$41.0 million, an increase of $613,000, or 2%, as compared to the same period in
1995 of $40.4 million. Revenue from domestic sales of DTH products for the three
month period ended March 31, 1996 was $24.0 million, an increase of $3.4
million, or 17%, as compared to the same period in 1995. The increase in
domestic revenue was primarily due to $8.2 million in revenue from the sale of
EchoStar Receiver Systems during the three month period ended March 31, 1996.
There were no EchoStar Receiver System sales during the comparable period in
1995. Approximately $922,000 of the increase in domestic revenue for the three
month period ended March 31, 1996 was due to an increase in the number of
satellite receivers sold for a competitor's DBS system ("Competitor DBS
Receivers"). Revenue from Competitor DBS Receiver sales was $7.7 million for the
three month period ended March 31, 1996, as compared to $6.8 million for the
same period in 1995. The increases in domestic revenue were principally offset
by a decrease of $4.7 million, or 47%, in revenue from sales of C-band satellite
receivers and related accessories, during the three month period ended March 31,
1996, as compared to the same period in 1995. The increases in domestic revenue
were also partially offset by a decrease of $1.2 million, or 42%, in revenue
from sales of non-proprietary descrambler modules, during the three month period
ended March 31, 1996, as compared to the same period in 1995. The domestic
market for C-band DTH products continued to decline during the three month
period ended March 31, 1996, and this decline will continue with the growth of
DBS service and equipment sales. This decline had been expected by the Issuer as
described below.
47
<PAGE>
Domestically, the Issuer sold approximately 45,000 satellite receivers in
the three month period ended March 31, 1996, an increase of 67% as compared to
approximately 27,000 receivers for the same period in 1995. Although there was
an increase in the number of satellite receivers sold in 1996 as compared to
1995, overall revenue did not increase proportionately as a result of a
substantial shift in product mix to lower priced DBS receivers and related
accessories, and an approximate 23% reduction in the average selling price of
C-band receivers. Included in the number of satellite receivers sold for the
three month period ended March 31, 1996 are approximately 17,000 EchoStar
Receiver Systems. EchoStar Receiver System revenue represented approximately 20%
of total revenue for the three month period ended March 31, 1996.
Also included in the number of satellite receivers sold for the three month
period ended March 31, 1996 are approximately 18,000 Competitor DBS Receivers as
compared to 11,000 for the same period in 1995. During the three month period
ended March 31, 1996, the Competitor DBS Receivers were sold at an approximate
30% reduction in the average selling price as compared to the same period in
1995. Competitor DBS Receiver revenue was 19% of total revenue for the three
month period ended March 31, 1996. The Issuer's agreement to distribute
Competitor DBS Receiver systems terminated on December 31, 1995 and during the
first quarter of 1996, the Issuer sold the majority of its existing inventory of
Competitor DBS Receivers. The elimination of Competitor DBS Receiver inventory
will be offset by a substantial increase in inventory of EchoStar Receiver
Systems and related components, the sale of which is expected to offset the
elimination of revenue derived from the sale of Competitor DBS Receivers.
The Issuer markets its current C-band DTH products by offering competitive
pricing and consumer financing in order to minimize the decline in domestic
C-band DTH sales resulting from the increased popularity of DBS equipment and
programming. Additionally, during all of 1995 and through the first quarter of
1996, the Issuer sold Competitor DBS Receivers which partially offset the
decline in domestic C-band sales in 1995. During the three month period ended
March 31, 1996 the decline in sales of C-band DTH products was more than offset
by sales of Competitor DBS Receiver and EchoStar Receiver Systems. With the
elimination of Competitor DBS Receiver inventory, domestic DTH product revenue
in subsequent quarters will be substantially derived from the sale of EchoStar
Receiver Systems which, although no assurances can be given, should accelerate
in the second quarter as demand for DISH Network-SM- programming increases as a
result of heightened advertising and marketing efforts.
Loan origination and participation income for the three month period ended
March 31, 1996 was $372,000, an increase of $107,000, or 40%, compared to the
same period in 1995. The increase in loan origination and participation income
for the three month period ended March 31, 1996 was primarily due to increased
finance volume, including the financing of EchoStar Receiver Systems. In the
first quarter of 1996, EchoStar formed a wholly owned subsidiary, Dish Network
Credit Corporation, for the purpose of providing consumer financing for
EchoStar's domestic DTH products and services. At that time, the Issuer's
subsidiary that previously provided these services ceased new loan origination
activities. In future periods, revenue from loan origination and participation
income will decline.
Programming revenue for the three month period ended March 31, 1996 was $3.9
million, an increase of $42,000, or 1%, as compared to the same period in 1995.
The increase was primarily due to DISH Network-SM- consumer and commercial
programming revenue of $464,000 generated during the three month period ended
March 31, 1996. The increase in revenue derived from the sale of DISH
Network-SM- programming was offset by a decrease in C-band DTH programming
revenue. The industry-wide decline in domestic C-band equipment sales has
resulted, and is expected to continue to result in a decline in C-band DTH
programming revenue. The Issuer believes that the expected decline in C-band DTH
programming revenue in 1996 will be more than offset by sales of DISH
Network-SM- programming.
Revenue from international sales of DTH products for the three month period
ended March 31, 1996 was $12.8 million, a decrease of $3.0 million, or 19%, as
compared to the same period in 1995.
48
<PAGE>
This decrease during the three month period ended March 31, 1996, resulted
principally from reduced sales to the Middle East where the Issuer's largest
international DTH customer is based, and an approximate 20% reduction in the
average selling price of analog satellite receivers. This decline was partially
offset by increased sales in Africa. Revenue from sales of DTH products in the
Middle East suffered beginning in August 1995 as a result of restrictions
against imports, and may not return to historic analog levels even as import
restrictions are eased. Historic analog sales levels may not be reached because
of new digital service planned for the Middle East which is currently expected
to begin in the third quarter of 1996. Overall, the Issuer's international
markets for analog DTH products declined during the three month period ended
March 31, 1996 as anticipation for new digital services increased. Also, the
decrease discussed above was partially offset by an increase in other DTH
product revenue. Internationally, the Issuer sold approximately 76,000 analog
satellite receivers during the three month period ended March 31, 1996, a
decrease of 11%, compared to approximately 85,000 units sold during the same
period in 1995. The decrease was principally due to international anticipation
of new digital services as discussed above. The Issuer is currently negotiating
with digital service providers to distribute their proprietary receivers in the
Issuer's international markets.
OPERATING EXPENSES. Costs of DTH products sold were $32.8 million for the
three month period ended March 31, 1996, an increase of $3.3 million, or 11%, as
compared to the same period in 1995. The increase in DTH operating expenses for
1996 resulted primarily from the increase in sales of DTH products. Operating
expenses for DTH products as a percentage of DTH product revenue were 89% and
81% for the three month period ended March 31, 1996 and 1995, respectively. The
increase was principally the result of declining sales prices of C-band DTH
products and Competitor DBS Receivers as described above, during the three month
period ended March 31, 1996 as compared to the same period in 1995.
Operating expenses for programming were $3.3 million for the three month
period ended March 31, 1996, a decrease of $149,000, or 4%, as compared to the
same period in 1995. Operating expenses for programming as a percentage of
programming revenue for the three month period ended March 31, 1996 were 84% as
compared to 89% for the same period in 1995. The decrease in operating expenses
for programming as a percentage of programming revenue for the three month
period ended March 31, 1996 was primarily a result of higher margins earned on
DISH Network-SM-programming partially offset by declining margins on C-band
programming.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $10.6 million for the three month period ended
March 31, 1996, an increase of $2.7 million, or 34%, as compared to the same
period in 1995. Selling, general and administrative expenses as a percentage of
total revenue increased to 26% for the three month period ended March 31, 1996
as compared to 19% for the same period in 1995. This increase was principally
due to: (i) marketing and advertising prior to and in conjunction with the
introduction of DISH Network-SM- service; (ii) increased personnel in all areas
of the organization to support the DISH Network-SM-; and (iii) costs related to
the Digital Broadcast Center, which commenced operations in the third quarter of
1995.
Research and development costs totaled $1.2 million for the three month
period ended March 31, 1996, as compared to $1.3 million for the same period in
1995. The decrease was principally due to the reduction in research necessary to
provide C-band receivers to domestic and international markets, partially offset
by increased research and development costs related to digital DBS satellite
receivers.
EBITDA. EBITDA for the three month period ended March 31, 1996 was a
negative $5.6 million, a decrease of $5.3 million compared to the same period in
1995. The decrease resulted from the factors affecting revenue and expenses
discussed above. EBITDA represents earnings before interest income, interest
expense net of other income, income taxes, depreciation and amortization. EBITDA
is commonly used in the telecommunications industry to analyze companies on the
basis of operating performance, leverage and liquidity. EBITDA is not intended
to represent cash flows for the
49
<PAGE>
period, nor has it been presented as an alternative to operating income as an
indicator of operating performance and should not be considered in isolation or
as a substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
DEPRECIATION. Depreciation for the three month period ended March 31, 1996
was $3.3 million, an increase of $3.0 million, or 817%, as compared to the same
period in 1995. The overall increase primarily resulted from depreciation on the
Digital Broadcast Center and EchoStar I which were placed in service during the
fourth quarter of 1995 and the first quarter of 1996, respectively.
OTHER INCOME AND EXPENSE. Other expense for the three month period ended
March 31, 1996 was $3.8 million, an increase of $914,000 or 32% as compared to
the same period in 1995. The increase in other expense for the three month
period ending March 31, 1996 resulted primarily from a reduction in interest
income due to an overall decrease for the period in the 1994 Notes Escrow
Account, cash and marketable investment securities. This was partially offset by
a decrease in interest expense resulting from additional interest capitalized in
1996 as compared to the same period in 1995.
PROVISION FOR INCOME TAXES. Income tax benefit for the three month period
ended March 31, 1996 was $5.1 million compared to $1.4 million during the same
period in 1995. This increase is principally the result of changes in components
of income and expenses discussed above during the three month period ended March
31, 1996. The Issuer's deferred tax assets (approximately $17.1 million at March
31, 1996) relate principally to temporary differences for amortization of
original issue discount on the 1994 and 1996 Notes and various accrued expenses
which are not deductible until paid. No valuation allowance has been provided
because the Issuer currently believes it is more likely than not that these
deferred assets will ultimately be realized. If future operating results differ
materially and adversely from the Issuer's current expectations, its judgment
regarding the need for a valuation allowance may change.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUE. Total revenue for 1995 was $163.9 million, a decrease of $27.1
million, or 14%, as compared to total revenue for 1994 of $191.0 million.
Revenue from domestic sales of DTH products for 1995 was $87.3 million, a
decrease of $24.5 million, or 22%, as compared to 1994. This decrease in
domestic revenues was primarily due to an expected decline of $26.9 million, or
24%, in revenue from sales of satellite receivers and related accessories,
during 1995, as compared to 1994. The decrease in domestic revenues for 1995 was
partially offset by $12.5 million in sales of non-proprietary descrambler
modules compared to $11.0 million in 1994. The domestic market for C-band DTH
products continued to decline during 1995 and this decline is expected to
continue. The decline had been expected by the Issuer as described below. The
Issuer also decreased its emphasis on relatively high cost, low margin
descrambler modules beginning in the second quarter of 1994.
Domestically, the Issuer sold approximately 131,000 satellite receivers in
1995, an increase of 15% as compared to approximately 114,000 receivers sold in
1994. Although there was an increase in the number of satellite receivers sold
in 1995 as compared to 1994, overall revenues declined as a result of a change
in product mix resulting from the introduction of lower priced DBS receivers and
related accessories, and an approximate 23% reduction in the average selling
price of C-band receivers. Included in the number of satellite receivers sold
are those sold for a competitor's DBS system ("Competitor DBS Receivers")
manufactured and supplied by a third party manufacturer ("Competing DBS
Manufacturer") which totaled approximately 67,000 for 1995, as compared to
21,000 for 1994. Competitor DBS Receiver revenues were $34.0 million for 1995,
as compared to $15.0 million for 1994. Competitor DBS Receiver revenues were 21%
of total revenues for 1995.
In the second half of 1994 and throughout 1995, an increasing percentage of
domestic DTH satellite retailers relied on attractive financing packages to
generate sales. During most of 1994, certain of the Issuer's competitors offered
consumer financing that retailers considered more attractive than financing
offered by the Issuer. This competitive financing advantage resulted in
retailers selling competing products rather than Issuer products and was
partially responsible for the decline in
50
<PAGE>
C-band DTH unit sales and revenue. The Issuer has entered into agreements with
two national consumer finance groups permitting the Issuer to offer what it
currently believes to be competitive financing terms. However, once a retailer
chooses an alternative financing source, it is difficult to recapture that
business. While volume and participation payments increased throughout 1995,
loan origination and participation payments are not expected to reach historic
levels in the short term.
Commencing in 1995, the Issuer stopped receiving monthly participation
payments from Household Retail Services, Inc. ("HRSI") on its loan portfolio,
contributing to a decrease in loan origination and participation income from
1994. Loan origination and participation income for 1995 was $1.9 million, a
decrease of $1.7 million, or 47%, compared to 1994. The Issuer has filed suit
against HRSI for nonpayment of participation revenue, among other things.
The Issuer aggressively markets its current offering of C-band DTH products
by offering competitive pricing and financing in order to minimize the decline
in domestic C-band DTH sales resulting from the increased popularity of "small
dish" equipment. Additionally, the Issuer currently sells Competitor DBS
Receivers for reception of programming offered by other service providers.
Competitor DBS Receiver sales partially offset the decline in domestic C-band
sales in 1995. The decline is also expected to be offset by sales of the
Issuer's proprietary DBS products commencing in 1996. The Issuer's agreement to
distribute Competitor DBS Receivers terminated on December 31, 1995.
Programming revenue for 1995 was $15.1 million, an increase of $556,000, or
4%, as compared to 1994. The increase was primarily due to additional sales of
programming packages through retailers and, to a lesser extent, the renewal and
retention of existing customers as a result of more attractive pricing and more
effective marketing. While the Issuer began to more aggressively market its
services in the second quarter of 1995, the industry-wide decline in domestic
C-band equipment sales is expected to result in a decline in C-band DTH
programming revenues as well over time. The Issuer believes that the decline in
C-band DTH programming revenues will be fully offset by sales of the Issuer's
DBS programming in 1996.
Revenue from international sales of DTH products for 1995 was $59.6 million,
a decrease of $1.4 million, or 2%, as compared to 1994. The decrease for 1995
resulted principally from reduced sales to the Middle East where the Issuer's
largest international DTH customer is based. This decline was partially offset
by increased sales in Africa. Revenue from sales of DTH products in the Middle
East suffered beginning in August 1995 as a result of recently implemented
restrictions against imports, and may not return to historic levels even after
import regulations are lifted, the timing of which cannot be predicted. Historic
sales levels may not be reached because of new digital service planned for the
Middle East beginning in the first quarter of 1996. Internationally, the Issuer
sold approximately 331,000 satellite receivers in 1995, an increase of 15%,
compared to approximately 289,000 units sold during 1994. The increase was
primarily due to a continued emphasis by the Issuer on lower priced products in
1995 to meet marketplace demands. For 1995, the effects of volume increases were
offset by a 17% decrease in the average selling price as compared to 1994.
OPERATING EXPENSES. Costs of DTH products sold were $120.2 million for
1995, a decrease of $13.5 million, or 10%, as compared to 1994. The decrease in
DTH operating expenses for 1995 resulted primarily from the decrease in sales of
DTH products. Operating expenses for DTH products as a percentage of DTH product
revenue were 82% for 1995, as compared to 77% for 1994. The increase was
principally the result of declining sales prices of C-band DTH products as
described above, during 1995 as compared to 1994 and the cost of promotional
campaigns.
Operating expenses for programming were $13.6 million for 1995, an increase
of $1.9 million, or 17%, as compared to 1994. Operating expenses for programming
as a percentage of programming revenue were 90% for 1995 as compared to 80% for
1994. Programming expenses increased at a greater rate than revenues from
programming principally because the prior periods included the flow through of
certain volume discounts. Additionally, the C-band program packaging business is
extremely competitive, which restricts the ability to pass on contracted
affiliation agreement cost increases to consumers.
51
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $35.0 million for 1995, an increase of $4.8
million, or 16%, as compared to 1994. Selling, general and administrative
expenses as a percentage of total revenue increased to 22% for 1995 as compared
to 16% for 1994. The change was principally the result of the reduction of
revenues from domestic sales of DTH products and increased costs to support,
among other things, expansion of the Issuer's DTH product installation network
and administrative costs associated with development of the DISH Network-SM-. In
addition, $1.1 million of compensation expense was recorded with regard to
55,000 shares of Class A Common Stock contributed by EchoStar to EchoStar's
401(k) plan.
Research and development costs totaled $5.0 million for 1995 as compared to
$5.9 million for 1994. The decrease was principally due to the reduction in
research necessary to provide C-band receivers to domestic and international
markets, partially offset by increased research and development costs related to
digital DBS satellite receivers.
EBITDA. EBITDA for 1995 was a negative $4.9 million, a decrease of $20.4
million, or 132%, as compared to 1994. The decrease resulted from the factors
affecting revenue and expenses discussed above. EBITDA represents earnings
before interest income, interest expense net of other income, income taxes,
depreciation and amortization. EBITDA is commonly used in the telecommunications
industry to analyze companies on the basis of operating performance, leverage
and liquidity. EBITDA is not intended to represent cash flows for the period,
nor has it been presented as an alternative to operating income as an indicator
of operating performance and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles.
DEPRECIATION. Depreciation for 1995 was $3.1 million, an increase of
$815,000, or 36%, as compared to 1994. The overall increase primarily resulted
from depreciation on assets placed in service during the third and fourth
quarters of 1995.
OTHER INCOME AND EXPENSE. Other expense for 1995 was $10.6 million, a
decrease of $2.1 million, or 17%, as compared to 1994. The difference in other
income and expense for 1995 compared to 1994 resulted primarily from the
amortization of original issue discount and deferred debt issuance costs of
$23.5 million, in 1995, and $20.7 million, in 1994, net of capitalized interest,
on the 1994 Notes, which were issued on June 7, 1994. Other expense has been
reduced by investment income on monies deposited in an escrow account (the "1994
Escrow Account") of $8.8 million for 1995, and $6.5 million for 1994. Interest
capitalized relating to development of the EchoStar DBS System for 1995 was
$25.0 million as compared to $5.7 million for 1994.
PROVISION FOR INCOME TAXES. Income tax benefit for 1995 was $6.2 million as
compared to the income tax provision for 1994 of $399,000. This change is
principally the result of changes in components of income and expenses discussed
above during 1995 and 1994, respectively. The Issuer's deferred tax assets
(approximately $13.9 million at December 31, 1995) relate principally to
temporary differences for amortization of original issue discount on the 1994
Notes and various accrued expenses which are not deductible until paid. No
valuation allowance has been provided because the Issuer currently believes it
is more likely than not that these assets will be realized. If future operating
results differ materially and adversely from the Issuer's current expectations,
its judgment regarding the need for a valuation allowance may change.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
REVENUE. Total revenue in 1994 was $191.0 million, a decrease of $30.0
million, or 14%, as compared to total revenue in 1993 of $221.0 million. Revenue
from domestic sales of DTH products in 1994 was $111.8 million, a decrease of
$41.0 million, or 27%, as compared to 1993. Approximately $22.8 million, or 56%,
of the decrease was due to a decline in the number of satellite receivers sold,
reduced sales of equipment and accessories typically sold in conjunction with
receivers and lower selling prices for that equipment. The Issuer also
experienced a decrease of $18.2 million in non-
52
<PAGE>
proprietary descrambler module sales during 1994, as compared to 1993. This
decrease in 1994 reflects the impact of higher than normal bulk sales of modules
to customers during 1993. The Issuer decreased its emphasis on sales of these
high cost, low margin products during 1994.
Domestically, the Issuer sold 114,000 receivers in 1994, a decline of 14%,
as compared to 1993. Two of the most important factors responsible for the
decline in the Issuer's satellite receiver sales were the unavailability of
competitive financing and a reduction in inventory as a result of the Issuer's
expectation of a decrease in DTH product sales resulting from the introduction
of DBS.
In 1994, an increasing percentage of domestic DTH satellite retailers relied
on attractive financing packages to generate sales. During most of 1994, certain
of the Issuer's competitors offered consumer financing that satellite retailers
considered more attractive than financing offered by the Issuer. This
competitive financing advantage resulted in satellite retailers selling
competing products to their customers rather than the Issuer's products.
EchoStar has entered into agreements with two national banks permitting EchoStar
to offer what it presently believes to be competitive financing terms.
Loan origination and participation income for 1994 was $3.7 million, a
decrease of $170,000, or 4%, as compared to 1993. The decrease resulted from a
decline in loan originations due to the Issuer's competitors offering retailers
financing considered more attractive than financing offered through EchoStar
prior to the new financing agreements entered into by the Issuer. The decline
was partially offset by revenue received from participation in outstanding
balances of the Issuer's financing portfolio during all of 1994. Commencing in
1995, the Issuer stopped receiving monthly participation payments on the loan
portfolio. See "Business -- Legal Proceedings." Although the Issuer believes
that it has entered into competitive financing arrangements, the Issuer expects
loan origination and participation income to be substantially reduced in the
near term.
The Issuer intends to aggressively market its current offering of C-band DTH
products by offering competitive pricing and financing in order to minimize the
decline in domestic C-band DTH sales. Although no assurances can be given, the
Issuer expects to offset the decline in domestic C-band sales with sales of its
proprietary DBS products upon commencement of its DBS service in early 1996.
Programming revenue for 1994 was $14.5 million, an increase of $3.7 million,
or 34%, as compared to 1993. The increase was primarily due to increased sales
of programming packages through satellite retailers and, to a lesser extent, the
renewal and retention of existing customers as a result of more attractive
pricing and more effective marketing.
Revenue from international DTH products for 1994 was $60.9 million, an
increase of $7.4 million, or 14%, as compared to 1993. Such increases were
primarily the result of an increase in international consumer demand for DTH
products, especially in the Middle East and the Pacific Rim, in response to
growth in available satellite television programming. The Issuer sold 289,000
satellite receivers internationally during 1994, an increase of 43%, as compared
to 1993. The effects of volume increases were partially offset by a 17% decrease
in the average selling price, as compared to 1993, due to an emphasis by the
Issuer on lower priced products in 1994 to meet marketplace demands.
Although comparative revenues from domestic sales of DTH products declined
in 1994, fourth quarter 1994 total DTH revenues increased approximately $3.3
million, or 7%, over third quarter 1994 revenues, which were $6.0 million, or
16% higher than second quarter revenues. As a result of sales of Competitor DBS
Receivers and increased international sales, fourth quarter DTH revenues of
$47.6 million were higher than any other quarter during 1994. This increase is
primarily due to an increase in domestic receiver sales to 66,000 in the second
half of 1994 compared to 48,000 in the first half of 1994, which reflects the
typically higher sales volumes during the fall season and increased sales of
Competitor DBS Receivers.
OPERATING EXPENSES. Costs of DTH products sold were $133.6 million for
1994, a decrease of $27.8 million, or 17%, as compared to 1993. Operating
expenses for DTH products as a percentage of
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DTH product revenue were 77% and 78% for 1994 and 1993, respectively. The
decrease in DTH operating expenses in 1994 resulted primarily from the 42%
decrease in non-proprietary descrambler module sales, which sell at relatively
low gross margins.
Operating expenses for programming were $11.7 million for 1994, an increase
of $2.3 million, or 25%, as compared to 1993. Operating expenses for programming
as a percentage of programming revenue in 1994 were 80% as compared to 87% in
1993. Programming revenue increased at a greater rate than operating expenses
for programming principally because of discounts available on wholesale
programming prices as a result of the increased number of subscribers and better
pricing as a result of more favorable programming contracts entered into during
1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $30.2 million in 1994 and 1993. Selling, general
and administrative expenses as a percentage of total revenue increased to 16%
for 1994 compared to 14% for 1993. The increase as a percent of total revenue is
principally the result of the reduction of domestic sales of DTH products.
Research and development costs totaled $5.9 million for 1994, as compared to
$5.1 million in 1993. The increase is principally due to additional research
necessary to provide receivers to more international markets and the initial
development of the Issuer's DBS receivers. The Issuer's expenses research and
development costs as incurred and includes such costs in selling, general and
administrative expenses.
EBITDA. EBITDA for 1994 was $15.5 million, a decrease of $4.4 million, or
22%, compared to 1993. EBITDA was 8% of total revenue for 1994, as compared to
9% of total revenue for 1993. Such decrease resulted from the factors affecting
revenue and expenses discussed above.
DEPRECIATION. Depreciation in 1994 was $2.2 million, an increase of
$566,000, or 34%, as compared to 1993. The increase primarily resulted from
purchases of manufacturing equipment and tooling during 1994 and a full year's
depreciation on equipment and tooling purchased throughout 1993.
OTHER INCOME AND EXPENSE. Other expense in 1994 was $12.7 million, an
increase of $13.3 million, as compared to 1993. The difference in other income
and expense compared to 1993 resulted primarily from the amortization of
original issue discount and deferred debt issuance costs which totaled $26.4
million on the 1994 Notes which were issued on June 7, 1994. This amount was
partially offset by $6.5 million of investment income in the 1994 Escrow Account
and capitalized interest of $5.7 million relating to the development of the
EchoStar DBS System.
PROVISION FOR INCOME TAXES. Provision for income taxes for 1994 was
$399,000, an increase of $1.8 million, as compared to 1993. This increase is
principally the result of the Issuer's subsidiaries (other than ESC) terminating
their Subchapter S corporation status effective December 31, 1993. This change
in tax status was recognized by establishing a net deferred tax asset of $1.9
million on that date for temporary differences between tax basis and amounts
reported in the Issuer's Financial Statements. The 1994 increase in the current
and long term deferred tax asset was $7.3 million, which relates principally to
the deferred deductibility of interest related to the 1994 Notes. ESC terminated
its Subchapter S corporation status effective January 1, 1994. This change in
tax status resulted in the Issuer recognizing federal and state corporate income
taxes for all of 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used by operations were $138,000 for the three month period ended
March 31, 1996 as compared to $3.8 million used by operations for the same
period in 1995. Cash used by operations for the three month period ended March
31, 1996 was mainly a result of advances to affiliates for construction and
launch of EchoStar III partially offset by deferred programming revenue received
related to the DISH Network-SM- and the sale of the majority of Competitor DBS
Receiver inventory. The Issuer expects any declines in inventory to be offset by
substantial increases in EchoStar Receiver System inventory and related
components. The anticipated increase in inventory is expected to
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negatively affect cash flow in the short term. However, as EchoStar builds its
DISH Network-SM- subscriber base, the negative affect on cash flow should be
offset by an increase in revenue attributable to sales of EchoStar Receiver
Systems and DISH Network-SM- programming. In the event subscriptions to DISH
Network-SM- programming do not meet anticipated levels, the negative affect on
cash flow will continue.
Cash flows used by operations were $21.9 million for 1995. Cash flows were
used primarily for purchases of inventory and a $10.0 million DBS inventory
deposit. The increase of approximately $19.7 million in inventory during 1995
principally represents: (i) purchase of integral components for EchoStar
Receiver Systems; (ii) a planned increase in inventory of Competitor DBS
Receivers; and (iii) an increase in international inventory to support expected
international demand. Funds necessary to increase these inventories came from
cash reserves.
Cash flows provided by operations were $24.2 million and $30.2 million for
1994 and 1993, respectively. Cash flows were mainly expended for purchases of
property and equipment in 1994 and 1993, principally in connection with
development of the EchoStar DBS System and for distributions to stockholders of
the Issuer's subsidiaries in 1993. Distributions to stockholders of the Issuer's
subsidiaries were made to pay taxes on S corporation taxable income in 1993. The
Issuer is prohibited from making further dividend payments by the terms of its
debt agreements, except in certain limited circumstances. Cash flows provided by
operations in 1994 were invested in short-term interest-bearing marketable
securities or segregated as restricted cash and marketable securities.
Certain subsidiaries of EchoStar were parties to a credit facility (the
"Credit Facility") with Bank of America Illinois. The Credit Facility expired in
May 1996 and EchoStar does not currently intend to arrange a replacement credit
facility. Instead, EchoStar is using available cash to collateralize its letter
of credit obligations, which historically was the only significant use of the
Credit Facility. At March 31, 1996, EchoStar had cash collateralized $15.5
million of certain standby letters of credit for trade purchases which is
included in restricted cash and marketable securities in the accompanying
supplemental quarterly financial information of EchoStar included elsewhere in
this Prospectus.
During June 1994, Dish, Ltd. issued 624,000 units consisting of $624.0
million principal amount of the 1994 Notes and 3,744,000 Warrants (representing
2,808,000 shares of EchoStar Class A Common Stock) for aggregate net proceeds of
approximately $323.3 million, which were placed in the 1994 Escrow Account.
Through March 31, 1996, $276.8 million had been withdrawn from the 1994 Escrow
Account. Of that amount, $28.3 million was to reimburse the Issuer for monies
expended for the construction and launch of EchoStar I and EchoStar II prior to
June 7, 1994, and will be reinvested in development of the EchoStar DBS System.
At March 31, 1996, approximately $251.9 million of these proceeds had been
applied to development and construction of the EchoStar DBS System and
approximately $24.9 million had been applied to other permitted uses. As of
March 31, 1996, approximately $63.6 million remained in the 1994 Escrow Account,
which included investment earnings.
In March 1996, the Issuer consummated a private placement of the 1996 Notes.
The Issuer was formed in January 1996 for the purpose of the 1996 Notes
Offering. EchoStar has contributed all of the outstanding capital stock of its
wholly owned subsidiary, Dish, Ltd., to the Issuer. The Issuer issued 580,000
notes consisting of $580.0 million principal amount of the 1996 Notes for
aggregate net proceeds of approximately $337.0 million of which $177.3 million
was placed in the 1996 Escrow Account and the remaining $159.7 million is
included in cash and cash equivalents in the Issuer's supplemental quarterly
financial information as of March 31, 1996, included elsewhere in this
Prospectus. Through March 31, 1996, $7.5 million had been withdrawn from the
1996 Escrow Account for development and construction of the EchoStar DBS System.
As of March 31, 1996, approximately $170.0 million remained in the 1996 Escrow
Account, which included investment earnings. Total cash on hand and marketable
investment securities at March 31, 1996 were approximately $162.9 million.
Based upon existing cash resources and expected revenue and expenses,
exclusive of DISH Network-SM- marketing expenses, EchoStar anticipates requiring
an additional $40.0 million in working
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capital in 1996 related to operations and the development of the EchoStar DBS
System. This cash requirement could increase if subscribers are not added as
planned or expenses, including subscriber acquisition costs, exceed present
levels and estimates. Additionally, in 1996, EchoStar has expended or expects to
expend: (i) approximately $125.3 million in connection with the launch of
EchoStar II and EchoStar III; (ii) approximately $46.7 million for launch
insurance on EchoStar II and EchoStar III; (iii) approximately $52.5 million for
construction of EchoStar III and EchoStar IV; (iv) approximately $8.0 million
for in-orbit payments to Martin Marietta on EchoStar I and EchoStar II; (v)
approximately $52.3 million for the purchase of DBS frequencies at 148 DEG. WL;
(vi) $10.4 million for other 1994 Escrow related expenditures related to
development of the EchoStar DBS System; and (vii) up to $95.0 million for the
introduction, product marketing and other operating expenses for the DISH
Network-SM-. Funds for these expenditures, as well as proposed expenditures
beyond 1996 related to costs expected to be incurred in connection with the
construction and launch of EchoStar's first four satellites, in an approximate
amount of $235.0 million, are expected to come from the 1996 Notes Escrow
Account, the 1994 Notes Escrow Account and available cash and marketable
investment securities. However, in order to continue development of the third
and fourth satellites beyond the second quarter in 1997, additional capital will
be required. There are no assurances that additional capital will be available,
or, if available, that it will be available on terms favorable to EchoStar.
In addition to the commitments described above, the Issuer has entered into
agreements to purchase DBS satellite receivers and related components for the
EchoStar DBS System. As of March 31, 1996 those purchase order commitments
totaled as much as $622.2 million. At March 31, 1996, the total of all
outstanding purchase order commitments with domestic and foreign suppliers was
as much as $641.3 million. All but approximately $85.9 million of the purchases
related to these commitments are expected to be made during 1996 and the
remainder is expected to be made during 1997. EchoStar expects to finance these
commitments from available cash, marketable investment securities and sales of
inventory, including the sale of EchoStar Receiver Systems and related products.
In the event price and marketing competition intensifies among DBS and other
"small dish" operators, EchoStar may be at a competitive disadvantage as a
result of its limited financial resources. EchoStar is currently test marketing
a special promotion in a limited number of markets pursuant to which customers
are able to purchase a discounted package, including an EchoStar Receiver System
and annual programming package, for below the suggested retail price. If
EchoStar elects to expand the promotion nationwide for an extended period, or if
market conditions force it to do so, EchoStar's subscriber acquisition costs
will increase substantially resulting in a significant negative impact on
EchoStar's liquidity and net income. EchoStar may therefore be required to raise
additional capital during 1996. There can be no assurance that EchoStar will be
successful raising additional capital, or whether such capital can be raised on
terms favorable to EchoStar.
EchoStar had outstanding $415.7 million and $778.6 million of long -term
debt (including the 1994 and 1996 Notes, deferred satellite contract payments on
EchoStar I and mortgage debt) as of December 31, 1995 and March 31, 1996,
respectively. In addition, because interest on the 1994 Notes is not payable
currently in cash but accretes through June 1, 1999, the 1994 Notes will
increase by $241.8 million through that date. Also, because interest on the 1996
Notes is not payable in cash but accretes through March 15, 2000, the 1996 Notes
will increase by $230.0 million through that date. Contractor financing of $28.0
million is available for EchoStar II. Interest on the contractor financing is at
the prime rate and principal payments are payable in equal monthly installments
over five years following the launch of the satellite.
AVAILABILITY OF OPERATING CASH FLOW TO THE ISSUER
The 1996 Indenture, the 1994 Indenture, and Dish, Ltd.'s short-term credit
facility impose various restrictions on the transfer of funds among EchoStar and
its subsidiaries, including the Issuer. Subject to these restrictions, EchoStar
intends to cause its subsidiaries to execute various intercompany agreements to
effect the sharing of personnel and assets, including satellites and license
rights,
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that form an integral part of the EchoStar DBS System. These agreements are
expected to take the form of management agreements (for use of personnel) and
lease agreements (for use of assets) which will have a principal objective of
effecting an equitable allocation of revenues and costs associated with
operating the DISH Network-SM-.
Although the Notes are collateralized by the stock of Dish, Ltd., the stock
of a direct subsidiary of EchoStar, various assets expected to form an integral
part of the EchoStar DBS System (and not otherwise encumbered by the 1994
Indenture), and guarantees of EchoStar and certain of its other subsidiaries,
the Issuer's ability to fund interest and principal payments on the Notes will
depend on successful operation of the DISH Network-SM- and the Issuer having
access to available cash flows generated by the DISH Network-SM-. If cash
available to the Issuer is not sufficient to service the Notes, EchoStar would
be required to obtain cash from other sources such as asset sales, issuance of
equity securities, or new borrowings. There can be no assurance that those
alternative sources would be available, or available on favorable terms, or
sufficient to meet debt service requirements on the 1996 Notes.
ASSETS OF PRINCIPAL GUARANTORS
EchoStar guarantees the 1996 Notes on a subordinated basis. EchoStar's
initial public offering of Class A Common Stock in June 1995 resulted in net
proceeds of approximately $63.0 million. EchoStar's assets at March 31, 1996
included assets purchased with those proceeds and cash remaining from the Equity
Offering. Substantially all of the proceeds from the Equity Offering were used:
(i) to secure launches for a third and fourth satellite; (ii) to support,
through loans to DBSC, construction of a third satellite; (iii) to purchase, for
$4.0 million, convertible subordinated secured debentures from DBS Industries,
Inc.; and (iv) for general corporate purposes, including the down payment, for
DBS frequencies purchased at 148 DEG. WL at the FCC Auction in January 1996,
which will be reimbursed with the proceeds of the 1996 Notes Offering.
OTHER
1994 AND 1996 NOTES
EchoStar I was successfully launched by Great Wall in December 1995. In the
event of a launch failure of EchoStar II, Dish, Ltd. would first be required
under the 1994 Notes Indenture to make an offer to repurchase one-half of the
then accreted value of the 1994 Notes. In the event that EchoStar does not have
the right to use orbital slot authorizations granted by the FCC covering a
minimum of 21 transponders at a single full CONUS orbital slot, the Issuer and
Dish, Ltd. will be required to make an offer to repurchase all or a portion of
the outstanding 1996 Notes and 1994 Notes, respectively. Additionally, in the
event that EchoStar DBS Corporation, a wholly owned subsidiary of EchoStar,
fails to obtain authorization from the FCC for frequencies purchased at the FCC
Auction in January 1996, or in the event that such authorization is revoked or
rescinded, the Issuer will be required under the 1996 Notes Indenture to
repurchase the maximum principal amount of the 1996 Notes that may be purchased
with the proceeds of any refund received from the FCC.
If the DBSC Merger or similar transaction does not occur on or before March
1, 1997, the Issuer will be required to repurchase at least $83.0 million
principal amount of the 1996 Notes. Further, in the event that EchoStar incurs
more than $7.8 million in expenses (as defined in the 1996 Notes Indenture) in
connection with the DBSC Merger, the Issuer will be required to apply an amount
equal to such expenses minus $7.8 million to an offer to repurchase the maximum
principal amount of the 1996 Notes that may be purchased out of such proceeds.
If any of the above described events were to occur, EchoStar's plan of
operations, including its liquidity, would be adversely affected and its current
business plan could not be fully implemented. Further, EchoStar's short-term
liquidity would be adversely affected in the event of: (i) significant delay in
the delivery of certain products and equipment necessary for operation of the
EchoStar DBS System; (ii) shortfalls in estimated levels of operating cash
flows; or (iii) unanticipated expenses in connection with development of the
EchoStar DBS System.
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RECEIVER MANUFACTURERS
EchoStar has agreements with two manufacturers to supply DBS receivers for
EchoStar. To date, only one of the manufacturers has produced a receiver
acceptable to EchoStar. That manufacturer is presently manufacturing receivers
in quantities sufficient to meet expected demand. No assurances can be given
that EchoStar's other manufacturer will be able to produce an acceptable
receiver in the future. Until the other manufacturer produces a receiver
acceptable to EchoStar, EchoStar is dependent on one manufacturing source for
its receivers. To date, EchoStar has paid the nonperforming manufacturer $10.0
million and has an additional $15.0 million in an escrow account as security for
EchoStar's payment obligations under that contract. If that manufacturer does
not produce an acceptable receiver in the near future, EchoStar may terminate
that contract, which would cause longer term dependence on a single
manufacturing source. If EchoStar's sole manufacturer is unable for any reason
to produce receivers in a quantity sufficient to meet demand, EchoStar's
liquidity and results of operations may be adversely affected. If the contract
with EchoStar's other manufacturer is terminated, there can be no assurance
EchoStar would be able to recover all amounts paid the manufacturer.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment Of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). EchoStar
has adopted SFAS No. 121 in the first quarter of 1996 and its adoption has not
had a material impact on EchoStar's financial position, results of operations or
cash flows.
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), issued by FASB in October 1995 and
effective for fiscal years beginning after December 15, 1995, encourages, but
does not require, a fair value based method of accounting for employee stock
options or similar equity instruments. It also allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), but requires
pro forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. EchoStar has adopted SFAS No. 123
in the first quarter of 1996 and has elected to continue to measure compensation
cost under APB No. 25 and to comply with the pro forma disclosure requirements.
Therefore, this statement has had no impact on EchoStar's results of operations.
IMPACT OF INFLATION; BACKLOG
Inflation has not materially affected EchoStar's operations during the past
three years. EchoStar believes that its ability to increase charges for products
and services in future periods will depend primarily on competitive pressures.
EchoStar does not have any material backlog of its products.
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BUSINESS
GENERAL
EchoStar was incorporated in Nevada during 1995 in connection with a
reorganization of a group of businesses under common control, the first of
which, Echosphere Corporation ("Echosphere"), was incorporated in 1980. Since
its incorporation, Echosphere, directly or indirectly, has been engaged in the
design, manufacture, distribution and installation of DTH products, domestic
distribution of DTH programming and consumer financing of EchoStar's domestic
DTH products and services. A subsidiary of EchoStar was granted a conditional
satellite construction permit, a specific orbital slot assignment and frequency
assignments by the FCC in 1989 to provide DBS service.
EchoStar successfully launched its first DBS satellite, EchoStar I, in
December 1995. EchoStar is one of only two companies with United States licensed
operational capacity sufficient to provide comprehensive nationwide DBS
programming service in 1996. Currently, EchoStar offers over 100 channels of
high quality digital video and audio programming to the entire continental
United States. EchoStar's DISH Network-SM- service is expected to expand to
approximately 200 digital video and audio channels following the successful
launch of its second DBS satellite this fall.
EchoStar will target approximately 110 million potential subscribers in the
continental United States, including approximately 96 million television
households. DISH Network-SM- subscribers can choose from a variety of
programming packages which EchoStar believes will have a better price-to-value
relationship than packages currently offered by most pay television providers.
For example, the entry level programming package America's Top 40-SM- is priced
at $19.99 per month and consists of 40 of the top "expanded basic cable"
channels, including a conventional premium service, The Disney
Channel-Registered Trademark-. EchoStar will also offer various regional sports
networks numerous premium services, pay-per-view programming and, following the
launch of a second satellite, additional premium services and expanded
pay-per-view offerings. EchoStar has negotiated affiliation agreements with
major content providers, giving it the right to broadcast substantially all of
the most popular programming, including ESPN-Registered Trademark-,
MTV-Registered Trademark-, Nickelodeon-Registered Trademark-,
VH-1-Registered Trademark-, Showtime Network-Registered Trademark-, The Disney
Channel-Registered Trademark-, USA Network-Registered Trademark-,
CNN-Registered Trademark-, Headline News-Registered Trademark-, TNT-SM-, CNN
International-SM-, Turner Classic Movies-Registered Trademark-, The Discovery
Channel-Registered Trademark-, A&E-SM-, HBO-Registered Trademark-,
Cinemax-Registered Trademark-, Lifetime Television-SM-, The Family
Channel-Registered Trademark-, C-Span-Registered Trademark-,
CNBC-Registered Trademark-, and many other programming services. EchoStar also
provides a user-friendly on screen programming guide, or navigator, facilitating
the management of current and future program offerings by consumers.
EchoStar believes that it will have access to more U.S. licensed DBS
frequencies than any of its competitors. EchoStar controls, or will control
(subject to certain FCC approvals and findings) as many as 90 such frequencies,
including 21 frequencies at one of the three U.S. licensed orbital slots
currently capable of providing nationwide DBS service. See " Industry Overview
DBS Industry." EchoStar believes that access to this substantial amount of DBS
spectrum will enable it to achieve higher subscriber penetration and higher
revenue per subscriber than would otherwise be possible. EchoStar currently
plans to use this spectrum to offer a substantial number of additional video
channels, including alternate time zone feeds of popular expanded basic cable
programming, multiplexed premium movie services, frequent start pay-per-view,
local programming for the largest local U.S. television markets, niche and
foreign language programming, professional and college sporting events, HDTV,
business and educational programming and high-speed transmission of Internet
data.
The introduction of DBS receivers is widely regarded as the most successful
introduction of a consumer electronics product in U.S. history, surpassing the
rollout of color televisions, VCRs and compact disc players. During the 18
months ended December 31, 1995, approximately 2.2 million U.S. households
subscribed to DTH satellite service. According to an industry study performed
during late 1995, 85% of all consumers are satisfied with DBS picture quality,
compared to a consumer satisfaction level of approximately 47% for cable.
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Of the approximately 96 million television households in the United States,
it is estimated that approximately 60 million subscribers pay an average of $33
per month for multichannel programming services. EchoStar believes that there is
significant unsatisfied demand for high quality, reasonably priced television
programming. Although primary markets for the EchoStar DBS System are likely to
include the approximately 11.0 million households not passed by cable television
systems and the approximately 20.4 million households currently passed by cable
television systems with relatively limited channel capacity, EchoStar also
expects to target cable subscribers in urban and suburban areas who are
dissatisfied with the quality or price of their cable programming.
DISH Network-SM- programming is available to any subscriber who purchases or
leases an EchoStar receiver system, which includes an 18-inch satellite dish, a
digital satellite receiver, a user-friendly remote control and related
components (an "EchoStar Receiver System"). The suggested retail price of an
EchoStar Receiver System is currently between approximately $499 and $599,
depending on the model selected by the customer, among other factors. Dealer
incentives and EchoStar sponsored promotions may reduce the actual cost of an
EchoStar Receiver System below the suggested retail price. The initial capital
cost required to receive DISH Network-SM- programming may reduce the demand for
EchoStar Receiver Systems, since EchoStar Receiver Systems must be purchased,
while cable and certain of EchoStar satellite competitors lease their equipment
to the consumer with little if any initial hardware payment required. EchoStar
is currently test marketing a special promotion in a limited number of markets
pursuant to which customers are able to purchase a discounted package, including
an annual programming package for $300 (which is comparable to the price for a
similar package of cable programming), and EchoStar Receiver System for $199. If
EchoStar elects to expand the promotion nationwide for an extended period, or if
market conditions force it to do so, the initial capital investment relative to
cable will be greatly reduced. In this event, EchoStar's subscriber acquisition
costs will increase substantially, potentially resulting in a significant
negative impact on EchoStar's liquidity and net income.
The EchoStar Receiver System is fully compatible with MPEG-2, the world
digital standard for computers and consumer electronics products, and provides
image and sound quality superior to current analog cable or MMDS television
services. EchoStar intends to market EchoStar Receiver Systems through its
nationwide network of approximately 3,000 independent distributors and
retailers. EchoStar is also currently engaged in discussions with brand name
consumer electronics equipment manufacturers for the production and distribution
of EchoStar Receiver Systems through national consumer electronics retailer
networks. EchoStar is also negotiating with a number of mass merchandisers,
direct sales organizations and consumer electronics retailers for other
distribution paths for EchoStar Receiver Systems.
STRATEGY
EchoStar's primary objective is to become one of the leading providers of
pay television services in the United States. EchoStar's strategy to achieve
this objective is to:
- Provide subscribers with more quality programming at lower price points
than other pay television providers.
- Utilize its large and established independent retail network to obtain
substantial market share in rural areas and areas served by cable systems
with relatively limited channel capacity.
- Employ world standard MPEG-2 digital technology to achieve lower
manufacturing costs and assure superior product capability, including
compatibility with other consumer electronics products.
- Expand consumer electronics retail distribution through relationships with
major retailers or through licensing arrangements with brand name consumer
electronics manufacturers.
- Provide superior customer service by furnishing a single source to
purchase DISH Network-SM- hardware and programming and to obtain
financing, installation and customer care.
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- Deploy satellites at additional DBS orbital slots to expand EchoStar's
product offerings with complementary video, data and interactive products.
DBS is the most efficient, least capital intensive means of reaching the
largest number of U.S. television households. EchoStar's first two satellites
will transmit high quality, digital television to the entire continental United
States for a capital cost of less than $500 million, or approximately $5 per
television household, permitting profitability with relatively low market
penetration. EchoStar believes that its strategy, together with the ability to
exploit the more favorable cost structure and the lower invested capital
requirements of DBS relative to other pay television providers, will enable
EchoStar to achieve its objectives.
In addition to the DBS business, EchoStar is engaged in the design,
manufacture, distribution and installation of DTH products, domestic
distribution of DTH programming and consumer financing of EchoStar's domestic
DTH products and services. During the six years ended December 31, 1995,
EchoStar sold over 1.7 million DTH receivers worldwide.
The elements of EchoStar's strategy are discussed below.
LOWER PRICED PROGRAMMING PACKAGES
As a result of the generally lower invested capital required of digital DBS
operators relative to cable television operators, EchoStar believes it is
currently one of the lowest cost providers of nationwide pay television
programming. Unlike cable television, DBS does not require access to public
rights-of-way, multiple origination facilities (commonly known as head-ends) or
ground construction to install, maintain or upgrade services, thus eliminating a
major portion of the significant capital required to operate a technologically
advanced cable television system. Cable industry trade groups and research
associations report that significant capital expenditures would be necessary to
upgrade existing analog coaxial cable television systems to digital fiber optic
technology. These expenditures are estimated to exceed $900 per subscriber. As a
result, EchoStar believes that DISH Network-SM- services are generally less
expensive than cable television subscriptions, while providing better video
quality, access to more channels and greater choice in programming packages.
EchoStar believes that cable companies generally will be unable or unwilling to
lower their prices to subscribers given the higher implicit cost of the
infrastructure necessary to deliver programming to their customers as compared
to DBS programming.
While wireless cable operators currently provide an analog signal, with
limited capacity and inferior image and sound quality compared to DBS, it is
expected that most large market operators backed by local telephone companies
will upgrade to digital technology over the next several years. In order to
implement this upgrade those operators will be required to install digital
decoders in each customer's home at a cost comparable to the cost of an EchoStar
DBS receiver and make certain modifications to their transmission facilities.
The cost of this digital upgrade will be significant and will have to be
amortized over a smaller base of potential customers.
EchoStar's low cost infrastructure and high channel capacity due to digital
compression enables the DISH Network-SM- to offer a wide variety of programming
packages at attractive price points. The DISH Network-SM- offers a variety of
programming packages including popular cable television networks. The America's
Top 40-SM- programming package, which includes a conventional premium service,
The Disney Channel-Registered Trademark-, is priced at $19.99 per month. This
package includes a diverse range of programming including news, sports, general
entertainment, movies, and family programming and will represent a competitive
value. The America's Top 40 Premium Plus-SM- package, priced at $29.99 per
month, and the America's Top 40 Deluxe Plus-SM- package, priced at $39.99 per
month, includes the America's Top 40-SM- package combined with one and two
multiplexed premium services, respectively, including HBO-Registered Trademark-,
Cinemax-Registered Trademark- and Showtime-Registered Trademark-. According to
industry reports and trade press, multiplexed premium services, which include
three to five channels per service for the same retail price as one service,
have proven to be popular with consumers. Additional packages and combinations
are expected, including superstations, network programming and regional sports
offerings. The DISH
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Network-SM- offers pay-per-view movies and niche services on an "a la carte"
basis. EchoStar plans to package its EchoStar Receiver System and programming
and offer discounts to customers who purchase packages during certain
promotions. EchoStar's pay-per-view strategy focuses on the premier movie titles
which generate substantial viewer interest and, consequently, higher revenues
and margins.
ESTABLISHED INDEPENDENT RETAIL NETWORK
EchoStar has an established nationwide network of approximately 3,000
independent full-service distributors and retailers of DTH and DBS satellite
products and services that has been developed over the past 15 years. Based on
its relationships with these retailers and its knowledge of distribution
channels from marketing DTH products and competitor's DBS products, EchoStar
believes that it has a competitive advantage over other DBS providers in
marketing the DISH Network-SM-. EchoStar offers a commission program based on
sales of hardware and programming that it believes is competitive with
commissions programs offered by other DTH operators. In addition to utilizing
this retailer network, EchoStar will target other distribution channels,
including national consumer electronic outlets, direct sales organizations and
mass merchandisers.
ADOPT SECOND GENERATION DIGITAL TECHNOLOGY
The EchoStar DBS System is fully compatible with MPEG-2 digital compression
technology, the world standard for computers and digital consumer electronics
and products. MPEG-2 compatibility gives EchoStar the advantage of seamlessly
interfacing with future digital consumer electronics and computer products. This
compatibility will generally result in lower costs to consumers as more
manufacturers use common components to design their products.
DEVELOP CONSUMER ELECTRONICS RETAIL DISTRIBUTION
EchoStar is currently in discussions with large brand name consumer
electronics companies to manufacture and provide greater retail distribution of
EchoStar Receiver Systems. EchoStar believes that these companies are interested
in manufacturing EchoStar DBS compatible equipment because of the opportunity to
package the receiver with an array of new digital consumer electronics products,
including HDTV, audio and video playback equipment and personal computers. These
manufacturers may also augment EchoStar's distribution through channels such as
consumer electronics outlets and mass merchandisers.
EchoStar is also actively pursuing, and has entered into several agreements
with, mass merchants, discount clubs and certain major retailers to distribute
EchoStar Receiver Systems and DISH Network-SM- programming. From these
discussions, EchoStar believes that these retailers have an interest in
retailing EchoStar Receiver Systems due to its differentiated program offerings.
EchoStar currently has agreements with SCI Systems, Inc. ("SCI") (the world's
largest electronics contract manufacturer) and Sagem Group ("Sagem") (a major
European consumer electronics equipment manufacturer) to manufacture DBS
receivers to be distributed through its retail network. To date, only SCI has
produced a receiver acceptable to EchoStar, and SCI is presently manufacturing
receivers in sufficient quantities to meet expected demand. No assurance can be
given that Sagem will be able to produce an acceptable receiver in the future.
Until Sagem produces a receiver acceptable to EchoStar, EchoStar is dependent on
one manufacturing source for its receivers. If SCI is unable for any reason to
produce receivers in a quantity sufficient to meet demand, EchoStar's liquidity
and results of operations may be adversely affected.
INTEGRATED CUSTOMER SERVICE
EchoStar provides customer service competitive with other DTH operators by
offering integrated customer care through a single point of contact. By calling
1-800-333-DISH, customers can purchase hardware and programming, schedule
installation, obtain technical support, make inquiries regarding their accounts
and receive information about the DISH Network-SM-. In order to maximize its
customer service, EchoStar will maintain its own call center and has also
contracted with industry leader Electronic Data Systems Inc. ("EDS"), to provide
call center services. In contrast, DirecTv and
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USSB subscribers must make two separate telephone calls to subscribe to typical
popular programming combinations (one for DirecTv programming and one for USSB
programming), and a separate call for hardware customer service.
DEPLOY SATELLITES TO EXPAND PRODUCT OFFERINGS
EchoStar expects to utilize its substantial DBS capacity to offer expanded
product offerings to its customers, including video, data, and interactive
products. EchoStar currently plans to launch three additional satellites,
EchoStar II, EchoStar III, and EchoStar IV, by 1998. EchoStar currently plans to
use this capacity to offer a substantial number of additional video channels,
including basic and premium cable, frequent start pay-per-view, local
programming to the largest U.S. television markets, niche and foreign language
programming, extensive professional and college sports events, HDTV, business
and educational programming and high-speed transmission of Internet data.
INDUSTRY OVERVIEW
DBS INDUSTRY
DBS, as used in this Prospectus, describes a high power satellite broadcast
service in the Ku frequency band which by international agreement has been
assigned unique nine degree orbital spacing permitting higher powered
transmissions which can be received on an 18-inch satellite dish. Other DTH
services include FSS, which describes low power (C-band) and medium power
(Ku-band) satellite services. Small dish size generally increases consumer
acceptance and provides a substantial competitive advantage over other DTH
services.
Although the concept of DBS was introduced in 1982, it did not become
commercially viable until the last several years because available satellite
technology did not allow for the power required to transmit to small dishes and
digital compression technology had not been adequately developed. Today, DBS
provides the most cost efficient national point to multi-point transport of
video, audio and data services. The advent of high powered satellites allows for
18-inch dishes and digital compression technology permits the broadcast of up to
ten channels of programming per transponder.
Eight DBS orbital slots, each with 32 frequencies, have been or will be
allocated by the FCC for use by domestic DBS providers. The FCC has indicated
its belief that only the 101 DEG. WL, 110 DEG. WL and 119 DEG. WL slots provide
full CONUS coverage and, therefore, these three slots are considered the most
strategic. With respect to a fourth orbital position, 61.5 DEG. WL, difficulties
with "look angles," among other factors, may make full CONUS DBS service from
that orbital position commercially impractical.
The FCC has issued or is expected to issue licenses or construction permits
for DBS orbital locations as follows.
<TABLE>
<CAPTION>
FREQUENCY ALLOCATIONS FOR U.S. DBS ORBITAL SLOTS
TOTAL ------------------------------------------------------------------------------
FREQUENCIES 61.5 DEG. 101 DEG. 110 DEG. 119 DEG. 148 DEG. 157 DEG. 166 DEG. 175 DEG.
-----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EchoStar (1)....................... 90 11 1 21 24 1 32
DirecTv............................ 54 27 27
MCI................................ 28 28
Continental........................ 22 11 11
Tempo.............................. 22 11 11
Dominion (2)....................... 16 8 8
USSB............................... 16 5 3 8
Unassigned......................... 8 2 5 1
-- -- -- -- -- -- -- --
---
Totals......................... 256 32 32 32 32 32 32 32 32
-- -- -- -- -- -- -- --
-- -- -- -- -- -- -- --
---
---
</TABLE>
- ------------------------
(1) Includes one frequency at 110 DEG. WL, 10 frequencies at 119 DEG. WL and 11
frequencies at 175 DEG. WL as a result of EchoStar's December 1994 merger
with DirectSat. Excludes the five frequencies at 119 DEG. WL for which
EchoStar has an STA. Also includes 11 frequencies at 61.5 DEG. WL and 11
frequencies at 175 DEG. WL controlled by DBSC. EchoStar has filed an
application requesting FCC approval for the merger of DBSC with a subsidiary
of EchoStar. In January 1996, EchoStar entered the winning bid in the FCC
Auction for 24 frequencies at 148 DEG. WL. See "Prospectus Summary--
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Recent Developments." EchoStar believes it will be assigned an additional 10
frequencies at 175 DEG. WL and one frequency at 166 DEG. WL, if the FCC
finds that EchoStar has a firm satellite construction contract, but there is
no assurance in this regard. EchoStar has not yet developed a business plan
for the 175 DEG. WL orbital slot, which has limited utility for service to
the continental U.S.
(2) Dominion has appealed the FCC's decision refusing to reconsider the
cancellation of Dominion's claim to eight frequencies at the 119 DEG. WL
orbital slot. In the event Dominion's FCC appeal is successful, Dominion
would forego any rights to frequencies at 61.5 DEG. WL.
In the event EchoStar is unable to raise substantial additional capital,
EchoStar may not be able to retain all of the licenses or construction permits
granted to it by the FCC. There can be no assurances that additional capital
will be available, or if available that it will be available on terms favorable
to EchoStar.
As of the date of this Prospectus, only EchoStar and DirecTv have
authorizations for more than 11 frequencies in the strategic U.S. licensed
orbital slots which provide for full CONUS coverage. In the FCC Auction, MCI
entered the winning bid to acquire the permit for 28 of 32 frequencies at the
110 DEG. WL orbital slot. Issuance of the permit is subject to FCC approval.
EchoStar presently expects that MCI will be able to offer DBS services from this
slot within approximately two years or possibly sooner. See "Risk
Factors--Competitive Nature of the Industry" and "--Competition--DBS
Industry--Other DBS Operators."
Programming for DBS is generally available from the majority of programmers
on the same terms as are offered to cable operators. The Cable Act, subject to
certain exceptions, requires programmers controlled by integrated cable
companies to offer programming to all potential buyers on fair and reasonable
terms. Additionally, although not required by law, in EchoStar's experience,
substantially all unaffiliated programmers have made their programming available
on fair and reasonable terms. Pay-per-view programming has also generally been
made available to DBS providers on substantially the same terms and conditions
as are available to cable operators. See "Risk Factors--Risks of Adverse Effects
of Government Regulation."
As of June 10, 1996, EchoStar had approximately 50,000 subscribers to DISH
Network-SM- programming.
C-BAND/DTH INDUSTRY
The DTH industry provides satellite television products and services,
including hardware and software for the reception and decryption of satellite
television programming. Currently, the majority of satellite programming is
transmitted at the C-band radio frequency, which typically requires dish sizes
ranging from six to 12 feet in diameter, depending upon geographic location.
This large dish compensates for a relatively low (under 20 Watts per
transponder) power signal. As of December 31, 1995, approximately 4.2 million
C-band systems had been sold in the United States at an average price of over
$2,000.
THE MARKET
GENERAL
EchoStar believes that there is a significant unsatisfied demand for high
quality, reasonably priced television programming and that the domestic and
international markets for satellite products and services are growing as a
result of the following continuing fundamental characteristics: (i) cable
infrastructure is either weak or non-existent in many domestic and international
areas; (ii) a high percentage of current pay television subscribers are
dissatisfied with their current programming choices, service or pricing; (iii)
distribution of television programming to national, regional and international
audiences is increasing; and (iv) technological advancements, such as higher
powered satellites and digital compression, have continued. Although many cable
operators are expected to commit significant capital to upgrade their systems to
a competitive digital configuration, EchoStar believes that cable operators will
focus upgrades on the nation's top twenty to fifty television markets
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and will largely ignore the rural areas which are among EchoStar's primary
target markets. Although EchoStar believes major upgrade programs will occur in
the top television markets, many of those markets have a divergent group of
cable operators with varying strategic initiatives. EchoStar believes this
fragmentation will work in EchoStar's favor as it attempts to gain market share
in these areas. Additionally, to match the digital offerings expected by
EchoStar, cable operators or customers must make an investment in a digital
receiver similar to the receiver to be offered by EchoStar.
EchoStar believes that the demand for satellite television services in the
U.S. has grown and will continue to grow and that the DISH Network-SM- provides
the most attractive alternative to cable. While the high-power DBS share of the
U.S. television market is currently small compared to cable, it has been
steadily increasing. Industry studies indicate that a substantial number of
consumers are dissatisfied with cable television, that former cable subscribers
who subscribe to a DBS system are more satisfied with it than cable. This
research also indicates that the most likely DBS customers are homeowners with
families who currently have or have had cable, subscribed to the premium cable
channels and consider television a significant component of their entertainment
activities. EchoStar believes, based on this research, that the following
factors will contribute to the market growth of the DISH Network-SM-.
DEMAND FOR MORE CHOICE IN TELEVISION PROGRAMMING AND BETTER QUALITY PICTURE
AND SOUND. Prior to the growth of cable television services, television viewers
were offered a relatively limited number of channels. As the number of channels
increased, consumer demand for more programming choices also increased. EchoStar
expects this trend will continue and that consumers will desire even more
programming choices than are available through cable. EchoStar believes
consumers are also increasingly demanding improved picture quality compared to
what has historically been offered by over-the-air VHF and UHF broadcasters and
by cable. EchoStar believes that the EchoStar DBS System is well-positioned to
benefit from these growing demands.
WEAK CABLE INFRASTRUCTURE. There are many rural areas of the United States
with either limited capacity of less than 39 channels or no cable television
availability. Of the approximately 11,000 cable systems in the United States,
many are located in rural areas outside significant population centers. The cost
to upgrade these systems would be significant and, in many cases, economically
unfeasible in a competitive environment. Since DTH satellite is the most
economical way to deliver programming, EchoStar believes that rural areas
provide a prime market for its satellite television products and services.
DISSATISFIED CABLE SUBSCRIBERS. EchoStar believes that a substantial number
of current cable subscribers are dissatisfied with the quality of picture and
sound, limited channel capability, complicated multi-tier packaging, cost of
service, and level of customer service provided by their cable systems. Industry
research has indicated that the number of cable subscribers dissatisfied with
cable television is significant. EchoStar believes that those cable subscribers
represent a substantial market opportunity and will potentially be attracted to
its DBS service.
INCREASED DISTRIBUTION OF TELEVISION PROGRAMMING. The global television
market is experiencing significant growth, both in terms of the number of
broadcasters creating programming and the number of channels available to
viewers. Within the United States, the number of television programming
providers grew from three in 1970 to in excess of 200 currently. Similarly,
deregulation in other countries has fostered the entry into the market of
additional television broadcasters. The number of television channels and
viewing alternatives available to United States and international audiences is
expected to continue to grow dramatically.
EchoStar believes that national broadcasters and other service providers
will expand their use of satellites to distribute programming to national,
regional and international audiences. Major United States programmers are
undertaking efforts to transition from their current limited international roles
to global entertainment providers. In addition, EchoStar believes that
international broadcasters will expand their use of satellites to distribute
programming to domestic audiences of similar
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ethnic, linguistic or cultural heritage, a cornerstone of EchoStar's niche
programming strategy. This programming is provided more economically by
utilizing satellite television systems rather than local cable and other
programming delivery systems.
Likewise, consumer demand for additional programming choices has increased
as the availability of channels has increased. EchoStar believes that this trend
will continue and consumers will demand more programming choices than those
offered by their cable systems.
CONTINUING TECHNOLOGICAL ADVANCEMENTS. Recent technological advancements,
such as the advent of high powered satellites (which made possible the reduction
in the size of satellite dishes) and the development of digital compression
technology, have increased signal transmission capacity and lowered costs.
THE MARKET FOR DBS
EchoStar believes that the potential United States DBS market includes the
approximately 96 million households with television sets, together with
approximately 8.0 million businesses, 4.8 million commercial trucks, 3.0 million
recreational vehicles and 200,000 schools, libraries and other institutions that
desire access to high quality video, audio and data programming. Based upon
recent statistics approximately 64% of the 96 million United States households
with television sets currently pay for programming. Given the anticipated
relative low cost and greater programming choices of EchoStar's DBS service
compared to cable, EchoStar believes that it will be able to successfully
penetrate its target markets.
EchoStar also believes that, as a result of the large base of potential
customers, the EchoStar DBS System will be commercially viable even if only low
market penetration levels are achieved in any particular target market. EchoStar
has identified the following specific market segments as primary targets for
DBS:
NON-PASSED HOUSEHOLDS. One of the primary targets for EchoStar's DBS
services will be United States households with television sets that are not
presently passed by cable -- a total of approximately 11 million homes. Of
these, in excess of 2 million are former cable subscribers who have relocated
and do not currently subscribe because cable is unavailable to them at their new
residences. The subscribers who are unserved by cable are generally located in
sparsely populated rural and remote areas beyond the economic reach of cable
systems. These households also include second homes. This market presents an
opportunity for DBS providers because, unlike cable service, the economics of
delivering DBS service are not affected by population density or remoteness, and
the same service can be provided to subscribers in such areas on the same basis
as provided in densely populated urban areas. Although C-band satellite
television services are available throughout the country, EchoStar believes that
many non-passed households settle for local broadcasting due to the size and
cost of C-band satellite dishes. EchoStar believes that non-passed households
will respond favorably to the availability of programming services, especially
to economically priced DBS services and reception equipment.
HOUSEHOLDS PASSED BY CABLE. EchoStar also intends to target the 85 million
households that are passed by cable television, including the 20.4 million
households that are passed by cable systems offering limited channel capacity
(less than 39 channels). Although programming offerings of cable systems in
major metropolitan areas are significant, most cable systems have a typical
analog capacity of 30 to 80 channels. In order to expand their capacity to that
to be offered by the DISH Network-SM-, EchoStar believes that cable systems
would have to upgrade their analog networks to fiber-based digital service.
Fiber upgrade implementation is in progress in a few cable systems in select
metropolitan markets, with a resultant increase of channel capacity anticipated
to be available in five to ten years. Due to the substantial capital investment
required for widescale deployment of fiber-based services, several cable
companies have pushed back originally-announced deployment schedules.
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EchoStar believes that consumers will continue to demand the improved audio and
video quality, and expanded programming offerings, that are currently available
with DBS technology, but not available from over-the-air VHF and UHF
broadcasters or from cable.
INTERNATIONAL AND CULTURAL MARKETS. There are approximately 8.0 million
households headed by persons of foreign nationality living in the United States,
encompassing 22.6 million foreign born persons living in the United States.
Generally, it is not cost effective for traditional broadcasters or cable
companies to provide targeted programming to these households due to the
generally low number of such niche customers in any particular local market.
These customers, along with other customers interested in receiving
international and other cultural programming, will be an important target market
for EchoStar. EchoStar's incremental cost to provide multicultural programming
is relatively insignificant given the ability of digital DBS service to utilize
a national delivery system for all mainstream and multicultural programming.
EchoStar believes that, by directly marketing international programming to these
customers, it will also sell more of its most popular programming.
MOBILE, COMMERCIAL AND INSTITUTIONAL MARKETS. Other target markets for DBS
services include mobile, commercial and institutional markets. Already, many
recreational vehicle owners have purchased C-band satellite dishes. Management
believes that lower equipment prices and the smaller dish size will attract many
more recreational vehicle owners to DBS service, similar to the current
experience in Europe. EchoStar also believes that businesses, hotels,
restaurants, schools, libraries, apartment buildings and other commercial and
institutional organizations will purchase EchoStar's DBS programming and
equipment in order to receive educational, foreign language and niche video and
audio programming. EchoStar also intends to market its DBS service to the marine
and other mobile markets requiring actuated systems.
BUSINESS COMMUNICATION NETWORKS. EchoStar also intends to target
professional and related business groups as potential markets for its
programming services. Such groups include multi-level marketing organizations
and legal, medical, accounting and real estate professionals, among others.
CURRENT EXPERIENCE OF DIGITAL DTH OPERATORS
The digital DTH satellite business in the United States has experienced
tremendous consumer acceptance. The introduction of DBS receivers is widely
regarded as the most successful introduction of a consumer electronics product
in U.S. history, surpassing the roll out of color televisions, VCRs and compact
disc players. During the 18 month period ended December 31, 1995, approximately
2.2 million U.S. households subscribed to digital DTH satellite service. DBS
providers have been successful penetrating households both passed and not passed
by traditional cable operators. According to one DBS service provider,
approximately 50% of its subscribers are passed by traditional cable operators.
Approximately 50% of those were actually subscribing to cable at the time they
chose to subscribe. EchoStar has also been encouraged by the willingness of
early DBS subscribers to pay relatively high monthly programming fees.
Subscribers are currently paying an average of approximately $50 per month for
DBS programming, as compared to approximately $33 per month for the average
cable subscription. According to industry estimates, 85% of all consumers are
satisfied with DBS picture quality compared to a consumer acceptance rate of
approximately 47% for cable.
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DBS AND RELATED SERVICES
PROGRAMMING
EchoStar currently offers over 100 channels of digital video and audio
programming directly to its subscriber base including, but not limited to, the
following:
EXPANDED BASIC CABLE CHANNELS
<TABLE>
<S> <C>
USA Original series, movies, high profile sports and animated
children's programming.
TBS Movies, documentaries, comedies, children's shows and
sports, including the NBA and Atlanta Braves baseball.
TNT Classic and original movies, NFL and comprehensive NBA
schedule.
ESPN Wide variety of sports programming including the NFL, NHL
and MLB.
CARTOON NETWORK Programming from the Hanna Barbera cartoon library.
NICKELODEON Top rated children's programming.
A&E Cultural and entertainment programming.
LIFETIME Movies, specials and feature films targeted to women.
CNN In-depth news and commentary.
THE DISCOVERY CHANNEL Non-fiction entertainment and documentaries.
THE FAMILY CHANNEL Family-oriented entertainment.
MTV Music video and entertainment network.
SCI-FI CHANNEL Science fiction, fantasy, classic horror and factual
science programming.
THE LEARNING CHANNEL Diverse mix of how-to, cooking, science, history and
educational shows.
CNBC Late breaking market news and personal finance
information.
COURT TV News from courtrooms around the world.
C-SPAN Coverage of U.S. congressional events and public affairs.
ESPN2 Differentiated sports programming targeting younger
viewers, including the NHL.
HEADLINE NEWS Concise, fast-paced 30 minute news updates.
CNN FN Comprehensive business and financial news.
CNN INTERNATIONAL International news, sports and weather.
TURNER CLASSIC MOVIES Movies, special features and entertainment.
E! Programming from the world of celebrities and
entertainment.
THE WEATHER CHANNEL Local, national and international weather.
THE TRAVEL CHANNEL Video visits and travel information and advice.
VH-1 Music videos for adults and cultural programming.
COUNTRY MUSIC TELEVISION Contemporary country music hits.
EWTN Continuous family-oriented and religious programming.
PREMIUM CHANNELS
DISNEY CHANNEL* Animated Disney classics, original series, entertainment
specials and movies.
HBO Five channels of first run movies including award winning
originals, high profile sports and special events and
concerts.
CINEMAX Three channels of popular movies.
SHOWTIME Three channels of first run and original movies.
THE MOVIE CHANNEL Two channels of first run movies.
</TABLE>
- ------------------------
* Included in all DISH Network-SM- programming packages which include America's
Top 40-SM-.
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EchoStar offers a variety of value oriented programming packages. EchoStar's
America's Top 40-SM- programming package is priced at $19.99 per month. This
service level will include news, sports, general entertainment, movies, and
family programming, including The Disney Channel-Registered Trademark-, and is
attractively priced in relation to its competition. For price points ranging
from $29.99 to $39.99 per month, EchoStar offers its America's Top 40-SM-
package with one or more multiplexed premium services such as
HBO-Registered Trademark-, Cinemax-Registered Trademark-, The Movie
Channel-Registered Trademark- and Showtime-Registered Trademark-. Additional
packages and combinations include superstations, network programming and
regional sports offerings. EchoStar plans to package its EchoStar Receiver
System and programming and offer discounts to customers who purchase packages
during certain promotions.
To subscribe to the full complement of services offered by current DBS
service providers, including DirecTv and USSB, a consumer would be required to
pay approximately $65 per month. DirecTv predominately markets a package of
services available at a price point of $29.95 per month, although other packages
are available, including a more limited selection of "basic cable" channels for
$19.95. USSB predominately markets a tier of popular basic services for $7.95
per month and premium service packages ranging from $10.95 to $34.95 per month.
EchoStar's America's Top 40-SM- programming package includes the best of
DirecTv's and USSB's basic programming, plus The Disney
Channel-Registered Trademark-, for less than $20 per month. EchoStar offers
comparable programming for less than $50 per month. In addition, DISH
Network-SM- subscribers receive a single bill for all programming services while
subscribers to DirecTv and USSB receive two bills. Currently, DirecTv offers
subscribers the NFL Sunday Ticket-TM- and USSB offers Flix-TM-, both channels
which are available to those service providers on an exclusive basis. The
suggested retail price to the consumer of satellite receiver systems offered by
EchoStar and DirecTv generally are comparable. See "-- EchoStar Receiver
Systems."
EchoStar's program offerings also include additional channels with regional
sports, niche programming, educational and cultural programming, shopping
services, pay-per-view options and certain subscriber selected programming. In
addition to these offerings, The DISH Network-SM- service includes: (i)
"Superstations," such as KTLA, WGN and WPIX; and (ii) network feeds of ABC, NBC
and CBS from various time zones plus Fox and PBS. With the launch of EchoStar
II, EchoStar expects to further expand its DISH Network-SM- program offerings to
include: (i) additional multiplexed premium services; (ii) additional regional
sports services; (iii) expanded pay-per-view options; (iv) out-of-market
professional and college sports programming; (v) international programs; and
(vi) niche programming, including business programming. EchoStar is finalizing
agreements with major production studios, including Disney, Paramount, Warner
Brothers, Columbia TriStar, Sony and Universal Studios, to provide pay-per-view
movies and events. EchoStar has dedicated six channels for pay-per-view movies
on EchoStar I, and expects to expand to 20 to 40 channels upon the successful
deployment of EchoStar II. Pay-per-view options may include first run movies,
live sporting and entertainment events. These video offerings are complemented
with compact disc quality audio programming provided by Muzak as well as library
and other data services, such as financial and weather information.
ECHOSTAR RECEIVER SYSTEMS
DISH Network-SM- programming is available to any subscriber who purchases or
leases an EchoStar Receiver System. A typical EchoStar Receiver System includes
an 18-inch satellite receiver dish, a receiver, which processes and descrambles
signals for television viewing, a remote control and related components. The
EchoStar Receiver System is also fully compatible with local broadcast signals.
The EchoStar Receiver System is generally available in a standard and premium
model. The premium model includes a universal UHF remote, an expanded favorite
channel list and a high speed data port, all features not available on the
standard model.
Households can receive local broadcast signals, either through a standard
television antenna (a traditional rooftop or set-top antenna) or by subscribing
to basic cable and can also switch between DBS signals and local programming
signals using the remote control. According to the industry
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research, approximately 76% of DBS households currently receive local
programming signals from standard television antennas. Following the launch of
EchoStar II, EchoStar also expects to make available a system that will permit
subscribers to watch different channels on multiple televisions simultaneously.
The suggested retail price for an EchoStar Receiver System is currently between
$499 and $599, depending on the model selected, among other factors. Dealer
incentives and EchoStar sponsored promotions may reduce the actual cost of an
EchoStar Receiver System below the suggested retail price. The initial capital
cost required to receive DISH Network-SM- programming may reduce the demand for
EchoStar Receiver Systems, since EchoStar Receiver Systems must be purchased,
while cable and certain of EchoStar's satellite competitors lease their
equipment to the consumer with little if any initial hardware payment required.
EchoStar is currently test marketing a special promotion in a limited number of
markets pursuant to which customers are able to purchase a discounted package,
including an annual programming package for $300 (which is comparable to the
price for a similar package of cable programming), and an EchoStar Receiver
System for $199. EchoStar believes the suggested retail price of a DSS satellite
receiver system for DirecTv programming is currently between approximately $499
and $799, although special dealer incentives and promotions may decrease the
cost to the customer. Both service providers currently offer system financing to
the consumer.
Authorization information for subscription programming is expected to be
stored on microchips placed on a credit card-sized access, or smart card. The
smart card, which can easily be updated or replaced periodically at low cost,
provides a simple and effective method to authorize and deauthorize subscription
programming. If the receiver's smart card is authorized for a particular
channel, the data is decrypted and passed on for audio and video decompression.
After decompression, the digital audio and video are reconstructed into analog
format for display on a standard television set.
The EchoStar DBS System integrates a number of technological advances,
including digital audio and video compression. The combination of these elements
in the EchoStar DBS System is intended to provide the consumer with affordable
access to a broad spectrum of entertainment and informational products, home
shopping and similar services, educational services and databases.
EchoStar does not manufacture EchoStar Receiver Systems directly. Instead
EchoStar has contracted for the manufacture of EchoStar Receiver Systems with
high-volume contract electronics manufacturers. EchoStar has entered into
agreements with SCI and Sagem to manufacture MPEG-2 DBS receivers in quantities
which EchoStar believes will be adequate to meet anticipated demand during 1996.
EchoStar is also in negotiations with several brand name consumer electronics
manufacturers to produce receivers for use with the DISH Network.
EchoStar also acted as an agent for the sale of DBS programming offered by a
current DBS competitor through the end of 1995. EchoStar will continue to
distribute satellite receivers manufactured for that competitor's DBS system
("Competitor DBS Receivers") in 18 states until all current inventory is sold or
returned.
FINANCING
EchoStar offers consumers the opportunity to lease or finance their EchoStar
Receiver Systems, including installation costs and certain programming packages,
on competitive terms. EchoStar has agreements with major consumer finance groups
to make consumer credit available to EchoStar customers. All EchoStar financing
is provided by third parties and is generally non-recourse to EchoStar. Under
EchoStar's revolving charge plan, customers are issued a DISHTM private label
credit card allowing them to increase service levels at any time.
INSTALLATION
During 1994, EchoStar began increasing its presence in the DTH and
commercial satellite receiver installation business. Approximately 35 employees
were hired during 1995, and more are expected to be hired during 1996 if
anticipated demand for dependable high volume DTH and commercial satellite
installations materializes, and the number of experienced satellite retailers
continues to decline. By offering local satellite retailers the opportunity to
become associated with a nationwide installation group,
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EchoStar intends to make installation business available to retailers that they
would not otherwise have the ability to obtain. Similarly, based on its industry
strength, EchoStar expects that businesses with nationwide installation needs
will select EchoStar for installation services.
OTHER COMPONENTS
SUBSCRIBER MANAGEMENT. EchoStar has entered into an agreement with Cable
Services Group, Inc. ("CSG") to provide subscriber management, billing and
remittance services for Dish Network-SM- subscribers. Under the terms of the
agreement, EchoStar is also provided with access to a subscriber management
system maintained by CSG which facilitates the authorization of particular
programming and the issuance of updated access cards, and coordinates billing
and renewal functions.
CUSTOMER CARE CALL CENTER. EchoStar has entered into an agreement with EDS
to provide customer call center operations. These operations complement those
currently managed by EchoStar, while greatly expanding service capacity.
Potential and existing subscribers can call a single phone number to receive
assistance for hardware, programming, installation or service.
DIGITAL BROADCAST CENTER. The first step in the delivery of satellite
programming to the customer is the uplink of that programming to the satellite.
Uplink is the process by which signals are received from either the programming
originator or distributor and transmitted to a satellite. EchoStar recently
constructed a digital broadcast center in Cheyenne, Wyoming that uplinks
programming to EchoStar's satellites. The digital broadcast center contains
fiber optic lines and downlink antennas to receive programming and other data at
the center, as well as a number of large uplink antennas and other equipment
necessary to modulate and demodulate the programming and data signals. The
compression and encryption of the programming signals will also be done at this
center.
The real estate underlying the digital broadcast center was deeded to a
subsidiary of EchoStar by a quasi-governmental economic development entity for
nominal consideration.
CONDITIONAL ACCESS SYSTEM. EchoStar has contracted with Nagra Plus, SA to
provide access control systems, as well as smart cards used with each EchoStar
Receiver System necessary to receive the authorization code. The access control
system is central to the security network that prevents unauthorized viewing of
programming. In the event the equipment or access control systems fail to
perform as intended, EchoStar's plan of operations would be adversely affected.
EchoStar believes the vendor it has chosen is highly qualified, and has
confidence that the access control system will adequately prevent unauthorized
access to programming. Further, the receiver has been designed with the
flexibility to completely change the access control system in the event of a
security breach. However, the technology is still relatively new and success is
not an absolute certainty. In the event that such systems or products fail to
operate as intended, EchoStar's business would be adversely affected if the
vendors could not rapidly implement corrective measures.
COMPRESSION SYSTEM. EchoStar has entered into an agreement with DiviCom,
Inc. to provide the necessary equipment to digitize, compress and encrypt the
analog signals transmitted by programmers to EchoStar's digital broadcast
center. Digitized signals are then multiplexed and modulated into an MPEG-2
transport stream for transmission to EchoStar's satellites. Once a customer has
ordered programming from EchoStar, an authorization code is transmitted to the
customer's satellite receiver, allowing the customer to receive the programming
within seconds after placing the order.
TRACKING, TELEMETRY AND CONTROL OF SATELLITES AFTER LAUNCH. Once a
satellite is placed at its orbital location, ground stations control it until
the end of its in-orbit lifetime. EchoStar has entered into an agreement with
AT&T to provide TT&C services with respect to EchoStar I and EchoStar II,
including orbital analysis and satellite engineering. The agreement terminates
upon the later to occur of December 31, 2005 or the end of the useful life of
EchoStar II. The agreement limits the liability of AT&T in the event it
negligently performs its services under the agreement or otherwise terminates
the agreement prior to the expiration of its term. It is expected that such
risks will be covered by in-orbit insurance; however, no assurances can be given
that such insurance can be obtained on commercially reasonable terms.
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While TT&C services have not yet been procured for EchoStar III or EchoStar
IV, EchoStar believes that these services can be timely obtained from a number
of vendors.
DBS AND OTHER PERMITS
EchoStar's subsidiaries have been assigned 21 DBS frequencies at 119 DEG.
WL, one of the three U.S. licensed orbital slots that provide full CONUS
coverage. Of these frequencies, eleven are held by EchoStar Satellite
Corporation ("ESC"). Eleven of the 16 transponders on EchoStar I will be
utilized to operate those frequencies. Ten frequencies were acquired as a result
of a merger between DirectSat and a subsidiary of EchoStar, which was
consummated in December 1994. Ten of the sixteen transponders on EchoStar II
will be utilized to operate these frequencies. In addition, EchoStar has
received an STA from the FCC to operate the remaining five frequencies
(approximately 30 additional video channels for a total of approximately 100
video channels) on EchoStar I. The STA expires August 31, 1996 unless extended.
There can be no assurance that EchoStar will be permitted to operate the
additional five transponders after that period.
In addition to its frequencies at 119 DEG. WL, DirectSat has been assigned
11 frequencies at 175 DEG. WL, and EchoStar expects to be assigned an additional
ten frequencies at 175 DEG. WL provided the FCC finds that ESC has a firm
contract for the construction of a satellite at this orbital slot, but there can
be no assurance in this regard. While a firm business plan has not yet been
finalized, these frequencies could be used to provide a high power DBS service
to the Western continental U.S., Hawaii and Alaska, and could also be
potentially valuable as a link for the provision of programming between the
United States and the Pacific Rim, if FCC and ITU coordination can be arranged.
EchoStar currently owns approximately 40% of the outstanding common stock of
DBSC, which holds a conditional satellite construction permit and specific
orbital slot assignments for eleven DBS frequencies at each of 61.5 DEG. WL and
175 DEG. WL. EchoStar expects to acquire 100% of DBSC pursuant to the DBSC
Merger. The DBSC Merger has been approved by DBSC's shareholders. FCC Approval
of the DBSC Merger is also required, and has been applied for. The deadline for
filing oppositions to the DBSC Merger with the FCC was March 15, 1996. EchoStar
is aware of only one opposition, which was filed by the CPT. EchoStar believes
that the FCC has previously considered and rejected issues similar to the
arguments raised by CPT and that the filing of the CPT opposition does not
materially decrease the likelihood that the FCC will approve the DBSC Merger.
Assuming FCC approval and consummation of the Merger, EchoStar will hold,
through its DBSC subsidiary, the construction permit and slot assignments for
these frequencies. In connection with the DBSC Merger, EchoStar expects to issue
approximately 658,000 shares of its Class A Common Stock to DBSC shareholders in
exchange for all of the DBSC stock that it does not already own.
ESC's, DirectSat's and DBSC's permits are subject to continuing due
diligence requirements imposed by the FCC. See "--Governmental Regulation--FCC
Permits and Licenses." Each company's applications to extend their DBS permits
have been conditionally approved by the FCC and are subject to further FCC and
appellate review, but there can be no assurance that the FCC will determine in
the future that ESC, DirectSat or DBSC have complied with the due diligence
requirements. Failure to comply with due diligence requirements could result in
the revocation of DBS permits.
During January 1996, the FCC held an auction for 28 frequencies at the
110 DEG. WL orbital slot and 24 frequencies at the 148 DEG. WL orbital slot. At
the FCC Auction, EchoStar entered the high bid of $52.3 million to acquire a DBS
construction permit for the use of 24 frequencies at the 148 DEG. WL orbital
slot. To participate in the FCC Auction, EchoStar deposited $12 million with
FCC. If the construction permit is granted, EchoStar will be required to pay the
remainder of the purchase price for the 148 DEG. WL orbital slot. EchoStar will
be required to complete construction of that satellite within four years of the
permit grant, and the satellite must be in operation within six years of the
grant.
EchoStar has an application pending before the FCC for a two satellite U.S.
FSS Ka-band system and a two satellite extended Ku-band satellite system.
EchoStar has been granted a license for a two
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satellite FSS Ku-band system, which is conditioned on EchoStar making an
additional financial showing. There can be no assurance the FCC will consider
EchoStar's additional showing to be adequate. If the pending applications are
granted, and EchoStar successfully constructs and launches FSS, extended Ku-band
and Ka-band satellites, those satellites might be used to complement EchoStar
DBS System programming, or for a variety of other uses. It is possible that the
unique FSS Ku-band and Ka-band orbital locations requested by EchoStar and
others could permit construction of satellites with sufficient power to allow
dish sizes comparable to DBS. All of these projects are in an early stage of
development and there is no assurance that EchoStar's applications will be
granted by the FCC or that, if granted, EchoStar will successfully exploit the
resulting business opportunities. All of these applications are currently being
challenged by several companies with interests adverse to EchoStar's.
An 80% owned subsidiary of EchoStar has applied for construction permits and
authorizations to operate a six satellite low earth orbit satellite system.
While primary applications for that system are unrelated to DBS, it is possible
that the system could serve as a path for wireless communication with EchoStar
DBS customers, particularly for periodic polling of units for pay-per-view
purchases and relative rapid feedback on viewer pay-per-view buy rates and
preferences. This project is in an early stage of development and there is no
assurance that EchoStar's application will be granted by the FCC or that, if
granted, EchoStar will successfully exploit the resulting business opportunity.
THE SATELLITES
EchoStar I and EchoStar II are Martin Marietta Series 7000 satellites
equipped with 16 Ku-band transponders, each with 130 Watts of power,
approximately eight times the power of typical C-band transponders. EchoStar III
is a Marietta Series 2100AX satellite equipped with 3,840 Watts of power which
can be divided among 16 to 32 Ku-band transponders. Each transponder will be
capable of handling analog video channels or multiple digital video, audio and
data channels. The satellites have a minimum design life of 12 years and an
estimated orbital life of 15 years or more if optimally deployed. The Satellite
Contracts provide for the construction and delivery of multiple high powered DBS
satellites and related services.
All pre-launch payments due to Martin Marietta with respect to EchoStar I
and EchoStar II were made. The remainder of the aggregate purchase price for
each satellite is required to be paid, with interest at the prime rate, over a
period of five years after the delivery and launch of each satellite (the
"Deferred Payments"); provided, however, if EchoStar II is not launched within
180 days after delivery by Martin Marietta, EchoStar is required under the
Satellite Contracts to begin making the Deferred Payments. The majority of the
purchase price for EchoStar III is required to be paid in monthly payments
during construction. Deferred Payments in an amount approximately equal to 20%
of the aggregate Deferred Payments for EchoStar I and EchoStar II, are also
available for EchoStar III on similar terms.
The contracts for construction for EchoStar I and EchoStar II contain
clauses providing for penalties for late delivery by Martin Marietta of the
satellites. EchoStar is currently negotiating the contract provisions to
determine what, if any, penalties will be paid by Martin Marietta for any late
delivery.
Except under limited circumstances, Martin Marietta generally owns each
satellite it constructs for EchoStar, and the components thereof, until the
launch of each satellite. As security for the portion of the Deferred Payments
due to Martin Marietta with respect to EchoStar I and EchoStar II, Dish, Ltd.
has: (i) granted to Martin Marietta a security interest in substantially all
assets of Dish, Ltd. and its subsidiaries, other than the stock of the
subsidiaries and proceeds derived from the sale of the 1994 Notes, subordinate
to the first security interest in the assets of ESC granted to the Trustee under
the 1994 Indenture, and to the liens granted to any commercial bank which
provides a revolving credit facility to Dish, Ltd., except that such security
interest ranks pari passu with the security interest in the assets of ESC
granted for the benefit of the holders of the 1994 Notes with respect to $30.0
million of the Deferred Payments; and (ii) caused Dish, Ltd. and its
subsidiaries to guarantee payment in full of the Deferred Payments. Following
any default on the Deferred Payments, Martin Marietta is
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prohibited from realizing on any of the collateral for a period of at least five
years following consummation of the 1994 Notes Offering, and in any event for
180 days following such default. Martin Marietta also has a security interest in
certain assets of EchoStar's subsidiaries other than ESC, which lien ranks
senior to the lien on such assets granted for the benefit of the holders of the
1994 Notes.
Thirty days prior to launch, EchoStar will also be required to provide
Martin Marietta with adequate security for the EchoStar III Deferred Payments.
SATELLITE LAUNCHES
EchoStar has entered into a contract for Arianespace to launch EchoStar II
from Korou, French Guiana in September 1996 (the "Arianespace Contract"). The
Arianespace Contract also provides the potential for the EchoStar launch to
occur during August 1996 if earlier scheduled launches are accelerated or
delayed. The Arianespace Contract contains provisions entitling either party to
delay the launch in limited circumstances, subject to the payment of penalties
in some cases. Pursuant to the Arianespace Contract, as of June 7, 1996,
EchoStar has paid approximately $43.4 million to Arianespace.
EchoStar has the right, in its sole discretion, to terminate the Arianespace
Contract at any time subject to forfeiture of certain amounts paid to
Arianespace. In addition, EchoStar has the right to terminate the Arianespace
Contract and receive a full refund of all amounts paid to Arianespace if the
total launch delays caused by Arianespace exceed certain periods specified in
the Arianespace Contract.
The launch is nominally scheduled to be performed on a dedicated Ariane-4
launch vehicle. Ariane is generally perceived by the international launch
insurance community as being among the most reliable launch providers today and
the success rate for Ariane-4 launches is higher than industry norms. This
launch vehicle has a success rate of over 90%. The launch of Arianespace's new
Ariane-5 launch vehicle, on June 4, 1996, was not successful. The Ariane-5
launch vehicle is significantly different than the Ariane-4 launch vehicle.
Although the specific cause of the Ariane-5 launch failure has not been
determined, if it is determined that the launch failure is unrelated to
Ariane-4, EchoStar does not believe that the launch failure of the Ariane-5
launch vehicle will delay the launch of EchoStar II. However, any significant
delay in the launch of EchoStar II would have an adverse affect on EchoStar.
EchoStar II was originally schedule to be launched by Great Wall. EchoStar I
was successfully launched by Great Wall in December 1995. The total price for
the Great Wall launch was approximately 60% of the Ariane launch price. Payments
will be due monthly, and in contrast to the Great Wall launch, all payments to
Ariane will be due prior to the launch date.
EchoStar notified Great Wall of its decision to terminate the launch of
EchoStar II with Great Wall. EchoStar applied $15.0 million previously paid
Great Wall in connection with this launch to the final $15.0 million owed Great
Wall related to the launch of EchoStar I. In May 1996, EchoStar received a
refund of the remaining $4.5 million previously paid Great Wall in connection
with the second launch.
EchoStar has entered into a contract for launch services with Lockheed for
the launch of EchoStar III from Cape Canaveral Air Station, Florida during the
period of September 1997 through November of 1997, subject to delay or
acceleration in certain circumstances (the "Lockheed Contract"). The Lockheed
Contract provides for launch of the satellite utilizing an Atlas IIAS launch
vehicle. As of June 7, 1996, EchoStar has made the initial payment of $5.0
million and the remaining price is payable in installments in accordance with
the payment schedule set forth in the Lockheed Contract. Under that schedule,
substantially all of the price is required to be paid before the launch.
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EchoStar has the right, in its sole discretion, to terminate the Lockheed
Contract at any time subject to forfeiture of certain amounts paid to Lockheed.
In addition, EchoStar has a right to terminate the Lockheed Contract and receive
a full refund for all amounts paid to Lockheed if the total launch delays
(except certain excusable delays) caused by Lockheed exceed 12 months.
EchoStar has contracted with LKE for the launch of an additional satellite
during 1998 from the Kazakh Republic, a territory of the former Soviet Union,
utilizing a Proton launch vehicle. Either party may request a delay in the
relevant launch period, subject to the payment of penalties based on the length
of the delay and the proximity of the request to the launch date.
EchoStar has the right, in its sole discretion, to terminate the LKE
Contract at any time, subject to the forfeiture of certain amounts paid to LKE.
In addition, EchoStar has the right to terminate the LKE Contract and receive a
full refund of all amounts paid to LKE in certain circumstances, including: (i)
a launch delay caused by LKE which exceeds nine months from the last day of the
original launch period; (ii) an increase in the price or change in payment or
other terms necessitated by compliance with, or implementation of, the trade
agreement between the United States and Russia; (iii) EchoStar's inability to
obtain necessary export licenses; (iv) the failure of Proton launch vehicles;
and (v) EchoStar's inability to procure launch insurance on commercially
reasonable terms. In the event termination of the LKE Contract is caused by the
failure of Proton launch vehicles, however, LKE would be entitled to retain up
to $15.0 million, depending on the number and proximity of Proton failures to
EchoStar's scheduled launch.
EchoStar expects to launch on a Proton D-le four stage launch vehicle. Astra
1F, the first commercial launch on a Proton D-le, was successfully launched on
March 27, 1996. LKE currently has contracts providing for the launch of at least
five non-EchoStar western satellites through 1997.
INSURANCE
Under the terms of the Satellite Contracts, Martin Marietta bears the risk
of loss of the EchoStar satellites during the construction phase up to launch.
At launch, title and risk of loss pass to EchoStar, at which time the launch
insurance becomes operative. EchoStar contracted for launch insurance coverage
for each of EchoStar I and EchoStar II in the amount of $219.3 million and,
together with the cash segregated and reserved on its balance sheet, satisfied
its current insurance obligations under the 1994 Indenture. While there can be
no assurance, EchoStar believes its launch insurers will permit substitution of
Arianespace for Great Wall as the launch provider for EchoStar II.
Thirty days prior to the launch of EchoStar II, EchoStar is required to
certify to the Trustee under the 1994 Indenture that it has launch insurance,
cash and cash equivalents in an amount at least equal to one-half of the
accreted value of the 1994 Notes then outstanding plus the amount of Deferred
Payments with respect to the satellite.
The launch insurance policy covers the period between launch through
completion of testing and commencement of commercial operations. The policy
protects against losses resulting from the failure of a satellite to achieve its
proper orbit parameters or to perform in accordance with the satellite's
operational performance parameters. The 1994 Indenture also requires in-orbit
insurance to be kept in force for EchoStar I and EchoStar II in specified
amounts.
The launch insurance policy contains, and the insurance policy with respect
to in-orbit operation is expected to contain, standard commercial satellite
insurance provisions, including a material change condition, that would result
in the cancellation of insurance or alter the effective rate depending upon the
success or failure of other launches by Arianespace, and customary exclusions,
including for: (i) military or similar actions; (ii) laser, directed energy, or
nuclear anti-satellite devices; (iii) insurrection and similar acts; (iv)
governmental confiscation; (v) nuclear reaction or radiation contamination; (vi)
willful or intentional acts of EchoStar or its contractors; (vii) loss of
market, loss of revenue, extra expenses, incidental and consequential damages;
and (viii) third-party claims against EchoStar.
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EchoStar has procured insurance for the launch of EchoStar III or EchoStar
IV. The 1996 Indenture requires EchoStar to obtain in-orbit insurance for
EchoStar III, in an amount equal to the cost to construct, launch and insure
EchoStar III (in the case of in-orbit insurance with a deductible no greater
than 20%).
OTHER PRODUCTS AND RELATED SERVICES
EchoStar currently offers a broad range of products, from approximately $250
DTH systems in Europe that can receive signals from only one or two co-located
satellites, to approximately $3,000 systems at retail that are capable of
receiving signals from 20 or more satellites. Principal product lines include
EchoStar-Registered Trademark-, HTS Premier-TM- and HTS Tracker-TM- name brands,
with good, better and best options typically available for each line and each
geographic reception area. EchoStar sold approximately 462,000 satellite
receivers worldwide in 1995. EchoStar's sales of DTH products are somewhat
seasonal, with higher domestic sales normally occurring in the late summer and
fall months in advance of increased consumer programming demand during the fall
and winter months.
DOMESTIC
Satellite retailers have historically sold large C-band satellite receiver
systems to consumers in rural areas through store fronts or small home-based
businesses. The decline in the number of conventional satellite retailers in the
United States, which form the core of EchoStar's distribution system, was
significant during 1995 and is expected to continue in 1996 as a result of
competition from the sale of DBS systems through consumer electronic outlets.
Those satellite retailers which are not marketing DBS systems may be
particularly vulnerable. However, new satellite retailers continue to enter the
market, which partially offsets the decline.
INTERNATIONAL
EchoStar's international product line includes a broad range of DTH and
commercial satellite equipment and accessories, including satellite receivers,
integrated receiver decoders, antennas, actuators, feeds and LNBs. During 1995,
the equipment was distributed, primarily with the EchoStar-Registered Trademark-
brand name, through EchoStar's distribution centers. EchoStar's products are
tailored to each country's standard television formats. In addition, on-screen
instructions and pre-programmed channels are available in a variety of
languages. EchoStar's international receivers can process C-band and Ku-band
signals with both 110- and 240-volt power sources and have been designed to
withstand the fluctuating power sources often found in developing countries.
PROGRAMMING
Since 1986, EchoStar has acquired programming directly from top programmers,
and packaged and distributed that programming throughout the United States to
C-band system users through EchoStar's independent retailer network. EchoStar
has nonexclusive affiliation agreements for the distribution of most top
programming available from domestic satellites, including
CNN-Registered Trademark-, USA-Registered Trademark-,
ESPN-Registered Trademark-, TBS-TM-, The Discovery
Channel-Registered Trademark-, TNT-TM-, HBO-Registered Trademark-,
Showtime-Registered Trademark-, MTV-Registered Trademark-,
A&E-Registered Trademark-, The Disney Channel-Registered Trademark-, national
networks, "Superstations" and other "best of cable" programming.
FINANCING
Through financing arranged by EchoStar, consumers are able to finance their
DTH-related product and service home entertainment purchases in a single
package. Credit approval is often granted while customers are still in a
dealer's showroom, and funds are customarily forwarded to dealers within 24
hours of receiving the original completed loan documents. EchoStar's consumer
financing arrangement allows "one-stop shopping" for equipment, programming and
installation services, while avoiding many of the risks inherent in financing
consumer receivables.
EchoStar also offers an option to lease DTH-related equipment for up to a
seventy-two month period, and to obtain programming during the lease term, for
one fixed monthly payment. The leases contain an annual purchase option allowing
the customer to purchase the equipment for a predetermined amount. The lease
program helps EchoStar compete more effectively and thereby increase sales and
customer loyalty.
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SALES AND MARKETING
DBS
EchoStar has developed a comprehensive marketing strategy designed to
promote the EchoStar DBS System under the DISH Network-SM- brand name and
distinguish itself from cable and other DBS providers. The first phase of the
strategy is designed to build market awareness of the DISH Network-SM-,
reinforce EchoStar's historical presence in the satellite industry and focus the
market's attention on EchoStar's goal of "A Dish in Every Home."
EchoStar's marketing strategy includes national and regional broadcast and
print advertising, promoting the benefits of the DISH Network-SM-, to support
the initial nationwide product rollout. EchoStar has engaged a national
advertising agency to develop, produce and place all radio, television and print
advertising spots. The media campaign is expected to begin during mid-1996. In
addition, comprehensive dealer guides describing all aspects of the DISH
Network-SM- and its integrated product lines (programming, hardware, financing
and installation) will be delivered to distributors during nationwide
educational seminars. EchoStar will continue offering a high level of retail
support, and will provide comprehensive point of sale literature, product
displays, demonstration kiosks and signage for retail outlets. EchoStar also
provides a promotional channel as well as a programming subscription for
in-store viewing. EchoStar's mobile sales and marketing team will visit retail
outlets on a regular basis to reinforce training and ensure point-of-sale needs
are quickly fulfilled. A DISH Network merchandise catalogue will also be
available for distributors to add to their promotional materials.
EchoStar offers a commission program that it believes is competitive with
that offered by other DTH operators. The program pays qualified distributors and
retailers a percentage of programming revenues generated by subscribers to whom
they sell EchoStar Receiver Systems. Commissions will be earned by distributors
and retailers over an extended period and will be paid regularly.
Following the initial nationwide launch of service, EchoStar will continue
to place national and regional broadcast and print advertisements, provide
retail support, and offer co-operative marketing campaigns with distributors on
an ongoing basis. One channel of programming is provided on the DISH Network-SM-
to educate subscribers on additional services and promotions.
EchoStar intends to utilize its existing nationwide network of approximately
3,000 independent distributors and retailers to market and distribute EchoStar
Receiver Systems and programming services to its target markets. EchoStar also
intends to distribute EchoStar Receiver Systems through consumer electronics
outlets in conjunction with brand name consumer electronics manufacturers, or
under its own brand name. EchoStar also intends to expand into other, less
traditional distribution channels. Based on its knowledge of these distribution
channels from its marketing of C-band DTH products and services domestically
over the last 15 years and its marketing of DBS products in Europe and the
United States, EchoStar believes it will be able to optimize the marketing of
its DBS products and services to distinguish itself from other DBS suppliers.
Considerable consumer education was required to develop the market for DBS
service. The initial entrants into the DBS market have incurred the greatest
educational burden because they introduced DBS to consumers.
OTHER PRODUCTS AND SERVICES
EchoStar's DTH sales and marketing efforts are concentrated in three
geographic regions: the Americas, Europe and Asia. The corporate marketing
department, located at EchoStar's corporate headquarters in Englewood, Colorado,
supports regional efforts by coordinating research, strategy, promotion,
pricing, advertising and new product development. EchoStar focuses on marketing
and distributing its DTH products and services, programming services and
consumer financing services through its independent retailer network. EchoStar
also provides its independent retailer network with marketing support ranging
from cooperative advertising funds to customized advertising campaigns.
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RESEARCH AND DEVELOPMENT AND MANUFACTURING
Satellite receivers designed by EchoStar's research and development group
have won numerous awards from dealers, retailers and industry trade
publications. EchoStar's research and development personnel focus on shaping the
EchoStar and HTS product lines to meet specific consumer needs and to compete
effectively against products designed and manufactured by larger consumer
electronics companies. In addition to overseeing the manufacture of its own
products, EchoStar has also acted as the original equipment manufacturer of
satellite receivers for other large retailers and manufacturers. EchoStar's
quality assurance standards require all EchoStar product models to undergo
extensive testing. EchoStar also sets and enforces product design and quality
assurance requirements at non-EchoStar manufacturing facilities in the United
States, France, Hong Kong, Korea, China, Malaysia, India and the Philippines.
COMPETITION
Each of the businesses in which EchoStar operates is highly competitive.
EchoStar's existing and potential competitors comprise a broad range of
companies offering video, audio, data, programming and entertainment services.
EchoStar also faces competition from companies offering products and services
that perform similar functions, including companies that offer hardwire cable
television products and services, wireless cable products and services, DTH
products and services, as well as DBS programming and other satellite
programming, and companies developing new technologies. Many of EchoStar's
competitors have substantially greater financial and marketing resources than
EchoStar. EchoStar expects that quality and variety of programming, quality of
picture and service and cost will be the key bases of competition. See "Risk
Factors -- Competitive Nature of the Industry."
DBS INDUSTRY
CABLE TELEVISION. Cable television service is currently available to
approximately 90% of the approximately 96 million U.S. television households.
The cable television industry in the United States currently serves
approximately 61 million subscribers, representing approximately 64% of U.S.
television households. As an established provider of programming, cable
television is a formidable competitor for many programming services, offering 30
to 80 channels at an average monthly subscription price of approximately $33.
While cable companies service a majority of the United States television
households today, EchoStar believes the cost to cable companies to upgrade their
coaxial systems to offer expanded digital video and audio programming similar to
that to be offered by DBS operators will be at least $500 per subscriber, or
approximately $30.5 billion nationwide. Upgrading those systems to fiber optic
technology could require a substantially greater investment. Such upgrades, if
undertaken, are expected to take five to ten years to complete industry-wide. As
a result, EchoStar believes that there will be a substantial delay before cable
systems can offer programming services equivalent to satellite television
providers on a national basis and that many cable systems may never be upgraded.
EchoStar intends to specifically target markets served by such systems.
The DISH Network-SM- will encounter a number of difficulties competing with
cable television technology and substantial competition is expected in the
overall market for television households. Cable television has an entrenched
position in the domestic consumer marketplace. EchoStar believes that
anticipated advances of cable television, such as interactivity and expanded
channel capacity, may not be widely available in the near term at a reasonable
cost to the consumer. If the substantial capital costs of those advances, when
available, are passed on to the consumer, it will ultimately enhance the
attractiveness of low cost DBS programming.
Up-front costs are also a potential disadvantage of a DBS system. Although
the initial retail price of an EchoStar Receiver System is currently between
approximately $499 and $599, depending on the features selected by the customer,
among other factors, EchoStar believes that technological advances and market
growth of DBS will eventually reduce the retail cost of DBS receiving equipment.
EchoStar intends to mitigate this disadvantage by offering lease and finance
options structured to produce
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minimum monthly payments competitive with cable rates. In addition, dealer
incentives and EchoStar sponsored promotions may reduce the actual cost of an
EchoStar Receiver System below the suggested retail price. The initial cost
required to receive Dish Network-SM- programming may reduce the demand for
EchoStar Receiver Systems, since EchoStar Receiver Systems must be purchased,
while cable and certain of EchoStar's satellite competitors lease their
equipment to the consumer with little if any initial hardware payment required.
EchoStar is currently test marketing a special promotion in a limited number of
markets pursuant to which customers are able to purchase a discounted package,
including an annual programming package for $300 (which is comparable to the
price for a similar package of cable programming), and an EchoStar Receiver
System for $199. If EchoStar elects to expand the promotion nationwide for an
extended period, or if market conditions force it to do so, the initial capital
investment relative to cable will be greatly reduced, but EchoStar's subscriber
acquisition costs will substantially increase.
Since reception of DBS signals requires line of sight to the satellite, it
may not be possible for some households served by cable to receive DBS signals.
In addition, the DISH Network-SM- will not be available to households in
apartment complexes, or other multiple dwelling units that do not facilitate or
allow the installation of the EchoStar Receiver System.
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 trials. If
these trials are successful, many consumers may find cable service to be more
attractive than DBS for the reception of programming.
OTHER DBS OPERATORS. In addition to EchoStar, several other companies have
DBS authorizations and are positioned to compete with EchoStar for home
satellite subscribers. DirecTv has channel assignments at what is recognized as
a strategic orbital slot due to its position over the central United States.
DirecTv successfully launched its first DBS satellite in December 1993, its
second satellite in August 1994 and a third satellite in June 1995 as an
in-orbit spare. That satellite might also be operated by DirecTv to provide
additional capacity, thereby making DirecTv more attractive to potential
consumers. USSB owns five transponders on DirecTv's first satellite and offers a
programming service separate from DirecTv's service, with programming not
available from DirecTv. Affiliates of the National Rural Telecommunications
Cooperative have acquired territories in rural areas of the United States as
distributors of DirecTv programming.
AT&T and DirecTv have an exclusive agreement for AT&T to market and
distribute DirecTv's DBS service. As part of the agreement, AT&T made an initial
investment of approximately $137.5 million to acquire 2.5% of the equity of
DirecTv with an option to increase its investment to up to 30% over five years.
This agreement provides a significant base of potential customers for the
DirecTv DBS system and allows AT&T and DirecTv to offer customers a package of
digital entertainment and communications services. As a result, EchoStar is at a
competitive disadvantage marketing to these customers. AT&T and DirecTv also
announced plans to jointly develop new multi-media services for DirecTv under
the agreement. The AT&T and DirecTv agreement will increase the competition
EchoStar encounters in the overall market for pay television customers.
In the FCC Auction, MCI entered the winning bid of $682.5 million to acquire
the permit for 28 of 32 frequencies at the 110 DEG. WL orbital slot. MCI and
News announced that they have formed a joint venture to build and operate a DBS
system at 110 DEG. WL. The permit will give MCI and News the capacity to offer
over 200 channels of digital video programming. MCI is expected to take
responsibility for developing business communication services and News is
expected to be responsible for consumer services. MCI and News expect that
building and launching the satellites for their system will cost an additional
$1 billion and that DBS services will be offered to consumers and businesses in
approximately two years. However, if MCI and News acquire satellites which have
already been constructed, service could begin sooner. MCI and News have
substantially greater resources than EchoStar and their joint venture will
increase the competition EchoStar encounters in the overall market for pay
television customers.
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PrimeStar currently offers medium power Ku-band programming service to
customers using dishes approximately three feet in diameter. In addition,
PrimeStar is believed to be the programming operator that will utilize existing
DBS authorizations of Tempo DBS, Inc. ("Tempo"). TCI, which is the largest cable
television company in the United States, is currently constructing two
satellites that will be ready for launch in 1996 and either of which could be
utilized to offer DBS service from Tempo's orbital slot at 119 DEG. WL.
PrimeStar has the right to offer DBS programming services from these satellites.
Alternatively, PrimeStar may offer FSS service via its satellites provided by GE
Americom or others. In mid-1994, TCI and Tempo entered into an agreement with
Advanced Communications Corporation ("Advanced") whereby Tempo would purchase
Advanced's FCC permit at 110 DEG. WL and lease the capacity available under the
permit to PrimeStar. In October 1995, however, the FCC revoked Advanced's permit
and announced its intention to auction Advanced's DBS channels in January 1996.
Appeals are currently pending relating to the FCC's action and EchoStar is
unable to predict the outcome of such litigation. It is possible Advanced or
other parties may prevail in their appeals challenging the FCC's decision to
reclaim Advanced's frequencies at 110 DEG. WL and 148 DEG. WL and, if they do,
any award of a construction permit by virtue of the FCC Auction may be
rescinded. If PrimeStar successfully launches a high-power DBS satellite, it
will become a more significant competitor, as it would have the ability to offer
its programming through a high-power DBS system similar to that to be offered by
EchoStar. If PrimeStar does not exercise its right, it is expected that TCI will
use these satellites to directly enter the DBS programming business, and may
launch satellites capable of providing service to the continental United States
during 1996. EchoStar is at a competitive disadvantage to PrimeStar with regard
to market entry, programming and, possibly, volume discounts for programming
offerings, particularly if programming vendors aggregate PrimeStar's DBS
customers and cable customers of the PrimeStar partners to obtain volume
discounts from programming vendors.
DirecTv, USSB and PrimeStar have instituted aggressive promotional campaigns
marketing their respective DBS and Ku-band service. Their marketing efforts have
focused on the breadth of popular programming and cost of service. In the case
of DirecTv and USSB, their marketing efforts have been joined by AT&T, RCA, Sony
Electronics, Inc. and other manufacturers which market DBS receivers and related
components. Several other manufacturers have begun or are expected to begin
manufacturing such equipment, including Uniden America Corp., Toshiba America
Consumer Products, Inc. and Hughes Network Systems, Inc. PrimeStar currently
offers a lease program whereby consumers can lease a PrimeStar system for as
little as approximately $1.00 per day (including approximately thirty channels
of programming). PrimeStar's lease program is widely credited for the recent
success of PrimeStar's Ku-band service. EchoStar currently expects to offer a
comparable program to finance or lease an EchoStar Receiver System.
DirecTv and USSB together offer over 150 channels of DBS video programming.
EchoStar currently has the capacity to provide approximately 100 channels of
video programming increasing to at least 125 channels of video programming at
the time EchoStar II is fully operational. Due to their substantially greater
resources, earlier market entry, greater number of channels, manufacturing
alliances with low cost, high volume manufacturers with established retail
distribution, possible volume discounts for programming offerings, and, in the
case of PrimeStar, relationship with cable programmers, EchoStar is at a
competitive disadvantage to DirecTv, USSB and PrimeStar. EchoStar believes that
it can successfully compete with these companies given, among other things,
EchoStar's: (i) lower cost structure; (ii) programming strategy; (iii)
established dealer network; (iv) second generation digital technology, which
incorporates world standard full MPEG-2 technology; and (v) intent to license
the manufacture of EchoStar Receiver Systems to multiple manufacturers.
According to trade publications, as of December 31, 1995 DirecTv had
approximately 1.2 million subscribers, approximately one-half of whom subscribed
to USSB programming, and PrimeStar had approximately 1.0 million subscribers. As
a result of the success achieved by each of these programming providers,
EchoStar may find it difficult to successfully compete and attract sufficient
subscribers to achieve profitability.
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During March 1996, AlphaStar Television Network which is owned by Tee-Comm,
began offering DTH programming in the United States on a limited basis, and
intends to expand to 120 channels later this year, and 200 channels by the end
of 1997. The service uses MPEG-2/DVB digital compression technology to receive
medium power Ku-band signals via 24 to 36 inch dishes. Although compliance with
certain regulatory requirements is necessary for the commencement of service by
a Canadian company, the entry of an additional programming provider will result
in additional competition for subscribers.
The FCC indicated that it intends to apply to the ITU for additional orbital
locations for use to provide DBS service to the United States. Canada, Mexico
and other countries hold the rights to DBS orbital slots which are capable of
providing service to the United States. If the FCC moves forward with this
initiative or if other countries authorize DBS providers to utilize their
orbital slots to serve the United States, additional competition could be
created, and EchoStar's spectrum could become less valuable. At this time,
EchoStar cannot predict whether the FCC will move forward with this initiative,
whether other countries will authorize DBS providers to utilize their orbital
slots to serve the United States or whether the FCC initiative or authorizations
by other countries will ultimately result in any additional service to the
United States.
The FCC on January 22, 1996, announced its decision to authorize U.S.
licensed FSS operators which currently operate internationally to provide wholly
domestic service in the United States. The FCC also announced its intention to
address at a later date issues relating to the provision of wholly domestic U.S.
service by signals originating in foreign countries, whether via U.S. or
non-U.S. satellites. In the event U.S. licensed FSS operators which currently
operate internationally decide to provide programming wholly in the United
States or that non-U.S. licensed operators are permitted to provide programming
to the United States, the number of competitors offering DTH service in the
United States may increase.
WIRELESS CABLE AND OTHER MICROWAVE SYSTEMS. There are approximately 180
wireless cable systems presently operating in the United States. Wireless cable
served approximately 710,000 subscribers at the end of 1995. Typically, these
systems offer 20 to 40 channels of programming, which may include local
programming; however, these systems will require large capital expenditures to
upgrade to digital compression technology to compete effectively with DBS.
Wireless cable also requires direct line of sight from the receiver to the
transmitter tower, which creates the potential for substantial interference from
terrain, buildings and foliage in the line of sight. Certain wireless cable
companies may become more competitive as a result of recently announced
affiliations with telephone companies. Bell Atlantic Corporation and NYNEX
Corporation have invested $100 million in CAI Wireless Systems, Inc. Also,
Pacific Telesis Group has purchased 100% of the equity of Cross Country
Wireless.
TELEPHONE COMPANIES. Certain regional telephone operating companies and
long distance telephone companies could become significant competitors in the
future, as they have expressed an interest in becoming subscription television
and information providers. The legislation recently passed by Congress permits
these local telephone companies to provide high-power DBS service, although any
telephone company desiring to become a high-power DBS broadcaster would still
need to obtain an FCC license for an available orbital location. Certain
telephone companies have received authorization to begin test marketing video
and other services to their customers in limited geographic areas using fiber
optic cable and digital compression over existing telephone lines. The
legislation recently passed by Congress removes barriers to entry which
previously inhibited, or made it more difficult, for telephone companies to
compete in the provision of video programming and information services. As more
telephone companies begin to provide cable programming and other information and
communications services to their customers, additional significant competition
for subscribers will develop. Among other things, telephone companies have an
existing relationship with substantially every household in their service area,
substantial economic resources, and an existing infrastructure and may be able
to subsidize the delivery of programming through their position as the sole
source of telephone service to the home.
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VHF/UHF BROADCASTERS. Most areas of the United States are covered by
traditional terrestrial VHF/UHF broadcasts that typically offer three to ten
channels. These broadcasters are often low to medium power operators with a
limited coverage area and provide local, network and syndicated programming. The
local content nature of the programming may be important to the consumer, and
VHF/UHF programming is typically free of charge. Congress is expected to
consider the release of additional digital spectrum for use by these
broadcasters later this year.
DTH INDUSTRY
DTH PRODUCTS. EchoStar faces competition in the sale of satellite receivers
in North America from other manufacturers and from other distributors. The North
American market is dominated by EchoStar, General Instrument Corporation and
Uniden America Corp.
Most major manufacturers of satellite receivers in North America offer a
variety of models, from relatively low priced units to more expensive receivers
with a greater number of features. There are few patented components in DTH
systems. Competition in the sale of DTH products occurs primarily on quality,
price, service, marketing and features. EchoStar believes that it generally
competes effectively in all of these areas. In recent years, EchoStar has
consistently been highly rated in most of these categories by polls conducted by
industry trade publications.
EchoStar also faces competition in the distribution of DTH systems from
approximately 30 distributors in North America. The large number of distributors
creates intense competition, primarily on price, marketing and service. EchoStar
responds to that competition by offering 24-hour turnaround time on repairs,
same day order fulfillment and what it believes to be one of the top satellite
retailer incentive programs in the industry.
In addition, EchoStar competes against DBS technology and medium power
Ku-band DTH systems. DBS and medium power Ku-band satellites use Ku-band
frequencies that can be received by significantly smaller dishes and less
expensive systems than C-band satellite systems. As a result of the smaller dish
size, DBS and medium power Ku-band systems are more widely accepted than C-band
systems, particularly in urban areas. DBS and medium power Ku-band competition
have negatively affected, and will continue to negatively affect, C-band sales.
However, EchoStar believes that many consumers may continue to choose to
purchase C-band systems for the next several years because of the remaining
orbital life of existing C-band satellites, the amount and quality of
programming available and the continuing marketing efforts by programmers and
others designed to attract and retain C-band subscribers, among other factors.
The decline in the number of C-band sales by EchoStar was partially offset in
1994 and 1995 by the sale of Competitor DBS Receivers, which EchoStar
distributed in 18 states.
Internationally, EchoStar competes against a variety of manufacturers and
distributors in different countries. In certain regions, EchoStar has a small
market share, while in others, such as Africa, EchoStar believes that it has a
larger market share than any of its competitors. In some markets, EchoStar
cannot effectively compete due to local restrictions on foreign companies and
due to the necessity of using proprietary products for which EchoStar does not
hold licenses.
DTH PROGRAMMING. EchoStar competes with many large DTH program packages,
some of whom are affiliated with well known, large program originators, and some
of whom are affiliated with cable operators. EchoStar competes by offering
promotional programming packages in conjunction with its sales of DTH systems.
Since a significant portion of EchoStar's programming sales are generated
through DTH retailers, EchoStar also competes for retailer relationships on the
basis of commission rates and quality of service offered to the retailer and its
customers. In addition, the programming market faces competition from cable
television as well as emerging technologies such as DBS services, multichannel,
multipoint distribution systems and others. The largest competitors of EchoStar
in programming distribution include NetLink Satellite USA, owned by TCI,
SuperStar
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Satellite Entertainment, National Programming Service, Turner Home Satellite,
Inc., HBO Direct, Inc. and Showtime Satellite Networks. These competitors have
substantially greater financial resources than EchoStar, have substantially more
subscribers, and are therefore able to obtain more favorable pricing from
programmers compared to EchoStar.
DTH FINANCING AND LEASING. EchoStar currently offers financing and leasing
options in conjunction with its DTH products and services. Other equipment
manufacturers and distributors also offer financing to consumers who purchase
their products and services. At times, certain of EchoStar's competitors have
offered consumers longer amortizations of their loans than EchoStar has offered.
Long amortizations are popular with DTH retailers, who can then offer the
consumer a lower monthly payment, or a more expensive system for the same
payment. EchoStar has experienced a decline in financing revenue due partially
to the longer loan amortizations offered by some of EchoStar's competitors. With
its new financing arrangements with two national banks and a leasing
organization, EchoStar is able to make available financing which it believes is
competitive with that available from its competitors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
GOVERNMENT REGULATION
GENERAL
Authorizations and permits issued by the FCC and foreign regulatory agencies
performing similar functions are required for the operation of satellites and
other components of the EchoStar DBS System, and the sale of satellite receivers
and other EchoStar products in the United States and certain foreign countries.
In addition, as the prospective operator of a privately owned United States
satellite system, EchoStar is subject to the regulatory authority of the FCC and
the International Radio Regulations promulgated by the ITU. As a distributor of
television programming, EchoStar is also affected by numerous laws and
regulations, including the Communications Act. EchoStar believes that it remains
free to set prices and serve customers according to its business judgment,
without rate regulation or the statutory obligation under Title II of the
Communications Act to avoid undue discrimination among customers, but pursuant
to the recently passed telecommunications legislation, EchoStar may be
classified as a telecommunications carrier subject to Title II. While EchoStar
believes that it is unlikely that such reclassification would increase
substantially the regulatory burdens imposed on EchoStar or have an adverse
impact on EchoStar's DBS operations, there can be no assurance in this regard.
EchoStar also requires import and general destination export licenses issued by
the United States Department of Commerce for the delivery of its manufactured
products to overseas destinations. Finally, because EchoStar has engaged a
foreign launch provider for the EchoStar II satellite, and may engage a foreign
launch provider for the EchoStar III or EchoStar IV satellites, United States
export regulations apply to the delivery of the satellite and to providing
related technical information to the launch provider.
While EchoStar has generally been successful to date in connection with
regulatory compliance matters, there can be no assurance that EchoStar will
succeed in obtaining or maintaining all requisite regulatory approvals for its
operations, or that it will do so without the imposition of conditions or
restrictions on EchoStar.
FCC PERMITS AND LICENSES
As the operator of a DBS system, EchoStar is subject to FCC jurisdiction and
review primarily for: (i) authorization of individual satellites (i.e., meeting
minimum financial, legal and technical standards) and earth stations; (ii)
avoiding interference with other radio frequency emitters; (iii) complying with
rules the FCC has established specifically for holders of U.S. DBS satellite
authorizations and receivers; and (iv) complying with applicable provisions of
the Communications Act. The FCC has granted a conditional satellite construction
permit to EchoStar for two satellites. It has assigned eleven specified
frequencies for EchoStar I at an orbital slot at 119 DEG. WL. EchoStar's
subsidiary DirectSat has a conditional permit for ten additional frequencies at
the same orbital location, one frequency at 110 DEG. WL and eleven frequencies
at 175 DEG. WL. These permits are conditioned
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on satisfaction of ongoing construction and related obligations. There can be no
assurance that EchoStar and DirectSat will be able to comply with the FCC's due
diligence obligations or that the FCC will determine that they have complied
with such due diligence obligations. DirectSat's and EchoStar's permits and
extension requests have been and may continue to be contested in FCC proceedings
and in court by Dominion, PrimeStar, Advanced, Tempo, MCI, DirecTv and others.
In November 1994, the FCC approved a merger of DirectSat with a wholly owned
subsidiary of EchoStar. While Dominion filed what it styled as comments
objecting to the merger, the FCC issued an order approving the merger and
EchoStar believes that the likelihood of unfavorable reconsideration of the
order approving the merger is unlikely.
The FCC's DBS rules require, among other diligence obligations, that a DBS
permittee place its satellite system in operation within six years following the
initial grant of a construction permit (originally by August 15, 1995 in the
case of EchoStar and DirectSat). EchoStar and DirectSat timely filed requests
with the FCC for extensions of these authorizations to conform to EchoStar's and
DirectSat's anticipated launch schedules for EchoStar I and EchoStar II. There
can be no assurance that EchoStar and DirectSat will be able to comply with the
FCC's due diligence obligations or that the FCC will determine that they have
complied with such due diligence obligations.
By an Order released January 11, 1996 in File No. 129-SAT-EXT-95, the
International Bureau of the FCC granted an extension of EchoStar's permit to
August 15, 1996 with respect to the 119 DEG. WL orbital location. It deferred
decision on EchoStar's request for an extension of time with respect to its
western satellite pending the FCC's analysis of EchoStar's 1992 due diligence
showing for that location. By separate Order released January 11, 1996, File No.
DBS-88-1, the FCC's International Bureau conditionally granted EchoStar launch
and positioning authority for EchoStar I. On February 12, 1996, EchoStar filed
an application for a license to operate EchoStar I. EchoStar certified that the
in-orbit operations of the satellite fully conform to the specifications set
forth in its application as modified and in the FCC launch authorization, with
only one exception: the satellite is currently located at 119.0 DEG. WL instead
of 119.2 DEG. WL. By order of the International Bureau released March 4, 1996,
EchoStar was granted special temporary authority to operate at that location
until the launch of EchoStar II or until August 31, 1996, whichever is earlier,
subject to the condition that it cause no harmful interference to other
satellites. By order of the International Bureau released on the same date,
EchoStar was also granted special temporary authority to operate all 16
transponders on EchoStar I, until August 31, 1996, subject to the same
non-interference condition. While the FCC has granted EchoStar conditional
authority to use C-band frequencies for TT&C functions for EchoStar I, stating
that the required coordination process with Canada and Mexico has been
completed, the FCC subsequently received a communication from an official of the
Ministry of Communications and Transportation of Mexico stating that EchoStar
I's TT&C operations could cause unacceptable interference to Mexican satellites.
While EchoStar believes that it is unlikely that the FCC will subsequently
require EchoStar to relinquish use of such C-band frequencies for TT&C purposes,
there can be no assurances that such objections will not subsequently require
EchoStar to relinquish the use of such C-band frequencies for TT&C purposes.
Among other regulatory requirements, the DBS systems of EchoStar and
DirectSat are required to conform to the ITU Region 2 Plan for the Broadcast
Satellite Service ("BSS Plan"). Any operations that are not consistent with the
BSS Plan (including, among other things, digital transmission), can only be
authorized on a non-interference basis pending successful modification of the
BSS Plan. Accordingly, unless and until the BSS Plan is modified to include the
technical parameters of a DBS applicant's operations, non-standard satellites
must not cause harmful electrical interference to, and are not entitled to any
protection from, interference caused by other assignments that are in
conformance with the BSS Plan.
By a separate Order released January 11, 1996 in File No. 131-SAT-EXT-95,
the International Bureau extended the construction permit of DirectSat to August
15, 1999. This grant was subject to the condition that DirectSat make
significant progress toward construction and operation of its DBS
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system substantially in compliance with the timetable submitted pursuant to
Amendment No. 7 of its satellite construction contract, dated June 17, 1995, or
with a more expedited timetable. The International Bureau also urged DirectSat
to expedite construction and launch of additional satellites for its DBS system.
PrimeStar has filed an application for review requesting that the FCC reverse
the International Bureau's decision to extend DirectSat's construction permit.
See "-- Operation of the EchoStar DBS System -- DBS and Other Permits" and "--
Legal Proceedings."
The FCC has also declared that it will carefully monitor the semi-annual
reports required to be filed by DBS permittees. Failure of EchoStar or DirectSat
to file adequate semi-annual reports or to demonstrate progress in the
construction of their DBS systems may result in cancellation of their permits.
With respect to DirectSat, a request for launch authority, as well as for a
minor modification to DirectSat's construction permit and removal of conditions,
was filed with the FCC prior to the merger with EchoStar and remains pending. An
application to change frequencies for TT&C services is also pending and has been
opposed by Advanced and Dominion. Additional technical amendments may also be
required to be filed with the FCC. While opposition to these applications have
been filed, and will be filed in the future in the event of further amendments,
EchoStar expects that the necessary approvals for EchoStar II will be timely
obtained. EchoStar also intends to file an application for a license to operate
EchoStar II in orbit once EchoStar II is launched successfully.
EchoStar currently owns approximately 40% of the outstanding common stock of
DBSC, which holds a conditional satellite construction permit and specific
orbital slot assignments for eleven DBS frequencies at each of 61.5 DEG. WL and
175 DEG. WL. EchoStar expects to acquire 100% of DBSC pursuant to the DBSC
Merger. The DBSC Merger has been approved by DBSC's shareholders. FCC Approval
of the DBSC Merger is also required, and has been applied for. The deadline for
filing oppositions to the DBSC Merger with the FCC was March 15, 1996. EchoStar
is aware of only one opposition, which was filed by the CPT. EchoStar believes
that the FCC has previously considered and rejected issues similar to the
arguments raised by CPT and that the filing of the CPT opposition does not
materially decrease the likelihood that the FCC will approve the DBSC Merger.
Assuming FCC approval and consummation of the Merger, EchoStar will hold,
through its DBSC subsidiary, the construction permit and slot assignments for
these frequencies. See "-- DBS and Related Services -- DBS and Other Permits."
The licenses which the FCC issues for an operational DBS system to use
frequencies at a specified orbital location are for a term of ten years. At the
expiration of the initial license term, the FCC may renew the satellite
operator's license or authorize the operator to operate for a period of time on
special authority, but there is no assurance that the FCC will take such
actions. EchoStar also requires FCC authority to operate earth stations,
including the earth stations necessary to uplink programming to its satellites.
FCC AUCTION RULES
EchoStar submitted the winning bid for the 148 DEG. WL frequencies and has
paid the required $10.5 million down payment. EchoStar has also filed the
"long-form" application for a construction permit required of the winning
bidder. EchoStar's application was placed on public notice on March 6, 1996,
triggering a filing window of 30 days for members of the public, including
EchoStar's competitors, to file petitions to dismiss or deny the application. No
parties have objected to the application, but to date the FCC has not granted
the application. EchoStar must submit the balance of its bid within five
business days of the grant of its application by the FCC. If the FCC grants
EchoStar's application, parties may seek FCC review or reconsideration and/or
judicial review of the FCC's action.
The FCC has imposed stringent disclosure obligations on a winning bidder
that seeks to transfer a DBS license acquired through competitive bidding within
six years of the initial permit grant. Together with its application seeking
approval of such a transfer, the winning bidder must submit all contracts and
related documents and full information on all agreed-upon consideration
negotiated with the purchase.
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DBS RULES
The FCC has also promulgated the following new rules:
- The term of DBS licenses has been extended from 5 to 10 years;
- In addition to the pre-existing construction and operation
milestones, holders of new permits must complete construction
of the first satellite in their system within four years of
authorization and their entire systems within six years;
- The holders of new authorizations must provide DBS service to
Alaska and Hawaii where such service is technically feasible
from the acquired orbital locations (service to Alaska and
Hawaii from 148 DEG. WL is presumed feasible);
- Those holding DBS permits as of the effective date of the rules
must either provide DBS service to Hawaii or Alaska from at
least one of their orbital locations or relinquish their
western assignments; and
- A DBS licensee must begin DBS operations within five years of
receipt of its license, but may otherwise make unrestricted use
of the spectrum for non-DBS purposes during that time. After
the first five years, the licensee may continue to provide
non-DBS service so long as at least half of its total capacity
at a given orbital location is used each day for DBS.
PENDING APPEALS
Several parties, including EchoStar, DBSC and DirectSat, have petitioned the
U.S. Court of Appeals for the D.C. Circuit to review on a variety of grounds the
FCC's Report & Order which determined to auction frequencies at 110 DEG. WL and
148 DEG. WL. Several other parties have also appealed a related Order where the
FCC reclaimed the channels that were auctioned from another DBS permittee,
Advanced, for failing to construct its satellites in a timely manner. Such
review may result in invalidation of the FCC Auction in whole or in part. In
such a case, the FCC may be compelled to conduct a new auction, rescind the
construction permits for the channels which were auctioned or consider
alternative means of assigning available DBS channels.
An opposition to the DBSC Merger was filed with the FCC by CPT on March 15,
1996, the deadline for filing petitions and oppositions regarding approval by
the FCC of the DBSC Merger. EchoStar believes that the FCC has previously
considered and rejected issues similar to the arguments made in the oppositions
and that the filing of the CPT opposition does not materially decrease the
likelihood that the FCC will approve the DBSC Merger. CPT and another public
interest organization subsequently filed a joint letter at the FCC challenging
the Merger. This letter raises the same issues as CPT's earlier objection.
THE CABLE ACT
In addition to regulating pricing practices and competition within the
franchise cable television industry, the Cable Act was intended to establish and
support existing and new multi-channel video services, such as "wireless" cable
and DBS, to provide television programming.
Although EchoStar can provide no assurance as to the impact of the Cable Act
and amendments thereto on its businesses, EchoStar believes that the overall
effects on its present operations and its proposed DBS operation will be
positive. EchoStar expects to benefit from the programming access provision of
the Cable Act in that it will be able to gain access to previously unavailable
programming services and may obtain reduced costs for certain programming
services. Any amendment to, or interpretation of, the Cable Act that permits the
cable companies or entities affiliated with cable companies to discriminate
against competitors such as EchoStar in making available programming could
adversely affect EchoStar's ability to acquire programming on a cost-effective
basis. Certain of the restrictions on cable affiliated programmers will expire
in 2002 unless the FCC extends them.
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<PAGE>
EXPORT REGULATION
From time to time, EchoStar requires import licenses and general destination
export licenses to receive and deliver components of DTH systems. Also, EchoStar
has contracted with Arianespace for the launch of EchoStar II, and with LKE for
the launch of a satellite from the Kazakh Republic, a territory of the former
Soviet Union. Export licenses will be required to be obtained from the
Department of Commerce for the transport of any satellites to Korou, French
Guiana and to the Kazakh Republic. Martin Marietta will be required to obtain
technical data exchange licenses from the Department of Commerce permitting the
exchange between Martin Marietta and Arianespace and LKE, respectively, of
certain information necessary to prepare the satellites for launch. No
assurances can be given that the data exchange or export licenses will be
granted, or that implementation of the Trade Agreement will not negatively
affect EchoStar's ability to launch EchoStar IV on a Proton launch vehicle. LKE
has advised EchoStar, however, that, while no assurances can be given, it
believes the necessary technical data and hardware export licenses can be
obtained in time for the first scheduled launch of an EchoStar satellite. There
can be no assurance those licenses can be obtained in a timely manner to avoid a
launch delay.
PATENTS AND TRADEMARKS
EchoStar uses a number of trademarks for its products and services,
including "EchoStar-Registered Trademark-," "DISH
Network-Registered Trademark-," "DISH Network-SM-," "America's Top 40-SM-," and
others. Many of these trademarks are registered by EchoStar, and those
trademarks that are not registered are generally protected by common law and
state unfair competition laws. Although EchoStar believes that these trademarks
are not essential to EchoStar's business, EchoStar has taken affirmative legal
steps to protect its trademarks in the past and intends to actively protect
these trademarks in the future.
EchoStar is the assignee of certain patents for products and product
components manufactured and sold by EchoStar, none of which EchoStar considers
to be significant to its continuing operations. In addition, EchoStar has
obtained and, although no assurances can be given, expects to obtain, licenses
for certain patents necessary to the manufacture and sale by EchoStar and others
of DBS receivers and related components. EchoStar has been notified that certain
features of the EchoStar Receiver System allegedly infringe on patents held by
others, and that royalties are therefore required to be paid. EchoStar has
rejected the allegations of infringement and intends to vigorously defend
against any suit filed by the parties.
EMPLOYEES
EchoStar had approximately 710 employees at March 31, 1996, approximately
620 of whom worked in EchoStar's domestic operations and approximately 90 of
whom worked in EchoStar's international operations. EchoStar is not a party to
any collective bargaining agreement and considers its relations with its
employees to be good. Additional personnel will be hired to manage and operate
the EchoStar DBS System.
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<PAGE>
PROPERTIES
EchoStar owns its corporate headquarters, its uplink facility in Cheyenne,
Wyoming and three additional locations. The following table sets forth certain
information concerning EchoStar's properties.
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE OWNED OR
DESCRIPTION/USE LOCATION FOOTAGE LEASED
- --------------------------------------------- ------------------------------ ------------ -----------
<S> <C> <C> <C>
Corporate Headquarters and Warehouse
Distribution Center Englewood, Colorado 155,000 Owned
Office and Distribution Center Sacramento, California 78,500 Owned
Digital Broadcast Center Cheyenne, Wyoming 55,000 Owned
European Headquarters and Warehouse Almelo, The Netherlands 53,800 Owned
Warehouse Facility Denver, Colorado 40,000 Owned
Office and Distribution Center Bensenville, Illinois 19,000 Leased
Office and Distribution Center Miami, Florida 16,500 Leased
Office and Distribution Center Norcross, Georgia 16,000 Leased
Office and Distribution Center Dallas, Texas 11,200 Leased
Office and Distribution Center Columbia, Maryland 13,400 Leased
Office and Distribution Center Phoenix, Arizona 10,000 Leased
Asian Distribution Center Singapore 7,000 Leased
Office and Distribution Center Anaheim, California 4,300 Leased
Office Madrid, Spain 2,100 Leased
Asian Headquarters Singapore 1,900 Leased
Office Bangalore, India 1,200 Leased
Office Beijing, China 1,000 Leased
</TABLE>
LEGAL PROCEEDINGS
EchoStar is a party to certain legal proceedings arising in the ordinary
course of its business. EchoStar does not believe that any of these proceedings
will have a material adverse affect on EchoStar's financial position, results of
operations or liquidity.
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<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth information concerning the executive officers
and directors of EchoStar Communications Corporation. The executive officers and
directors of the Issuer, Dish, Ltd., and New DBSC are the same as the executive
officers and directors of EchoStar Communications Corporation, except that Alan
M. Angelich and Raymond C. Friedlob do not serve as directors of the Issuer,
Dish, Ltd., and New DBSC.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- ---------------------------------------------
<S> <C> <C>
Charles W. Ergen 43 Chairman, Chief Executive Officer, President
and Director
Alan M. Angelich 52 Director
Raymond L. Friedlob 51 Director
Carl E. Vogel 38 Chief Operating Officer and Executive Vice
President
James DeFranco 43 Executive Vice President and Director
R. Scott Zimmer 39 Vice President and Director
David K. Moskowitz 38 Senior Vice President, General Counsel and
Secretary
Steven B. Schaver 42 Chief Financial Officer
J. Allen Fears 39 Vice President, Treasurer and Controller
</TABLE>
CHARLES W. ERGEN. Mr. Ergen has been Chairman of the Board of Directors,
Chief Executive Officer and President of EchoStar since its formation and,
during the past five years, has held various positions with EchoStar's
subsidiaries, including President and Chief Executive Officer of Echosphere,
Echonet Business Network, Inc. ("EBN") and ESC, and Director of Echosphere,
Houston Tracker Systems, Inc. ("HTS"), EchoStar International Corporation
("EIC"), ESC and EBN. Mr. Ergen, along with his spouse and James DeFranco, was a
co-founder of EchoStar in 1980. Commencing in March 1995, Mr. Ergen also became
a director of SSE Telecom, Inc. ("SSET"), a company principally engaged in the
manufacture and sale of satellite telecommunications equipment.
ALAN M. ANGELICH. Mr. Angelich has been a director of EchoStar and a member
of its Audit and Executive Compensation Committees since October 1995. Mr.
Angelich is presently a principal with Janco Partners, Inc., an investment
banking firm specializing in the telecommunications industry. From May 1982 to
October 1993, Mr. Angelich served in various executive capacities with Jones
Intercable, Inc., including Vice Chairman of its Board of Directors from
December 1988 to October 1993. From August 1990 to October 1993, Mr. Angelich
was also the Chief Executive Officer of Jones Capital Markets, Inc.
RAYMOND L. FRIEDLOB. Mr. Friedlob has been a director of EchoStar and a
member of its Audit and Executive Compensation Committees since October 1995.
Mr. Friedlob is presently a member of the law firm of Friedlob, Sanderson,
Raskin, Paulson & Tourtillot, LLC. Prior to 1995, Mr. Friedlob was a partner of
Raskin & Friedlob, where he had practiced since 1970. Mr. Friedlob specializes
in federal securities law, corporate law, leveraged acquisitions, mergers and
taxation.
CARL E. VOGEL. Mr. Vogel was named President of EchoStar Satellite in
November 1995 and has been EchoStar's Executive Vice President and Chief
Operating Officer, and the President of Satellite Source, Inc. ("SSI"), since
April 1994. Prior to joining EchoStar, Mr. Vogel served as the Chief Executive
Officer of Jones Programming Services, Inc., a company engaged principally in
the acquisition and packaging of cable programming services for distribution via
cable television systems, from
89
<PAGE>
January 1990 to April 1994, and the Group Vice President of Finance of Jones
International, Ltd. and certain of its subsidiaries, companies engaged
principally in the cable television industry, from February 1983 to April 1994.
JAMES DEFRANCO. Mr. DeFranco is an Executive Vice President of EchoStar and
has been a Vice President and a Director of EchoStar since its formation and,
during the past five years, has held various positions with EchoStar's
subsidiaries, including President of HTS, EAC and HT Ventures, Inc. ("HTV"),
Executive Vice President of ESC, Senior Vice President of Echosphere and EBN,
and Director of SSI, Echosphere, HTS, EAC, EBN and HTV. Mr. DeFranco, along with
Mr. Ergen and Mr. Ergen's spouse, was a co-founder of EchoStar in 1980.
R. SCOTT ZIMMER. Mr. Zimmer has been a Vice President and a Director of
EchoStar since its formation. For the past five years, Mr. Zimmer has managed
the international operations of EchoStar and its subsidiaries.
DAVID K. MOSKOWITZ. Mr. Moskowitz is the Senior Vice President, Secretary
and General Counsel of EchoStar. Mr. Moskowitz joined EchoStar in March 1990.
Mr. Moskowitz is responsible for all legal affairs of EchoStar and its
subsidiaries.
STEVEN B. SCHAVER. Mr. Schaver was named Vice President and Chief Financial
Officer of EchoStar in February 1996. From November 1993 to February 1996, Mr.
Schaver was the Vice President of EchoStar's European and African operations.
From July 1992 to November 1993, Mr. Schaver was the Director of Sales and
Marketing for EchoStar's largest Spanish customer, Internacional de
Telecomunicaciones, S.A. in Madrid, Spain. Prior to July 1992 and since joining
EchoStar in 1984, he has held various positions with subsidiaries of EchoStar,
including Vice President of European operations. Prior to joining EchoStar Mr.
Schaver was a Banking Officer with Continental Illinois National Bank.
J. ALLEN FEARS. Mr. Fears has been the Vice President, Treasurer and
Controller of EchoStar since December 1992. Prior thereto Mr. Fears served as
Controller of all of EchoStar's subsidiaries from January 1988 to December 1992,
and as Assistant Controller of a subsidiary of EchoStar from October 1985 to
January 1988. Mr. Fears is responsible for the finance, accounting, tax and
budgeting systems of EchoStar and its subsidiaries.
The Board of Directors of EchoStar currently has an Audit Committee and an
Executive Compensation Committee, both of which were established in October
1995. The present members of the Audit and Executive Compensation Committees are
Messrs. Angelich and Friedlob. The principal functions of the Audit Committee
are: (i) to recommend to the Board of Directors the selection of independent
public accountants; (ii) review management's plan for engaging EchoStar's
independent public accountants during the year to perform non-audit services and
consider what effect these services will have on the independence of the
accountants; (iii) review the annual financial statements and other financial
reports which require approval by the Board of Directors; (iv) review the
adequacy of EchoStar's system of internal accounting controls; and (v) review
the scope of the independent public accountants' audit plans and the results of
the audit. The principal function of the Executive Compensation Committee is to
award grants under and administer EchoStar's Stock Incentive Plan.
The Board of Directors of the Issuer consists of Messrs. Ergen, DeFranco and
Zimmer. The Board of Directors of the Issuer has no committees. The executive
officers of the Issuer are the same as the executive officers of EchoStar.
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 pleasure of
the Board of Directors. Executive officers of EchoStar are elected annually to
serve until their respective successors are elected and qualified.
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<PAGE>
EXECUTIVE COMPENSATION
Executive officers are compensated by certain subsidiaries of the Issuer.
The following table sets forth the cash and non-cash compensation for the fiscal
years ended December 31, 1995, 1994 and 1993 of the Chief Executive Officer of
EchoStar and the next four most highly compensated executive officers of
EchoStar (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NUMBER OF
OTHER ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) GRANTED COMPENSATION (2)
- ------------------------------- --------- ----------- --------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Charles W. Ergen............... 1995 $ 190,000 $ -- $ -- 14,705 $ 15,158
Chairman, President, 1994 177,578 -- -- 53,568 888
and Chief Executive Officer 1993 156,000 -- -- -- 10,557
R. Scott Zimmer................ 1995 160,000 -- 88,229 14,705 32,390
Vice President 1994 148,006 -- 74,396 42,855 18,990
1993 132,000 95,452 71,458 -- 19,195
James DeFranco................. 1995 156,923 -- -- 11,764 15,158
Vice President 1994 154,461 -- -- 42,855 1,000
1993 144,000 55,778 -- -- 10,117
Carl E. Vogel.................. 1995 150,000 -- -- 21,641 11,346
Chief Operating Officer 1994 107,308 -- -- 375,776 500
and Executive Vice President 1993 -- -- -- -- --
David K. Moskowitz............. 1995 130,000 10,000 -- 28,048 13,270
Senior Vice President, 1994 125,384 -- -- 53,568 1,000
Secretary and General Counsel 1993 115,000 41,833 -- -- 6,497
</TABLE>
- ------------------------
(1) With respect to Mr. Zimmer, "Other Annual Compensation" includes housing and
car allowances related to Mr. Zimmer's overseas assignment. While each Named
Executive Officer enjoys certain other perquisites, such perquisites do not
exceed the lesser of $50,000 or 10% of each officer's salary and bonus.
(2) "All Other Compensation" includes amounts contributed to EchoStar's 401(k)
plan and premiums paid on health insurance on behalf of the Named Executive
Officers. With respect to Mr. Zimmer "All Other Compensation" also includes
home leave and education allowances related to his overseas assignment.
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<PAGE>
The following table provides information concerning grants of options to
purchase Class A Common Stock of EchoStar made in 1995 to the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM
OPTIONS EXECUTIVE IN PRICE PER EXPIRATION ------------------------
NAME GRANTED 1995 SHARE DATE 5% 10%
- -------------------------------------- ----------- --------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Charles W. Ergen...................... 14,705(1) 3.2% $ 17.00 06-20-05 $ 407,199 $ 648,397
R. Scott Zimmer....................... 14,705(1) 3.2% 17.00 06-20-05 407,199 648,397
James DeFranco........................ 11,764(1) 2.6% 17.00 06-20-05 325,759 518,717
Carl E. Vogel......................... 11,764(1) 2.6% 17.00 06-20-05 325,759 518,717
Carl E. Vogel......................... 9,877(2) 2.2% 20.25 12-22-05 325,794 518,772
David K. Moskowitz.................... 13,234(1) 2.9% 17.00 06-20-05 366,466 583,535
David K. Moskowitz.................... 14,814(2) 3.3% 20.25 12-22-05 488,642 778,079
</TABLE>
- ------------------------
(1) In June 1995, EchoStar granted options to the Named Executive Officers,
among other key employees, to purchase shares of Class A Common Stock. The
options vest 20% on June 20, 1996, and 20% thereafter on June 20, 1997,
1998, 1999 and 2000. See "-- Executive Compensation -- Stock Incentive
Plan." The options expire five years from the date on which each portion of
the option first becomes exercisable, subject to early termination in
certain circumstances.
(2) In December 1995, EchoStar granted options to the Named Executive Officers,
among other key employees, to purchase shares of Class A Common Stock. The
options vest 20% on December 22, 1996, and 20% thereafter on December 22,
1997, 1998, 1999 and 2000. See "-- Stock Incentive Plan." The options expire
five years from the date on which each portion of the option first becomes
exercisable, subject to early termination in certain circumstances.
The following table provides information as of December 31, 1995, concerning
unexercised options to purchase Class A Common Stock. None of the Named
Executive Officers exercised any stock options during 1995.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1995 DECEMBER 31, 1995 (1)
-------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Charles W. Ergen........................................ 10,714 57,559 $ 159,821 $ 745,864
R. Scott Zimmer......................................... 8,571 48,989 127,854 618,025
James DeFranco.......................................... 8,571 46,048 127,854 596,703
Carl E. Vogel........................................... 332,922 64,495 6,973,231 764,050
David K. Moskowitz...................................... 10,714 70,902 159,821 794,455
</TABLE>
- ------------------------
(1) The dollar value of each exercisable and unexercisable option was calculated
by multiplying the number of shares of Class A Common Stock underlying the
option by the difference between the exercise price of the option and the
closing price (as quoted in the Nasdaq National Market) of a share of Class
A Common Stock on December 31, 1995.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Prior to
October 1995, EchoStar did not have a Compensation Committee, and its Board of
Directors determined all matters concerning executive compensation.
DIRECTOR COMPENSATION. Directors of EchoStar who are not also executive
officers of EchoStar receive $500 for each meeting of the Board of Directors
attended and are reimbursed for reasonable travel expenses related to attendance
at Board meetings. Directors of EchoStar are elected annually by the
stockholders of EchoStar. Directors of the Issuer are not compensated for their
services as directors. Directors of the Issuer are elected annually by EchoStar.
The Board of Directors of EchoStar has approved the Non-Employee Stock
Option Incentive Plan (the "Director Plan") pursuant to which directors who are
not also employees of EchoStar are granted options to acquire 1,000 shares of
Class A Common Stock of EchoStar upon election to the Board. The Director Plan
is being submitted to shareholders of EchoStar for approval at the 1996 Annual
Meeting of Shareholders. Subject to such approval, the Board approved issuance
of options to Messrs. Angelich and Friedlob as of December 22, 1995. These
options are 100% vested upon issuance with an exercise price of $20.25 and a
term of five years.
EMPLOYMENT AGREEMENT. In March 1994, EchoStar entered into an employment
agreement with Carl E. Vogel, pursuant to which Mr. Vogel acts as Executive Vice
President and Chief Operating Officer of EchoStar and receives an annual salary
of $150,000. EchoStar has no employment agreements with any of its executive
officers other than Mr. Vogel.
EchoStar may terminate Mr. Vogel's employment at any time, with or without
cause, but will be required to compensate Mr. Vogel a specified amount if
EchoStar terminates his employment prior to January 1, 1997. Such compensation
will depend on the duration of Mr. Vogel's employment with EchoStar. Similarly,
Mr. Vogel may voluntarily terminate his employment with EchoStar at any time and
receive severance compensation in an amount based on the duration of his
employment with EchoStar at the time of such termination. On or after January 1,
1997, Mr. Vogel will have no right to receive any compensation from EchoStar
upon termination. For a period of one year following termination of Mr. Vogel's
employment with EchoStar, Mr. Vogel may not compete against EchoStar by working,
or acting in any other capacity, for a company in the DBS industry. Mr. Vogel
may, however, work for an affiliate of a company in the DBS industry, in a role
unrelated to that industry. Mr. Vogel also has an option to purchase 322,208
shares of Class A Common Stock of EchoStar for $3.10 per share (the "Vogel
Option").
STOCK INCENTIVE PLAN. EchoStar has adopted a stock incentive plan (the
"Incentive Plan") to provide incentives to attract and retain officers and other
key employees. EchoStar's Executive Compensation Committee administers the
Incentive Plan. Key employees are eligible to receive awards under the Incentive
Plan, in the Committee's discretion.
Awards available under the Incentive Plan include: (i) common stock purchase
options; (ii) stock appreciation rights; (iii) restricted stock and restricted
stock units; (iv) performance awards; (v) dividend equivalents; and (vi) other
stock-based awards. EchoStar has reserved up to ten million shares of Class A
Common Stock for granting awards under the Incentive Plan. Under the terms of
the Incentive Plan, the Committee retains discretion, subject to plan limits, to
modify the terms of outstanding awards and to reprice awards.
EchoStar has granted to officers and other key employees options under the
Incentive Plan for a total of 1,164,357 shares of Class A Common Stock. The
options generally vest at the rate of 20% per year commencing one year from the
date of grant and 20% thereafter on each anniversary of the date of grant. The
exercise prices of these options range between $9.33 and $20.25 per share.
LAUNCH BONUS PLAN. Effective December 16, 1995, EchoStar granted a
performance award of 10 shares of Class A Common Stock to all full time
employees with more than 90 days service. The total number of shares granted was
approximately 4,870 shares.
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<PAGE>
401(K) PLAN. In 1983, EchoStar adopted a defined-contribution tax-qualified
401(k) plan. EchoStar employees become eligible for participation in the 401(k)
plan upon completing one-half year of service with EchoStar and reaching age 21.
The 401(k) plan participants may contribute an amount equal to not less than 1%
and not more than 15% of their compensation in each contribution period.
EchoStar may make a 50% matching contribution up to a maximum of $1,000 per
participant per calendar year. EchoStar may also make an annual discretionary
profit sharing or employer stock contribution to the 401(k) plan with the
approval of the Board of Directors.
The 401(k) plan participants are immediately vested in their voluntary
contributions, plus actual earnings thereon. The balance of the vesting in the
401(k) plan participants' accounts is based on years of service. A participant
becomes 10% vested after one year of service, 20% vested after two years of
service, 30% vested after three years of service, 40% vested after four years of
service, 60% vested after five years of service, 80% vested after six years of
service and 100% vested after seven years of service.
Effective December 22, 1995, EchoStar contributed 55,000 shares of Class A
Common Stock to the 401(k) plan as a discretionary employer stock contribution.
EchoStar recognized expense, and an addition to its paid-in capital, for the
fair value (approximately $1.1 million) of the EchoStar shares contributed to
the Plan. No employee has voting or any other interest in the Class A Common
Stock unless still employed by EchoStar on December 31, 1996. Shares of the
Class A Common Stock have been allocated to the 401(k) accounts of the following
executive officers of EchoStar in accordance with the Plan: (i) Charles W.
Ergen, 699 shares; (ii) R. Scott Zimmer, 699 shares; (iii) James DeFranco, 699
shares; (iv) Carl E. Vogel, 511 shares; (v) David K. Moskowitz, 605 shares; and
(vi) all officers and directors as a group, 5,272 shares.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain subsidiaries of EchoStar have agreed to indemnify Charles W. Ergen,
Chief Executive Officer and President of EchoStar, James DeFranco, a Vice
President of EchoStar, R. Scott Zimmer, a Vice President of EchoStar, and Cantey
M. Ergen, a former Director of HTS and the spouse of Charles W. Ergen, for any
adjustments to such individuals' federal, state or local income taxes resulting
from adjustments to EchoStar's subsidiaries' taxable income or loss, tax credits
or tax credit recapture for years during which such individuals were
stockholders of such subsidiaries and such subsidiaries elected to be taxed as
Subchapter S corporations. This indemnity agreement also covers interest,
penalties and additions to tax, as well as fees and expenses, including
attorneys' and accountants' fees, if any.
Charles W. Ergen beneficially owns 10% of the stock of Wright Travel
Corporation ("Wright Travel"), a privately held travel agency which EchoStar
uses for its travel arrangements and which leases office space from EchoStar.
For the year ended December 31, 1995, EchoStar paid approximately $769,000 to
Wright Travel. These payments were primarily related to travel expenses, large
events and seminars that were contracted with Wright Travel at rates comparable
to those obtainable from independent third parties. In 1995, EchoStar earned
approximately $27,000 from the lease by Wright Travel of office space from
EchoStar, which amount was offset by approximately $10,000 required to be
credited by EchoStar to Wright Travel for the exclusive services of an employee
of Wright Travel.
EchoStar issued a long-term promissory note (the "Ergen Note") payable to
Charles W. Ergen in the principal amount of $14.7 million as of December 31,
1993. The proceeds of the Ergen Note were used to make payments toward the
construction and launch of EchoStar I (see Note 6 of Notes to EchoStar's
Financial Statements). In connection with the 1994 Notes Offering, Dish, Ltd.
exchanged shares of its Series A Preferred Stock for the Ergen Note and accrued
interest thereon at the rate of 10% per annum. Subsequent to the exchange, Mr.
Ergen sold five percent of his Series A Preferred Stock of Dish, Ltd. to James
DeFranco for $753,000. In 1995, Series A Preferred Stock of EchoStar was issued
in exchange for Series A Preferred Stock of Dish, Ltd. Pursuant to the 1994
Indenture, dividends may be paid on the Series A Preferred Stock of EchoStar
only if certain conditions are satisfied. See "Description of Certain
Indebtedness--1994 Notes." As of December 31, 1995, dividends accrued but unpaid
on the Dish, Ltd. Series A Preferred Stock and the Series A Preferred Stock of
EchoStar to Mr. Ergen and Mr. DeFranco, respectively, aggregated $2.0 million
and $107,000.
Since March 1995, Mr. Ergen has served on the Board of Directors of SSET. In
1994, EchoStar provided SSET with $8.75 million of financing through the
issuance by SSET to EchoStar of its seven-year, 6.5% subordinated convertible
non-recourse debentures, which are convertible into approximately 12% of SSET's
outstanding common stock, based on the number of shares of SSET common stock
outstanding at December 31, 1995. As of December, 31, 1995, the total amount
owed by SSET to EchoStar under the convertible debentures was approximately $9.6
million, including accrued interest. EchoStar also purchased all of SSET's
minority interest in DBSC and certain notes and accounts payable by DBSC to SSET
for $1.25 million. In connection with these transactions, Mr. Ergen advanced
$4.0 million to EchoStar, all of which was used to purchase convertible
debentures and certain assets of SSET. These advances were represented by a
promissory note bearing interest at 8% per annum and were repaid in June 1994
from the proceeds of the 1994 Notes Offering.
In December 1994, DirectSat, a subsidiary of SSET, was merged with a wholly
owned subsidiary of EchoStar. As a result of this merger, SSET acquired 800,780
shares of EchoStar's Class A Common Stock.
EchoStar believes that each of the transactions described above between
EchoStar and its affiliates were on terms comparable to those which would have
been obtainable from unaffiliated third parties.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and the accompanying notes set forth information
concerning the beneficial ownership of EchoStar's equity securities as of May
31, 1996. The information is presented for: (i) each person known by EchoStar to
be the beneficial owner of more than five percent of any class of EchoStar's
capital stock; (ii) each director of EchoStar; (iii) each Named Executive
Officer; and (iv) all directors and executive officers as a group. Except as
otherwise indicated, each person listed in the following table has informed
EchoStar that such person has sole voting and investment power with respect to
such person's shares of capital stock.
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME (1) NUMBER OF SHARES CLASS
----------------- -----------------
<S> <C> <C>
8% Series A Cumulative Preferred Stock
Charles W. Ergen............................................................ 1,535,847(2) 95.0%
James DeFranco.............................................................. 80,834 5.0%
All Directors and Executive Officers as a Group (twelve persons)............ 1,616,681 100.0%
Class A Common Stock
Charles W. Ergen............................................................ 31,425,449(3) 73.6%(4)(5)
James DeFranco.............................................................. 1,712,588(6) 4.0%(4)
R. Scott Zimmer............................................................. 827,917(7) 1.9%(4)
SSE Telecom, Inc............................................................ 912,717(8) 2.1%(4)
Carl E. Vogel............................................................... 346,245(9) *
David K. Moskowitz.......................................................... 28,692(10) *
All Directors and Executive Officers as a Group (twelve persons)............ 34,405,683 11) 80.6 %(4)
Class B Common Stock
Charles W. Ergen............................................................ 29,804,401 100.0 %
All Directors and Executive Officers as a Group (twelve persons)............ 29,804,401 100.0 %
</TABLE>
- ------------------------
*Less than 1%
(1) Except as otherwise noted, the address of each such person is 90 Inverness
Circle East, Englewood, Colorado 80112.
(2) Includes 1,125,000 shares of Series A Preferred Stock held in trust for the
benefit of Mr. Ergen's minor children and other members of his family. Mr.
Ergen's spouse is the trustee for that trust. All of the Series A Preferred
Stock is pledged to Martin Marietta as security for the performance of
certain of ESC's obligations under the Satellite Contracts.
(3) Includes: (i) 24,368 shares of Class A Common Stock issuable to Mr. Ergen
upon exercise of employee stock options; (ii) 29,804,401 shares of Class A
Common Stock issuable upon conversion of Mr. Ergen's Class B Common Stock;
(iii) 410,847 shares of Class A Common Stock issuable upon conversion of Mr.
Ergen's Series A Preferred Stock; (iv) 1,125,000 shares of Class A Common
Stock issuable upon conversion of Series A Preferred Stock held in trust for
the benefit of Mr. Ergen's minor children and other members of his family;
and (v) 55,000 shares of Class A Common Stock held by the EchoStar
Communications Corporation 401(k) Plan, of which Mr. Ergen is a trustee.
(4) The beneficial ownership percentage was calculated assuming exercise or
conversion of all Class B Common Stock, Preferred Stock, Warrants and
employee stock options ("Derivative Securities") into Class A Common Stock
by all holders of such Derivative Securities. Assuming exercise or
conversion of Derivative Securities by such person, and only by such person,
the beneficial ownership of Class A Common Stock would be as follows: Mr.
Ergen, 74.8%; Mr. DeFranco, 16.2%; Mr. Zimmer, 8.1%; Mr. Vogel, 3.6%; and
all officers and directors as a group,
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81.0%. SSE Telecom, Inc. does not own any Derivative Securities. If none of
the holders of Derivative Securities exercise or convert such securities,
SSE Telecom, Inc. would beneficially own 8.6% of the outstanding Class A
Common Stock.
(5) The percentage of total voting power held by Mr. Ergen is 96.1%, after
giving effect to the exercise of the Warrants and the employee stock
options.
(6) Includes: (i) 19,494 shares of Class A Common Stock issuable to Mr. DeFranco
upon exercise of employee stock options; (ii) 80,834 shares of Class A
Common Stock issuable upon conversion of Mr. DeFranco's Series A Preferred
Stock; (iii) 751 shares of Class A Common Stock held as custodian for his
minor children; and (iv) 375,000 shares of Class A Common Stock controlled
by Mr. DeFranco as general partner of a partnership.
(7) Includes: (i) 20,083 shares of Class A Common Stock issuable to Mr. Zimmer
upon exercise of employee stock options; (ii) 2,300 shares of Class A Common
Stock owned jointly with members of his family; and (iii) 100,000 shares of
Class A Common Stock held in trust for the benefit of Mr. Zimmer's children
and other members of his family. Mr. Zimmer's spouse is the trustee for that
trust.
(8) Includes 111,937 shares of Class A Common Stock owned by EchoSat
Corporation, a wholly owned subsidiary of SSE Telecom, Inc. The address of
SSE Telecom, Inc. is 8230 Leesburg Pike, Suite 710, Vienna, Virginia 22182.
(9) Includes: (i) 345,988 shares of Class A Common Stock issuable to Mr. Vogel
upon exercise of employee stock options; and (ii) 247 shares of Class A
Common Stock owned jointly with Mr. Vogel's spouse.
(10) Includes: (i) 24,074 shares of Class A Common Stock issuable to Mr.
Moskowitz upon exercise of employee stock options; (ii) 3,000 shares of
Class A Common Stock owned by Mr. Moskowitz's spouse; (iii) 166 shares of
Class A Common Stock held as custodian for his minor children; and (iv)
1,023 shares of Class A Common Stock held as trustee for Mr. Ergen's
children.
(11) Includes: (i) 176,334 shares of Class A Common Stock issuable upon exercise
of employee stock options; (ii) 55,000 shares held by the 401(k) plan; (iii)
375,000 shares of Class A Common Stock held in a partnership; (iv) 322,208
shares of Class A Common Stock issuable upon exercise of the Vogel Option;
(v) 1,616,681 shares of Class A Common Stock issuable upon conversion of
Series A Preferred Stock; (vi) 29,804,401 shares of Class A Common Stock
issuable upon conversion of Class B Common Stock; (vii) 101,941 shares of
Class A Common Stock held in the name of, or in trust for, minor children
and other family members; and (viii) 5,753 shares of Class A Common Stock
owned by or jointly with family members.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
Set forth below is a summary of certain indebtedness to which the Issuer is
subject. This summary describes all material elements of such indebtedness but
does not purport to be complete and is qualified in its entirety by reference to
the applicable agreements filed as exhibits to the Registration Statement of
which this Prospectus is a part.
1994 NOTES
In June 1994, Dish, Ltd. issued the 1994 Notes, which generated gross
proceeds of approximately $335.1 million. Interest on the 1994 Notes accrues at
the rate of 12 7/8% per annum, but is not payable in cash prior to June 1, 1999.
Thereafter, interest will accrue at the same rate and will be payable in cash
semi-annually on June 1 and December 1 of each year. Principal of the 1994 Notes
accretes to $624 million in 1999, and matures on June 1, 2004. The 1994 Notes
are secured by, among other things: (i) a pledge of all of the issued and
outstanding capital stock of certain of EchoStar's subsidiaries; (ii) a first
priority security interest in the assets of ESC (subject to the terms of an
intercreditor agreement with, among others, Martin Marietta and the Bank)
including a first priority security interest in EchoStar I and, when launched,
EchoStar II; (iii) a first priority security interest in the 1994 Escrow Account
and Dish, Ltd.'s customer lists and related rights with respect to EchoStar I
and EchoStar II; (iv) a collateral assignment, insofar as they relate to
EchoStar I and EchoStar II, of the Satellite Contracts, the Launch Contracts,
all programming contracts, all TT&C contracts and each other contract necessary
for the operation of EchoStar I and EchoStar II; and (v) a subordinate lien on
the assets of the Credit Agreement Borrowers.
Except as set forth below, the 1994 Notes are not redeemable at Dish, Ltd.'s
option prior to June 1, 1999. Thereafter, the 1994 Notes are subject to
redemption at the option of Dish, Ltd., in whole or in part, at the redemption
prices set forth in the 1994 Indenture. In addition, at any time prior to June
1, 1997, Dish, Ltd. may redeem the 1994 Notes at a redemption price equal to
111.5% of the accreted value thereof on the repurchase date with the net
proceeds of one public or private sale of certain equity interests of Dish,
Ltd., provided that: (i) at least two-thirds of the 1994 Notes remain
outstanding immediately after the occurrence of such redemption; and (ii) such
redemption occurs within 120 days of the date of the closing of any such sale.
On each of June 1, 2002 and June 1, 2003, Dish, Ltd. is required to redeem 25%
of the original aggregate principal amount of the 1994 Notes at a redemption
price equal to 100% of the principal amount thereof, together with accrued and
unpaid interest to the redemption date.
The 1994 Indenture provides that in the event of a "Change of Control,"
Dish, Ltd. is required to make an offer to purchase all 1994 Notes at 101% of
the accreted value thereof (if prior to June 1, 1999) or 101% of the principal
amount thereof (if on or after June 1, 1999), plus accrued and unpaid interest
to the date of payment. "Change of Control" means: (i) any transaction or series
of transactions, the result of which is that the Principals and their Related
Parties (as such terms are hereinafter defined), or an entity controlled by the
Principals and their Related Parties, cease to be the "beneficial owners" (as
defined in Rule 13d-3 under the Exchange Act) of at least 30% of the total
equity interests of Dish, Ltd. and to have the voting power to elect at least a
majority of the Board of Directors of Dish, Ltd.; or (ii) the first day on which
a majority of the members of the Board of Directors of Dish, Ltd. are not
Continuing Directors. "Continuing Director" means as of any date of
determination, any member of the Board of Directors of Dish, Ltd. who: (a) was a
member of such Board of Directors on the date of the 1994 Indenture; or (b) was
nominated for election or elected to such Board of Directors with the
affirmative vote of a majority of the Continuing Directors who were members of
such Board at the time of such nomination or election. "Principals" means
Messrs. Ergen, DeFranco, Zimmer, Vogel, Fears and Moskowitz. "Related Parties"
means, with respect to any Principal: (y) the spouse and each immediate family
member of such Principal; and (z) each trust, corporation, partnership or other
entity of which such Principal beneficially holds an 80% or more controlling
interest.
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The 1994 Indenture contains restrictive covenants that, among other things,
impose limitations on Dish, Ltd. and its subsidiaries with respect to their
ability to: (i) incur additional indebtedness; (ii) issue preferred stock; (iii)
apply the proceeds of certain asset sales; (iv) create, incur or assume liens;
(v) create dividend and other payment restrictions with respect to Dish, Ltd.'s
subsidiaries; (vi) merge, consolidate or sell assets; (vii) incur subordinated
or junior debt; and (viii) enter into transactions with affiliates. In addition,
Dish, Ltd., may pay dividends on its equity securities only if: (y) no default
is continuing under the 1994 Indenture; and (z) after giving effect to such
dividend, Dish, Ltd.'s ratio of total indebtedness to cash flow (calculated in
accordance with the 1994 Indenture) would not exceed 4.0 to 1. Moreover, the
aggregate amount of such dividends generally may not exceed the sum of 50% of
Dish, Ltd.'s consolidated net income (calculated in accordance with the 1994
Indenture) from the date of issuance of the 1994 Notes, plus 100% of the
aggregate net proceeds to Dish, Ltd. from the issuance and sale of certain
equity interests of Dish, Ltd. (including common stock).
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DESCRIPTION OF EXCHANGE NOTES
The following summary of certain provisions of: (i) the 1996 Indenture; and
(ii) the Registration Rights Agreement does not purport to be complete and is
qualified in its entirety by reference to the 1996 Indenture and the
Registration Rights Agreement. All material elements of the 1996 Indenture and
the Registration Rights Agreement are set forth below. The definitions of
certain terms used in the following summary are set forth below under "--Certain
Definitions." In the following summary, "EchoStar" refers to EchoStar
Communications Corporation only, not including its direct and indirect
subsidiaries. Unless the context otherwise requires, all references herein to
the "Notes" shall include the Old Notes and the Exchange Notes.
GENERAL
The Exchange Notes will be issued, and the Old Notes were issued, pursuant
to the 1996 Indenture among the Issuer, the Guarantors, EchoStar DBS and First
Trust National Association, as trustee (the "Trustee"). The terms of the
Exchange Notes are the same in all respects (including principal amount,
interest rate, maturity, security and ranking) as the terms of the Old Notes for
which they may be exchanged pursuant to the Exchange Offer, except that the
Exchange Notes (1) are freely transferrable by holders thereof (except as
provided below) and (ii) are not entitled to certain registration rights and
certain liquidated damages provisions which are applicable to the Old Notes
under the Registration Rights Agreement. The Exchange Notes will be issued under
the 1996 Indenture governing the Old Notes. The Exchange Notes are subject to
all such terms, and holders of Notes are referred to the 1996 Indenture and the
Trust Indenture Act for a statement thereof.
The Notes rank PARI PASSU in right of payment with all senior indebtedness
of the Issuer. Although the Notes are titled "Senior": (i) the Issuer has not
issued, and does not have any plans to issue, any indebtedness to which the
Notes would be senior; and (ii) the Notes are effectively subordinated to all
liabilities of EchoStar (except liabilities to general creditors) and its
Subsidiaries (except liabilities of the Issuer), including liabilities to
general creditors. As of December 31, 1995, the liabilities of EchoStar and its
Subsidiaries aggregated approximately $466.4 million. In addition, the cash flow
generated by the assets and operations of the Issuer's Subsidiaries will only be
available to satisfy the Issuer's obligations on the Notes at any time after
payment of all amounts due and payable at such time under the 1994 Notes by
Dish, Ltd. The Notes are secured by liens on certain assets of the Issuer and
its Affiliates and will be guaranteed on a senior unsecured or subordinated
basis, from time to time, by certain Affiliates of the Issuer. See "--
Security," "-- Affiliate Guarantees," "Risk Factors -- Springing Guarantees" and
"Risk Factors -- Contingent Collateral."
PRINCIPAL, MATURITY AND INTEREST
The Old Notes were issued in the aggregate principal amount of $580.0
million which was sufficient to generate gross proceeds to the Issuer of
approximately $350.0 million. The Notes will mature on March 15, 2004.
Commencing on March 15, 2000, interest will accrue at the rate of 13 % per annum
and will be payable semi-annually in cash on each March 15 and September 15,
commencing September 15, 2000, to holders of record on the immediately preceding
March 1 and September 1. Interest will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from March 15, 2000.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. The Exchange Notes will bear interest from March 25, 1996. Holders of
the Old Notes whose Old Notes are accepted for exchange will be deemed to have
waived the right to have interest accrete, or to receive any payment in respect
of interest on the Old Notes accreted, from March 25, 1996, to the date of
issuance of the Exchange Notes.
The Notes will be payable both as to principal and interest at the office or
agency of the Issuer maintained for such purpose or, at the option of the
Issuer, payment of interest may be made by check mailed to the holders of the
Notes at their respective addresses set forth in the register of holders of
Notes. Until otherwise designated by the Issuer, the Issuer's office or agency
will be the office of the Trustee maintained for such purpose. The Exchange
Notes will be issued in registered form, without coupons, in denominations of
$1,000 and integral multiples thereof.
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OPTIONAL REDEMPTION
Except as provided in the next paragraph, the Notes will not be redeemable
at the Issuer's option prior to March 15, 2000. Thereafter, the Notes will be
subject to redemption at the option of the Issuer, in whole or in part, upon not
less than 30 nor more than 60 days' notice, at the redemption prices (expressed
as percentages of principal amount) set forth below, together with accrued and
unpaid interest thereon to the applicable redemption date, if redeemed during
the 12-month period beginning on March 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
-------------
<S> <C>
2000....................................................... 106.5625%
2001....................................................... 104.3750%
2002....................................................... 102.1875%
2003....................................................... 100.0000%
</TABLE>
Notwithstanding the foregoing, at any time prior to March 15, 1999, the
Issuer may redeem Notes at a redemption price equal to 112.125% of the Accreted
Value thereof on the repurchase date with the net proceeds of one public or
private sale of Equity Interests (other than Disqualified Stock) of EchoStar
(other than to EchoStar and its Subsidiaries); PROVIDED that (a) at least
two-thirds in aggregate principal amount of the Notes originally issued remain
outstanding immediately after the occurrence of such redemption and (b) such
redemption occurs within 120 days of the date of the closing of any such sale.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed or, if the Notes are not so listed, on a pro rata basis, by lot
or by such other method as the Trustee deems fair and appropriate, PROVIDED that
no Notes with a principal amount of $1,000 or less shall be redeemed in part.
Notice of redemption shall be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each holder of Notes to be
redeemed at its registered address. If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note shall state the portion of
the principal amount thereof to be redeemed. A new Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest will cease to accrete or accrue on Notes or portions thereof
called for redemption.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Issuer will be required to
make an offer (a "Change of Control Offer") to each holder of Notes to
repurchase all or any part (equal to $1,000 or an integral multiple thereof) of
such holder's Notes at a purchase price equal to 101% of the Accreted Value
thereof on the date of purchase (if prior to March 15, 2000) or 101% of the
aggregate principal amount thereof, together with accrued and unpaid interest
thereon to the date of purchase (if on or after March 15, 2000) (in either case,
the "Change of Control Payment"). Within 15 days following any Change of
Control, the Issuer shall mail a notice to each holder stating:
(a) that the Change of Control Offer is being made pursuant to the
covenant entitled "Change of Control";
(b) the purchase price and the purchase date, which shall be no earlier
than 30 days nor later than 40 days after the date such notice is mailed
(the "Change of Control Payment Date");
(c) that any Notes not tendered will continue to accrete and accrue
interest in accordance with the terms of the 1996 Indenture;
(d) that, unless the Issuer defaults in the payment of the Change of
Control Payment, all Notes accepted for payment pursuant to the Change of
Control Offer shall cease to accrete or accrue interest after the Change of
Control Payment Date;
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(e) that holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of Notes delivered for purchase, and a
statement that such holder is withdrawing his election to have such Notes
purchased;
(f) that holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of the
Notes surrendered, which unpurchased portion must be equal to $1,000 in
principal amount or an integral multiple thereof; and
(g) any other information material to such holder's decision to tender
Notes.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes in connection with a Change of Control. Due to the
highly leveraged structure of the Issuer, the Issuer may not be able to
repurchase all of the Notes tendered for purchase upon the occurrence of a
Change of Control. If the Issuer fails to repurchase all of the Senior Secured
Notes tendered for purchase upon the occurrence of a Change of Control, such
failure will constitute an Event of Default. See "-- Events of Default and
Remedies."
Except as described above with respect to a Change of Control, the 1996
Indenture does not contain provisions that permit the holders of the Notes to
require that the Issuer repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
OFFER TO PURCHASE UPON THE OCCURRENCE OF CERTAIN EVENTS
In the event that:
(a) EchoStar and its Subsidiaries do not have the right to use orbital
slot authorizations granted by the FCC covering a minimum of 21 transponders
at a single full CONUS orbital slot;
(b) EchoStar and its Subsidiaries at any time fail to timely obtain or
maintain any material license or permit that is necessary to operate
EchoStar I or EchoStar II in the manner and in accordance with the plan of
operations described in this Prospectus (unless: (i) EchoStar or any of its
Subsidiaries is contesting the loss of such license or permit in good faith
at the FCC and has not exhausted its remedies at the FCC; and (ii) EchoStar
(together with any Subsidiary) continue to have the right to use such
license or permit if previously obtained);
the Issuer will be required to make an offer (an "Offer to Purchase") to each
holder of Notes to repurchase all or any part (equal to $1,000 or an integral
multiple thereof) of such holder's Notes at a purchase price equal to 101% of
the Accreted Value thereof on the date of purchase (if prior to March 15, 2000)
or 101% of the aggregate principal amount thereof, together with accrued and
unpaid interest thereon to the date of purchase (if on or after March 15, 2000).
In addition, in the event that:
(a) EchoStar DBS Corporation fails to obtain authorization from the FCC
for frequencies at the 148 WL orbital slot purchased at the FCC Auction, or
in the event that such authorization is revoked or rescinded, the Issuer
will be required to apply the proceeds of any refund of the purchase price
for such frequencies from the FCC to an offer to all holders of the Notes to
purchase the maximum principal amount of Notes that may be purchased out of
such proceeds;
(b) on or before March 1, 1997, DBSC has not either: (i) been merged
with a Subsidiary of EchoStar (the "DBSC Merger"); or (ii) consummated a
transaction or series of transactions (the "Substitute DBSC Transaction")
which, in the opinion of a majority of the Board of Directors of EchoStar as
evidenced by an Officers' Certificate delivered to the Trustee and an
investment banking firm of national standing selected by the Issuer: (A) has
the effect of providing EchoStar and its Subsidiaries substantially the same
benefits (without materially greater obligations) that
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would have accrued to EchoStar and its Subsidiaries had the DBSC Merger been
consummated; and (B) provides cash flow to EchoStar and its Subsidiaries
with substantially similar timing to the cash flows that would have been
generated had the DBSC Merger been consummated, the Issuer will be required
to apply the greater of: (i) $83.0 million; and (ii) an amount equal to
Investments by EchoStar and its Subsidiaries in DBSC Notes, since the date
of the 1996 Indenture, to an offer to all holders of the Notes to purchase
the maximum principal amount of Notes that may be purchased out of such
amount;
(c) EchoStar and its Subsidiaries, at any time after the DBSC Merger is
consummated, fail to timely obtain or maintain any material license
necessary to operate EchoStar III in the manner and in accordance with the
plan of operations described in this Prospectus (unless: (i) EchoStar or any
of its Subsidiaries is contesting the loss of such license or permit in good
faith at the FCC and has not exhausted its remedies at the FCC; and (ii)
EchoStar (together with any subsidiary) continues to have the right to use
such license or permit if previously obtained), the Issuer will be required
to apply $83.0 million, minus the total amount of all Offer Payments
previously made pursuant to this paragraph (c), to an offer to all holders
of the Notes to purchase the maximum principal amount of Notes that may be
purchased out of such amount; or
(d) EchoStar and its Subsidiaries incur more than $7.8 million of
expenses (including, without limitation, dissenters' appraisal rights and
purchases of fractional shares) in connection with the DBSC Merger, as soon
as the DBSC Merger has been consummated and the final appraisal rights of
any dissenters have been determined, the Issuer will be required to apply an
amount equal to such expenses, minus $7.8 million, to an offer to all
holders of the Notes to purchase the maximum principal amount of Notes that
may be purchased out of such proceeds;
in any case, at a purchase price of 101% of the Accreted Value thereof on the
date of purchase (if prior to March 15, 2000) or 101% of the aggregate principal
amount thereof, together with accrued and unpaid interest thereon to the date of
purchase (if on or after March 15, 2000) (in any case described in this sentence
or the prior sentence, the "Offer Payment").
Within 15 days following any event described above, the Issuer shall mail a
notice to each holder stating, among other things:
(i) that the Offer to Purchase is being made pursuant to the covenant
entitled "Offer to Purchase upon the Occurrence of Certain Events";
(ii) the purchase price and the purchase date, which shall be no earlier
than 30 days nor later than 40 days after the date such notice is mailed
(the "Offer Payment Date");
(iii) that any Notes not tendered will continue to accrete and accrue
interest in accordance with the terms of the 1996 Indenture;
(iv) that, unless the Issuer defaults in the payment of the Offer
Payment, all Notes accepted for payment pursuant to the Offer to Purchase
shall cease to accrete and/or accrue interest after the Offer Payment Date;
(v) that holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the second
Business Day preceding the Offer Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder, the principal
amount of Notes delivered for purchase, and a statement that such holder is
withdrawing his election to have such Notes purchased;
(vi) that holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of the
Notes surrendered, which unpurchased portion must be equal to $1,000 in
principal amount or an integral multiple thereof; and
(vii) any other information material to such holder's decision to tender
Notes.
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The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes in connection with an Offer to Purchase. Due to the
highly leveraged structure of the Issuer, the Issuer may not be able to
repurchase all of the Notes required to be purchased by it in connection with an
Offer to Purchase. If the Issuer fails to repurchase all of the Notes required
to be purchased by it in connection with an Offer to Purchase, such failure will
constitute an Event of Default. See "Events of Default and Remedies."
SIGNIFICANT TRANSACTIONS
EchoStar or any of its Subsidiaries will be permitted to enter into a
transaction or series of transactions (a "Significant Transaction") with another
entity (a "Strategic Partner"), notwithstanding the fact that such Significant
Transaction would otherwise be prohibited under the terms of the 1996 Indenture,
in which it: (i) sells, leases, conveys or otherwise disposes of any of its
assets (including by way of a sale-and-leaseback transaction) to such Strategic
Partner; or (ii) makes an Investment in such Strategic Partner; PROVIDED that:
(i) EchoStar or such Subsidiary receives fair market value for any
property or assets transferred in such Significant Transaction in the
opinion of a majority of the Board of Directors of EchoStar as evidenced by
an Officers' Certificate delivered to the Trustee and an investment banking
firm of national standing selected by the Issuer; and
(ii) prior to the consummation of such Significant Transaction, the
Issuer makes an offer (a "Special Offer to Purchase") to each holder of
Notes to repurchase, within 15 days following the consummation of such
Significant Transaction, all or any part (equal to $1,000 or an integral
multiple thereof) of such holder's Notes at a purchase price equal to 101%
of the Accreted Value thereof on the date of purchase (if prior to March 15,
2000) or 101% of the aggregate principal amount thereof, together with
accrued and unpaid interest thereon to the date of purchase (if on or after
March 15, 2000) (in either case, the "Special Offer Payment"). At least 30
days prior to the consummation of such Significant Transaction, the Issuer
shall mail a notice to each holder stating:
(a) that the Special Offer to Purchase is being made pursuant to the
covenant entitled "Significant Transactions";
(b) the purchase price and the purchase date, which shall be no
earlier than 30 days nor later than 60 days after the date such notice is
mailed (the "Special Offer Payment Date");
(c) that any Notes tendered will only be repurchased in the event
that such Significant Transaction is consummated;
(d) that any Notes not tendered or not repurchased will continue to
accrete and accrue interest in accordance with the terms of the 1996
Indenture;
(e) that, if such Significant Transaction is consummated, unless the
Issuer defaults in the payment of the Special Offer Payment, all Notes
accepted for payment pursuant to the Special Offer to Purchase shall
cease to accrete or accrue interest after the Special Offer Payment Date;
(f) that holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the second
Business Day preceding the Special Offer Payment Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the holder,
the principal amount of Notes delivered for purchase, and a statement
that such holder is withdrawing his election to have such Notes
purchased;
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(g) that holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered, which unpurchased portion must be equal to $1,000
in principal amount or an integral multiple thereof; and
(h) a description of such Significant Transaction, as well as any
other information material to such holder's decision to tender Notes.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes pursuant to a Special Offer to Purchase. Due to the
highly leveraged structure of the Issuer, the Issuer may not be able to
repurchase all of the Notes tendered for purchase in connection with a Special
Offer to Purchase. If a Significant Transaction is consummated and the Issuer
fails to repurchase all of the Notes tendered for purchase, such failure will
constitute an Event of Default. See "-- Events of Default and Remedies."
In the event that EchoStar or any of its Subsidiaries sells, transfers or
disposes of any of the Collateral in a Significant Transaction, the Issuer's
payment obligations under the Notes will be secured by a first priority security
interest in the pro rata portion of the net proceeds of such Significant
Transaction attributable to such Collateral, as determined by an investment
banking firm of national standing selected by the Issuer.
DISBURSEMENT OF FUNDS -- ESCROW ACCOUNT
The 1996 Indenture provides that the Issuer initially place such proceeds of
the Offering as are designated in "Use of Proceeds" in the Prospectus to be
applied for purchase of the frequencies at the 148 DEG. WL orbital slot
purchased at the FCC Auction or for construction, launch or insurance of
EchoStar III and EchoStar IV in the Escrow Account held by the Escrow Agent for
the benefit of the holders of the Senior Secured Notes. The Issuer will enter
into the Escrow and Disbursement Agreement, which will provide, among other
things, that funds may be disbursed from the Escrow Account only upon
satisfaction of certain conditions set forth in the Escrow and Disbursement
Agreement. The purchase price of frequencies at the 148 DEG. WL orbital slot
(and related costs) in the amount of $52.3 million will not be disbursed until
the Issuer delivers an Officers' Certificate to the Trustee and the Escrow Agent
certifying that the purchase price for the conditional construction permit for
use of 24 channels at the 148 DEG. WL orbital slot purchased in the FCC Auction
is due and payable within five or fewer days. The Escrow Agent will not be
permitted to disburse any proceeds of the Offering from the Escrow Account
towards costs related to construction, launch and insurance of EchoStar III and
EchoStar IV, unless the Issuer delivers an Officers' Certificate, prior to such
disbursement, to the Trustee and the Escrow Agent certifying that such funds
will be applied toward required payments under the Satellite Contracts or Launch
Contracts relating to EchoStar III or EchoStar IV or toward a down payment on
Launch Insurance or In-Orbit Insurance for EchoStar III or EchoStar IV.
Pending the disbursement of funds from the Escrow Account, the Issuer will
cause such funds to be invested in Marketable Securities. The Notes are secured
by, among other things, a first priority security interest in the Escrow
Account.
CERTAIN COVENANTS
RESTRICTED PAYMENTS. The 1996 Indenture provides that neither EchoStar nor
any of its Subsidiaries may, directly or indirectly:
(a) declare or pay any dividend or make any distribution on account of
any Equity Interests of EchoStar or any of its Subsidiaries, other than
dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of EchoStar or dividends or distributions payable to any
Wholly Owned Subsidiary of EchoStar (other than Unrestricted Subsidiaries of
the Issuer);
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(b) purchase, redeem or otherwise acquire or retire for value any
outstanding Equity Interests of EchoStar, any of its Subsidiaries or any
other Affiliate of EchoStar, other than any such Equity Interests owned by
EchoStar or any of its Wholly Owned Subsidiaries (other than Unrestricted
Subsidiaries of the Issuer);
(c) voluntarily purchase, redeem, defease or otherwise acquire or retire
for value any Indebtedness that is expressly subordinated in right of
payment to the Notes, except in accordance with the scheduled mandatory
redemption or repayment provisions set forth in the original documentation
governing such Indebtedness; or
(d) make any Restricted Investment
(all such payments and other actions set forth in clauses (a) through (d) above
being collectively referred to as "Restricted Payments"), unless, at the time of
such Restricted Payment:
(i) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(ii) after giving effect to such Restricted Payment and the incurrence
of any Indebtedness the net proceeds of which are used to finance such
Restricted Payment, the Indebtedness to Cash Flow Ratio of the Issuer (if
before the date upon which the DBSC Merger is consummated) or of the Issuer
and DBSC, taken as a single entity (if on or after the date upon which the
DBSC Merger is consummated), would not have exceeded 5.0 to 1; and
(iii) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Issuer after the date of the 1996 Indenture,
is less than the sum of: (A) 50% of the Consolidated Net Income of EchoStar
for the period (taken as one accounting period) from January 1, 1996 to the
end of EchoStar's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted Payment
(or, if such Consolidated Net Income for such period is a deficit, minus
100% of such deficit); plus (B) an amount equal to 100% of the aggregate net
cash proceeds received by EchoStar and its Subsidiaries from the issue or
sale of Equity Interests (other than Disqualified Stock) of EchoStar (other
than Equity Interests sold to a Subsidiary of EchoStar and other than
Disqualified Stock), since the date of the 1996 Indenture.
The foregoing provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would have
complied with the provisions of the 1996 Indenture;
(2) the redemption, repurchase, retirement or other acquisition of any
Equity Interests of EchoStar or the Issuer in exchange for, or out of the
net proceeds of, the substantially concurrent sale (other than to a
Subsidiary of EchoStar) of other Equity Interests of EchoStar or the Issuer
(other than Disqualified Stock);
(3) the payment of dividends on, or the redemption of, Dish Preferred
Stock;
(4) Investments in an aggregate amount not to exceed $20 million;
provided that such Investments are in businesses of the type described under
"-- Activities of EchoStar";
(5) Investments as the result of financing activity of EAC or Dish
Network Credit Corporation in the ordinary course of their respective
businesses;
(6) the purchase of employee stock options, or capital stock issued
pursuant to the exercise of employee stock options, in an aggregate amount
not to exceed $2 million in any calendar year and in an aggregate amount not
to exceed $10 million since the date of the 1996 Indenture;
(7) a Permitted Refinancing (as defined below in "-- Incurrence of
Indebtedness and Issuance of Preferred Stock");
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(8) Investments in an amount equal to the net proceeds received by
EchoStar from the issue and sale of Equity Interests of EchoStar (other than
Equity Interests sold to a Subsidiary of EchoStar and other than
Disqualified Stock), since the date of the 1996 Indenture;
(9) expenses incurred in connection with the DBSC Merger (including,
without limitation, dissenters' appraisal rights and purchases of fractional
shares);
(10) the purchase of odd-lots of Equity Interests of EchoStar, in an
amount not to exceed $1 million in the aggregate; or
(11) Investments in DBSC Notes.
Restricted Payments made pursuant to clauses (1) and (8) shall be included as
Restricted Payments in any computation made pursuant to clause (iii) above.
Not later than the date of making any Restricted Payment, the Issuer shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, which calculations
shall be based upon the Issuer's latest available financial statements.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK. The 1996
Indenture provides that:
(a) none of DBSC (on or after the date on which the DBSC Merger is
consummated), the Issuer or any Restricted Subsidiary of the Issuer may,
directly or indirectly, create, incur, issue, assume, guaranty or otherwise
become directly or indirectly liable with respect to (collectively, "incur")
any Indebtedness (including Acquired Debt); and
(b) none of DBSC (on or after the date on which the DBSC Merger is
consummated), the Issuer or any Restricted Subsidiary of the Issuer may
issue any Disqualified Stock or any shares of preferred stock;
PROVIDED, HOWEVER, that: (i) if prior to the date upon which the DBSC Merger is
consummated, the Issuer and each of its Restricted Subsidiaries may incur
Indebtedness or issue shares of preferred stock if, after giving effect to the
incurrence of such Indebtedness or the issuance of such preferred stock and the
application of the proceeds thereof, the Issuer's Indebtedness to Cash Flow
Ratio would not have exceeded 5.0 to 1; or (ii) if on or after the date upon
which the DBSC Merger is consummated, DBSC, the Issuer and each of its
Restricted Subsidiaries may incur Indebtedness or issue shares of preferred
stock if, after giving effect to the incurrence of such Indebtedness or the
issuance of such preferred stock and the application of the proceeds thereof,
the Indebtedness to Cash Flow Ratio of the Issuer and DBSC, taken as a single
entity, would not have exceeded 5.0 to 1.
The foregoing limitation will not apply to:
(i) the incurrence of the Deferred Payments and letters of credit with
respect thereto;
(ii) the incurrence of Bank Debt;
(iii) the incurrence of Indebtedness in an aggregate amount not to exceed
$15 million upon a finding by the Issuer (evidenced by a resolution of the
Board of Directors of EchoStar set forth in an Officers' Certificate
delivered to the Trustee) that such Indebtedness is necessary to finance
costs in connection with the development, construction, launch or insurance
of EchoStar II (or any permitted replacements thereof), PROVIDED that such
Indebtedness is subordinated by its terms in right and priority to the
Notes;
(iv) Indebtedness between and among the Issuer and each of its Restricted
Subsidiaries;
(v) Acquired Debt of a person incurred prior to the date upon which such
person was acquired by the Issuer or any of its Subsidiaries (excluding
Indebtedness incurred by such entity other than in the ordinary course of
its business in connection with, or in contemplation of, such entity being
so acquired) in an aggregate principal amount not to exceed $15 million,
PROVIDED
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that such Indebtedness and the holders thereof do not at any time have
direct or indirect recourse to any property or assets of the Issuer or any
of its Subsidiaries other than the property and assets of such acquired
entity and its Subsidiaries;
(vi) Existing Indebtedness;
(vii) additional Indebtedness in an aggregate amount not to exceed $15
million at any one time outstanding;
(viii) the incurrence of Purchase Money Indebtedness by the Issuer or any
Restricted Subsidiary in an aggregate amount not to exceed $20 million at
any one time outstanding; or
(ix) the incurrence by the Issuer or any of its Subsidiaries of
Indebtedness issued in exchange for, or the proceeds of which are used to
extend, refinance, renew, replace, or refund Indebtedness referred to in
clauses (i), (iii), (v), (vi), (vii) and (viii) above ("Refinancing
Indebtedness"); PROVIDED, HOWEVER, that: (A) the principal amount of such
Refinancing Indebtedness shall not exceed the principal amount and accrued
interest of the Indebtedness so extended, refinanced, renewed, replaced,
substituted or refunded; (B) the Refinancing Indebtedness shall have a final
maturity later than, and a Weighted Average Life to Maturity equal to or
greater than, the final maturity and Weighted Average Life to Maturity of
the Indebtedness being extended, refinanced, renewed, replaced or refunded;
and (C) the Refinancing Indebtedness shall be subordinated in right of
payment to the Notes, if at all, on terms at least as favorable to the
holders of Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced or refunded (a
"Permitted Refinancing").
ASSET SALES. If DBSC (on or after the date on which the DBSC Merger is
consummated), the Issuer or any Restricted Subsidiary of the Issuer, in a single
transaction or a series of related transactions:
(a) sells, leases, conveys or otherwise disposes of any of its assets
(including by way of a sale-and-leaseback transaction), other than: (i)
sales of inventory in the ordinary course of business; (ii) sales to the
Issuer or a Wholly Owned Restricted Subsidiary of the Issuer by any
Restricted Subsidiary of the Issuer; (iii) sales of accounts receivable by
EAC for cash in an amount at least equal to the fair market value of such
accounts receivable; and (iv) sales of rights to satellite launches
(PROVIDED that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Issuer shall be governed by the
provisions of the 1996 Indenture described below under the caption "Merger,
Consolidation, or Sale of Assets"); or
(b) issues or sells equity securities of any Subsidiary of the Issuer,
in either case, which assets or securities: (i) have a fair market value in
excess of $10 million (as determined in good faith by the Board of Directors of
EchoStar evidenced by a resolution of the Board of Directors of EchoStar and set
forth in an Officers' Certificate delivered to the Trustee; PROVIDED, HOWEVER,
that if the fair market value of such assets exceeds $20 million, the fair
market value shall be determined by an investment banking firm of national
standing selected by the Issuer); or (ii) are sold or otherwise disposed of for
net proceeds in excess of $10 million (each of the foregoing, an "Asset Sale"),
then:
(A) DBSC, the Issuer or such Restricted Subsidiary, as the case may be,
must receive consideration at the time of such Asset Sale at least equal to
the fair market value (as determined in good faith by the Board of Directors
of EchoStar evidenced by a resolution of the Board of Directors of EchoStar
and set forth in an Officers' Certificate delivered to the Trustee;
PROVIDED, HOWEVER, that if the fair market value of such assets exceeds $20
million, the fair market value shall be determined by an investment banking
firm of national standing selected by the Issuer) of the assets sold or
otherwise disposed of; and
(B) at least 80% of the consideration therefor received by DBSC, the
Issuer or such Subsidiary, as the case may be, must be in the form of cash
or Cash Equivalents; PROVIDED, HOWEVER, that
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up to $15 million of non-cash assets at any one time may be considered to be
cash for purposes of this clause (B), PROVIDED that the provisions of the
next paragraph are complied with as such non-cash assets are converted to
cash.
The 1996 Indenture also provides that the Net Proceeds from such Asset Sale
shall be placed in the Escrow Account, and shall be disbursed only: (i) to make
Receiver Subsidies, to buy or lease satellite frequencies at orbital slots or to
purchase tangible assets to be used in the business of EchoStar as described
under "-- Activities of EchoStar," or if the Issuer sells any of its satellites
after launch, only to purchase a replacement satellite; or (ii) as set forth in
the next sentence. Any Net Proceeds from any Asset Sale that are not applied or
invested as provided in the preceding sentence within 180 days after such Asset
Sale, and not applied to an offer to repurchase 1994 Notes required by the 1994
Indenture, shall constitute "Excess Proceeds" and shall be applied to an offer
to purchase Notes as set forth under "-- Excess Proceeds Offer."
Notwithstanding the foregoing provisions, DBSC may transfer its right and
interest in any permits and licenses relating to the use of channels at the
175 DEG. WL orbital slot, or any portions thereof, without receiving any
consideration.
LIENS. The 1996 Indenture provides that none of EchoStar DBS Corporation
(at any time at which the Notes are secured by a pledge of all of its issued and
outstanding Capital Stock), DBSC (on or after the date on which the DBSC Merger
or a Substitute DBSC Transaction is consummated), the Issuer or any Restricted
Subsidiary of the Issuer may directly or indirectly create, incur, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired, or on any
income or profits therefrom or assign or convey any right to receive income
therefrom, except Permitted Liens.
MAINTENANCE OF INSURANCE. The 1996 Indenture provides that:
(a) prior to the launch of EchoStar III (or any permitted replacement
thereof), the Issuer will obtain or cause to be obtained, Launch Insurance
with respect to each such satellite; and
(b) at all times subsequent to 180 days following the launch of EchoStar
III (and any permitted replacement thereof), the Issuer will maintain
In-Orbit Insurance with respect to such satellite.
The 1996 Indenture provides that EchoStar III (or any replacement thereof) may
not be launched unless Launch Insurance has been obtained.
In the event that the Trustee receives proceeds from any Launch Insurance or
In-Orbit Insurance covering EchoStar III (or any replacement thereof), or in the
event that the Issuer or any of its Subsidiaries receives proceeds from any
insurance maintained by Martin Marietta or any launch provider covering EchoStar
III, all such proceeds (including any cash or Cash Equivalents deemed to be
proceeds of Launch Insurance or In-Orbit Insurance pursuant to the respective
definition thereof) shall be placed in the Escrow Account and shall be disbursed
only: (i) to purchase a replacement satellite, provided that if such replacement
satellite is of lesser value compared to the insured satellite, any insurance
proceeds remaining after purchase of such replacement satellite must be applied
to the construction, launch and insurance of a satellite of equal or greater
value as compared to the insured satellite (or in accordance with (ii) below);
or (ii) to the extent that such proceeds are not: (A) applied or contractually
committed to be applied as described in (i) above within 180 days of the receipt
of such proceeds or (B) applied to an offer to repurchase 1994 Notes required by
the 1994 Indenture, as "Excess Proceeds" to be applied to an offer to purchase
Notes as set forth under "-- Excess Proceeds Offer."
The 1996 Indenture provides that the holders of the Notes will be granted:
(i) a first priority security interest in each satellite constructed, launched
or insured with any portion of the proceeds of Launch or In-Orbit Insurance
covering EchoStar III (or any replacement thereof); and (ii) a collateral
assignment of all contracts relating to the construction, launch, insurance and
TT&C of each such satellite.
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TRANSFER OF ORBITAL SLOTS. The 1996 Indenture provides that for as long as
the Notes are secured by a pledge of all of the issued and outstanding Capital
Stock of EchoStar DBS Corporation, EchoStar DBS Corporation may not transfer,
sell, assign or otherwise dispose of any of its right or interest in the permits
and licenses relating to the use of channels at the 148 DEG. WL orbital slot,
PROVIDED, HOWEVER, that the foregoing shall not prohibit transfers to a Wholly
Owned Subsidiary of EchoStar (other than an Unrestricted Subsidiary) all of
whose issued and outstanding stock is pledged to secure the Notes.
In addition, the 1996 Indenture provides that on or after the date that the
DBSC Merger is consummated, DBSC may not transfer, sell, assign or otherwise
dispose of any of its right or interest in the permits and licenses relating to
the use of channels at the 61.5 DEG. WL orbital slot, PROVIDED, HOWEVER, that
the foregoing shall not prohibit transfers to a Wholly Owned Subsidiary of
EchoStar (other than an Unrestricted Subsidiary) all of whose issued and
outstanding stock is pledged to secure the Notes.
CONSTRUCTION OF ECHOSTAR III. The 1996 Indenture provides that EchoStar and
the Issuer will cause the construction and launch of EchoStar III (and any
replacements thereof) to be prosecuted with diligence and continuity in a good
and workmanlike manner in accordance with the Satellite Contracts and the Launch
Contracts.
ACTIVITIES OF ECHOSTAR. The 1996 Indenture provides that neither EchoStar
nor any of its Subsidiaries may engage in any business other than developing,
owning, engaging in and dealing with all or any part of the business of domestic
and international satellite communications, and reasonably related extensions
thereof, including but not limited to the purchase, ownership, operation,
leasing and selling of, and generally dealing in or with, one or more
communications satellites and the transponders thereon, the acquisition,
transmission, broadcast, production and other provision of programming therewith
and the manufacturing, distribution and financing of equipment (including
consumer electronic equipment) relating thereto.
ADDITIONAL SUBSIDIARY GUARANTEES. The 1996 Indenture provides that if the
Issuer or any Guarantor transfers or causes to be transferred, in one or a
series of related transactions, property or assets (including, without
limitation, businesses, divisions, real property, assets or equipment) having a
fair market value (as determined in good faith by the Board of Directors of
EchoStar evidenced by a resolution of the Board of Directors of EchoStar and set
forth in an Officers' Certificate delivered to the Trustee; PROVIDED, HOWEVER,
that if the fair market value exceeds $10 million, the fair market value shall
be determined by an investment banking firm of national standing selected by the
Issuer) exceeding $500,000 to any Subsidiary of the Issuer that is neither a
Subsidiary of Dish, Ltd. nor a Guarantor, or if such Subsidiary incurs any
Indebtedness or issues any preferred stock, EchoStar shall, or shall cause the
owner of such Subsidiary to: (a) enter into a pledge agreement in order to
pledge all of the issued and outstanding Capital Stock of such Subsidiary as
Security to the Trustee for the benefit of the holders of the Notes; and (b)
cause such Subsidiary to: (i) execute and deliver to the Trustee a supplemental
indenture in form and substance reasonably satisfactory to the Trustee pursuant
to which such Subsidiary shall unconditionally Guarantee all of the Issuer's
obligations under the Notes on the terms set forth in the 1996 Indenture; and
(ii) deliver to the Trustee an Opinion of Counsel reasonably satisfactory to the
Trustee that such pledge agreement and such supplemental indenture have been
duly authorized, executed and delivered by and are valid and binding obligations
of such Subsidiary or such owner, as the case may be; PROVIDED, HOWEVER, that
the foregoing provisions shall not apply to transfers of property or assets
(other than cash) by the Issuer or any Guarantor in exchange for cash or Cash
Equivalents in an amount equal to the fair market value (as determined in good
faith by the Board of Directors of EchoStar evidenced by a resolution of the
Board of Directors of EchoStar and set forth in an Officers' Certificate
delivered to the Trustee; PROVIDED, HOWEVER, that if the fair market value
exceeds $10 million, the fair market value shall be determined by an investment
banking firm of national standing selected by the Issuer) of such property or
assets.
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DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The 1996
Indenture provides that the Issuer shall not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to:
(a) pay dividends or make any other distribution to the Issuer or any of
its Restricted Subsidiaries on its Capital Stock or with respect to any
other interest or participation in, or measured by, its profits, or pay any
Indebtedness owed to the Issuer or any of its Subsidiaries;
(b) make loans or advances to the Issuer or any of its Subsidiaries; or
(c) transfer any of its properties or assets to the Issuer or any of its
Subsidiaries; except for such encumbrances or restrictions existing under or
by reasons of:
(i) Existing Indebtedness and existing agreements as in effect on the
date of the 1996 Indenture;
(ii) the Credit Agreement as in effect on the date of the 1996
Indenture, and any amendments, extensions, refinancings, renewals,
restatements, replacements or refundings thereof that are no more
restrictive with respect to the provisions set forth in clauses (a), (b)
and (c) above than the Credit Agreement as in effect on the date of the
1996 Indenture;
(iii) applicable law or regulation;
(iv) any instrument governing Acquired Debt as in effect at the time
of acquisition (except to the extent such Indebtedness was incurred in
connection with, or in contemplation of, such acquisition), which
encumbrance or restriction is not applicable to any person, or the
properties or assets of any person, other than the person, or the
property or assets of the person, so acquired, PROVIDED that the
Consolidated Cash Flow of such person shall not be taken into account in
determining whether such acquisition was permitted by the terms of the
1996 Indenture;
(v) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices; or
(vi) Refinancing Indebtedness (as defined in "-- Incurrence of
Indebtedness and Issuance of Preferred Stock"), PROVIDED that the
restrictions contained in the agreements governing such Refinancing
Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
MERGER, CONSOLIDATION, OR SALE OF ASSETS. The 1996 Indenture provides that
the Issuer may not consolidate or merge with or into (whether or not the Issuer
is the surviving entity), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or more
related transactions to, another person unless:
(a) the Issuer is the surviving person or the person formed by or
surviving any such consolidation or merger (if other than the Issuer) or to
which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia;
(b) the person formed by or surviving any such consolidation or merger
(if other than the Issuer) or the person to which such sale, assignment,
transfer, lease, conveyance or other disposition will have been made assumes
all the obligations of the Issuer, pursuant to a supplemental indenture in
form reasonably satisfactory to the Trustee, under the Notes and the 1996
Indenture;
(c) immediately after such transaction, no Default or Event of Default
exists; and
(d) the Issuer or the person formed by or surviving any such
consolidation or merger (if other than the Issuer) or to which such sale,
assignment, transfer, lease, conveyance or other
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disposition will have been made: (i) will have Consolidated Net Worth
immediately after the transaction (but prior to any purchase accounting
adjustments or accrual of deferred tax liabilities resulting from the
transaction) not less than the Consolidated Net Worth of the Issuer
immediately preceding the transaction; and (ii) would, at the time of such
transaction after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Indebtedness to Cash Flow Ratio test set forth in the covenant entitled
"Incurrence of Indebtedness and Issuance of Preferred Stock."
Notwithstanding the foregoing, the Issuer may merge with another person if:
(a) the Issuer is the surviving person;
(b) the consideration issued or paid by the Issuer in such merger
consists solely of Equity Interests (other than Disqualified Stock) of the
Issuer; and
(c) immediately after giving effect to such merger, the Issuer's
Indebtedness to Cash Flow Ratio does not exceed the Issuer's Indebtedness to
Cash Flow Ratio, immediately prior to such merger.
TRANSACTIONS WITH AFFILIATES. The 1996 Indenture provides that neither
EchoStar nor any of its Subsidiaries may sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into any contract, agreement, understanding, loan, advance
or guarantee with, or for the benefit of, any Affiliate (including any
Unrestricted Subsidiary) (each of the foregoing, an "Affiliate Transaction"),
unless:
(a) such Affiliate Transaction is on terms that are no less favorable to
EchoStar or such Subsidiary than those that would have been obtained in a
comparable transaction by EchoStar or such Subsidiary with an unrelated
person;
(b) if such Affiliate Transaction involves aggregate payments in excess
of $500,000 the Issuer delivers to the Trustee a resolution of the Board of
Directors of EchoStar set forth in an Officers' Certificate certifying that
such Affiliate Transaction complies with clause (a) above and such Affiliate
Transaction is approved by a majority of the disinterested members of the
Board of Directors of EchoStar; and
(c) if such Affiliate Transaction involves aggregate payments in excess
of $15 million, the Issuer delivers to the Trustee an opinion as to the
fairness to EchoStar or such Subsidiary from a financial point of view of
such Affiliate Transaction issued by an investment banking firm of national
standing:
PROVIDED, HOWEVER, that: (i) the payment of compensation to directors and
management of EchoStar in amounts approved by the Compensation Committee of
the Board of Directors of EchoStar (which shall consist of a majority of
outside directors); (ii) the payment of dividends on, or the redemption of,
the Dish Preferred Stock to the extent otherwise permitted by the 1996
Indenture; (iii) transactions between or among EchoStar and its Wholly Owned
Subsidiaries (other than Unrestricted Subsidiaries of the Issuer); (iv) the
transfer of rights and interests in any permits or licenses relating to the
use of channels at the 175 DEG. WL orbital slot; and (v) transactions
permitted by the provisions of the 1996 Indenture described above under the
covenant "Restricted Payments" shall not be deemed Affiliate Transactions.
REPORTS. Whether or not required by the rules and regulations of the
Securities and Exchange Commission (the "Commission"), so long as any Notes are
outstanding, the Issuer will file with the Commission and furnish to the holders
of Notes all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Issuer were required to file such forms, including a "Management's Discussion
and Analysis of
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Financial Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Issuer's certified public accountants.
In addition, such information will be provided for the Issuer and DBSC, taken as
a single entity.
PAYMENTS FOR CONSENT. Neither EchoStar nor any of its Subsidiaries may,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any holder of a Note for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the 1996 Indenture or the Notes unless such consideration is offered to be
paid or agreed to be paid to all holders of the Notes that consent, waive or
agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
EXCESS PROCEEDS OFFER. When the cumulative amount of Excess Proceeds that
have not been applied in accordance with the covenants entitled "Asset Sales"
and "Maintenance of Insurance" or this paragraph exceeds $5 million, the Issuer
will be obligated to make an offer to all holders of the Notes (an "Excess
Proceeds Offer") to purchase the maximum principal amount of Notes that may be
purchased out of such Excess Proceeds at an offer price in cash in an amount
equal to 101% of the Accreted Value thereof on the date fixed for the closing of
such offer (if prior to March 15, 2000) or 101% of the principal amount thereof,
together with accrued and unpaid interest to the date fixed for the closing of
such offer (if on or after March 15, 2000), in either case in accordance with
the procedures set forth in the 1996 Indenture. If the aggregate Accreted Value
or principal amount, as the case may be, of Notes surrendered by holders thereof
exceeds the amount of such Excess Proceeds, the Trustee shall select the Notes
to be purchased on a pro rata basis. To the extent that the aggregate Accreted
Value or principal amount, as the case may be, of Notes tendered pursuant to an
Excess Proceeds Offer is less than the amount of such Excess Proceeds, the
Issuer may use any remaining Excess Proceeds for general corporate purposes.
Upon completion of an Excess Proceeds Offer, the amount of Excess Proceeds shall
be reset at zero.
SECURITY
Initially, the Notes have been secured by: (i) a pledge of all of the issued
and outstanding Capital Stock of EchoStar DBS Corporation (which Lien will be
released at such time as the DBSC Merger or the Substitute DBSC Transaction has
been consummated and all security interests, collateral assignments and pledges
required to be granted in connection with such consummation have been granted)
and Dish, Ltd.; (ii) a pledge of all of the Capital Stock of DBSC held by
EchoStar or any of its Subsidiaries (including any such Capital Stock acquired
subsequent to the date of the 1996 Indenture); (iii) a pledge of all DBSC Notes
held by EchoStar or any Subsidiary of EchoStar (including DBSC Notes executed
subsequent to the date of the 1996 Indenture); and (iv) a first priority
security interest in the Escrow Account (collectively, together with any
additional security described in the second, sixth and eighth paragraphs of this
section, the "Collateral").
In addition, the Notes may be secured by certain Collateral relating to DBSC
and EchoStar III as further described in this paragraph. Upon consummation of
the DBSC Merger, the Notes will be secured by: (i) a first priority security
interest, when launched, in EchoStar III; (ii) a collateral assignment (as soon
as practicable, but no more than 60 days after the date upon which the DBSC
Merger is consummated), of all contracts relating to the construction, launch
(other than the Launch Contract with Great Wall, PROVIDED that at least one
other contract has been entered into for launch of EchoStar III), insurance and
TT&C of EchoStar III; and (iii) a pledge of all of the issued and outstanding
Capital Stock of DBSC. In the event that the DBSC Merger is not consummated and
the Substitute DBSC Transaction is consummated the Notes will be secured by a
collateral assignment of all contracts and agreements relating to the Substitute
DBSC Transaction. In the event that neither the DBSC Merger nor the Substitute
DBSC Transaction is consummated, no additional Collateral will be provided to
secure the Notes, however, the Issuer will be required to apply the greater of:
(i) $83.0 million; and (ii) an amount equal to Investments by EchoStar and its
Subsidiaries in DBSC Notes, since the date of the 1996 Indenture, to an offer to
all holders of the Notes to purchase the maximum principal amount of Notes that
may be purchased out of such amount. See "-- Offer to Purchase upon
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the Occurrence of Certain Events." There can be no assurance that the FCC will
approve the DBSC Merger or that the DBSC Merger or the Substitute DBSC
Transaction will be consummated. See "Risk Factors -- Contingent Collateral."
The Issuer and certain of its Affiliates have entered into one or more
pledge agreements (the "Pledge Agreements") and one or more security agreements
(the "Security Agreements") providing for the grant by the Issuer and such
Affiliates to the Trustee, as collateral agent for the holders of the Notes, of
security interests in the Collateral. All such security interests will secure
the payment and performance when due of all of the Obligations of the Issuer
under the Notes and the 1996 Indenture.
Martin Marietta may, after launch, have a PARI PASSU lien on, and will be
entitled, upon disposition, to share ratably in the proceeds of EchoStar III, up
to an aggregate of $20 million. There can be no assurance that, upon any
disposition of such Collateral, such Collateral will generate sufficient
proceeds to satisfy all amounts due with respect to the Notes.
EchoStar and its Subsidiaries may not sell, transfer or dispose of EchoStar
III after it is launched, unless, prior to such sale transfer or disposition,
the holders of the Notes are granted: (i) a first priority security interest in
an operational substitute satellite, in geosynchronous orbit, of equal or
greater value; and (ii) a collateral assignment of all contracts relating to the
construction, launch, insurance or TT&C of such Substitute Satellite.
EchoStar and its Subsidiaries may not incur or suffer to exist Liens on
EchoStar III (or any replacement thereof), except: (i) prior to launch, Liens in
favor of satellite contractors; (ii) after launch, Liens not to exceed $20
million securing the Deferred Payments, ranking PARI PASSU with the Liens on
EchoStar III (or such replacement) in favor of the holders of the Notes; and
(iii) additional Liens securing the Deferred Payments, subordinated to the Liens
on EchoStar III (or such replacement) in favor of the holders of the Notes.
In the event that the proceeds of Launch Insurance or In-Orbit Insurance are
applied to the purchase of one or more replacement satellites in accordance with
the covenant entitled "Maintenance of Insurance," the Notes will be secured by:
(i) a first priority security interest in each such replacement satellite; and
(ii) a collateral assignment, of all contracts relating to the construction,
launch, insurance or TT&C of each such replacement satellite.
Upon the occurrence and during the continuance of an Event of Default: (i)
all rights of EchoStar and its Subsidiaries to exercise voting or other
consensual rights with respect to any stock pledged to secure the Notes shall
cease, and all such rights shall become vested in the Trustee, which, to the
extent permitted by law, shall have the sole right to exercise such voting and
other consensual rights; (ii) all rights of EchoStar and its Subsidiaries to
receive cash dividends, interest and other payments made upon or with respect to
such pledged stock shall cease and such cash dividends, interest and other
payments shall be paid to the Trustee; and (iii) the Trustee may sell the
Collateral or any part thereof in accordance with the terms of the Pledge
Agreements and the Security Agreements. All funds distributed under the Pledge
Agreements, the Security Agreements or the Escrow and Disbursement Agreement and
received by the Trustee for the benefit of the holders of the Notes shall be
distributed by the Trustee in accordance with the provisions of the 1996
Indenture.
Under the terms of the Pledge Agreements and the Security Agreements, the
Trustee will determine the circumstances and manner in which the Collateral
shall be disposed of, including, but not limited to, the determination of
whether to release all or any portion of the Collateral from the Liens created
by the Pledge Agreements or the Security Agreements and whether to foreclose on
the Collateral following an Event of Default. Moreover, upon the full and final
payment and performance of all Obligations of the Issuer under the Notes and the
1996 Indenture, or upon defeasance of the Notes, the Pledge Agreements and the
Security Agreements shall terminate and the Collateral shall be released. In
addition, in the event that any Collateral is sold and the Net Proceeds thereof
are applied in accordance with the terms of the covenant entitled "Asset Sales,"
the Trustee shall release
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the Liens in favor of the Trustee in the assets sold; PROVIDED, that the Trustee
shall have received from the Issuer an Officers' Certificate and an Opinion of
Counsel that such Net Proceeds have been or will be so applied.
In the event that EchoStar or any of its Subsidiaries sells, transfers or
disposes of any of the Collateral, which sale, transfer or disposition is not
otherwise provided for above, the Issuer's payment obligations under the Notes
will be secured by a first priority security interest in the pro rata portion of
the net proceeds of such sale, transfer or disposition attributable to such
Collateral, as determined by an investment banking firm of national standing
selected by the Issuer.
AFFILIATE GUARANTEES
Initially, the Issuer's payment obligations under the Notes have been
guaranteed on a subordinated basis by EchoStar.
On and after the Dish Guarantee Date, the Issuer's payment obligations under
the Notes and the 1996 Indenture will be guaranteed by Dish, Ltd. (the "Dish
Guarantee"), which Guarantee will rank PARI PASSU with all senior unsecured
Indebtedness of Dish, Ltd. The Dish Guarantee will not be effected until the
earlier of: (i) the first date upon which Dish Ltd. is permitted, pursuant to
the terms of the 1994 Indenture to Guarantee the Issuer's total payment
obligations under all of the then-outstanding Notes; and (ii) the first date
upon which the 1994 Notes are no longer outstanding or have been defeased. There
can be no assurance that such conditions will be satisfied at any time. See
"Risk Factors -- Springing Guarantees."
On and after the date upon which the DBSC Merger is consummated, the
Issuer's payment obligations under the Notes and the 1996 Indenture will be
guaranteed by DBSC, which guarantee will rank PARI PASSU with all senior
unsecured Indebtedness of DBSC. There can be no assurance that the DBSC Merger
will be approved by the FCC or consummated. See "Risk Factors -- Springing
Guarantees."
The obligations of each Guarantor under its Guarantee will be limited, if
necessary, to such amount as will not constitute a fraudulent conveyance under
applicable law. Investors should note that the assets and equity represented by
Dish, Ltd. currently constitute substantially all of the total assets and
substantially all of the total equity of the Issuer and its Subsidiaries taken
as a whole.
The 1996 Indenture provides that, subject to the next paragraph, no
Guarantor may consolidate or merge with or into (whether or not such Guarantor
is the surviving entity), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or more
related transactions to, another person unless:
(a) such Guarantor is the surviving person or the person formed by or
surviving any such consolidation or merger (if other than such Guarantor) or
to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia;
(b) the person formed by or surviving any such consolidation or merger
(if other than such Guarantor) or the person to which such sale, assignment,
transfer, lease, conveyance or other disposition will have been made assumes
all the obligations of such Guarantor, pursuant to a supplemental indenture
in form reasonably satisfactory to the Trustee, under the Notes and the 1996
Indenture;
(c) immediately after such transaction, no Default or Event of Default
exists; and
(d) such Guarantor or the person formed by or surviving any such
consolidation or merger, or to which such sale, assignment, transfer, lease,
conveyance or other disposition will have been made: (i) will have
Consolidated Net Worth immediately after the transaction (but prior to any
purchase accounting adjustments or accrual of deferred tax liabilities
resulting from the transaction) not less than the Consolidated Net Worth of
such Guarantor immediately preceding the
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transaction; and (ii) will have an Indebtedness to Cash Flow Ratio
immediately after the transaction that does not exceed such Guarantor's
Indebtedness to Cash Flow Ratio immediately preceding the transaction.
Except as set forth in the provisions entitled "-- Certain Covenants" and
"-- Merger, Consolidation, or Sale of Assets," nothing contained in the 1996
Indenture shall prevent any consolidation or merger of a Guarantor with or into
the Issuer or shall prevent any sale or conveyance of the property of a
Guarantor as an entirety or substantially as an entirety to the Issuer.
The 1996 Indenture provides that in the event of a sale or other disposition
of all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the person acquiring the property (in the event of a sale or
other disposition of all of the assets of such Guarantor) will be released and
relieved of any obligations under its Guarantee, PROVIDED that the Net Proceeds
of such sale or other disposition are applied in accordance with the provisions
described under "-- Certain Covenants -- Asset Sales."
The Guarantee executed by Dish, Ltd. will provide that prior to the Dish
Guarantee Date:
(a) neither Dish, Ltd. nor any of its Subsidiaries may, directly or
indirectly, create, incur, issue, assume, guaranty or otherwise become
directly or indirectly liable with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt);
(b) Dish, Ltd. may not issue any Disqualified Stock; and
(c) none of Dish, Ltd.'s Subsidiaries may issue any shares of preferred
stock.
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The foregoing limitation will not apply to: (i) any Permitted Refinancing;
or (ii) the incurrence of any Indebtedness by Dish, Ltd. that would be permitted
under the terms of the 1994 Indenture, notwithstanding the fact that Dish,
Ltd.'s Indebtedness to Cash Flow Ratio exceeded 5.0 to 1 (before June 1, 1998)
or 4.0 to 1 (on or after June 1, 1998).
EVENTS OF DEFAULT AND REMEDIES
The 1996 Indenture provides that each of the following constitutes an Event
of Default (unless the provisions described under "-- Significant Transactions"
are applicable and the Issuer complies with such provisions):
(a) default for 30 days in the payment when due of interest on the
Notes;
(b) default in payment when due of principal on the Notes at maturity,
upon redemption or otherwise;
(c) failure to comply with the provisions described under "-- Offer to
Purchase upon Change of Control," "-- Offer to Purchase upon the Occurrence
of Certain Events," "-- Significant Transactions," "-- Certain Covenants --
Maintenance of Insurance," "-- Certain Covenants -- Transactions with
Affiliates," "-- Disbursement of Funds -- Escrow Account" or "-- Certain
Covenants -- Asset Sales" or the failure by the Issuer to comply with the
third paragraph under "-- Security";
(d) default under the provisions described under "-- Certain Covenants
-- Restricted Payments" or "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock" or under any of the Collateral
Documents, which default remains uncured for 15 days, or the breach of any
representation or warranty, or the making of any untrue statement, in any
certificate delivered by the Issuer pursuant to the 1996 Indenture or the
Collateral Documents;
(e) failure by the Issuer for 60 days after notice from the Trustee or
the holders of at least 25% in principal amount of the Notes then
outstanding to comply with its other agreements in the 1996 Indenture or the
Notes;
(f) a continuing default after expiration of any applicable grace period
by the Issuer or any of its Affiliates under any of the Satellite Contracts
or the Launch Contracts, which default would permit a party other than the
Issuer or its Affiliates to terminate its obligations under such contract;
(g) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by EchoStar or any of its Subsidiaries (or
the payment of which is guaranteed by EchoStar or any of its Subsidiaries),
other than the Credit Agreement, which default is caused by a failure to pay
when due principal or interest on such Indebtedness within the grace period
provided in such Indebtedness (a "Payment Default"), and the principal
amount of any such Indebtedness, together with the principal amount of any
other such Indebtedness under which there has been a Payment Default,
aggregates $5 million or more;
(h) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by EchoStar or any of its Subsidiaries (or
the payment of which is guaranteed by EchoStar or any of its Subsidiaries),
other than Credit Agreement, which default results in the acceleration of
such Indebtedness prior to its express maturity and the principal amount of
any such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $5 million or more;
(i) failure by EchoStar, EchoStar DBS Corporation (at any time at which
the Notes are secured by a pledge of all of its issued and outstanding
Capital Stock), DBSC (on or after the date
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of the DBSC Merger), the Issuer or any of the Issuer's Subsidiaries to pay
final judgments (other than any judgment as to which a reputable insurance
company has accepted full liability) aggregating in excess of $2 million,
which judgments are not stayed within 60 days after their entry;
(j) certain events of bankruptcy or insolvency with respect to EchoStar
or certain of its Subsidiaries (including the filing of a voluntary case,
the consent to an order of relief in an involuntary case, the consent to the
appointment of a custodian, a general assignment for the benefit of
creditors or an order of a court for relief in an involuntary case,
appointing a custodian or ordering liquidation, which order remains unstayed
for 60 days); and
(k) any Guarantee of the Notes shall be held in a judicial proceeding to
be unenforceable or invalid or shall cease for any reason to be in full
force and effect, or any Guarantor, or any person acting on behalf of any
Guarantor, shall deny or disaffirm its obligations under its Guarantee of
any Notes.
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately (plus, in the case of an Event
of Default that is the result of an action by EchoStar or any of its
Subsidiaries intended to avoid restrictions on or premiums related to
redemptions of the Notes contained in the 1996 Indenture or the Notes, an amount
of premium that would have been applicable pursuant to the Notes or as set forth
in the 1996 Indenture). Notwithstanding the foregoing, in the case of an Event
of Default arising from the events of bankruptcy or insolvency with respect to
or any of its Subsidiaries described in (j) above, all outstanding Notes will
become due and payable without further action or notice. Holders of the Notes
may not enforce the 1996 Indenture or the Notes except as provided in the 1996
Indenture. Subject to certain limitation, holders of a majority in principal
amount of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from holders of the Notes notice of
any continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in such holders' interest.
The holders of a majority in aggregate principal amount of the Notes then
outstanding, by notice to the Trustee, may on behalf of the holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the 1996 Indenture, except a continuing Default or Event of Default in the
payment of interest or premium on, or principal of, the Notes.
The Issuer is required to deliver to the Trustee annually a statement
regarding compliance with the 1996 Indenture, and the Issuer is required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATOR AND
STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of EchoStar or
any of its Affiliates, as such, shall have any liability for any obligations of
EchoStar or any of its Affiliates under the Notes or the 1996 Indenture or for
any claim based on, in respect of, or by reason of, such obligations or their
creation. Each holder of Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a waiver
is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuer may, at its option and at any time, elect to have all obligations
discharged with respect to the outstanding Notes ("Legal Defeasance"). Such
legal defeasance means that the Issuer will be deemed to have paid and
discharged the entire indebtedness represented by the outstanding Notes, except
for: (a) the rights of holders of outstanding Notes to receive payments in
respect of the principal of, premium, if any, and interest on the Notes when
such payments are due, or on the redemption date, as the case may be; (b) the
Issuer's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an
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office or agency for payment and money for security payments held in trust; (c)
the rights, powers, trust, duties and immunities of the Trustee, and the
Issuer's obligations in connection therewith; and (d) the Legal Defeasance
provisions of the 1996 Indenture. In addition, the Issuer may, at its option and
at any time, elect to have all obligations released with respect to certain
covenants that are described in the 1996 Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "-- Events
of Default and Remedies" will no longer constitute an Event of Default with
respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance: (i) the
Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Notes, cash in U.S. dollars, non-callable U.S. government
obligations, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants
selected by the Trustee, to pay the principal of, premium, if any, and interest
on the outstanding Notes on the stated maturity or on the applicable optional
redemption date, as the case may be; (ii) in the case of Legal Defeasance, the
Issuer shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the Issuer has
received from, or there has been published by the Internal Revenue Service, a
ruling or (B) since the date of the 1996 Indenture, there has been a change in
the applicable Federal income tax law, in each case to the effect that, and
based thereon such opinion of counsel shall confirm that, the holders of such
Notes will not recognize income, gain or loss for Federal income tax purposes as
a result of such Legal Defeasance, and will be subject to Federal income tax in
the same amount, in the same manner and at the same times as would have been the
case if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Issuer shall have delivered to the Trustee an opinion of counsel
in the United States reasonably acceptable to such Trustee confirming that the
holders of such Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Covenant Defeasance and will be subject to
federal income on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred; (iv) no
Default or Event of Default shall have occurred and be continuing on the date of
such deposit or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after the
date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under the 1996
Indenture or any other material agreement or instrument to which the Issuer or
any of its Subsidiaries is a party or by which EchoStar or any of its
Subsidiaries is bound; (vi) the Issuer shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the Issuer with
the intent of preferring the Holders of such Notes over any other creditors of
the Issuer or with the intent of defeating, hindering, delaying or defrauding
any other creditors of the Issuer or others; and (vii) the Issuer shall have
delivered to the Trustee an Officers' Certificate stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next paragraph, the 1996 Indenture, the Notes and
the Collateral Documents may be amended or supplemented with the consent of the
holders of at least a majority in principal amount of the Notes then outstanding
(including consents obtained in connection with a tender offer or exchange offer
for Notes), and any existing default or compliance with any provision of the
1996 Indenture or the Notes may be waived with the consent of the holders of a
majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for Notes).
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Without the consent of each holder affected, however, an amendment or waiver
may not (with respect to any Note held by a non-consenting holder):
(a) reduce the principal amount of Notes whose holders must consent to
an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of any Note or
alter the provisions with respect to the redemption of the Notes;
(c) reduce the rate of or change the time for payment of interest on any
Notes;
(d) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the holders of at least a majority in aggregate
principal amount of the Notes and a waiver of the payment default that
resulted from such acceleration);
(e) make any Note payable in money other than that stated in the Notes;
(f) make any change in the provisions of the 1996 Indenture relating to
waivers of past Defaults or the rights of holders of Notes to receive
payments of principal of or interest on the Notes;
(g) waive a redemption payment with respect to any Note; or
(h) make any change in the foregoing amendment and waiver provisions.
In addition, without the consent of at least 66 2/3% of the Notes then
outstanding, an amendment or a waiver may not make any change to the covenants
in the 1996 Indenture entitled "Offer to Purchase upon Change of Control,"
"Offer to Purchase upon the Occurrence of Certain Events," "Asset Sales" and
"Excess Proceeds Offer" (including, in each case, the related definitions).
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Issuer and the Trustee may amend or supplement the 1996 Indenture, the
Notes, the Pledge Agreement, the Security Agreement or the Escrow and
Disbursement Agreement to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Issuer's obligations to holders of
the Notes in the case of a merger or consolidation, to make any change that
would provide any additional rights or benefits to the holders of the Notes or
that does not adversely affect the legal rights under the 1996 Indenture of any
such holder, or to comply with requirements of the Commission in order to effect
or maintain the qualification of the 1996 Indenture under the Trust Indenture
Act.
CONCERNING THE TRUSTEE
The 1996 Indenture contains certain limitations on the rights of the
Trustee, should the Trustee become a creditor of the Issuer, to obtain payment
of claims in certain cases, or to realize on certain property received in
respect of any such claim as security or otherwise. The Trustee will be
permitted to engage in other transactions with the Issuer; however, if the
Trustee acquires any conflicting interest, it must eliminate such conflict
within 90 days, apply to the Commission for permission to continue as Trustee or
resign.
The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The 1996 Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. The Trustee will not be relieved from liabilities for its
own negligent action, its own negligent failure to act or its own willful
misconduct, except that: (i) this sentence shall not limit the preceding
sentence of this paragraph; (ii) the Trustee shall not be liable for any error
of judgment made in good faith, unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not
be liable
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with respect to any action it takes or omits to take in good faith in accordance
with a direction received by it pursuant to the first sentence of this
paragraph. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the 1996 Indenture at the request
of any holder of Notes, unless such holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
NOTES BOOK-ENTRY, DELIVERY AND FORM
Old Notes initially purchased by qualified institutional buyers were
initially issued in the form of [three] global Notes (collectively the "Global
Old Note") and was deposited on the date of the closing of the sale of the Old
Notes offered hereby (the "Closing Date") with, or on behalf of, The Depository
Trust Company (the "Depositary") and registered in the name of Cede & Co., as
nominee of the Depositary (such nominee being referred to herein the "Global
Note Holder"). Except as set forth in the next paragraph, the Exchange Notes
exchanged for Old Notes represented by the Global Old Note will be represented
by one or more global Exchange Notes in registered form (collectively, the
"Global Exchange Note" and, together with the Global Old Note, the "Global
Note"), deposited with the Depositary and registered in the name of the Global
Noteholder.
Exchange Notes that are issued as described below under "-- Certificated
Notes" will be issued in the form of registered definitive certificates (the
"Certificated Notes"). Such Certificated Notes may, unless the Global Note has
previously been exchanged for Certificated Notes, be exchanged for an interest
in the Global Note representing the principal amount of Exchange Notes being
transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly. Persons who are
not Participants may beneficially own securities held by or on behalf of the
Depositary only through the Depositary's Participants or the Depositary's
Indirect Participants.
The Issuer expects that pursuant to procedures established by the
Depositary: (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Initial Purchasers with portions of
the principal amount of the Global Note; and (ii) ownership of the Exchange
Notes evidenced by the Global Note will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by the
Depositary (with respect to the interests in the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer Exchange Notes evidenced by the
Global Note will be limited to such extent.
So long as the Global Note Holder is the registered owner of any Exchange
Notes, the Global Note Holder will be considered the sole holder under the 1996
Indenture of any Exchange Notes evidenced by the Global Note. Beneficial owners
of Exchange Notes evidenced by the Global Note will not be considered the owners
or holders thereof under the 1996 Indenture for any purpose, including with
respect to the giving of any responsibility or liability for any aspect of the
records of the Depositary or for maintaining, supervising or reviewing any
records of the Depositary relating to the Exchange Notes.
Payments in respect of the principal of, premium, if any, and interest, and
Liquidated Damages, if any, on any Notes registered in the name of the Global
Note Holder on the applicable record date will be payable by the Trustee to or
at the direction of the Global Note Holder in its capacity as the registered
holder under the 1996 Indenture. Under the terms of the 1996 Indenture, the
Issuer and the Trustee may treat the persons in whose names Notes, including the
Global Note, are registered as the owners thereof for the purpose of receiving
such payments. Consequently, neither the Issuer nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of Notes. The Issuer believes, however, that it is currently the policy
of the Depositary to immediately credit the accounts of the relevant
Participants with such payments, in amounts
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proportionate to their respective holders of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
CERTIFICATED NOTES
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Exchange Notes in the form of Certificated Notes. Upon any such
issuance, the Trustee is required to register such Certificated Notes in the
name of, and cause the same to be delivered to, such person or persons (or the
nominee of any thereof). In addition, if: (i) the Issuer notifies the Trustee in
writing that the Depositary is no longer willing or able to act as a depository
and the Issuer is unable to locate a qualified successor within 90 days; or (ii)
The Issuer, at its option, notifies the Trustee in writing that it elects to
cause the issuance of Exchange Notes in the form of Certificated Notes under the
1996 Indenture, then, upon surrender by the Global Note Holder of its Global
Note, Exchange Notes in such form will be issued to each person that the Global
Note Holder and the Depositary identify as being the beneficial owner of the
related Exchange Notes.
Neither the Issuer nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of the
Exchange Notes and the Issuer and the Trustee may conclusively rely on, and will
be protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The 1996 Indenture requires that payments in respect of the Exchange Notes
represented by the Global Note (including principal, premium, if any, interest
and Liquidated Damages, if any) be made by wire transfer of immediately
available funds to the accounts specified by the Global Note. With respect to
Certificated Notes, the Issuer will make all payments of principal, premium, if
any, interest and Liquidated Damages, if any) by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address. Secondary trading in long-term notes and debentures of corporate
issuers is generally settled in clearinghouse or next-day funds. In contrast,
the Notes represented by the Global Note are expected to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Notes will, therefore, be required by the
Depositary to be settled in immediately available funds.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the 1996 Indenture
without charge by writing to the Issuer, 90 Inverness Circle East, Englewood,
Colorado 80112, attention David K. Moskowitz, facsimile (303) 799-0354.
OLD NOTES' REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Issuer, the Guarantors and the Initial Purchasers entered into a
registration rights agreement dated March 25, 1996 (the "Registration Rights
Agreement"). Pursuant to the Registration Rights Agreement, the Issuer and the
Guarantors agreed to file with the Commission the Registration Statement with
respect to this Exchange Offer for the Exchange Notes. Pursuant to the Exchange
Offer, the Issuer and the Guarantors are offering to the holders of Transfer
Restricted Notes who are able to make certain representations the opportunity to
exchange their Transfer Restricted Notes for Exchange Notes. If: (i) the Issuer
is not permitted to consummate the Exchange Offer because the Exchange Offer is
not permitted by applicable law or Commission policy; or (ii) any holder of
Transfer Restricted Notes notifies the Issuer within the specified time period
that: (A) it is prohibited by law or Commission policy from participating in the
Exchange Offer; (B) that it may not resell the Exchange Notes acquired by it in
the Exchange Offer to the public without delivering a prospectus and the
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prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales; or (C) that it is a broker-dealer and
owns Old Notes acquired directly from the Issuer or an affiliate of the Issuer,
the Issuer and the Guarantors will file with the Commission a shelf registration
statement (the "Shelf Registration Statement") to cover resales of the Old Notes
by the holders thereof who satisfy certain conditions relating to the provisions
of information in connection with the Shelf Registration Statement. The Issuer
and the Guarantors will use their best efforts to cause the applicable
registration statement to be declared effective as promptly as possible by the
Commission. For purposes of the foregoing, "Transfer Restricted Notes" means
each Old Note until: (i) the date on which such Old Note has been exchanged by a
person other than a broker-dealer for an Exchange Note in the Exchange Offer;
(ii) following the exchange by a broker-dealer in the Exchange Offer of an Old
Note for an Exchange Note, the date on which such Exchange Note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of the prospectus contained in the Registration Statement; (iii) the
date on which such Old Note has been effectively registered under the Securities
Act and disposed of in accordance with the Shelf Registration Statement; or (iv)
the date on which such Old Note is distributed to the public pursuant to Rule
144 under the Act.
The Registration Rights Agreement provides that: (i) the Issuer and the
Guarantors will file the Registration Statement with the Commission on or prior
to April 24, 1996; (ii) the Issuer and the Guarantors will use their best
efforts to have the Registration Statement declared effective by the Commission
on or prior to June 23, 1996; (iii) unless the Exchange Offer would not be
permitted by applicable law or Commission policy, the Issuer and the Guarantors
will commence the Exchange Offer and use their best efforts to issue, on or
prior to 30 business days after the date on which the Registration Statement was
declared effective by the Commission, Exchange Notes in exchange for all Old
Notes tendered prior thereto in the Exchange Offer; and (iv) if obligated to
file the Shelf Registration Statement, the Issuer and the Guarantors will use
their best efforts to file the Shelf Registration Statement with the Commission
on or prior to 30 days after such filing obligation arises (and in any event on
or before June 23, 1996, and to use their best efforts cause the Shelf
Registration Statement to be declared effective by the Commission on or prior to
90 days after such obligation arises. If: (a) the Issuer and the Guarantors fail
to file any of the Registration Statements required by the Registration Rights
Agreement on or before the date specified for such filing; (b) any of such
Registration Statements is not declared effective by the Commission on or prior
to the date specified for such effectiveness (the "Effectiveness Target Date");
(c) the Issuer and the Guarantors fail to consummate the Exchange Offer within
30 business days of the Effectiveness Target Date with respect to the
Registration Statement; or (d) the Shelf Registration Statement or the
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted Notes
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (d) above a "Registration Default"),
then the Issuer and the Guarantors jointly and severally agree to pay liquidated
damages to each holder of Old Notes, with respect to the first 90-day period
immediately following the occurrence of such Registration Default in an amount
equal to $.05 per week per $1,000 principal amount of Old Notes held by such
holder ("Liquidated Damages"). The amount of the Liquidated Damages will
increase by an additional $.05 per week per $1,000 principal amount of Old Notes
with respect to each subsequent 90-day period until all Registration Defaults
have been cured, up to a maximum amount of Liquidated Damages of $.40 per week
per $1,000 principal amount of Old Notes constituting Transfer Restricted Notes.
All accrued Liquidated Damages will be paid by the Issuer on each Damages
Payment Date to the Global Note Holder by wire transfer to the accounts
specified by them or by mailing checks to their registered addresses if no such
accounts have been specified. Following the cure of all Registration Defaults,
the accrual of Liquidated Damages will cease.
Holders of Old Notes will be required to make certain representations to the
Issuer (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement and to
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provide comments on the Shelf Registration Statement within the time periods set
forth in the Registration Rights Agreement in order to have their Old Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the 1996 Indenture.
Reference is made to the 1996 Indenture for a full disclosure of all such terms,
as well as any other capitalized terms used herein for which no definition is
provided.
"ACCRETED VALUE" means, as of any date of determination prior to March 15,
2000, the sum of: (a) the initial offering price of each Note; and (b) the
portion of the excess of the principal amount of each Note over such initial
offering price which shall have been accreted thereon through such date, such
amount to be so accreted on a daily basis at the rate per annum disclosed on the
cover page of the Prospectus of the initial offering price of the Notes,
compounded semi-annually on each March 15 and September 15 from the date of
issuance of the Notes through the date of determination.
"ACQUIRED DEBT" means, with respect to any specified person, Indebtedness of
any other person existing at the time such other person merges with or into or
becomes a Subsidiary of such specified person, or Indebtedness incurred by such
person in connection with the acquisition of assets, including Indebtedness
incurred in connection with, or in contemplation of, such other person merging
with or into or becoming a Subsidiary of such specified person or the
acquisition of such assets, as the case may be.
"AFFILIATE" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED, HOWEVER,
that beneficial ownership of 10% or more of the voting securities of a person
shall be deemed to be control; PROVIDED FURTHER that no individual, other than a
director of EchoStar or an officer of EchoStar with a policy making function,
shall be deemed an Affiliate of EchoStar or any of its Subsidiaries, solely by
reason of such individual's employment, position or responsibilities by or with
respect to EchoStar or any of its Subsidiaries.
"BANK DEBT" means Indebtedness incurred pursuant to the Credit Agreement in
an aggregate amount not to exceed 90% of the accounts receivable of the Credit
Agreement Borrowers eligible for inclusion in the borrowing base under the
Credit Agreement, plus 75% of the inventory of the Credit Agreement Borrowers
eligible for inclusion in the borrowing base under the Credit Agreement, plus
100% of the cash collateral and marketable securities of the Credit Agreement
Borrowers eligible for inclusion in the borrowing base under the Credit
Agreement.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"CAPITAL STOCK" means any and all shares, interests, participations, rights
or other equivalents (however designated) of corporate stock or partnership
interests, whether common or preferred.
"CASH EQUIVALENTS" means: (a) U.S. dollars; (b) securities issued or
directly and fully guaranteed or insured by the U.S. government or any agency or
instrumentality thereof having maturities of not more than six months from the
date of acquisition; (c) certificates of deposit and eurodollar time deposits
with maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500 million; (d) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in clauses
(b) and
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(c) entered into with any financial institution meeting the qualifications
specified in clause (c) above; and (e) commercial paper rated P-1, A-1 or the
equivalent thereof by Moody's Investors Service, Inc. or Standard & Poor's
Corporation, respectively, and in each case maturing within six months after the
date of acquisition.
"CHANGE OF CONTROL" means: (a) any transaction or series of transactions
(including, without limitation, a tender offer, merger or consolidation) the
result of which is that the Principals and their Related Parties or an entity
controlled by the Principals and their Related Parties cease to be the
"beneficial owners" (as defined in Rule 13(d)(3) under the Exchange Act) of at
least 30% of the total Equity Interests in EchoStar and to have the voting power
to elect at least a majority of the Board of Directors of EchoStar; (b) the
first day on which a majority of the members of the Board of Directors of
EchoStar are not Continuing Directors; (c) any transaction or series of
transactions (including, without limitation, a tender offer, merger or
consolidation) the result of which is that the Principals and their Related
Parties or an entity controlled by the Principals and their Related Parties
cease to be the "beneficial owners" (as defined in Rule 13(d)(3) under the
Exchange Act) of at least 30% of the total Equity Interests in the Issuer and to
have the voting power to elect at least a majority of the Board of Directors of
the Issuer; or (d) the first day on which a majority of the members of the Board
of Directors of the Issuer are not Continuing Directors.
"COLLATERAL DOCUMENTS" means the Escrow and Disbursement Agreement, the
Pledge Agreements and the Security Agreements.
"CONSOLIDATED CASH FLOW" means, with respect to any person for any period,
the Consolidated Net Income of such person for such period, plus, to the extent
deducted in computing Consolidated Net Income: (a) provision for taxes based on
income or profits; (b) consolidated interest expense of such person for such
period, whether paid or accrued (including amortization of original issue
discount and deferred financing costs, non-cash interest payments and the
interest component of Capital Lease Obligations); (c) depreciation and
amortization (including amortization of goodwill and other intangibles) of such
person for such period; and (d) any extraordinary loss and any net loss realized
in connection with any Asset Sale, in each case, on a consolidated basis
determined in accordance with GAAP, provided that Consolidated Cash Flow shall
not include interest income derived from the net proceeds of the Offering.
"CONSOLIDATED NET INCOME" means, with respect to any person for any period,
the aggregate of the Net Income of such person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; PROVIDED,
HOWEVER, that: (a) the Net Income of any person that is not a Subsidiary or that
is accounted for by the equity method of accounting shall be included only to
the extent of the amount of dividends or distributions paid to the referent
person, in the case of a gain, or to the extent of any contributions or other
payments by the referent person, in the case of a loss; (b) the Net Income of
any person that is a Subsidiary that is not a Wholly Owned Subsidiary shall be
included only to the extent of the amount of dividends or distributions paid to
the referent person; (c) the Net Income of any person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded; (d) the Net Income of any Subsidiary of such person shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions is not at the time permitted by operation of the terms of its
charter or bylaws or any other agreement, instrument, judgment, decree, order,
statute, rule or government regulation to which it is subject; and (e) the
cumulative effect of a change in accounting principles shall be excluded.
"CONSOLIDATED NET WORTH" means the sum of: (a) the stockholders' equity of
such person; plus (b) the amount reported on such person's most recent balance
sheet with respect to any series of preferred stock (other than Disqualified
Stock) that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such person upon issuance of such preferred stock, less: (i) all
write-ups (other than write-ups resulting from foreign currency translations and
write-ups of tangible assets of a going concern business made within 12
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months after the acquisition of such business) subsequent to the date of the
1996 Indenture in the book value of any asset owned by such person or a
consolidated Subsidiary of such person; and (ii) all unamortized debt discount
and expense and unamortized deferred charges, all of the foregoing determined in
accordance with GAAP.
"CONTINUING DIRECTOR" means, as of any date of determination, any member of
the Board of Directors of EchoStar or the Issuer, as the case may be, who: (a)
was a member of such Board of Directors on the date of the 1996 Indenture; or
(b) was nominated for election or elected to such Board of Directors with the
affirmative vote of a majority of the Continuing Directors who were members of
such Board at the time of such nomination or election.
"CREDIT AGREEMENT" means the Credit Agreement dated as of May 6, 1994
between Bank of America Illinois and certain of the Credit Agreement Borrowers,
as such agreement may be amended, extended, refinanced, renewed, restated,
replaced or refunded from time to time, PROVIDED that the lenders party to the
Credit Agreement may not be Affiliates of EchoStar.
"CREDIT AGREEMENT BORROWERS" means Echo Acceptance Corporation, Echosphere
Corporation, EchoStar International Corporation, Houston Tracker Systems, Inc.,
Satellite Source, Inc, Dish Network Credit Corporation and EchoStar Satellite
Corporation.
"DBSC" means Direct Broadcasting Satellite Corporation and its successors
and assigns, as appropriate under the circumstances.
"DBSC NOTES" means notes of DBSC representing Indebtedness to EchoStar or
any of its Subsidiaries for amounts applied to construction, launch and
insurance of EchoStar III and no more than $2 million of other expenses.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DEFERRED PAYMENTS" means Indebtedness to satellite contractors incurred in
connection with the construction and launch of EchoStar I, EchoStar II, EchoStar
III and EchoStar IV in an amount not to exceed $108 million.
"DISH GUARANTEE DATE" means the earlier of: (i) the first date upon which
Dish Ltd. is permitted, pursuant to the terms of the 1994 Indenture, to
Guarantee the Issuer's total payment obligations under all of the
then-outstanding Notes; and (ii) the first date upon which the 1994 Notes are no
longer outstanding or have been defeased.
"DISH PREFERRED STOCK" means Dish Ltd.'s 8% Series A Cumulative Preferred
Stock having an aggregate liquidation preference not in excess of $15.1 million.
"DISQUALIFIED STOCK" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to date on
which the Notes mature.
"ELIGIBLE INSTITUTION" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent in
foreign currency, whose debt is rated Investment Grade at the time as of which
any investment or rollover therein is made.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXISTING INDEBTEDNESS" means the Notes and any other Indebtedness of the
Issuer and its Subsidiaries in existence on the date of the 1996 Indenture until
such amounts are repaid.
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"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are applicable as of the date of
determination; PROVIDED, HOWEVER, that these definitions and all ratios and
calculations contained in the covenants "Restricted Payments," "Incurrence of
Indebtedness and Issuance of Preferred Stock," "Asset Sales" and "Dividend and
Other Payment Restrictions Affecting Subsidiaries" shall be determined in
accordance with GAAP as in effect and applied by EchoStar and its Subsidiaries
on the date of the 1996 Indenture, consistently applied; PROVIDED, FURTHER, that
in the event of any change in GAAP or in any change by EchoStar or any of its
Subsidiaries in GAAP applied that would result in any change in any such ratio
or calculation, the Issuer shall deliver to the Trustee, each time any such
ratio or calculation is required to be determined or made, an Officers'
Certificate setting forth the computations showing the effect of such change or
application on such ratio or calculation.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"GUARANTOR" means EchoStar, Dish, Ltd. and (from and after the date upon
which the DBSC Merger is consummated) DBSC, and any other entity that executes a
Guarantee of the obligations of the Issuer under the Notes, and their respective
successors and assigns.
"HEDGING OBLIGATIONS" means, with respect to any person, the obligations of
such person under: (a) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements; and (b) other agreements or
arrangements designed to protect such person against fluctuations in interest
rates.
"IN-ORBIT INSURANCE" means, with respect to a satellite, In-Orbit insurance
providing coverage beginning 180 days after the launch of such satellite in an
amount which, together with cash and Cash Equivalents (not including cash and
Cash Equivalents in the Escrow Account) segregated and reserved on the balance
sheet of the Issuer, for the duration of the useful life of the satellite or
until applied in accordance with the covenant entitled "Maintenance of
Insurance," in an amount equal to or greater than the cost of construction,
launch and insurance of such satellite, which insurance shall provide pro rata
benefits to the insured upon a loss of more than 20% of the capacity of such
satellite and shall compensate the insured for a total loss upon a loss of more
than 50% of the capacity of such satellite. For purposes of the 1996 Indenture,
the proceeds of any In-Orbit Insurance shall be deemed to include the amount of
cash and Cash Equivalents segregated and reserved by the Issuer for purposes of
the preceding sentence.
"INDEBTEDNESS" means, with respect to any person, any indebtedness of such
person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or representing the balance
deferred and unpaid of the purchase price of any property (including pursuant to
capital leases) or representing any Hedging Obligations, except any such balance
that constitutes an accrued expense or trade payable, if and to the extent any
of the foregoing (other than Hedging Obligations) would appear as a liability
upon a balance sheet of such person prepared in accordance with GAAP, and also
includes, to the extent not otherwise included, the Guarantee of items that
would be included within this definition.
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"INDEBTEDNESS TO CASH FLOW RATIO" means, with respect to any person, the
ratio of: (a) the Indebtedness of such Person and its Subsidiaries as of end of
the most recently ended fiscal quarter, plus the amount of any Indebtedness
incurred subsequent to the end of such fiscal quarter; to (b) such person's
Consolidated Cash Flow for the most recently ended four full fiscal quarters for
which internal financial statements are available immediately preceding the date
on which such event for which such calculation is being made shall occur (the
"Measurement Period"); PROVIDED, HOWEVER, that: (i) in making such computation,
Indebtedness shall include the total amount of funds outstanding and available
under any revolving credit facilities; and (ii) in the event that the Issuer or
any of its Subsidiaries consummates a material acquisition or an Asset Sale or
other disposition of assets subsequent to the commencement of the Measurement
Period but prior to the event for which the calculation of the Indebtedness to
Cash Flow Ratio is made, then the Indebtedness to Cash Flow Ratio shall be
calculated giving pro forma effect to such material acquisition or Asset Sale or
other disposition of assets, as if the same had occurred at the beginning of the
applicable period.
"INVESTMENT GRADE" means with respect to a security, that such security is
rated, by at least two nationally recognized statistical rating organizations,
in one of each such organization's four highest generic rating categories.
"INVESTMENTS" means, with respect to any person, all investments by such
person in other persons (including Affiliates) in the forms of loans (including
Guarantees), advances or capital contributions (excluding commission, travel and
similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
"LAUNCH INSURANCE" means, with respect to a satellite, launch insurance
(including, at the option of the Issuer, reflight coverage for any launch by
Arianespace or Lockheed Martin, PROVIDED that such coverage permits assignment
of the right to any subsequent launch, without consent of the launch provider)
covering the period of the launch of such satellite to 180 days after such
launch in an amount which, together with cash and Cash Equivalents segregated
and reserved on the balance sheet of the Issuer until the successful launch of
such satellite or until applied in accordance with the covenant entitled
"Maintenance of Insurance," is equal to or greater than the cost of
construction, launch and insurance of such satellite, which insurance shall
provide pro rata benefits to the insured upon a loss of more than 20% of the
capacity of such satellite and shall compensate the insured for a total loss
upon a loss of more than 50% of the capacity of such satellite; PROVIDED,
HOWEVER, that the amount of cash and Cash Equivalents that may be used by the
Issuer for purposes of this definition may include cash and Cash Equivalents
contained in the Escrow Account only for purposes of Launch Insurance with
respect to EchoStar III, but only to the extent that the Issuer certifies, in an
Officer's Certificate delivered to the Trustee, that such cash and Cash
Equivalents are reasonably not expected to be necessary for the completion of
the development, construction, launch and operation of the relevant satellite.
For purposes of the 1996 Indenture, the proceeds of any Launch Insurance shall
be deemed to include the amount of cash and Cash Equivalents segregated and
reserved by the Issuer for purposes of the preceding sentence.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent status) of any jurisdiction).
"MARKETABLE SECURITIES" means: (a) Government Securities; (b) any
certificate of deposit maturing not more than 270 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution; (c)
commercial paper maturing not more than 270 days after the date of acquisition
issued by a corporation (other than an Affiliate of the Issuer) with an
Investment Grade rating, at the time as
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of which any investment therein is made, issued or offered by an Eligible
Institution; (d) any bankers acceptances or money market deposit accounts issued
or offered by an Eligible Institution; and (e) any fund investing exclusively in
investments of the types described in clauses (a) through (d) above.
"NET INCOME" means, with respect to any person, the net income (loss) of
such person, determined in accordance with GAAP, excluding, however, any gain
(but not loss), together with any related provision for taxes on such gain (but
not loss), realized in connection with any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions), and
excluding any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss).
"NET PROCEEDS" means the aggregate cash proceeds received by DBSC, the
Issuer or any of its Restricted Subsidiaries, as the case may be, in respect of
any Asset Sale, net of the direct costs relating to such Asset Sale (including,
without limitation, legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred, as a result thereof, taxes
paid or payable as a result thereof (after taking into account any available tax
credits or deductions and any tax sharing arrangements), amounts required to be
applied to the repayment of Indebtedness secured by a Lien on the asset or
assets that are the subject of such Asset Sale and any reserve for adjustment in
respect of the sale price of such asset or assets. Net Proceeds shall exclude
any non-cash proceeds received from any Asset Sale, but shall include such
proceeds when and as converted by the Issuer or any Restricted Subsidiary to
cash.
"1994 INDENTURE" means the Indenture relating to the 1994 Notes.
"1994 NOTES" means the 12 7/8% Senior Secured Discount Notes due 2004 of
Dish, Ltd.
"NON-RECOURSE INDEBTEDNESS" of any person means Indebtedness of such person
that: (i) is not guaranteed by any other person (except a Wholly Owned
Subsidiary of the referent person); (ii) is not recourse to and does not
obligate any other person (except a Wholly Owned Subsidiary of the referent
person) in any way; (iii) does not subject any property or assets of any other
person (except a Wholly Owned Subsidiary of the referent person), directly or
indirectly, contingently or otherwise, to the satisfaction thereof; and (iv) is
not required by GAAP to be reflected on the financial statements of any other
person (other than a Subsidiary of the referent person) prepared in accordance
with GAAP.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"PERMITTED INVESTMENTS" means: (a) Investments in EchoStar or in a Wholly
Owned Subsidiary of EchoStar, other than Unrestricted Subsidiaries of the
Issuer; (b) Investments in Cash Equivalents and Marketable Securities; (c)
conversion of debentures of SSET and DBS Industries, Inc. ("DBSI"), in
accordance with their terms, into Equity Interests of SSET and DBSI; and (d)
Investments by EchoStar or any Subsidiary of EchoStar in a person if, as a
result of such Investment: (i) such person becomes a Wholly Owned Restricted
Subsidiary of the Issuer or a Wholly Owned Subsidiary of EchoStar that is not a
Subsidiary of the Issuer; or (ii) such person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, EchoStar or a Wholly Owned Subsidiary of
EchoStar that is not an Unrestricted Subsidiary of the Issuer.
"PERMITTED LIENS" means: (a) Liens securing the Notes; (b) Liens securing
the Deferred Payments; (c) Liens on EchoStar III to the extent permitted under
"-- Security"; (d) Liens securing the Bank Debt on assets of the Issuer's
Restricted Subsidiaries; (e) Liens securing the 1994 Notes; (f) Liens securing
Purchase Money Indebtedness, PROVIDED that such Indebtedness was permitted to be
incurred by the terms of the 1996 Indenture and such Liens do not extend to any
assets of the Issuer or its Restricted Subsidiaries other than the assets so
acquired; (g) Liens securing Indebtedness the proceeds of which are used to
develop, construct, launch or insure any satellites other than EchoStar I,
EchoStar II or EchoStar III (or any permitted replacements thereof), PROVIDED
that such Indebtedness was permitted to be incurred by the terms of the 1996
Indenture and such Liens do not
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extend to any assets of DBSC, the Issuer or its Restricted Subsidiaries other
than such satellites being developed, constructed, launched or insured and to
the related licenses, permits and construction, launch and TT&C contracts; (h)
Liens on orbital slots, licenses and other assets and rights of the Issuer,
PROVIDED that such orbital slots, licenses and other assets and rights relate
solely to the satellites referred to in clause (g) of this definition; (i) Liens
on property of a person existing at the time such person is merged into or
consolidated with DBSC, the Issuer or any Restricted Subsidiary of the Issuer,
PROVIDED, that such Liens were not incurred in connection with, or in
contemplation of, such merger or consolidation, other than in the ordinary
course of business; (j) Liens on property of an Unrestricted Subsidiary at the
time that it is designated as a Restricted Subsidiary pursuant to the definition
of "Unrestricted Subsidiary," PROVIDED that such liens were not incurred in
connection with, or contemplation of, such designation; (k) Liens on property
existing at the time of acquisition thereof by DBSC, the Issuer or any
Restricted Subsidiary of the Issuer; PROVIDED that such Liens were not incurred
in connection with, or in contemplation of, such acquisition and do not extend
to any assets of DBSC, the Issuer or any of its Restricted Subsidiaries other
than the property so acquired; (l) Liens to secure the performance of statutory
obligations, surety or appeal bonds or performance bonds, or landlords',
carriers', warehousemen's, mechanics', suppliers', materialmen's or other like
Liens, in any case incurred in the ordinary course of business and with respect
to amounts not yet delinquent or being contested in good faith by appropriate
process of law, if a reserve or other appropriate provision, if any, as is
required by GAAP shall have been made therefore; (m) Liens existing on the date
of the 1996 Indenture; (n) Liens for taxes, assessments or governmental charges
or claims that are not yet delinquent or that are being contested in good faith
by appropriate proceedings promptly instituted and diligently concluded;
PROVIDED that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (o) Liens incurred in the
ordinary course of business of DBSC, the Issuer or any Restricted Subsidiary of
the Issuer (including, without limitation, Liens securing Purchase Money
Indebtedness) with respect to obligations that do not exceed $2 million in
principal amount in the aggregate at any one time outstanding; and (p)
extensions, renewals or refundings of any Liens referred to in clauses (a)
through (o) above, provided that any such extension, renewal or refunding does
not extend to any assets or secure any Indebtedness not securing or secured by
the Liens being extended, renewed or refinanced.
"PRINCIPALS" means Charles W. Ergen, James DeFranco, R. Scott Zimmer, Carl
E. Vogel, Steven B. Schaver, J. Allen Fears and David K. Moskowitz.
"PURCHASE MONEY INDEBTEDNESS" means indebtedness of the Issuer or any of its
Restricted Subsidiaries incurred (within 180 days of such purchase) to finance
the purchase of any assets of the Issuer or any of its Restricted Subsidiaries:
(a) to the extent the amount of Indebtedness thereunder does not exceed 80% of
the purchase cost of such assets; (b) to the extent the purchase cost of such
assets is or should be included in "additions to property, plant and equipment"
in accordance with GAAP; (c) to the extent that such Indebtedness is not
recourse to the Issuer or any of its Restricted Subsidiaries or any of their
respective assets, other than the assets so purchased; and (d) if the purchase
of such assets is not part of an acquisition of any Person.
"RECEIVER SUBSIDY" means a subsidy, rebate or other similar payment by
EchoStar or any of its Subsidiaries, in the ordinary course of business, to
subscribers, vendors or distributors, relating to an EchoStar Receiver System,
not to exceed the cost of such EchoStar Receiver System, together with the cost
of installation of such EchoStar Receiver System.
"RELATED PARTY" means, with respect to any Principal, (a) the spouse and
each immediate family member of such Principal and (b) each trust, corporation,
partnership or other entity of which such Principal beneficially holds an 80% or
more controlling interest.
"RESTRICTED INVESTMENT" means an Investment other than Permitted
Investments.
"RESTRICTED SUBSIDIARY" means, any corporation, association or other
business entity of which more than 50% of the total voting power of shares of
Capital Stock entitled (without regard to the
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occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
the Issuer or one or more Subsidiaries of the Issuer or a combination thereof,
other than Unrestricted Subsidiaries.
"SUBSIDIARY" means, with respect to any person, any corporation, association
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by such person or
one or more of the other Subsidiaries of such person or a combination thereof.
"UNRESTRICTED SUBSIDIARY" means; (A) EchoStar Real Estate Corporation,
EchoStar International (Mauritius) Ltd., EchoStar Manufacturing and Distribution
Pvt. Ltd. and Satrec Mauritius Ltd.; and (B) any Subsidiary of the Issuer
designated as an Unrestricted Subsidiary in a resolution of the Board of
Directors of the Issuer: (a) no portion of the Indebtedness or any other
obligation (contingent or otherwise) of which, at the time of such designation:
(i) is guaranteed by the Issuer or any other Subsidiary of the Issuer (other
than another Unrestricted Subsidiary); (ii) is recourse to or obligates the
Issuer or any other Subsidiary of the Issuer (other than another Unrestricted
Subsidiary) in any way; or (iii) subjects any property or asset of the Issuer or
any other Subsidiary of the Issuer (other than another Unrestricted Subsidiary),
directly or indirectly, contingently or otherwise, to satisfaction thereof; (b)
with which neither the Issuer nor any other Subsidiary of the Issuer (other than
another Unrestricted Subsidiary) has any contract, agreement, arrangement,
understanding or is subject to an obligation of any kind, written or oral, other
than on terms no less favorable to the Issuer or such other Subsidiary than
those that might be obtained at the time from persons who are not Affiliates of
the Issuer; and (c) with which neither the Issuer nor any other Subsidiary of
the Issuer (other than another Unrestricted Subsidiary) has any obligation: (i)
to subscribe for additional shares of Capital Stock or other equity interests
therein; or (ii) to maintain or preserve such Subsidiary's financial condition
or to cause such Subsidiary to achieve certain levels of operating results
PROVIDED, HOWEVER, that none of Dish, Ltd., EchoStar Satellite Corporation,
DirectSat Corporation, Echo Acceptance Corporation, Houston Tracker Systems,
Inc., EchoStar International Corporation and Echosphere Corporation may be
designated as Unrestricted Subsidiaries. At the time that the Issuer designates
a Subsidiary as an Unrestricted Subsidiary, the Issuer will be deemed to have
made a Restricted Investment in an amount equal to the fair market value (as
determined in good faith by the Board of Directors of the Issuer evidenced by a
resolution of the Board of Directors of the Issuer and set forth in an Officers'
Certificate delivered to the Trustee; PROVIDED, HOWEVER, that if the fair market
value of such Subsidiary exceeds $10 million, the fair market value shall be
determined by an investment banking firm of national standing selected by the
Issuer) of such Subsidiary. An Unrestricted Subsidiary may be designated as a
Restricted Subsidiary of the Issuer if, at the time of such designation after
giving pro forma effect thereto as if such designation had occurred at the
beginning of the applicable four-quarter period, the Issuer would be permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Cash Flow
Ratio test set forth in the covenant entitled "-- Incurrence of Indebtedness and
Issuance of Preferred Stock."
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
principal amount of such Indebtedness into (b) the total of the product obtained
by multiplying (i) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal, including payment at
final maturity, in respect thereof, by (ii) the number of years (calculated to
the nearest one-twelfth) that will elapse between such date and the making of
such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means a Wholly Owned Subsidiary of the
Issuer that is a Restricted Subsidiary of the Issuer.
"WHOLLY OWNED SUBSIDIARY" means, with respect to any person, any Subsidiary
all of the outstanding voting stock (other than directors' qualifying shares) of
which is owned by such person, directly or indirectly.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the principal United States federal income
tax consequences of the ownership and disposition of Notes. This summary is
based on the Internal Revenue Code of 1986, as amended to the date hereof (the
"Code"), administrative pronouncements, judicial decisions and existing and
proposed Treasury Regulations, changes to any of which subsequent to the date
hereof may affect the tax consequences described below. This summary addresses
only initial holders of Notes who acquire such Notes at their "issue price," as
defined below, and discusses only Notes held as capital assets within the
meaning of Section 1221 of the Code. It does not discuss all of the tax
consequences that may be relevant to a holder in light of such holder's
particular circumstances or to holders subject to special rules, such as certain
financial institutions, insurance companies, dealers in securities or persons
holding the Notes as part of a straddle or a hedging arrangement.
HOLDERS OF NOTES SHOULD CONSULT THEIR TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE UNITED STATED FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR
SITUATIONS, AS WELL AS WITH REGARD TO ANY TAX CONSEQUENCES ARISING UNDER THE
LAWS OF ANY STATE, LOCAL OR FOREIGN JURISDICTION.
ORIGINAL ISSUE DISCOUNT
The Old Notes were, and the Exchange Notes will be, issued with original
issue discount ("OID") equal to the difference between their "issue price" and
their "stated redemption price at maturity", as such terms are defined in the
Code and Treasury Regulations. The "issue price" of a Note will be the first
price at which a substantial amount of the Notes is sold to the public. For this
purpose, the public does not include bond houses, brokers or similar persons or
organizations acting in the capacity of underwriters, placement agents or
wholesalers.
The "stated redemption price at maturity" of a Note will be equal to the sum
of all payments required under the Note other than payments of "qualified stated
interest" within the meaning of the Treasury Regulations. To have "qualified
stated interest," an instrument must, among other requirements, pay interest at
least annually during the entire term of the Notes. Because the Notes will not
pay interest until September 15, 2000, none of the interest on the Notes will be
qualified stated interest. As a result, all payments made under the Notes will
be treated as part of the stated redemption price at maturity and interest paid
on the Notes will not be taxable upon receipt, but the OID rules described below
will apply. The total OID on a Note will be equal to the difference between the
sum of all payments required under the Note and the issue price of the Note.
A holder of Notes will be required to include OID in income for U.S. federal
income tax purposes as it accrues, whether or not such holder uses the accrual
method of accounting. OID will accrue in accordance with a constant yield method
based on a compounding of interest. Under this method, holders of Notes will be
required to include in income increasingly greater amounts of OID in successive
accrual periods. OID allocable to any accrual period will equal the product of
the "adjusted issue price" of the Notes as of the beginning of such period and
the Notes' yield to maturity. The "adjusted issue price" of the Notes as of the
beginning of any accrual period will equal the issue price of the Notes
increased by OID previously includable in income and decreased by any payments
under the Notes. Because OID will accrue and be includable in income at least
annually and no payments will be made under the Notes until September 15, 2000,
the adjusted issue price of the Notes will increase until March 15, 2000. OID
includable in income will therefore increase during each accrual period until
March 15, 2000. Thereafter, OID includable in income for each six-month accrual
period will approximate the amount of cash interest due at the end of such
period.
APPLICABLE HIGH YIELD DISCOUNT RULES
The Old Notes are, and the Exchange Notes will be, "applicable high yield
discount obligations" ("AHYDOs"), as defined in the Code. Under the rules
applicable to AHYDOs, because the yield to maturity of the Notes will exceed the
"applicable federal rate" in effect at the time of their issuance (the "AFR")
plus six percentage points, a portion of the OID that accrues on the Notes will
not be
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deductible by the Issuer at any time. The non-deductible portion of the OID will
be an amount that bears the same ratio to such OID as (i) the excess of the
yield to maturity of the Notes over the AFR plus six percentage points bears to
(ii) the yield to maturity of the Notes. To the extent that the non-deductible
portion of OID would have been treated as a dividend if it had been distributed
with respect to the Issuer's stock, it will be treated for some purposes as a
dividend to holders of the Notes. Amounts of OID treated as dividends may
qualify for the dividends received deduction for corporate holders. OID that
accrues on the Notes and for which the Issuer's deductions are allowable (the
OID portion equal to or less than the AFR plus six percentage points) will not
be deductible by the Issuer until cash interest payments are made to
Noteholders.
EXCHANGE OFFER
The exchange of Exchange Notes for Old Notes pursuant to the Exchange Offer
will not be treated as a taxable exchange for federal income tax purposes
because the terms of the Exchange Notes will be identical to the terms of the
Old Notes other than the fact that the Exchange Notes will be registered.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
Upon the sale, exchange or retirement of a Note, a holder will recognize
taxable gain or loss equal to the difference between the amount realized on the
sale, exchange or retirement and such holder's adjusted tax basis in the Note. A
holder's adjusted tax basis in a Note will equal the initial tax basis of the
Note, increased by the amounts of any OID previously included in income by the
holder with respect to such Note and reduced by the amounts of any payments on
the Note received by such holder.
Gain or loss realized on the sale, exchange or retirement of a Note will be
capital gain or loss and will be long-term capital gain or loss if the holding
period of the Note exceeds one year as of the date of the sale, exchange or
retirement. Under current law, the excess of net long-term capital gains over
net short-term capital losses is taxed at a lower rate than ordinary income for
certain non-corporate taxpayers. The distinction between capital gain or loss
and ordinary income or loss is also relevant for purposes of, among other
things, limitation on the deductibility of capital losses.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Certain noncorporate holders may be subject to backup withholding at a rate
of 31% on payments of principal and interest (including OID) and premium on, and
the proceeds of disposition of, a Note. Backup withholding will apply only if
the holder: (i) fails to furnish its Taxpayer Identification Number ("TIN")
which, for an individual, would be his or her Social Security number; (ii)
furnishes an incorrect TIN; (iii) is notified by the IRS that it has failed
properly to report payments of interest and dividends; or (iv) under certain
circumstances, fails to certify, under penalty of perjury, that it has furnished
a correct TIN and has not been notified by the IRS that it is subject to backup
withholding for failure to report interest and dividend payments. Holders of the
Notes should consult their tax advisors regarding their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption, if applicable.
The amount of any backup withholding from a payment to a holder of a Note
will be allowed as a credit against the holder's United States federal income
tax liability and may entitle the holder to a refund, provided that the required
information is furnished to the Internal Revenue Service.
OTHER TAX CONSEQUENCES
In addition to the federal income tax considerations described above,
holders of Notes should consider potential state, local, income, franchise,
personal property and other taxation in any state or locality and the tax effect
of ownership, sale, exchange, or retirement of Notes in any state or locality.
Holders of Notes are advised to consult their own tax advisors with respect to
any state or local income, franchise, personal property or other tax
consequences arising out of their ownership of Notes.
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THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH HOLDER OF NOTES SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM OF HOLDING, EXCHANGING OR SELLING THE NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR FOREIGN INCOME
TAX LAWS AND ANY RECENT OR PROSPECTIVE CHANGES IN APPLICABLE TAX LAWS.
PLAN OF DISTRIBUTION
Based on interpretation by the Staff set forth in no-action letters issued
to third parties, the Issuer believes that Exchange Notes issued pursuant to the
Exchange Offer in exchange for the Old Notes may be offered for resale, resold
and otherwise transferred by holders thereof (other than any holder which is (i)
an affiliate of the Issuer, (ii) a broker-dealer who acquired Old Notes directly
from the Issuer or (iii) a broker-dealer who acquired Old Notes as a result of
market-making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business, and such holders are not engaged in, and do not intend to engage in,
and have no arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes; provided that broker-dealers
("Participating Broker-Dealers") receiving Exchange Notes in the Exchange Offer
will be subject to a prospectus delivery requirement with respect to resales of
such Exchange Notes. To date, the Staff has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to transactions involving an exchange of securities such as the
exchange pursuant to the Exchange Offer (other than a resale of an unsold
allotment from the sale of the Old Notes to the Initial Purchasers) with the
prospectus contained in the Registration Statement. Pursuant to the Registration
Rights Agreement, the Issuer has agreed to permit Participating Broker Dealers
and other persons, if any, subject to similar prospectus delivery requirements
to use this Prospectus in connection with the resale of such Exchange Notes. The
Issuer has agreed that, for a period of 180 days after the Exchange Date, it
will make this Prospectus, and any amendment or supplement to this Prospectus,
available to any broker-dealer that requests such documents in the Letter of
Transmittal.
Each holder of the Old Notes who wishes to exchange its Old Notes for
Exchange Notes in the Exchange Offer will be required to make certain
representations to the Issuer as set forth in "The Exchange Offer -- Terms and
Conditions of the Letter of Transmittal." In addition, each holder who is a
broker-dealer and who receives Exchange Notes for its own account in exchange
for Old Notes that were acquired by it as a result of market-making activities
or other trading activities will be required to acknowledge that it will deliver
a prospectus in connection with any resale by it of such Exchange Notes.
The Issuer will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
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The Issuer has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concession of any brokers or dealers and will
indemnify holders of the Notes (including any brokers-dealers) against certain
liabilities, including liabilities under the Securities Act, as set forth in the
Registration Rights Agreement.
NOTICE TO INVESTORS
Because the following instructions will apply to any Old Notes held by
holders who do not participate in the Exchange Offer, holders of the Old Notes
are advised to consult legal counsel prior to making any offer, resale, pledge
or transfer of any of the Old Notes.
The Old Notes have not been registered under the Securities Act and may not
be offered or sold within the United States or to U.S. Persons (as such terms as
defined under the Securities Act) except pursuant to an exemption from, or in a
transaction not subject to the registration requirements of the Securities Act.
Accordingly, the Old Notes were offered only to "qualified institutional buyers"
(as defined in Rule 144A under the Securities Act) in reliance on the exemption
from the registration requirements of the Securities Act provided by Rule 144A,
and to a limited number of institutional "accredited investors" within the
meaning of Rule 501(a)(1), (2), (3) and (7) under the Securities Act.
Each purchaser of Old Notes purchased in a sale made in reliance on Rule
144A has been deemed to have represented and agreed as follows (terms used in
this paragraph that are defined in Rule 144A are used herein as defined
therein):
(1) The purchaser is either (A) a qualified institutional buyer and is
aware that the sale to it is being made in reliance on Rule 144A, and such
qualified institutional buyer has acquired such Old Notes for its own
account or for the account of another qualified institutional buyer or, (B)
an "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or
(7) under the Securities Act (an "accredited investor") or, (C) if the Old
Notes are to be purchased for one or more accounts ("investor accounts") for
which it is acting as fiduciary or agent, each such account is an accredited
investor on a like basis.
(2) The purchaser understands that the Old Notes were offered in a
transaction not involving any public offering in the United States within
the meaning of the Securities Act, that the Old Notes have not been
registered under the Securities Act and that: (A) the Old Notes may be
offered, resold, pledged or otherwise transferred only: (i) to a person who
the seller reasonably believes is a qualified institutional buyer in a
transaction meeting the requirements of Rule 144A, in a transaction meeting
the requirements of Rule 144 under the Securities Act, outside the United
States to a foreign person in a transaction meeting the requirement of Rule
904 under the Securities Act or in accordance with another exemption from
the registration requirements of the Securities Act (and based upon an
opinion of counsel if the Issuer so requests); (ii) to the Issuer; or (iii)
pursuant to an effective registration statement, and, in each case, in
accordance with any applicable securities laws of any State of the United
States or any other applicable jurisdiction; and (B) the purchaser will, and
each subsequent holder is required to, notify any subsequent purchaser from
it of the resale restrictions set forth in (A) above.
(3) The purchaser understands that the certificates evidencing the Old
Notes bear, and if not exchanged pursuant to the Exchange Offer will
continue to bear, a legend substantially to the following effect unless
otherwise agreed by the Issuer and the holder thereof:
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED
OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT
OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS
ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR"
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(AS DEFINED IN RULE 501(a)(1), (2), (3), OR (7) OF REGULATION D UNDER
THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT
IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT,
(2) AGREES THAT IT WILL NOT, WITHIN THREE YEARS AFTER THE LATER OF THE
ORIGINAL ISSUANCE OF THIS NOTE OR THE LAST DATE ON WHICH THIS NOTE WAS
HELD BY AN AFFILIATE OF THE COMPANY, RESELL OR OTHERWISE TRANSFER THIS
NOTE EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE
UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE
144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN
INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER,
FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER
OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE)
AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF
NOTES AT THE TIME OF TRANSFER OF LESS THAN $250,000, AN OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE
WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E)
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER
THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT
WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IF THE PROPOSED TRANSFEREE
IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH
TRANSFER, FURNISH TO THE TRUSTEE AND THE COMPANY SUCH CERTIFICATIONS,
LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY
REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN
TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS
A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF
THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTIONS.
(4) The purchaser acknowledged that none of the Issuer, the Initial
Purchasers or any person representing the Issuer or the Initial Purchasers
made any representations to it with respect to the Issuer or the offering or
sale of the Old Notes, other than the information contained in the Offering
Memorandum, dated March 19, 1996, relating to the Old Notes (the "Offering
Memorandum"), which was delivered to it and upon which it relied in making
its investment decision with respect to the Old Notes. The purchaser had
access to such financial and other information concerning the Issuer and the
Old Notes as it deemed necessary in connection with its decision to purchase
the Old Notes, including an opportunity to ask questions of and request
information from the Issuer and the Initial Purchasers.
(5) The purchaser acknowledged that the Issuer and the Initial
Purchasers and others relied upon the truth and accuracy of the foregoing
acknowledgements, representations and agreements and agrees that, if any of
the foregoing acknowledgements, representations or agreements deemed to have
been made by it are no longer accurate, it shall promptly notify the Initial
Purchasers. If such purchaser acquired Old Notes as a fiduciary or agent for
one or more investor
136
<PAGE>
accounts, such purchaser represented that it has sole investment discretion
with respect to each such account and that it has full power to make the
foregoing acknowledgements, representations and agreements on behalf of each
such account.
Each purchaser of Old Notes that is an institutional accredited investor
executed and delivered a purchaser's letter for the benefit of the Initial
Purchasers and the Issuer, substantially in the form included as Appendix A to
the Offering Memorandum, whereby such institutional accredited investor (a)
agreed to the restrictions on transfer set forth in clause (2) above, (b)
confirmed that it: (i) acquired Old Notes having a minimum purchase price of at
least $100,000 for its own account and for each separate account for which it is
acting; (ii) acquired such Old Notes for its own account or for certain
qualified institutional accounts, as specified therein; and (iii) did not
acquire the Notes with a view to distribution thereof in a transaction that
would violate the Securities Act or the securities laws of any State of the
United States or any other applicable jurisdiction; and (c) acknowledged that
the registrar and transfer agent for the Old Notes will not be required to
accept for registration of transfer any Old Notes acquired by them, except upon
presentation of evidence satisfactory to the Issuer that the restrictions on
transfer set forth in clause (2) above have been complied with, and that any
such Old Notes will be in the form of definitive physical certificates bearing
the legend set forth in clause (3) above.
The Old Notes may not be sold or transferred to, and each purchaser, by its
purchase of the Old Notes has been deemed to have represented and covenanted
that it did not acquire the Old Notes for or on behalf of, and will not transfer
the Old Notes to, any pension or welfare plan (as defined in Section 3 of the
Employee Retirement Income Security Act of 1974; "ERISA") except that such a
purchase for or on behalf of a pension or welfare plan shall be permitted:
(1) to the extent such purchase is made by or on behalf of a bank
collective investment fund maintained by the purchaser in which no plan
(together with any other plans maintained by the same employer or employee
organization) has an interest in excess of 10% of the total assets in such
collective investment fund and the conditions of Section III of Prohibited
Transaction Class Exemption 91-38 issued by the Department of Labor are
satisfied;
(2) to the extent such purchase is made by or on behalf of an insurance
company pooled separate account maintained by the purchaser in which, at any
time while the Old Notes are outstanding, no plan (together with any other
plans maintained by the same employer or employee organization) has an
interest in excess of 10% of the total of all assets in such pooled separate
account and the conditions of Section III of Prohibited Transaction Class
Exemption 90-1 issued by the Department of Labor are satisfied;
(3) to the extent such purchase is made on behalf of a plan by: (i) an
investment advisor registered under the Investment Advisers Act of 1940 that
had as of the last day of its most recent fiscal year total assets under its
management and control in excess of $50 million and had stockholders' or
partners' equity in excess of $0.75 million, as shown in its most recent
balance sheet prepared in accordance with generally accepted accounting
principles; or (ii) a bank as defined in Section 202(a)(2) of the Investment
Advisers Act of 1940 with equity capital in excess of $1 million as of the
last day of its most recent fiscal year; or (iii) an insurance company which
is qualified under the laws of more than one state to manage, acquire or
dispose of any assets of a plan, which insurance company has as of the last
day of its most recent fiscal year, net worth in excess of $1 million and
which is subject to supervision and examination by a state authority having
supervision over insurance companies and, in any case, such investment
advisor, bank or insurance company is otherwise a qualified professional
asset manager, as such term is used in Prohibited Transaction Class
Exemption 84-14 issued by the Department of Labor, and the assets of such
plan when combined with the assets of other plans established or maintained
by the same employer (or affiliate thereof) or employee organization and
managed by such investment advisor,
137
<PAGE>
bank or insurance company, do not represent more than 20% of the total
client assets managed by such investment advisor, bank or insurance company,
and the conditions of Section I of such exemption are otherwise satisfied;
or
(4) to the extent such plan is a governmental plan (as defined in
Section 3 of ERISA) which is not subject to the provisions of Title I of
ERISA of Section 401 of the Internal Revenue Code.
EXPERTS
The audited financial statements of Dish, Ltd., the Issuer, EchoStar DBS
Corporation, and Direct Broadcasting Satellite Corporation (Colorado) included
in this Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of such firm as experts in giving
such reports.
LEGAL MATTERS
The validity of the Notes will be passed upon for the Issuer by Baker &
Hostetler, Cleveland, Ohio.
138
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
DISH, LTD.
- ---------------------------------------------------------------------------------------------------------
Report of Independent Public Accountants................................................................. F-3
Consolidated Balance Sheets at December 31, 1994 and 1995................................................ F-4
Combined and Consolidated Statements of Income for the Years Ended December 31, 1993, 1994 and 1995...... F-5
Combined and Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1994
and 1995................................................................................................ F-6
Combined and Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995.................................................................................................... F-7
Notes to Combined and Consolidated Financial Statements.................................................. F-9
<CAPTION>
ECHOSTAR COMMUNICATIONS CORPORATION
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Report of Independent Public Accountants................................................................. F-35
Consolidated Balance Sheets at December 31, 1994 and 1995................................................ F-36
Combined and Consolidated Statements of Income for the Years Ended December 31, 1993,1994 and 1995....... F-37
Combined and Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1994
and 1995................................................................................................ F-38
Combined and Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995.................................................................................................... F-39
Notes to Combined and Consolidated Financial Statements.................................................. F-41
<CAPTION>
ECHOSTAR SATELLITE BROADCASTING CORPORATION
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Report of Independent Public Accountants................................................................. F-66
Balance Sheet at January 24, 1996........................................................................ F-67
<CAPTION>
ECHOSTAR DBS CORPORATION
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Report of Independent Public Accountants................................................................. F-68
Balance Sheet at January 19, 1996........................................................................ F-69
<CAPTION>
DIRECT BROADCASTING SATELLITE CORPORATION (COLORADO)
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Report of Independent Public Accountants................................................................. F-70
Balance Sheet at December 31, 1995....................................................................... F-71
<CAPTION>
DIRECT BROADCASTING SATELLITE CORPORATION (DELAWARE)
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Report of Independent Public Accountants................................................................. F-73
Balance Sheets at March 31, 1995 and December 31, 1995................................................... F-74
Statements of Income for the Years Ended March 31, 1994 and 1995, and the nine months ended December 31,
1995.................................................................................................... F-75
Statements of Stockholders' Equity for the Five Years ended March 31, 1995, and the nine months ended
December 31, 1995....................................................................................... F-76
Statements of Cash Flows for the Years Ended March 31, 1994 and 1995, and the nine months ended December
31, 1995................................................................................................ F-77
Notes to Financial Statements............................................................................ F-78
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION
<S> <C>
DISH, LTD.
- ---------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets at December 31, 1995 and March 31, 1996 (Unaudited).......................... F-83
Consolidated Statements of Income for the three months ended March 31, 1995 and 1996 (Unaudited)......... F-84
Consolidated Statement of Stockholder's Equity for the three months ended March 31, 1996 (Unaudited)..... F-85
Consolidated Statements of Cash Flows for the three months ended March 31, 1995 and 1996 (Unaudited)..... F-86
Condensed Notes to Consolidated Financial Statements (Unaudited)......................................... F-88
<CAPTION>
ECHOSTAR COMMUNICATIONS CORPORATION
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Consolidated Balance Sheets at December 31, 1995 and March 31, 1996 (Unaudited).......................... F-97
Consolidated Statements of Income for the three months ended March 31, 1995 and 1996 (Unaudited)......... F-98
Consolidated Statement of Stockholders' Equity for the three months ended March 31, 1996 (Unaudited)..... F-99
Consolidated Statements of Cash Flows for the three months ended March 31, 1995 and 1996 (Unaudited)..... F-100
Condensed Notes to Consolidated Financial Statements (Unaudited)......................................... F-102
<CAPTION>
ECHOSTAR SATELLITE BROADCASTING CORPORATION
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Consolidated Balance Sheets at December 31, 1995 and March 31, 1996 (Unaudited).......................... F-112
Consolidated Statements of Income for the three months ended March 31, 1995 and 1996 (Unaudited)......... F-113
Consolidated Statement of Stockholder's Equity for the three months ended March 31, 1996 (Unaudited)..... F-114
Consolidated Statements of Cash Flows for the three months ended March 31, 1995 and 1996 (Unaudited)..... F-115
Condensed Notes to Consolidated Financial Statements (Unaudited)......................................... F-117
<CAPTION>
DIRECT BROADCASTING SATELLITE CORPORATION (DELAWARE)
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Balance Sheets at December 31, 1995 and March 31, 1996 (Unaudited)....................................... F-127
Statements of Income for the three months ended March 31, 1995 and 1996 (Unaudited)...................... F-128
Consolidated Statement of Stockholders' Equity for the three months ended March 31, 1996 (Unaudited)..... F-129
Statements of Cash Flows for the three months ended March 31, 1995 and 1996 (Unaudited).................. F-130
Condensed Notes to Financial Statements (Unaudited)...................................................... F-131
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dish, Ltd:
We have audited the accompanying consolidated balance sheets of DISH, LTD.
(a Nevada corporation and wholly owned subsidiary of EchoStar Communications
Corporation) and affiliates and subsidiaries, as described in Note 1, as of
December 31, 1994 and 1995, and the related combined and consolidated statements
of income, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. 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 the Companies
as of December 31, 1994 and 1995, and the combined and consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 23, 1996.
F-3
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994, AND 1995
ASSETS
<TABLE>
<CAPTION>
1994 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................................. $ 17,506 $ 13,949
Marketable investment securities...................................................... 31,038 210
Trade accounts receivable, net........................................................ 8,097 10,435
Inventories........................................................................... 20,327 38,769
Income tax receivable................................................................. -- 3,870
Deferred tax assets................................................................... 1,840 1,834
Other current assets.................................................................. 2,573 12,791
----------- -----------
Total current assets................................................................ 81,381 81,858
RESTRICTED CASH AND MARKETABLE SECURITIES:
Escrow................................................................................ 185,431 73,291
Other................................................................................. 11,400 26,400
PROPERTY AND EQUIPMENT, net............................................................. 151,240 333,199
OTHER NONCURRENT ASSETS................................................................. 43,040 44,547
----------- -----------
Total assets........................................................................ $ 472,492 $ 559,295
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable................................................................ $ 14,895 $ 19,063
Deferred programming revenue.......................................................... 6,572 5,563
Accrued expenses and other current liabilities........................................ 6,965 21,335
Notes payable and current portion of long-term debt................................... 238 4,782
----------- -----------
Total current liabilities........................................................... 28,670 50,743
1994 NOTES, net......................................................................... 334,206 382,218
LONG-TERM MORTGAGE DEBT AND NOTE PAYABLE, excluding current portion..................... 5,393 33,444
OTHER LONG-TERM LIABILITIES............................................................. 415 --
----------- -----------
Total liabilities................................................................... 368,684 466,405
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 11)
STOCKHOLDERS' EQUITY:
Preferred Stock, 20,000,000 shares authorized, 1,616,681 shares of Series A Cumulative
Preferred Stock issued and outstanding, including accrued dividends of $938,000 and
$1,555,000, respectively............................................................. 15,990 16,607
Class A Common Stock, $.01 par value, 200,000,000 shares authorized, 3,739,400 and
6,470,599 shares issued and outstanding, respectively................................ 38 65
Class B Common Stock, $.01 par value, 100,000,000 shares authorized, 29,804,401 shares
issued and outstanding............................................................... 298 298
Common Stock Purchase Warrants........................................................ 26,133 --
Additional paid-in capital............................................................ 62,197 89,495
Unrealized holding gains on available-for-sale securities, net of deferred taxes...... -- 251
Retained earnings (deficit)........................................................... (848) (13,826)
----------- -----------
Total stockholders' equity.......................................................... 103,808 92,890
----------- -----------
Total liabilities and stockholders' equity.......................................... $ 472,492 $ 559,295
----------- -----------
----------- -----------
</TABLE>
The accompanying notes to combined and consolidated financial
statements are an integral part of these balance sheets.
F-4
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUE:
DTH products and technical services...................................... $ 206,311 $ 172,753 $ 146,852
Programming.............................................................. 10,770 14,540 15,096
Loan origination and participation income................................ 3,860 3,690 1,942
----------- ----------- -----------
Total revenue.......................................................... 220,941 190,983 163,890
----------- ----------- -----------
EXPENSES:
DTH products and technical services...................................... 161,447 133,635 120,178
Programming.............................................................. 9,378 11,670 13,610
Selling, general and administrative...................................... 30,235 30,219 34,993
Depreciation............................................................. 1,677 2,243 3,058
----------- ----------- -----------
Total expenses......................................................... 202,737 177,767 171,839
----------- ----------- -----------
OPERATING INCOME (LOSS).................................................... 18,204 13,216 (7,949)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income.......................................................... 1,173 8,420 12,545
Interest expense, net of amounts capitalized............................. (632) (21,408) (23,985)
Losses on investments in joint ventures.................................. (50) (492) --
Minority interest in loss of consolidated joint venture and other........ 39 753 837
----------- ----------- -----------
Total other income (expense)........................................... 530 (12,727) (10,603)
----------- ----------- -----------
NET INCOME (LOSS) BEFORE INCOME TAXES...................................... 18,734 489 (18,552)
BENEFIT (PROVISION) FOR INCOME TAXES....................................... 1,384 (399) 6,191
----------- ----------- -----------
NET INCOME (LOSS).......................................................... $ 20,118 $ 90 $ (12,361)
----------- ----------- -----------
----------- ----------- -----------
PRO FORMA (UNAUDITED) NET INCOME (Note 7)
Historical net income before income taxes................................ $ 18,734
Historical (provision) benefit for income taxes.......................... 1,384
Pro forma income tax effects............................................. (7,846)
-----------
Pro forma net income..................................................... $ 12,272
-----------
-----------
</TABLE>
The accompanying notes to combined and consolidated financial
statements are an integral part of these statements.
F-5
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
OF
SUBSIDIARIES RETAINED
COMMON AND EARNINGS
SHARES OF STOCK ADDITIONAL (DEFICIT) AND TOTAL
COMMON STOCK PREFERRED COMMON PURCHASE PAID-IN UNREALIZED STOCKHOLDERS'
OUTSTANDING STOCK STOCK WARRANTS CAPITAL HOLDING GAINS EQUITY
--------------- --------- ------- -------- ------------ --------------- -------------
(NOTES 1 AND 9) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, at December 31, 1992... $ 6,881 $ 45,447 $ 52,328
Cash contributions to
capital....................... 2,497 2,497
Dividends declared............. (25,243) (25,243)
Net income..................... 20,118 20,118
Reorganization effective
December 31, 1993 --
Class A Common Stock......... 2,417 $ 24 (24) --
Class B Common Stock......... 29,804 298 (298) --
Termination of Subchapter S
Status of subsidiaries........ 40,322 (40,322) --
------- --------- ------- -------- ------------ --------------- -------------
BALANCES, at December 31, 1993... 32,221 -- 322 -- 49,378 -- 49,700
Issuance of Class A Common
Stock:
For acquisition of DirectSat,
Inc......................... 999 11 8,989 9,000
For cash..................... 324 3 3,830 3,833
Issuance of 1,616,681 shares of
8% Series A Cumulative
Preferred Stock............... $15,052 15,052
Issuance of Common Stock
Purchase Warrants............. $26,133 26,133
Series A Cumulative Preferred
Stock dividends............... 938 (938) --
Net income..................... 90 90
------- --------- ------- -------- ------------ --------------- -------------
BALANCES, at December 31, 1994... 33,544 15,990 336 26,133 62,197 (848) 103,808
Series A Cumulative Preferred
Stock dividends............... 617 (617) --
Common Stock Purchase Warrants
exercised..................... 2,731 27 (25,419) 25,392 --
Common Stock Purchase Warrants
exchanged for ECC Warrants.... (714) 714 --
Employee Savings Plan
Contribution and Launch
Bonuses Funded by Issuance of
ECC Common Stock.............. 1,192 1,192
Unrealized holding gains on
available-for-sale securities,
net........................... 251 251
Net loss....................... (12,361) (12,361)
------- --------- ------- -------- ------------ --------------- -------------
BALANCES, at December 31, 1995... 36,275 $16,607 $ 363 $ -- $89,495 $(13,575) $ 92,890
------- --------- ------- -------- ------------ --------------- -------------
------- --------- ------- -------- ------------ --------------- -------------
</TABLE>
The accompanying notes to combined and consolidated financial
statements are an integral part of these statements.
F-6
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................... $ 20,118 $ 90 $ (12,361)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities --
Depreciation............................................................ 1,677 2,243 3,058
Provision for doubtful accounts......................................... 254 (160) 920
Benefit for deferred taxes.............................................. (1,941) (7,330) (4,825)
Amortization of deferred debt issuance costs............................ -- 719 1,279
Amortization of discount on 1994 Notes, net of amounts capitalized...... -- 9,943 22,249
Equity in losses in joint ventures...................................... -- 492 --
Employee benefits funded with ECC Stock................................. -- -- 1,192
Loss on dispositions of fixed assets.................................... -- 133 --
Change in reserve for excess and obsolete inventory..................... (22) 502 1,212
Other, net.............................................................. (30) (941) (528)
Changes in working capital items--
Trade accounts receivable............................................. (3,439) 532 (2,456)
Inventories........................................................... 14,919 3,049 (19,654)
Income tax receivable................................................. -- -- (3,870)
Other current assets.................................................. (1,659) (183) 10,218)
Liability under cash management program............................... (4,018) (2,310) (57)
Trade accounts payable................................................ 1,156 4,958 4,168
Deferred programming revenue.......................................... 1,795 564 (1,009)
Accrued expenses...................................................... 1,637 611 (1,232)
Reserve for warranty costs............................................ (250) 50 (387)
Other current liabilities............................................. 18 1,009 631
Other, net............................................................ -- 234 --
---------- ----------- -----------
Net cash flows from operating activities............................ 30,215 24,205 (21,888)
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities............................. (18,227) (15,100) (3,004)
Sales of marketable investment securities................................. 16,132 4,439 33,816
Purchases of restricted marketable investment securities.................. -- (11,400) (15,000)
Purchases of property and equipment....................................... (19,225) (4,030) (4,077)
Proceeds from sale of property and equipment.............................. 383 523 29
Offering proceeds and investment earnings placed in escrow................ -- (329,831) (9,589)
Funds released from escrow account........................................ -- 144,400 122,149
Accrued satellite contract costs.......................................... -- (3,700) --
Investment in SSET........................................................ -- (8,750) --
Investment in DBSC........................................................ -- (4,210) 4,210
Investments in joint ventures............................................. (65) 1,614 --
Expenditures for satellite system under construction...................... -- (112,052) (109,507)
Expenditures from escrow for FCC authorization............................ -- (159) --
Expenditures for FCC authorizations....................................... -- -- (458)
Other..................................................................... 92 (309) --
---------- ----------- -----------
Net cash flows from investing activities............................ (20,910) (338,565) 18,569
---------- ----------- -----------
</TABLE>
The accompanying notes to combined and consolidated financial
statements are an integral part of these statements.
F-7
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term loans from banks............................................... $ 6,000 $ -- $ --
Repayments of short-term loans from banks................................. (7,256) -- --
Minority investor investment in and loan to consolidated joint venture.... 2,504 1,000 --
Net proceeds from issuance of 1994 Notes
and Common Stock Purchase Warrants....................................... -- 323,325 --
Expenditures from escrow for offering costs............................... -- (837) --
Proceeds from refinancing of mortgage indebtedness........................ -- 4,200 --
Repayments of mortgage indebtedness....................................... (152) (3,435) (238)
Loans from stockholder, net............................................... 12,451 4,000 --
Repayment of loans from stockholders...................................... -- (4,075) --
Net proceeds from issuance of Class A Common Stock........................ -- 3,833 --
Capital contributions..................................................... 2,497 -- --
Dividends paid............................................................ (22,243) 3,000) --
---------- ----------- -----------
Net cash flows from financing activities................................ (6,199) 325,011 (238)
---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ 3,106 10,651 (3,557)
CASH AND CASH EQUIVALENTS, beginning of period.............................. 3,749 6,855 17,506
---------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period.................................... $ 6,855 $ 17,506 $ 13,949
---------- ----------- -----------
---------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized........................ $ 633 $ 436 $ 461
Cash paid for income taxes................................................ 251 7,140 3,203
Cumulative Series A Preferred Stock dividends............................. -- 938 617
Dividends declared but not paid until 1994................................ 3,000 -- --
Accrued satellite contract costs.......................................... 3,700 -- 15,000
Exchange of note payable to stockholder, and interest thereon, for Series
A Preferred Stock........................................................ -- 15,052 --
Issuance of Class A Common Stock to acquire investment in DirectSat
Corporation.............................................................. -- 9,000 --
Property and equipment acquired under capital leases...................... -- 934 --
Note payable issued for deferred satellite construction payments.......... -- -- 32,833
Employee Savings Plan Contribution and launch bonuses funded by issuance
of ECC Common Stock...................................................... -- -- 1,192
</TABLE>
The accompanying notes to combined and consolidated financial
statements are an integral part of these statements.
F-8
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
(1) ORGANIZATION AND BUSINESS ACTIVITIES
Certain copmanies principally owned and controlled by Mr. Charles Ergen were
reorganized in 1993 into Dish, Ltd., formerly known as EchoStar Communications
Corporation (together with its subsidiaries, "Dish, Ltd.").
The principal reorganized entities, Echosphere Corporation (formed in 1980)
and Houston Tracker Systems, Inc. (acquired in 1986), are primarily engaged in
the design, assembly, marketing and worldwide distribution of direct to home
("DTH") satellite television products. Satellite Source, Inc. contracts for
rights to purchase satellite delivered television programming for resale to
consumers and other DTH retailers. Echo Acceptance Corporation ("EAC") arranges
nationwide consumer financing for purchasers of DTH systems and programming. The
FCC has granted EchoStar Satellite Corporation ("ESC") a conditional satellite
construction permit and frequency assignments for eleven odd-numbered
frequencies at 119 DEG. West Longitude ("WL"). The reorganized group also
includes other less significant domestic enterprises and several foreign
entities involved in related activities outside the United States.
In January 1994, Dish, Ltd. announced its intention to merge a subsidiary of
Dish, Ltd. with DirectSat Corporation ("DirectSat"), an approximately 80% owned
subsidiary of SSE Telecom, Inc. ("SSET") at that time. The merger was approved
by the FCC and consummated in December 1994. DirectSat stockholders received an
approximate 3% equity interest in Dish, Ltd. in exchange for all of DirectSat's
outstanding stock. DirectSat's principal assets are a conditional satellite
construction permit and frequency assignments for ten even-numbered frequencies
at 119 DEG. WL granted by the FCC.
Dish, Ltd. has contracted for the construction and launch of communications
satellites. EchoStar I, a high powered direct broadcast satellite ("DBS"), was
launched on December 28, 1995. EchoStar II is currently under construction and
scheduled for launch during 1996.
In June 1994, Dish, Ltd. completed an offering of 12 7/8% Senior Secured
Discount Notes due 2004 (the "1994 Notes") (Note 5) and Common Stock Purchase
Warrants (the "Warrants") (collectively, the "Notes Offering"), receiving net
proceeds of approximately $323.3 million. Dish, Ltd. and its subsidiaries are
subject to the terms and conditions of the Indenture related to the 1994 Notes
(the "1994 Indenture").
EXCHANGE AND MERGER
In April 1995, a new company, EchoStar Communications Corporation (same name
as the original name of Dish, Ltd.), was formed to conduct a public offering of
its Class A Common Stock and to become the parent of Dish, Ltd. as described
below. The new company is described below as "ECC". Elsewhere in these
footnotes, unless otherwise indicated, "EchoStar" or the "Company" refers to ECC
and its subsidiaries, including Dish, Ltd. The assets of ECC, other than its
investment in Dish, Ltd., are not subject to the 1994 Indenture (Note 16).
Further, the 1994 Indenture places significant restrictions on the payment of
dividends or other transfers by Dish, Ltd. to ECC.
ECC completed an offering of its Class A Common Stock on June 26, 1995, and
received net proceeds of approximately $63.0 million. Concurrently, Charles W.
Ergen, President and Chief Executive Officer of both ECC and Dish, Ltd.,
exchanged all of his shares of Class B Common Stock and Series A Preferred Stock
of Dish, Ltd. for like shares of ECC (the "Exchange") in the ratio of 0.75
shares of ECC for each share of Dish, Ltd. capital stock (the "Exchange Ratio").
All employee stock options of Dish, Ltd. were also assumed by ECC, adjusted for
the Exchange Ratio. In December 1995, ECC merged Dish, Ltd. with a wholly owned
subsidiary of ECC (the "Merger") and all
F-9
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
outstanding shares of Dish, Ltd. Class A Common Stock and Series A Preferred
Stock (other than those held by ECC) were automatically converted into the right
to receive like shares of ECC in accordance with the Exchange Ratio. Also
effective with the Merger, all outstanding Warrants for the purchase of Dish,
Ltd. Class A Common Stock automatically became exercisable for shares of ECC's
Class A Common Stock, adjusted for the Exchange Ratio (Note 16).
As the result of the Exchange and Merger, ECC owns all outstanding shares of
Dish, Ltd. capital stock. All share information included in the Dish Ltd.
financial statements is presented on the basis of the number of ECC shares into
which the Dish, Ltd. shares were converted. Additionally, the change in
authorized capital, the stock splits and the redesignation of common stock as
Class A and Class B shares described in Note 9 have been retroactively reflected
in the accompanying combined and consolidated financial statements.
The accompanying combined and consolidated financial statements include only
the accounts of Dish, Ltd. and its subsidiaries and exclude all accounts of
Dish, Ltd.'s parent, ECC. Separate parent only financial information for ECC is
supplementally provided in Note 16.
SIGNIFICANT RISKS AND UNCERTAINTIES
Execution of its business strategy to launch and operate DBS satellites has
dramatically changed the Company's operating results and financial position. At
December 31, 1993, Dish, Ltd.'s long-term debt, exclusive of amounts related to
its DBS projects, consisted of less than $5.0 million in mortgage indebtedness
and its investments in property and equipment, other than DBS satellite
payments, aggregated less than $20.0 million. At December 31, 1995, the Company
is committed to expend approximately $450 million to build and launch its first
two satellites and has completed the sale of the 1994 Notes for that purpose
(Notes 5 and 11). Annual interest expense on the 1994 Notes and depreciation of
the investment in the first two satellites will each be of a magnitude that
exceeds historical levels of income before taxes and the Company has reported
significant net losses beginning in 1995 and expects net losses to continue for
the foreseeable future. The Company's plans also include the construction and
launch of additional satellites and marketing programs to promote its DBS
products and services. The Company will need to raise significant additional
funds for those purposes and there can be no assurance that necessary funds will
be available or, if available, available on terms favorable to the Company.
However, management believes, but has no assurance, that demand for its DBS
products and services will develop to provide cash flow from operation of
EchoStar's DISH Network-SM- which, together with other sources of capital, will
be sufficient to satisfy future planned expenditures. Significant delays in
commencing operations of the EchoStar DBS System, or significant delays or
mission failures in the Company's satellite launch program, may subject the
Company to significant monetary penalties and would have significant adverse
consequences to its operating results and financial condition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. Actual results could differ from those estimates.
F-10
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION AND CONSOLIDATION
The accompanying financial statements combine the historical cost financial
statements of all reorganized entities for all periods presented and such
entities are consolidated in the balance sheet as of December 31, 1994 and 1995.
All significant intercompany transactions have been eliminated in the combined
and consolidated financial statements.
Effective June 1993, the Company acquired a fifty-one percent joint venture
interest in FlexTracker Sdn. Bhd. ("FlexTracker"), a Malaysian limited liability
company. A Singapore electronics manufacturing company owned the forty-nine
percent minority interest. FlexTracker manufactured integrated and stand-alone
receivers and positioners exclusively for the Company. In December 1994, the
Company terminated the FlexTracker joint venture and effectively sold its
interest in the joint venture's net assets to the Singapore company for $1.8
million. The Company's share of FlexTracker's losses for 1993 and 1994 amounted
to approximately $50,000 and $1.3 million, respectively, and an additional
$492,000 of loss was recognized upon sale of the net assets. FlexTracker's
financial statements have been consolidated in the accompanying combined and
consolidated financial statements from the date of acquisition through the date
of disposition.
The Company accounts for investments in fifty percent or less owned entities
using the equity method. At December 31, 1994 and 1995, these investments were
not material to the combined and consolidated financial statements of the
Company.
FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar because their sales and purchases are predominantly denominated in that
currency. Transactions denominated in currencies other than U.S. dollars are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period end translation) or realized
(upon settlement of the transaction). Net transaction gains (losses) for 1993,
1994 and 1995 were $19,000, $40,000 and $70,000 respectively.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with an original
maturity of ninety days or less to be cash equivalents. Cash equivalents as of
December 31, 1994 and 1995 consist of money market funds, corporate notes and
commercial paper stated at cost which equates to market value.
MARKETABLE INVESTMENT SECURITIES AND RESTRICTED CASH AND MARKETABLE SECURITIES
At December 31, 1994 marketable investment securities were recorded in the
financial statements at amortized cost and were generally held to maturity. At
December 31, 1995, the Company has classified all marketable investment
securities as available-for-sale. Accordingly, these investments are reflected
at market value based on quoted market prices. Related unrealized gains and
losses are reported as a separate component of stockholders' equity, net of
related deferred income taxes of
F-11
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$153,000 at December 31, 1995. The specific identification method is used to
determine cost in computing realized gains and losses. The major components of
marketable investment securities as of December 31, 1994 and 1995 are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
DECEMBER 31, 1994 ---------------------------------------
---------------------- UNREALIZED
AMORTIZED MARKET AMORTIZED HOLDING GAIN MARKET
COST VALUE COST (LOSS) VALUE
----------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Commercial paper........................... $ 19,976 $ 20,233 $ -- $ -- $ --
Corporate notes............................ 10,992 10,987 -- -- --
Municipal bonds............................ 70 70 -- -- --
Government bonds........................... -- -- 38 -- 38
Mutual funds............................... -- -- 188 (16) 172
----------- --------- ----- --- -----
$ 31,038 $ 31,290 $ 226 $ (16) $ 210
----------- --------- ----- --- -----
----------- --------- ----- --- -----
</TABLE>
Restricted Cash and Marketable Securities in Escrow as reflected on the
accompanying balance sheets represent net proceeds received from the Notes
Offering, plus interest earned, less amounts expended to date in connection with
the development, construction and launch of EchoStar's DISH Network-SM-. The
escrow funds are held by an escrow agent in an account (the "Escrow Account")
for the benefit of the holders of the 1994 Notes and are invested in certain
debt and other marketable securities, as permitted by the 1994 Indenture, until
disbursed for the express purposes identified in the Notes Offering prospectus.
The major components of Restricted Cash and Marketable Securities as of December
31, 1994 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
DECEMBER 31, 1994 -----------------------------------
------------------------ UNREALIZED
AMORTIZED MARKET AMORTIZED HOLDING MARKET
COST VALUE COST GAIN VALUE
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Commercial paper....................... $ 94,315 $ 94,909 $ 66,214 $ -- $ 66,214
Corporate notes........................ 8,954 8,954 -- -- --
Government bonds....................... -- -- 32,904 420 33,324
Municipal bonds........................ 92,513 93,010 -- -- --
Accrued interest....................... 1,049 1,049 153 -- 153
----------- ----------- ----------- ----- ---------
$ 196,831 $ 197,922 $ 99,271 $ 420 $ 99,691
----------- ----------- ----------- ----- ---------
----------- ----------- ----------- ----- ---------
</TABLE>
Other Restricted Cash includes $11.4 million to satisfy certain covenants
regarding launch insurance required by the 1994 Indenture. The Company is
required to maintain launch insurance and restricted cash totaling $225.0
million for each of EchoStar I and EchoStar II. The Company has obtained $219.3
million of launch insurance on each satellite, and, together with the cash
segregated and reserved on the accompanying balance sheets, has satisfied its
insurance obligations under the 1994 Indenture. In addition, as of December 31,
1995, $15.0 million was in an escrow account established pursuant to a
manufacturing contract for payment to the manufacturer as certain milestones are
reached.
REVENUE RECOGNITION AND TRADE ACCOUNTS RECEIVABLE
Revenue from sales of DTH products is recognized upon shipment to customers.
The Company maintains a reserve for potential losses in collection of its trade
accounts receivable based upon estimates of amounts that may ultimately be
uncollectible. The allowance for doubtful accounts was $186,000 and $1.1 million
as of December 31, 1994 and 1995, respectively.
F-12
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out ("FIFO") method. Proprietary products
are manufactured by outside suppliers to the Company's specifications; however,
final testing and assembly is performed by the Company. The Company also
distributes non-proprietary products purchased from other manufacturers.
Manufactured inventories include materials, labor and manufacturing overhead.
Cost of other inventories includes parts, contract manufacturers' delivered
price, assembly and testing labor, and related overhead, including handling and
storage costs. The major components of inventory were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
DBS receiver components.......................................................... $ -- $ 9,615
Spare parts...................................................................... 2,759 2,089
Competitor DBS Receivers......................................................... 2,207 9,404
Finished goods................................................................... 16,946 20,458
Reserve for excess and obsolete inventory........................................ (1,585) (2,797)
--------- ---------
$ 20,327 $ 38,769
--------- ---------
--------- ---------
</TABLE>
OTHER CURRENT ASSETS
Other current assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
DBS inventory deposit............................................................. $ -- $ 10,000
Receivables for funded loans...................................................... 257 437
Other............................................................................. 2,316 2,354
--------- ---------
$ 2,573 $ 12,791
--------- ---------
--------- ---------
</TABLE>
In conjunction with its commitments to purchase DBS satellite receivers
(Note 11), the Company has paid a deposit of $10.0 million to one of its
manufacturers. The deposit will be applied towards future payments for the DBS
satellite receivers as they are delivered during 1996.
Other current assets include receivables for consumer loans funded by EAC
but expected to be reimbursed to EAC on a nonrecourse basis by two unrelated
finance companies, normally within two business days after the credit is
accepted by those companies. Unreimbursed fundings were $257,000 and $437,000 as
of December 31, 1994 and 1995, respectively, all of which were subsequently
reimbursed. Total loans sourced by EAC during 1993, 1994 and 1995 were $85.6
million, $64.7 million and $50.1 million, respectively. In addition, EAC sourced
$8.6 million of leases in 1995.
Loan origination fees charged to the applicable DTH dealers are recognized
in income upon receipt of funding reimbursement from the purchaser of the loans.
EAC also receives a percentage of monthly finance charges billed by the
purchaser of the loans which is recognized in income as it becomes due to EAC.
FCC AUTHORIZATIONS AND ORGANIZATIONAL COSTS
FCC authorizations and organizational costs are recorded at cost and are
amortized using the straight-line method. Amortization periods for FCC
authorization costs are determined at the time
F-13
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the services related to the applicable FCC authorization commence, or
capitalized costs are written off at the time efforts to provide services are
abandoned. FCC authorization costs are expected to have a useful life of
approximately 12 years. Organizational costs are being amortized over five
years.
DEFERRED DEBT ISSUANCE COSTS AND DEBT DISCOUNT
Costs of completing the Notes Offering have been deferred (Note 4) and are
being amortized to interest expense over the term of the 1994 Notes.
Amortization of the original issue discount related to the Notes Offering (Note
5) is also being amortized and included in interest cost incurred so as to
reflect a constant rate of interest on the accreted balance of the 1994 Notes.
DEFERRED PROGRAMMING REVENUE
Deferred programming revenue consists of payments received from consumers
and dealers for satellite television programming to be provided. The revenue is
recognized on a straight-line basis over the period the programming is provided,
which generally does not exceed one year.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The composition of accrued expenses and other current liabilities is as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Accrued satellite contract costs.................................................. $ -- $ 15,000
Liability under cash management program 57 --
Accrued expenses.................................................................. 4,667 3,850
Reserve for warranty costs........................................................ 1,400 1,013
Other............................................................................. 841 1,472
--------- ---------
$ 6,965 $ 21,335
--------- ---------
--------- ---------
</TABLE>
The liability under cash management program represents checks written and
released in excess of balances presently on deposit with certain banks. As
checks clear these bank accounts, the resulting overdrafts are funded daily from
funds available in a concentration account at another bank.
The Company's proprietary products are under warranty against defects in
material and workmanship for one year from the date of original retail purchase.
The reserve for warranty costs is based upon historical units sold and expected
repair costs.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $3.2 million, $2.3
million and $1.9 million for the years ended December 31, 1993, 1994 and 1995,
respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development costs totaled $5.1 million, $5.9 million and $5.0 million for the
years ended December 31, 1993, 1994 and 1995, respectively.
INCOME TAXES
Prior to the December 31, 1993 reorganization (Note 1), the principal
combined entities were Subchapter S corporations and their income was taxable to
the stockholders rather than the companies. The provision for income taxes
reflected only amounts payable to states and foreign tax jurisdictions that did
not recognize Subchapter S status. Effective December 31, 1993, Subchapter S
status terminated and the Company will prospectively file consolidated corporate
federal and state income tax returns. As required by Statement of Financial
Accounting Standards No. 109, "Accounting for
F-14
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes" ("SFAS No. 109"), this change in tax status was recognized by
establishing deferred tax assets and liabilities for temporary differences
between the tax basis and amounts reported in the accompanying combined and
consolidated balance sheets (Note 7).
Under SFAS No. 109, the current provision for income taxes represents actual
or estimated amounts payable or refundable on tax returns filed or to be filed
for each year. Deferred tax assets and liabilities are recorded for the
estimated future tax effects of: (a) temporary differences between the tax basis
of assets and liabilities and amounts reported in the combined and consolidated
balance sheets, and (b) operating loss and tax credit carry forwards. The
overall change in deferred tax assets and liabilities for the period measures
the deferred tax expense for the period. Effects of changes in enacted tax laws
on deferred tax assets and liabilities are reflected as adjustments to tax
expense in the period of enactment. The measurement of deferred tax assets may
be reduced by a valuation allowance based on judgmental assessment of available
evidence if deemed more likely than not that some or all of the deferred tax
assets will not be realized.
EARNINGS PER SHARE
Earnings per share information is not presented in the combined and
consolidated financial statements of Dish, Ltd. because, as described in Note 1,
Dish, Ltd. is a wholly owned subsidiary of ECC. The Class A Common Stock of ECC
is quoted on the NASDAQ National Market. Earnings per share and weighted average
shares outstanding for ECC is presented in Note 16.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). The
Company will be required to adopt SFAS No. 121 in 1996 and expects that its
ultimate adoption will not have a significant impact on the Company's financial
position, results of operations or cash flows.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), issued by the FASB in October 1995
and effective for fiscal years beginning after December 15, 1995, encourages,
but does not require, a fair value based method of accounting for employee stock
options or similar equity instruments. It also allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees" ("APB No. 25"), but requires
pro forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. The Company expects to adopt SFAS
No. 123 in 1996. While the Company is still evaluating SFAS No. 123, it
currently expects to elect to measure compensation cost under APB No. 25 and
comply with the pro forma disclosure requirements. If the Company makes this
election, this statement will have no impact on the Company's results of
operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's financial statement presentation.
(3) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Cost includes interest capitalized of $370,000, $5.7 million and $25.0 million
during the years ended December 31, 1993,
F-15
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) PROPERTY AND EQUIPMENT (CONTINUED)
1994 and 1995, respectively on the EchoStar DBS System during construction at
the Company's effective borrowing rate. The major components of property and
equipment were as follows (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE ------------------------
(IN YEARS) 1994 1995
------------- ----------- -----------
<S> <C> <C> <C>
Construction in progress......................................... -- $ 139,500 $ 282,373
Land............................................................. -- 1,613 1,613
Buildings and improvements....................................... 7-40 8,936 21,006
Furniture, fixtures and equipment................................ 2-12 6,081 17,163
Vehicles......................................................... 7 992 1,310
Tooling.......................................................... 2 1,339 2,039
Furniture and equipment held for sale............................ -- 17,062
Computer equipment held for sale................................. -- 902
----------- -----------
Total property and equipment..................................... 158,461 343,468
Less-Accumulated depreciation.................................... (7,221) (10,269)
----------- -----------
Net property and equipment................................... $ 151,240 $ 333,199
----------- -----------
----------- -----------
</TABLE>
Construction in progress includes capitalized costs related to the
construction and launch (Note 11) of EchoStar I, which was launched in late
December 1995, and EchoStar II, which is scheduled for launch prior to the end
of 1996.
Construction in progress consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Progress amounts for satellite construction and launch, capitalized interest,
launch insurance, launch and in-orbit tracking, telemetry and control
services:
EchoStar I................................................................ $ 75,613 $ 193,629
EchoStar II............................................................... 62,438 88,634
Uplink facility........................................................... 1,449 --
Other..................................................................... -- 110
----------- -----------
$ 139,500 $ 282,373
----------- -----------
----------- -----------
</TABLE>
F-16
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) OTHER NONCURRENT ASSETS
The major components of other noncurrent assets were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Deferred debt issuance costs, net of amortization................................ $ 11,891 $ 10,622
FCC authorizations............................................................... 9,519 11,309
SSET convertible subordinated debentures and accrued interest.................... 9,029 9,610
Deferred tax assets, net......................................................... 7,431 12,109
Investment in DBSC............................................................... 4,210 --
Warehousing bond................................................................. 432 468
Prepaid travel................................................................... 315 293
Other............................................................................ 213 136
--------- ---------
$ 43,040 $ 44,547
--------- ---------
--------- ---------
</TABLE>
The merger with DirectSat described in Note 1 was accounted for as a
purchase. DirectSat's assets were valued at $9.0 million by the Company at the
time of the merger and are included in FCC authorizations in the above summary.
DirectSat has been granted a conditional satellite construction permit, specific
orbital slot assignments and frequency assignments by the FCC. The DirectSat
permits conditionally authorize DirectSat to provide DBS service utilizing: (i)
ten even-numbered channels at 119 DEG. WL, the same orbital location that has
been assigned to ESC; (ii) one channel at 110 DEG. WL; and (iii) 11 odd-numbered
channels at 175 DEG. WL. The Company expects to use DirectSat's approved
frequencies at 119 DEG. WL for the EchoStar II satellite.
The Company also purchased $8.75 million of SSET's 6.5% convertible
subordinated debentures which, if converted, would represent approximately 11.6%
of SSET's common stock, based on the number of shares of SSET common stock
outstanding at December 31, 1995. Management estimates that the fair value of
the SSET debentures approximates their carrying value in the accompanying
financial statements based on current interest rates and the conversion features
contained in the debentures. SSET is a reporting company under the Securities
Exchange Act of 1934 engaged in the manufacture and sale of satellite
telecommunications equipment. In March 1994, SSET also sold to the Company for
$1.25 million an approximate 6% ownership interest in the stock of Direct
Broadcasting Satellite Corporation ("DBSC") and certain notes and accounts
receivable from DBSC.
In November 1994, the Company resolved a suit brought by the Company against
DBSC regarding enforceability of the notes and accounts receivable. The
receivables were exchanged for shares of DBSC common stock and the Company
purchased additional DBSC shares for $2,960,000 so that, together with the
shares of DBSC acquired from SSET, the Company presently owns approximately 40%
of the outstanding common stock of DBSC. DBSC's principal assets include an FCC
conditional satellite construction permit and specific orbital slot assignments
for eleven DBS frequencies at 61.5 DEG. WL and eleven DBS frequencies at
175 DEG. WL.
In December 1995, ECC acquired Dish, Ltd.'s interest in DBSC for
approximately $4.2 million, representing the cost of the DBSC shares to Dish,
Ltd. The merger of DBSC with a subsidiary of ECC has been approved by DBSC
shareholders but may not be completed until the FCC has approved the merger.
Assuming FCC approval for consummation of this merger, ECC will hold, through
its DBSC subsidiary, the permit and slot assignments for these frequencies. In
connection with the merger, ECC expects to issue approximately 675,000 shares of
its Class A Common Stock to DBSC shareholders in exchange for all remaining DBSC
stock.
F-17
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) SENIOR SECURED NOTES
On June 7, 1994, Dish, Ltd. completed the Notes Offering of 624,000 units
consisting of $624 million aggregate principal amount of the 12 7/8% Senior
Secured Notes (the "1994 Notes") and 3,744,000 Warrants for the purchase of
Dish, Ltd. Class A Common Stock. Effective with the Merger (Note 1), these
Warrants became exercisable for 2,808,000 Shares of ECC's Class A Common Stock
(Note 9). The Notes Offering resulted in net proceeds to Dish, Ltd. of $323.3
million. At December 31, 1994, the 1994 Notes were reflected in the financial
statements at $334.2 million, net of unamortized discount of $289.8 million. At
December 31, 1995, the 1994 Notes totaled $382.2 million, net of unamortized
discount of $241.8 million. A limited trading market exists for the 1994 Notes.
However, based on information available to the Company, the 1994 Notes traded
for approximately $690 per bond near December 31, 1995. This suggests a current
aggregate market value of the 1994 Notes of approximately $430.6 million.
The 1994 Notes rank senior in right of payment to all subordinated
indebtedness of Dish, Ltd. and PARI PASSU in right of payment with all other
senior indebtedness of Dish, Ltd., subject to the terms of an Intercreditor
Agreement between Dish, Ltd., certain of its principal subsidiaries and certain
creditors thereof. The 1994 Notes are secured by liens on certain assets of
Dish, Ltd., including EchoStar I and EchoStar II and all other components of the
EchoStar DBS System owned by Dish, Ltd. and its subsidiaries. The 1994 Notes are
guaranteed by each material direct subsidiary of Dish, Ltd. (Note 12). Although
the 1994 Notes are titled "Senior": (i) Dish, Ltd. has not issued, and does not
have any current arrangements to issue, any significant indebtedness to which
the 1994 Notes would be senior, however, Senior Secured Notes being offered for
sale subsequent to December 31, 1995, by EchoStar Satellite Broadcasting
Corporation, another wholly owned subsidiary of ECC, will effectively be
subordinated to the 1994 Notes and all other liabilities of Dish, Ltd. and its
subsidiaries; and (ii) at December 31, 1994 and 1995, the 1994 Notes were
effectively subordinated to approximately $5.6 million and $5.4 million of
mortgage indebtedness, respectively, with respect to certain assets of Dish,
Ltd.'s subsidiaries, not including the EchoStar DBS System. Further, the 1994
Notes are subordinate to advances under the Credit Facility (Note 6), and will
be ranked PARI PASSU with the security interest of approximately $30.0 million
of contractor financing.
Interest on the 1994 Notes currently is not payable in cash but accrues
through June 1, 1999, with the 1994 Notes accreting to $624.0 million by that
date. Thereafter, interest on the 1994 Notes will be payable in cash
semi-annually on June 1 and December 1 of each year, commencing December 1,
1999. Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1994 Notes are not redeemable at Dish, Ltd.'s
option prior to June 1, 1999. Thereafter, the 1994 Notes will be subject to
redemption, at the option of Dish, Ltd., in whole or in part, at redemption
prices ranging from 104.828% during the year commencing June 1, 1999 to 100% on
or after June 1, 2002 of principal, together with accrued and unpaid interest
thereon to the redemption date. On each of June 1, 2002 and June 1, 2003, Dish,
Ltd. will be required to redeem 25% of the original aggregate principal amount
of 1994 Notes at a redemption price equal to 100% of the principal amount
thereof, together with accrued and unpaid interest thereon to the redemption
date. The remaining principal of the 1994 Notes will mature on June 1, 2004.
In the event of a change of control and upon the occurrence of certain other
events, as described in the 1994 Indenture, Dish, Ltd. will be required to make
an offer to each holder of 1994 Notes to repurchase all or any part of such
holder's 1994 Notes at a purchase price equal to 101% of the accreted value
thereof on the date of purchase, if prior to June 1, 1999, or 101% of the
aggregate principal amount thereof, together with accrued and unpaid interest
thereon to the date of purchase, if on or after June 1, 1999.
F-18
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) SENIOR SECURED NOTES (CONTINUED)
The 1994 Indenture contains restrictive covenants that, among other things,
impose limitations on Dish, Ltd. and its subsidiaries with respect to their
ability to: (i) incur additional indebtedness; (ii) issue preferred stock; (iii)
apply the proceeds of certain asset sales; (iv) create, incur or assume liens;
(v) create dividend and other payment restrictions with respect to Dish, Ltd.'s
subsidiaries; (vi) merge, consolidate or sell assets; (vii) incur subordinated
or junior debt; and (viii) enter into transactions with affiliates. In addition,
Dish, Ltd., may pay dividends on its equity securities only if (1) no default is
continuing under the 1994 Indenture; and (2) after giving effect to such
dividend, Dish, Ltd.'s ratio of total indebtedness to cash flow (calculated in
accordance with the 1994 Indenture) would not exceed 4.0 to 1. Moreover, the
aggregate amount of such dividends generally may not exceed the sum of 50% of
Dish, Ltd.'s consolidated net income (calculated in accordance with the 1994
Indenture) from the date of issuance of the 1994 Notes, plus 100% of the
aggregate net proceeds to Dish, Ltd. from the issuance and sale of certain
equity interests of Dish, Ltd. (including common stock).
(6) SHORT-TERM AND LONG-TERM DEBT
LONG-TERM MORTGAGE DEBT
In addition to the 1994 Notes (Note 5), long-term debt consists of the
following as of December 31, 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
8.75% note payable for deferred satellite contract payments due in equal monthly
installments of $677,590, including interest, through February 2001; secured by
substantially all assets of Dish, Ltd., and Dish, Ltd.'s subsidiaries............ $ -- $ 32,833
8.0% mortgage note payable due in equal monthly installments of $41,635, including
interest, through May 2008; secured by land and office building.................. 4,088 3,909
10.5% mortgage note payable due in equal monthly installments of $9,442, including
interest, through November 1998; final payment of $854,000 due November 1998;
secured by land and warehouse building........................................... 927 910
9.9375% mortgage note payable due in equal quarterly principal installments of
$10,625, plus interest, through April 2009; secured by land and office
building......................................................................... 616 574
--------- ---------
Total long-term debt, excluding the 1994 Notes.................................... 5,631 38,226
Less current installments......................................................... (238) (4,782)
--------- ---------
Long-term debt, excluding current installments.................................... $ 5,393 $ 33,444
--------- ---------
--------- ---------
</TABLE>
Aggregate maturities of the above long-term mortgage debt are as follows:
1996, $4.8 million; 1997, $6.2 million; 1998, $7.6 million; 1999, $7.3 million;
2000, $8.0 million; and thereafter, $4.3 million. In addition, contractor
financing of $28.0 million at the prime rate is available for EchoStar II
payable in installments over five years following the launch (Note 11).
DEFERRED SATELLITE CONTRACT PAYMENTS
The majority of the purchase price for the satellites is required to be paid
in progress payments, with the remainder payable in the form of non-contingent
payments deferred until EchoStar I and EchoStar II are in orbit, with interest
at the prime rate over a period of five years after the delivery
F-19
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
and launch of each such satellite (the "Deferred Payments"). As security for the
portion of the Deferred Payments due to the contractor (Martin Marietta), Dish,
Ltd. has: (i) granted a security interest in substantially all assets of Dish,
Ltd. and Dish, Ltd.'s subsidiaries (the "Dish, Ltd. subsidiaries"), other than
the stock of the EchoStar subsidiaries and the proceeds derived from the sale of
the 1994 Notes, subordinate to the first security interest in the assets of ESC
granted to the Trustee under the 1994 Indenture (Note 5), and to the liens
granted to any commercial bank which provides a revolving credit facility to
Dish, Ltd., except that such security interest ranks PARI PASSU with the
security interest in the assets of ESC granted for the benefit of the holders of
the 1994 Notes with respect to $30.0 million of the Deferred Payments; and (ii)
caused Dish, Ltd. and its subsidiaries to guarantee payment in full of such
Deferred Payments.
Martin Marietta has a security interest in the EchoStar DBS System which,
with respect to $30.0 million of the Deferred Payments, ranks PARI PASSU with
the lien on such assets granted for the benefit of the holders of the 1994
Notes, and, with respect to the remainder of the Deferred Payments, is
subordinated to the lien on such assets granted for the benefit of the holders
of the 1994 Notes. However, following any default on the Deferred Payments,
Martin Marietta is prohibited from realizing on any of such collateral for a
period of at least five years following consummation of the Notes Offering, and
in any event for 180 days following such default. Martin Marietta also has a
security interest in the assets of the Dish, Ltd. subsidiaries other than ESC
which lien, with respect to the assets of certain of the Dish, Ltd.
subsidiaries, ranks senior to the lien on such assets granted for the benefit of
the holders of the 1994 Notes.
LONG-TERM NOTES PAYABLE TO STOCKHOLDER
As of December 31, 1993, ESC had a long-term note payable to its principal
stockholder, including cumulative accrued interest at prime, of $14.7 million.
The loan proceeds were used to make payments due pursuant to the satellite
construction project (Note 11). The note accrued interest at 10% per annum from
January 1, 1994 to March 21, 1994. The stockholder exchanged the note together
with accrued but unpaid interest for Series A Preferred Stock on May 6, 1994
(Note 16). The principal stockholder also advanced $4.0 million to EchoStar in
1994 used to fund transactions with SSET (Note 4) which was repaid from proceeds
of the 1994 Notes.
The Company also had a noninterest-bearing note payable to its principal
stockholder at December 31, 1993 of $75,000 which was repaid in January 1994.
BANK CREDIT FACILITY
On May 6, 1994, the principal subsidiaries of Dish, Ltd., except ESC (the
"Borrowers"), entered into an agreement with Bank of America Illinois (the
"Bank"), to provide a revolving credit facility (the "Credit Facility") for
working capital advances and for letters of credit necessary for inventory
purchases and satellite construction payments. The maximum amount available to
the Borrowers under the Credit Facility is the lesser of the "Borrowing Base"
(as defined in the Credit Facility) or $17.0 million, if prior to March 6, 1996,
or $14.5 million, if on or after March 6, 1996. The Borrowing Base includes
specified percentages of eligible receivables, inventory and marketable
investment securities. At December 31, 1995 the Borrowing Base exceeded $17.0
million. Advances under the Credit Facility bear interest at: (i) the Bank's
Reference Rate (as defined in the Credit Facility); (ii) Eurodollar rate plus 2%
per annum or (iii) the secondary CD bid rate plus 2.25% per annum, at the
Borrowers' choice. Advances pursuant to the Credit Facility are secured by
substantially all of the assets of the Borrowers. At December 31, 1995, standby
letters of credit totaled $15.5 million, and there were no documentary letters
of credit or advances outstanding.
F-20
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
The Credit Facility contains customary representations, covenants and
conditions to borrowing. The Credit Facility also contains a number of negative
covenants that restrict the Borrowers from, among other things, incurring
additional indebtedness, creating liens on their assets, providing guarantees,
entering into merger or consolidation transactions, or disposing of their assets
outside the ordinary course of business. Except in certain circumstances
specified in the Credit Facility, the Borrowers are able to pay dividends to
Dish, Ltd. in an amount not to exceed 50% of excess cash flow (as defined in the
Credit Facility) in 1995 and 1996.
(7) INCOME TAXES
As stated in Note 2, the combined entities terminated their Subchapter S
status on December 31, 1993. This change in tax status was recognized by
establishing a net deferred tax asset of $1.9 million on that date for temporary
differences between tax basis and amounts reported in the accompanying combined
and consolidated balance sheet. The current provision for income taxes for 1993
reflects only amounts payable to certain states and foreign tax jurisdictions
that do not recognize Subchapter S status. Beginning in 1994, the group filed
consolidated corporate federal and state income tax returns.
The components of the (provision) benefit for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Current (provision) benefit
Federal............................................................. $ -- $ (5,951) $ 1,711
State............................................................... (128) (853) (44)
Foreign............................................................. (429) (925) (301)
--------- --------- ---------
(557) (7,729) 1,366
--------- --------- ---------
Deferred benefit
Federal............................................................. 1,686 6,342 4,440
State............................................................... 255 988 385
--------- --------- ---------
1,941 7,330 4,825
--------- --------- ---------
Total benefit (provision)....................................... $ 1,384 $ (399) $ 6,191
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-21
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
The types of temporary differences that give rise to a significant portion
of net deferred tax assets and their approximate tax effects as of December 31,
1994 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Current deferred tax assets
Inventory reserves and cost methods............................................. $ 438 $ 834
Reserve for warranty costs...................................................... 532 385
Accrued customer incentives..................................................... 234 --
Accrued employee incentives..................................................... 418 168
Allowance for doubtful accounts................................................. 106 456
Unrealized holding gain on marketable investment securities..................... -- (153)
Other........................................................................... 112 144
--------- ---------
Net current deferred tax assets........................................... 1,840 1,834
--------- ---------
Noncurrent deferred tax assets
Amortization of original issue discount (included in other noncurrent assets)... 7,431 15,439
Other........................................................................... -- 7
--------- ---------
7,431 15,446
--------- ---------
Noncurrent deferred tax liabilities
Capitalized costs deducted for tax.............................................. -- (2,351)
Depreciation.................................................................... -- (986)
--------- ---------
-- (3,337)
--------- ---------
Noncurrent net deferred tax assets........................................ 7,431 12,109
--------- ---------
Net deferred tax assets................................................... $ 9,271 $ 13,943
--------- ---------
--------- ---------
</TABLE>
No valuation allowance has been provided for the above deferred tax assets
because the Company currently believes it is more likely than not that these
assets will be realized. If future operating results differ materially and
adversely from the Company's current expectations, its judgment regarding the
need for a valuation allowance may change.
PRO FORMA TAX EFFECTS
The combined and consolidated statements of income present, on an unaudited
pro forma basis, net income for 1993 as if the Company had filed consolidated C
Corporation federal and state income tax returns for that year. The pro forma
tax effects assume foreign taxes paid would have been fully creditable against
United States federal taxes payable and that the deferred tax assets established
on December 31, 1993 as described above, would have been provided for as the
related temporary differences arose. The pro forma provisions for income taxes
for 1993 and the actual tax provisions for 1994 and 1995 are reconciled to the
amounts computed by applying the statutory federal tax rate to income before
taxes as follows (amounts in thousands).
F-22
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1993 1994 1995
---------------------- ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Statutory rate...................................... $ (6,557) (35.0)% $ (166) (34.0)% $ 6,493 35.0%
State income taxes, net of federal benefit.......... (450) (2.4) (88) (18.0) 222 1.2
Tax exempt interest income.......................... 350 1.9 60 12.3 10 0.1
Research and development credits.................... 195 1.0 156 31.9 31 0.2
Non-deductible interest expense..................... -- -- (258) (52.7) (293) (1.7)
Other............................................... -- -- (103) (21.1) (272) (1.4)
--------- ----- --------- ----- --------- -----
Total (provision) benefit for income taxes (pro
forma in 1993)................................... (6,462) (34.5)% $ (399) (81.6)% $ 6,191 33.4%
----- --------- ----- --------- -----
----- --------- ----- --------- -----
Less: Historical benefit for income taxes........... 1,384
---------
Pro forma tax effects............................... $ (7,846)
---------
---------
</TABLE>
(8) EMPLOYEE BENEFIT PLAN AND EXECUTIVE INCENTIVE BONUS PLANS
The Company has a 401(k) Employee Savings Plan (the "401(k) Plan") for
eligible employees. Voluntary employee contributions to the 401(k) Plan may be
matched 50% by the Company, subject to a maximum annual contribution by the
Company of $1,000 per employee. The Company may also make an annual
discretionary contribution to the plan with approval by the Company's Board of
Directors, subject to the maximum deductible limit provided by the Internal
Revenue Code of 1986, as amended. The Company's total cash contributions to the
401(k) Plan were $572,000, $170,000 and $177,000 for 1993, 1994 and 1995,
respectively. For 1995, ECC contributed 55,000 shares of its Class A Common
Stock to the 401(k) Plan as a discretionary contribution. Dish, Ltd. recognized
expense, and an addition to its paid in capital, for the fair value
(approximately $1.1 million) of the ECC shares contributed to the 401(k) Plan by
ECC.
During the years ended December 31, 1993, 1994 and 1995, the Company's Board
of Directors declared discretionary bonuses totaling $834,000, $711,000 and
$75,000 respectively. ECC also funded a launch bonus award of 10 shares of ECC
Class A Common Stock to all full time employees with more than 90 days service
as of December 16, 1995. Dish, Ltd. recognized expense, and an addition to its
paid in capital, for the fair value (approximately $78,000) of the ECC shares
issued to employees.
(9) STOCKHOLDERS' EQUITY
Ownership of each of the subsidiaries was generally uniform at the time of
formation of Dish, Ltd. described in Note 1. As of December 31, 1993, the
stockholders contributed their shares in the subsidiaries for an aggregate of
7,500 shares of Common Stock of Dish, Ltd. Retained earnings that had not been
distributed prior to the reorganization and related termination of Subchapter S
status were constructively distributed to the stockholders and contributed to
Dish, Ltd. as additional paid-in capital.
Effective March 10, 1994, the stockholders approved measures necessary to
increase the authorized capital of Dish, Ltd. to include 200 million shares of
Class A Common Stock, 100 million shares of Class B Common Stock, and 20 million
shares of Preferred Stock and determined to split all outstanding shares of
common stock on the basis of approximately 4,296 to 1.
Dividends declared and paid during the three years ended December 31, 1994,
included amounts to allow the stockholders to pay taxes on Subchapter S income
and for investment in and advances to ESC related to construction of EchoStar I
and EchoStar II (Notes 2, 3 and 6).
All accrued dividends payable to Mr. Ergen on his Dish, Ltd. Series A
Preferred Stock through the date of the Exchange ($1.4 million), and all accrued
dividends payable to the remaining holder of Dish,
F-23
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
Ltd. Series A Preferred Stock through the date of the Merger ($107,000), will
remain obligations of Dish, Ltd. (Note 1); however, no additional dividends will
accrue with respect to the Dish, Ltd. Series A Preferred Stock. The 1994
Indenture places significant restrictions on payment of those dividends, and
dividends are not expected to be paid in the foreseeable future. Through
December 31, 1995, additional accrued dividends payable to Mr. Ergen by ECC on
the ECC Series A Preferred Stock totaled $588,000.
(10) STOCK OPTIONS
In April 1994, the Company adopted a stock incentive plan (the "Stock
Incentive Plan") to provide incentive to attract and retain officers, directors
and key employees. ECC assumed all outstanding options for the purchase of Dish,
Ltd. common stock effective with the Exchange and Merger and has reserved up to
10.0 million shares of its Class A Common Stock for granting awards under the
Stock Incentive Plan. Awards available under the Stock Incentive Plan include:
(i) common stock purchase options; (ii) stock appreciation rights; (iii)
restricted stock and restricted stock units; (iv) performance awards; (v)
dividend equivalents; and (vi) other stock-based awards. All options granted
through December 31, 1995 have included exercise prices not less than the fair
market value of the Shares at the date of grant and vest as determined by the
Company's Board of Directors, generally at the rate of 20% per year.
The following summarizes the activity relating to options for the years
ended December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
----- ---------------
(IN THOUSANDS EXCEPT
FOR PER SHARE DATA)
<S> <C> <C>
Incentive stock options --
Options outstanding at beginning of year.......................................................... -- 745
Granted........................................................................................... 745 420
Exercised......................................................................................... -- (4)
Terminated........................................................................................ -- (44)
----- ---------------
Options outstanding at end of year................................................................ 745 1,117
----- ---------------
----- ---------------
Options exercisable at end of year................................................................ -- 141
----- ---------------
----- ---------------
Price of granted options.......................................................................... $9.33 $11.87 - $20.25
----- ---------------
----- ---------------
Price range of outstanding options................................................................ $9.33 $9.33 - $20.25
----- ---------------
----- ---------------
Price of terminated options....................................................................... $-- $9.33 - $17.00
----- ---------------
----- ---------------
</TABLE>
In March 1994, the Company entered into an employment agreement with one of
its executive officers. The officer was granted an option, containing certain
conditions to vesting, to purchase 322,208 shares of Class A Common Stock of the
Company for $1.0 million at any time prior to December 31, 1999, subject to
certain limitations. One-half of this option became exercisable on December 31,
1994 and the remainder became exercisable on December 31, 1995. The option was
not granted pursuant to the Stock Incentive Plan.
Effective March 1995, the Company granted an additional option to a key
employee to purchase 33,000 shares of Class A Common Stock, which vests 50% in
March 1996 and 50% in March 1997. The exercise price for each share of Class A
Common Stock is $11.87 per share. The option was not granted pursuant to the
Stock Incentive Plan.
F-24
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
The Company has contracted with Martin Marietta Corporation ("Martin
Marietta") for the construction and delivery of high powered DBS satellites, and
for related services. EchoStar I was shipped to China on November 16, 1995 and
EchoStar II is expected to be delivered in the summer of 1996. Penalties of up
to $5.0 million are payable by Martin Marietta in the event of delays in the
delivery of EchoStar I by Martin Marietta. As of December 31, 1995, those
penalties totaled $3.2 million, which amount has been deducted from the
Company's deferred satellite payment obligation (Note 6).
The Company also has contracts with China Great Wall Industry Corporation
("Great Wall") for the launch of up to seven satellites, using LM-2E or LM-3C
launch vehicles, from a launch base in China. EchoStar I was launched on
December 28, 1995. The EchoStar I and EchoStar II launch contract (the "Great
Wall Launch Contract") calls for the launch of EchoStar II during July through
September 1996.
A significant delay in the delivery or launch of EchoStar II would adversely
affect the Company's operations. In June 1995, another subsidiary of ECC
contracted with Lockheed-Khrunichev-Energia-International, Inc. ("LKE") for the
launch of a satellite, using a Proton launch vehicle, from a launch base in the
Russian Federation.
The Company has filed applications with the Federal Communications
Commission ("FCC") for authorization to construct, launch and operate a domestic
fixed satellite service system ("FSS System") and a two satellite Ka-band
satellite system. No assurances can be given that the Company applications will
be approved by the FCC or that, if approved, the Company will successfully
develop the FSS System or the Ka-band satellite system. The Company believes
that establishment of the FSS System or the Ka-band system would enhance its
competitive position in the DTH industry. In the event the Company's FSS or
Ka-band satellite system applications are approved by the FCC, or if the Company
commits to a third launch with Great Wall, additional debt or equity financing
would be required. Financing alternatives related to the FSS and Ka-band
satellite systems are currently being pursued by the Company. No assurances can
be given that financing will be available, or that it will be available on terms
favorable to the Company.
LEASES
Future minimum lease payments under noncancelable operating leases as of
December 31, 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31 --
<S> <C>
1996......................................................... $ 1,061
1997......................................................... 686
1998......................................................... 275
1999......................................................... 147
2000......................................................... 24
Thereafter................................................... 2
---------
Total minimum lease payments............................... $ 2,195
---------
---------
</TABLE>
Total rental expense for operating leases was $1.2 million in 1993, $1.4
million in 1994 and $1.2 million in 1995.
F-25
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
PURCHASE COMMITMENTS
The Company has entered into agreements with various manufacturers to
purchase DBS satellite receivers and related components manufactured based on
Dish, Ltd. supplied specifications and necessary to receive DBS programming
proposed to be offered by the Company upon commencement of operations of
EchoStar's DISH Network-SM-. As of December 31, 1995, the remaining commitments
total approximately $502.9 million. At December 31, 1995, the total of all
outstanding purchase order commitments with domestic and foreign suppliers was
$515.8 million. All but $11.1 million of the purchases related to these
commitments are expected to be made during 1996 and the remainder is expected to
be made during 1997. The Company expects to finance these purchases from
available cash and sales of inventory, including the sale of DBS receiver
systems and related products.
OTHER RISKS AND CONTINGENCIES
Equipment sold by the Company includes, as an integral component,
descrambler modules purchased from an unrelated entity under a nonexclusive
right and license which expires in 2001.
The Company has agreed to indemnify its stockholders for any adjustments to
their individual income tax returns resulting from adjustments to taxable income
or tax credits for years prior to 1994 during which the Company elected to be
taxed as Subchapter S corporations. The indemnities cover additions to tax,
interest and penalties, as well as attorneys' and accountants' fees and
expenses, if any.
The Company is subject to 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 these actions will not materially affect the
financial position, results of operations or liquidity of the Company.
F-26
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
The 1994 Notes are fully, unconditionally and jointly and severally
guaranteed by all subsidiaries of Dish, Ltd., except FlexTracker and certain de
minimis domestic and foreign subsidiaries. Summarized financial information for
Dish, Ltd. and the subsidiary guarantors is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income Statement Data --
Revenue.................................................................. $ 217,360 $ 187,044 $ 163,228
Expenses................................................................. 199,398 174,164 171,646
----------- ----------- -----------
Operating income (loss).................................................. 17,962 12,880 (8,418)
Other income (expense)................................................... 543 (12,707) (9,911)
----------- ----------- -----------
Net income (loss) before income taxes.................................... 18,505 173 (18,329)
(Provision) benefit for income taxes..................................... 1,384 (433) 6,182
----------- ----------- -----------
Net income (loss)...................................................... $ 19,889 $ (260) $ (12,147)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Balance Sheet Data --
Current assets............................................................... $ 80,914 $ 81,959
Property and equipment, net.................................................. 151,211 333,160
Other noncurrent assets...................................................... 239,560 143,866
------------ ------------
Total assets................................................................. $ 471,685 $ 558,985
------------ ------------
------------ ------------
Current liabilities.......................................................... $ 28,094 $ 50,710
Long-term liabilities........................................................ 340,014 415,662
Stockholders' equity......................................................... 103,577 92,613
------------ ------------
Total liabilities and stockholders' equity................................... $ 471,685 $ 558,985
------------ ------------
------------ ------------
</TABLE>
Upon consummation of the merger with DirectSat, DirectSat became, by virtue
of the merger, a guarantor of the 1994 Notes on a full, unconditional and joint
and several basis, in addition to the guarantees of the previous subsidiaries.
F-27
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) OPERATIONS IN GEOGRAPHIC AREAS
The Company sells its products on a worldwide basis and has established
operations in Europe and the Pacific Rim. Information about the Company's
operations in different geographic areas as of December 31, 1993, 1994 and 1995
and for the years then ended, were as follows (in thousands):
<TABLE>
<CAPTION>
UNITED OTHER
1993 STATES EUROPE INTERNATIONAL TOTAL
- -------------------------------------------------------------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Total revenue................................................. $ 175,453 $ 25,825 $ 19,663 $ 220,941
----------- --------- ------------ -----------
----------- --------- ------------ -----------
Export sales.................................................. $ 8,005
-----------
-----------
Operating income.............................................. $ 16,551 $ 96 $ 1,557 $ 18,204
----------- --------- ------------
----------- --------- ------------
Other income (expense), net................................... 530
-----------
Net income before income taxes................................ $ 18,734
-----------
-----------
Identifiable assets........................................... $ 84,656 $ 7,272 $ 10,478 $ 102,406
----------- --------- ------------
----------- --------- ------------
Corporate assets.............................................. 4,070
-----------
Total assets.................................................. $ 106,476
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
1994
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue................................................. $ 137,233 $ 24,072 $ 29,678 $ 190,983
----------- --------- ------------ -----------
----------- --------- ------------ -----------
Export sales.................................................. $ 7,188
-----------
-----------
Operating income.............................................. $ 10,811 $ 1,244 $ 1,161 $ 13,216
----------- --------- ------------
----------- --------- ------------
Other income (expense), net................................... (12,727)
-----------
Net income before income taxes................................ $ 489
-----------
-----------
Identifiable assets........................................... $ 77,172 $ 6,397 $ 2,359 $ 85,928
----------- --------- ------------
----------- --------- ------------
Corporate assets.............................................. 386,564
-----------
Total assets.................................................. $ 472,492
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
1995
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue................................................. $ 110,629 $ 31,351 $ 21,910 $ 163,890
----------- --------- ------------ -----------
----------- --------- ------------ -----------
Export sales.................................................. $ 6,317
-----------
-----------
Operating income (loss)....................................... $ (7,838) $ 146 $ (257) $ (7,949)
----------- --------- ------------
----------- --------- ------------
Other income (expense), net................................... (10,603)
-----------
Net income before income taxes................................ $ (18,552)
-----------
-----------
Identifiable assets........................................... $ 63,136 $ 10,088 $ 3,788 $ 77,012
----------- --------- ------------
----------- --------- ------------
Corporate assets.............................................. 482,283
-----------
Total assets.................................................. $ 559,295
-----------
-----------
</TABLE>
F-28
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) VALUATION AND QUALIFYING ACCOUNTS
The Company's valuation and qualifying accounts as of December 31, 1993,
1994 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Assets:
Allowance for doubtful accounts.............. $ 92 $ 305 $ -- $ (51) $ 346
Loan loss reserve............................ 25 52 29 (56) 50
Reserve for inventory........................ 1,425 136 -- (158) 1,403
Liabilities:
Reserve for warranty costs................... 1,600 326 -- (576) 1,350
Other reserves............................... 110 -- -- (17) 93
Year ended December 31, 1994:
Assets:
Allowance for doubtful accounts.............. $ 346 $ 8 $ -- $ (168) $ 186
Loan loss reserve............................ 50 75 -- (30) 95
Reserve for inventory........................ 1,403 329 -- (147) 1,585
Liabilities:
Reserve for warranty costs................... 1,350 508 -- (458) 1,400
Other reserves............................... 93 -- -- -- 93
Year ended December 31, 1995:
Assets:
Allowance for doubtful accounts.............. $ 186 $ 1,160 $ -- $ (240) $ 1,106
Loan loss reserve............................ 95 19 -- (36) 78
Reserve for inventory........................ 1,585 1,511 -- (299) 2,797
Liabilities:
Reserve for warranty costs................... 1,400 562 -- (949) 1,013
Other reserves............................... 93 -- -- (1) 92
</TABLE>
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly results of operations are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
----------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Total revenue............................................... $ 46,993 $ 42,748 $ 48,958 $ 52,284
Operating income............................................ 4,359 2,573 3,481 2,803
Net income (loss)........................................... 2,893 678 (1,619) (1,862)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
----------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Total revenue............................................... $ 40,413 $ 39,252 $ 43,606 $ 40,619
Operating (loss) income..................................... (698) 768 341 (8,360)
Net loss.................................................... (2,240) (1,813) (916) (7,392)
</TABLE>
F-29
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
In the fourth quarter of 1995, the Company incurred operating and net losses
principally as a result of expenses incurred related to development of the
EchoStar DBS System and lower sales volumes at reduced gross margins. The
Company also increased reserves related to inventory and trade accounts
receivable in the fourth quarter of 1995.
(16) PARENT ONLY FINANCIAL INFORMATION
The following financial information reflects the condensed parent only
balance sheets, statements of income and cash flows for ECC, reflecting the
assumed consummation of the Exchange and Merger retroactive to January 1, 1993.
The Exchange and Merger described in Note 1 was accounted for as a
reorganization of entities under common control.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
--------- --------- ----------
(IN THOUSANDS, EXCEPT SHARES AND
PER SHARE DATA)
<S> <C> <C> <C>
Income Statement Data --
Equity in earnings (losses) of subsidiaries................................. $ 20,118 $ 90 $ (12,361)
Other income................................................................ -- -- 1,321
--------- --------- ----------
Net income (loss) before income taxes....................................... 20,118 90 (11,040)
Provision for income taxes.................................................. -- -- (446)
--------- --------- ----------
Net income (loss)......................................................... $ 20,118 $ 90 $ (11,486)
--------- --------- ----------
--------- --------- ----------
Loss Attributable to Common Shares............................................ $ (848) $ (12,691)
--------- ----------
--------- ----------
Weighted Average Common Shares Outstanding.................................... 32,442 35,562
--------- ----------
--------- ----------
Loss Per Common and Common Equivalent Share................................... $ (0.03) $ (0.36)
--------- ----------
--------- ----------
Pro Forma (Unaudited) Net Income and Earnings Per Common Share (Note 7)
Historical net income before income taxes................................... $ 20,118
Pro forma income tax effects.............................................. (7,846)
---------
Pro forma net income...................................................... $ 12,272
---------
---------
Pro forma common shares outstanding....................................... 32,221
---------
---------
Pro forma earnings per common share....................................... $ 0.38
---------
---------
</TABLE>
F-30
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) PARENT ONLY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Balance Sheet Data --
Current assets:
Cash and cash equivalents....................................................... $ -- $ 7,802
Marketable investment securities................................................ -- 15,460
Advances to affiliates.......................................................... -- 19,545
Other current assets............................................................ -- 191
----------- -----------
Total current assets.......................................................... -- 42,998
----------- -----------
Investments in subsidiaries:
Restricted (Note 12)............................................................ 103,577 92,613
Unrestricted.................................................................... 231 280
----------- -----------
103,808 92,893
Other non current assets.......................................................... -- 21,111
----------- -----------
Total assets.................................................................. $ 103,808 $ 157,002
----------- -----------
----------- -----------
Current liabilities............................................................... $ -- $ 316
Stockholders' Equity:
Preferred Stock, 20,000,000 shares authorized, 1,616,681 shares of Series A
Cumulative Preferred Stock issued and outstanding, including accrued dividends
of $938,000 and $2,143,000, respectively....................................... 15,990 17,195
Class A Common Stock, $.01 par value, 200,000,000 shares authorized, 3,739,400
and 10,535,003 shares issued and outstanding, respectively..................... 38 105
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 Purchase Warrants.................................................. 26,133 714
Additional paid-in capital...................................................... 62,197 151,674
Unrealized holding gain on available-for-sale securities, net................... -- 239
Retained earnings (deficit)..................................................... (848) (13,539)
----------- -----------
Total stockholders' equity.................................................... 103,808 156,686
----------- -----------
Total liabilities and stockholders' equity.................................... $ 103,808 $ 157,002
----------- -----------
----------- -----------
</TABLE>
F-31
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) PARENT ONLY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
--------- --------- ----------
<S> <C> <C> <C>
Cash Flows Data --
Cash flows from operating activities:
Net income (loss).......................................................... $ 20,118 $ 90 $ (11,486)
Adjustments -
Equity in (earnings) losses of subsidiaries.............................. (20,118) (90) 12,361
Changes in -
Other current assets................................................... -- -- (191)
Current liabilities.................................................... -- -- 316
--------- --------- ----------
Net cash flows from operating activities............................. -- -- 1,000
--------- --------- ----------
Cash flows from investing activities:
Advances to affiliates..................................................... -- -- (19,545)
Purchases of marketable investment securities, net......................... -- -- (15,475)
Increase in noncurrent assets.............................................. -- -- (21,111)
--------- --------- ----------
Net cash flows from investing activities............................. -- -- (56,131)
--------- --------- ----------
Cash flows from financing activities:
Net proceeds from issuance of Class A Common Stock......................... -- -- 62,933
--------- --------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................................... -- -- 7,802
CASH AND CASH EQUIVALENTS, beginning of period............................... -- -- --
--------- --------- ----------
CASH AND CASH EQUIVALENTS, end of period..................................... $ -- $ -- $ 7,802
--------- --------- ----------
--------- --------- ----------
</TABLE>
EARNINGS PER SHARE
Earnings per share has been calculated based on the weighted average number
of shares of ECC common stock issued and outstanding and, if dilutive, common
stock equivalents (warrants and employee stock options) during the years ended
December 31, 1994 and 1995 and net income has been adjusted for cumulative
dividends on the 8% Series A Cumulative Preferred Stock (the "Series A Preferred
Stock"). Earnings per share for the year ended December 31, 1993 has been
calculated and presented on a pro forma basis as if the shares issued to effect
the December 31, 1993 reorganization (Note 1) were outstanding during each
period.
ECC 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 by
the holder. ECC's principal stockholder owns all outstanding Class B Common
Stock and all other stockholders own Class A Common Stock.
ECC SERIES A PREFERRED STOCK
On May 6, 1994, the Company exchanged 1,616,681 shares of its Preferred
Stock with its principal stockholder in consideration for the cancellation of a
note, plus accrued and unpaid interest thereon. Approximately 5%, or 80,834
shares, of the Preferred Stock were subsequently sold to another stockholder and
officer of the Company. The principal stockholder has pledged all of his
Preferred Stock to Martin Marietta as collateral security for contractor
financing (Note 6).
F-32
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) PARENT ONLY FINANCIAL INFORMATION (CONTINUED)
Each share of the Preferred Stock is convertible, at the option of the
holder, into one share of Class A Common Stock, subject to adjustment from time
to time upon the occurrence of certain events, including, among other things:
(i) dividends or distributions on Class A Common Stock payable in Class A Common
Stock or certain other capital stock; (ii) subdivisions, combinations or certain
reclassifications of Class A Common Stock; and (iii) issuances of Class A Common
Stock or rights, warrants or options to purchase Class A Common Stock at a price
per share less than the liquidation preference per share. In the event of the
liquidation, dissolution or winding up of EchoStar, the holders of Preferred
Stock would be entitled to receive an amount equal to approximately $10.64 per
share as of December 31, 1995.
The aggregate liquidation preference for all outstanding shares of Series A
Preferred Stock is limited to the principal amount represented by the note, plus
accrued and unpaid dividends thereon. Each share of Series A Preferred Stock is
entitled to receive dividends equal to eight percent 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 and is
entitled to the equivalent of ten votes for each share of Class A Common Stock
into which it is convertible. Except as otherwise 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. Cumulative but unpaid dividends totaled $938,000
and approximately $2.1 million at December 31, 1994 and 1995, respectively,
including amounts which remain the obligation of Dish, Ltd. (Note 9).
WARRANTS
The Warrants issued in connection with the Notes Offering were valued at
$26.1 million. The 1994 Notes and the Warrants became separately transferable
and exercisable effective December 1, 1994.
Each Warrant entitles the registered holder thereof, at such holder's
option, to purchase from ECC one share of Class A Common Stock at a purchase
price of $0.01 per share (the "Exercise Price"). The Exercise Price with respect
to all of the Warrants was paid in advance and, therefore, no additional amounts
are payable upon exercise of the Warrants.
Effective with the Merger (Note 1), or subsequently, all Warrants were
exercised and 2,808,000 Shares (as adjusted for the Exchange Ratio) of ECC's
Class A Common Stock were issued.
SUBSEQUENT EVENTS
In March 1996, ECC announced that its wholly owned subsidiary EchoStar
Satellite Broadcasting Corporation ("ESB"), is considering a private offering
(the "Offering") pursuant to Rule 144A under the Securities Act of 1933 of
Senior Secured Discount Notes due 2004 (the "Senior Secured Notes") expected to
provide net proceeds to ESB of $250.0 million. ESB was formed on January 24,
1996, for the purpose of the Offering. ECC will contribute all of the
outstanding capital stock of its wholly owned subsidiary, Dish, Ltd., to ESB.
EchoStar DBS Corporation ("EDC") was formed under Colorado law in January
1996 for purposes of participating in a Federal Communications Commission
auction ("FCC Auction") held on January 24 through January 26, 1996. EDC was
required to post a $10.0 million deposit to participate in the FCC Auction for
28 DBS frequencies at 110 DEG. WL and post a $2.0 million deposit to participate
in the FCC Auction for 24 DBS frequencies at 148 DEG. WL. EDC is a wholly owned
subsidiary of ECC.
F-33
<PAGE>
DISH, LTD. AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) PARENT ONLY FINANCIAL INFORMATION (CONTINUED)
On January 26, 1996, EDC submitted the winning bid of $52.3 million dollars
for 24 DBS frequencies at 148 DEG. WL. Previous deposits made with the FCC were
applied to satisfy the 20% down payment. The balance of the bid price must be
remitted to the FCC upon grant of the construction permit, which could occur as
early as April 1996.
Funds necessary to pay the balance of the purchase price are expected to be
provided by ECC from the proceeds of the Senior Secured Notes.
F-34
<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 affiliates and
subsidiaries, as described in Note 1, as of December 31, 1994 and 1995, and the
related combined and consolidated statements of income, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
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 the Companies
as of December 31, 1994 and 1995, and the combined and consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 23, 1996.
F-35
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994, AND 1995
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................................. $ 17,506 $ 21,754
Marketable investment securities.......................................................... 31,038 15,670
Trade accounts receivable, net............................................................ 8,097 9,179
Inventories............................................................................... 20,327 38,769
Income tax receivable..................................................................... -- 3,554
Deferred tax assets....................................................................... 1,840 1,779
Other current assets...................................................................... 2,573 13,037
---------- ----------
Total current assets.................................................................. 81,381 103,742
RESTRICTED CASH AND MARKETABLE SECURITIES:
Escrow.................................................................................... 185,431 73,291
Other..................................................................................... 11,400 26,400
PROPERTY AND EQUIPMENT, net................................................................. 151,240 354,000
OTHER NONCURRENT ASSETS..................................................................... 43,040 65,658
---------- ----------
Total assets.......................................................................... $ 472,492 $ 623,091
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................................................................... $ 14,895 $ 19,063
Deferred programming revenue.............................................................. 6,572 5,563
Accrued expenses and other current liabilities............................................ 6,965 21,335
Notes payable and current portion of long-term debt....................................... 238 4,782
---------- ----------
Total current liabilities............................................................. 28,670 50,743
1994 NOTES, net............................................................................. 334,206 382,218
LONG-TERM MORTGAGE DEBT AND NOTE PAYABLE, excluding current portion......................... 5,393 33,444
OTHER LONG-TERM LIABILITIES................................................................. 415 --
---------- ----------
Total liabilities..................................................................... 368,684 466,405
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 11)
STOCKHOLDERS' EQUITY:
Preferred Stock, 20,000,000 shares authorized, 1,616,681 shares of Series A Cumulative
Preferred Stock issued and outstanding, including accrued dividends of $938,000 and
$2,143,000, respectively................................................................. 15,990 17,195
Class A Common Stock, $.01 par value, 200,000,000 shares authorized, 3,739,400 and
10,535,003 shares issued and outstanding, respectively................................... 38 105
Class B Common Stock, $.01 par value, 100,000,000 shares authorized, 29,804,401 shares
issued and outstanding................................................................... 298 298
Common Stock Purchase Warrants............................................................ 26,133 714
Class C Common Stock, 100,000,000 shares authorized, none outstanding..................... -- --
Additional paid-in capital................................................................ 62,197 151,674
Unrealized holding gains on available-for-sale securities, net of deferred taxes.......... -- 239
Retained earnings (deficit)............................................................... (848) (13,539)
---------- ----------
Total stockholders' equity............................................................ 103,808 156,686
---------- ----------
Total liabilities and stockholders' equity............................................ $ 472,492 $ 623,091
---------- ----------
---------- ----------
</TABLE>
The accompanying notes to combined and consolidated financial
statements are an integral part of these balance sheets.
F-36
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
DTH products and technical services...................................... $ 206,311 $ 172,753 $ 146,852
Programming.............................................................. 10,770 14,540 15,096
Loan origination and participation income................................ 3,860 3,690 1,942
----------- ----------- -----------
Total revenue........................................................ 220,941 190,983 163,890
----------- ----------- -----------
EXPENSES:
DTH products and technical services...................................... 161,447 133,635 120,178
Programming.............................................................. 9,378 11,670 13,610
Selling, general and administrative...................................... 30,235 30,219 35,015
Depreciation............................................................. 1,677 2,243 3,058
----------- ----------- -----------
Total expenses....................................................... 202,737 177,767 171,861
----------- ----------- -----------
OPERATING INCOME (LOSS).................................................... 18,204 13,216 (7,971)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income.......................................................... 1,173 8,420 14,059
Interest expense, net of amounts capitalized............................. (632) (21,408) (23,985)
Losses on investments in joint ventures.................................. (50) (492) --
Minority interest in loss of consolidated joint venture and other........ 39 753 666
----------- ----------- -----------
Total other income (expense)......................................... 530 (12,727) (9,260)
----------- ----------- -----------
NET INCOME (LOSS) BEFORE INCOME TAXES...................................... 18,734 489 (17,231)
BENEFIT (PROVISION) FOR INCOME TAXES....................................... 1,384 (399) 5,745
----------- ----------- -----------
NET INCOME (LOSS).......................................................... $ 20,118 $ 90 $ (11,486)
----------- ----------- -----------
----------- ----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHARES..................................... $ (848) $ (12,691)
----------- -----------
----------- -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................................. 32,442 35,562
----------- -----------
----------- -----------
LOSS PER COMMON AND COMMON EQUIVALENT SHARE................................ $ (0.03) $ (0.36)
----------- -----------
----------- -----------
PRO FORMA (UNAUDITED) NET INCOME (Note 7)
Historical net income before income taxes................................ $ 18,734
Historical (provision) benefit for income taxes.......................... 1,384
Pro forma income tax effects............................................. (7,846)
-----------
Pro forma net income..................................................... $ 12,272
-----------
-----------
Pro forma common shares outstanding...................................... 32,221
-----------
-----------
Pro forma earnings per common share...................................... $ 0.38
-----------
-----------
</TABLE>
The accompanying notes to combined and consolidated financial
statements are an integral part of these statements.
F-37
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
OF
SUBSIDIARIES RETAINED
COMMON AND EARNINGS
SHARES OF STOCK ADDITIONAL (DEFICIT) AND TOTAL
COMMON STOCK PREFERRED COMMON PURCHASE PAID-IN UNREALIZED STOCKHOLDERS'
OUTSTANDING STOCK STOCK WARRANTS CAPITAL HOLDING GAINS EQUITY
--------------- --------- ------ -------- ------------ ------------- -------------
(NOTES 1 AND 9)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, at December 31, 1992....... $ 6,881 $ 45,447 $ 52,328
Cash contributions to capital...... 2,497 2,497
Dividends declared................. (25,243) (25,243)
Net income......................... 20,118 20,118
Reorganization effective December
31, 1993 --
Class A Common Stock............. 2,417 $ 24 (24) --
Class B Common Stock............. 29,804 298 (298) --
Termination of Subchapter S Status
of subsidiaries................... 40,322 (40,322) --
--------------- --------- ------ -------- ------------ ------------- -------------
BALANCES, at December 31, 1993....... 32,221 -- 322 -- 49,378 -- 49,700
Issuance of Class A Common Stock:
For acquisition of DirectSat,
Inc............................. 999 11 8,989 9,000
For cash......................... 324 3 3,830 3,833
Issuance of 1,616,681 shares of 8%
Series A Cumulative Preferred
Stock............................. $15,052 15,052
Issuance of Common Stock Purchase
Warrants.......................... $26,133 26,133
Series A Cumulative Preferred Stock
dividends......................... 938 (938) --
Net income......................... 90 90
--------------- --------- ------ -------- ------------ ------------- -------------
BALANCES, at December 31, 1994....... 33,544 15,990 336 26,133 62,197 (848) 103,808
Series A Cumulative Preferred Stock
dividends......................... 1,205 (1,205) --
Issuance of Class A Common Stock... 4,004 40 62,893 62,933
Common Stock Purchase Warrants
exercised......................... 2,731 26 (25,419 ) 25,393 --
Employee Savings Plan Contribution
and Launch Bonuses Funded by
Issuance of Class A Common
Stock............................. 60 1 1,191 1,192
Unrealized holding gains on
available-for-sale securities,
net............................... 239 239
Net loss........................... (11,486) (11,486)
--------------- --------- ------ -------- ------------ ------------- -------------
BALANCES, at December 31, 1995....... 40,339 $17,195 $ 403 $ 714 $151,674 $(13,300) $156,686
--------------- --------- ------ -------- ------------ ------------- -------------
--------------- --------- ------ -------- ------------ ------------- -------------
</TABLE>
The accompanying notes to combined and consolidated financial
statements are an integral part of these statements.
F-38
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................. $ 20,118 $ 90 $ (11,486)
Adjustments to reconcile net income (loss) to net cash flows from operating
activities --
Depreciation................................................................ 1,677 2,243 3,058
Provision for doubtful accounts............................................. 254 (160) 920
Benefit for deferred taxes.................................................. (1,941) (7,330) (4,763)
Amortization of deferred debt issuance costs................................ -- 719 1,279
Amortization of discount on 1994 Notes, net of amounts capitalized.......... -- 19,943 22,249
Equity in losses in joint ventures.......................................... -- 492 99
Employee benefits funded with Class A Common Stock.......................... -- -- 1,192
Loss on dispositions of fixed assets........................................ -- 133 --
Change in reserve for excess and obsolete inventory......................... (22) 502 1,212
Other, net.................................................................. (30) (941) (528)
Changes in working capital items --
Trade accounts receivable................................................. (3,439) 532 (2,002)
Inventories............................................................... 14,919 3,049 (19,654)
Income tax receivable..................................................... -- -- (3,554)
Other current assets...................................................... (1,659) (183) (10,464)
Liability under cash management program................................... (4,018) (2,310) (57)
Trade accounts payable.................................................... 1,156 4,958 4,168
Deferred programming revenue.............................................. 1,795 564 (1,009)
Accrued expenses.......................................................... 1,637 611 (1,232)
Reserve for warranty costs................................................ (250) 50 (387)
Other current liabilities................................................. 18 1,009 631
Other, net................................................................ -- 234 --
--------- --------- ---------
Net cash flows from operating activities................................ 30,215 24,205 (20,328)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities................................. (18,227) (15,100) (25,230)
Sales of marketable investment securities..................................... 16,132 4,439 40,563
Purchases of restricted marketable investment securities...................... -- (11,400) (15,000)
Purchases of property and equipment........................................... (19,225) (4,030) (4,077)
Proceeds from sale of property and equipment.................................. 383 523 29
Offering proceeds and investment earnings placed in escrow.................... -- (329,831) (9,589)
Funds released from escrow account............................................ -- 144,400 122,149
Accrued satellite contract cost............................................... -- (3,700) --
Investment in SSET............................................................ -- (8,750) --
Investment in DBSC............................................................ -- (4,210) --
Investment in DBSI............................................................ -- -- (1,000)
Long-term note receivable from DBSC........................................... -- -- (16,000)
Investments in joint ventures................................................. (65) 1,614 --
Expenditures for satellite system under construction.......................... -- (112,052) (129,506)
Expenditures from escrow for FCC authorization................................ -- (159) --
Expenditures for FCC authorizations........................................... -- -- (458)
Other......................................................................... 92 (309) --
--------- --------- ---------
Net cash flows from investing activities................................ (20,910) (338,565) (38,119)
--------- --------- ---------
</TABLE>
The accompanying notes to combined and consolidated financial
statements are an integral part of these statements.
F-39
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
---------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term loans from banks................................................ $ 6,000 $ -- $ --
Repayments of short-term loans from banks.................................. (7,256) -- --
Minority investor investment in and loan to consolidated joint venture..... 2,504 1,000 --
Net proceeds from issuance of 1994 Notes and Common Stock Purchase
Warrants.................................................................. -- 323,325 --
Expenditures from escrow for offering costs................................ -- (837) --
Proceeds from refinancing of mortgage indebtedness......................... -- 4,200 --
Repayments of mortgage indebtedness........................................ (152) (3,435) (238)
Loans from stockholder, net................................................ 12,451 4,000 --
Repayment of loans from stockholders....................................... -- (4,075) --
Net proceeds from issuance of Class A Common Stock......................... -- 3,833 62,933
Capital contributions...................................................... 2,497 -- --
Dividends paid............................................................. (22,243) (3,000) --
---------- ----------- ---------
Net cash flows from financing activities................................. (6,199) 325,011 62,695
---------- ----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................................... 3,106 10,651 4,248
CASH AND CASH EQUIVALENTS, beginning of period............................... 3,749 6,855 17,506
---------- ----------- ---------
CASH AND CASH EQUIVALENTS, end of period..................................... $ 6,855 $ 17,506 $ 21,754
---------- ----------- ---------
---------- ----------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized......................... $ 633 $ 436 $ 461
Cash paid for income taxes................................................. 251 7,140 3,203
Cumulative Series A Preferred Stock dividends.............................. -- 938 1,205
Dividends declared but not paid until 1994................................. 3,000 -- --
Accrued satellite contract costs........................................... 3,700 -- 15,000
Exchange of note payable to stockholder, and interest thereon, for Series A
Preferred Stock........................................................... -- 15,052 --
Issuance of Class A Common Stock to acquire investment in DirectSat
Corporation............................................................... -- 9,000 --
Property and equipment acquired under capital leases....................... -- 934 --
Note payable issued for deferred satellite construction payments........... -- -- 32,833
Employee Savings Plan Contribution and launch bonuses funded by issuance of
Class A Common Stock...................................................... -- -- 1,192
</TABLE>
The accompanying notes to combined and consolidated financial
statements are an integral part of these statements.
F-40
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
(1) ORGANIZATION AND BUSINESS ACTIVITIES
Certain companies principally owned and controlled by Mr. Charles Ergen were
reorganized in 1993 into Dish, Ltd., formerly known as EchoStar Communications
Corporation (together with its subsidiaries, "Dish, Ltd.").
The principal reorganized entities, Echosphere Corporation (formed in 1980)
and Houston Tracker Systems, Inc. (acquired in 1986), are primarily engaged in
the design, assembly, marketing and worldwide distribution of direct to home
("DTH") satellite television products. Satellite Source, Inc. contracts for
rights to purchase satellite delivered television programming for resale to
consumers and other DTH retailers. Echo Acceptance Corporation ("EAC") arranges
nationwide consumer financing for purchasers of DTH systems and programming. The
FCC has granted EchoStar Satellite Corporation ("ESC") a conditional satellite
construction permit and frequency assignments for eleven odd-numbered
frequencies at 119 DEG. West Longitude ("WL"). The reorganized group also
includes other less significant domestic enterprises and several foreign
entities involved in related activities outside the United States.
In January 1994, Dish, Ltd. announced its intention to merge a subsidiary of
Dish, Ltd. with DirectSat Corporation ("DirectSat"), an approximately 80% owned
subsidiary of SSE Telecom, Inc. ("SSET") at that time. The merger was approved
by the FCC and consummated in December 1994. DirectSat stockholders received an
approximate 3% equity interest in Dish, Ltd. in exchange for all of DirectSat's
outstanding stock. DirectSat's principal assets are a conditional satellite
construction permit and frequency assignments for ten even-numbered frequencies
at 119 DEG. WL granted by the FCC.
Dish, Ltd. has contracted for the construction and launch of communications
satellites. EchoStar I, a high powered direct broadcast satellite ("DBS"), was
launched on December 28, 1995. EchoStar II is currently under construction and
scheduled for launch during 1996.
In June 1994, Dish, Ltd. completed an offering of 12 7/8% Senior Secured
Discount Notes due 2004 (the "1994 Notes") (Note 5) and Common Stock Purchase
Warrants (the "Warrants") (collectively, the "Notes Offering"), receiving net
proceeds of approximately $323.3 million. Dish, Ltd. and its subsidiaries are
subject to the terms and conditions of the Indenture related to the 1994 Notes
(the "1994 Indenture").
EXCHANGE AND MERGER
In April 1995, a new company, EchoStar Communications Corporation (same name
as the original name of Dish, Ltd.), was formed to conduct a public offering of
its Class A Common Stock and to become the parent of Dish, Ltd. as described
below. The new company is described below as "ECC". Elsewhere in these
footnotes, unless otherwise indicated, "EchoStar" or the "Company" refers to ECC
and its subsidiaries, including Dish, Ltd. The assets of ECC, other than its
investment in Dish, Ltd., are not subject to the 1994 Indenture. Separate parent
only financial information for ECC is supplementally provided in Note 16.
Further, the 1994 Indenture places significant restrictions on the payment of
dividends or other transfers by Dish, Ltd. to ECC.
ECC completed an offering of its Class A Common Stock on June 26, 1995, and
received net proceeds of approximately $63.0 million. Concurrently, Charles W.
Ergen, President and Chief Executive Officer of both ECC and Dish, Ltd.,
exchanged all of his shares of Class B Common Stock and Series A Preferred Stock
of Dish, Ltd. for like shares of ECC (the "Exchange") in the ratio of 0.75
shares of ECC for each share of Dish, Ltd. capital stock (the "Exchange Ratio").
All employee stock options of Dish, Ltd. were also assumed by ECC, adjusted for
the Exchange Ratio. In December 1995,
F-41
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(1) ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
ECC merged Dish, Ltd. with a wholly owned subsidiary of ECC (the "Merger") and
all outstanding shares of Dish, Ltd. Class A Common Stock and Series A Preferred
Stock (other than those held by ECC) were automatically converted into the right
to receive like shares of ECC in accordance with the Exchange Ratio. Also
effective with the Merger, all outstanding Warrants for the purchase of Dish,
Ltd. Class A Common Stock automatically became exercisable for shares of ECC's
Class A Common Stock, adjusted for the Exchange Ratio. As the result of the
Exchange and Merger, ECC owns all outstanding shares of Dish, Ltd. capital
stock.
SIGNIFICANT RISKS AND UNCERTAINTIES
Execution of its business strategy to launch and operate DBS satellites has
dramatically changed the Company's operating results and financial position. At
December 31, 1993, Dish, Ltd.'s long-term debt, exclusive of amounts related to
its DBS projects, consisted of less than $5.0 million in mortgage indebtedness
and its investments in property and equipment, other than DBS satellite
payments, aggregated less than $20.0 million. At December 31, 1995, the Company
is committed to expend approximately $450 million to build and launch its first
two satellites and has completed the sale of the 1994 Notes for that purpose
(Notes 5 and 11). Annual interest expense on the 1994 Notes and depreciation of
the investment in the first two satellites will each be of a magnitude that
exceeds historical levels of income before taxes and the Company has reported
net losses beginning in 1995 and expects net losses to continue for the
foreseeable future. The Company's plans also include the construction and launch
of additional satellites and marketing programs to promote its DBS products and
services. The Company will need to raise significant additional funds for those
purposes and there can be no assurance that necessary funds will be available
or, if available, available on terms favorable to the Company. However,
management believes, but has no assurance, that demand for its DBS products and
services will develop to provide cash flow from operation of EchoStar's Dish
Network-SM- which, together with other sources of capital, will be sufficient to
satisfy future planned expenditures. Significant delays in commencing operations
of the EchoStar DBS System, or significant delays or mission failures in the
Company's satellite launch program, may subject the Company to significant
monetary penalties and would have significant adverse consequences to its
operating results and financial condition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION AND CONSOLIDATION
The accompanying financial statements for 1993 combine the historical cost
financial statements of all reorganized entities. The financial statements for
1994 and 1995 present the consolidation of Dish, Ltd. and its subsidiaries
through the date of the Exchange (Note 1) and the consolidation of ECC and its
subsidiaries, including Dish, Ltd, thereafter. The Exchange and Merger was
accounted for as a reorganization of entities under common control and the
historical cost basis of consolidated assets and liabilities was not affected by
the transaction. All significant intercompany transactions have been eliminated
in the combined and consolidated financial statements.
Effective June 1993, the Company acquired a fifty-one percent joint venture
interest in FlexTracker Sdn. Bhd. ("FlexTracker"), a Malaysian limited liability
company. A Singapore electronics
F-42
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
manufacturing company owned the forty-nine percent minority interest.
FlexTracker manufactured integrated and stand-alone receivers and positioners
exclusively for the Company. In December 1994, the Company terminated the
FlexTracker joint venture and effectively sold its interest in the joint
venture's net assets to the Singapore company for $1.8 million. The Company's
share of FlexTracker's losses for 1993 and 1994 amounted to approximately
$50,000 and $1.3 million, respectively, and an additional $492,000 of loss was
recognized upon sale of the net assets. FlexTracker's financial statements have
been consolidated in the accompanying combined and consolidated financial
statements from the date of acquisition through the date of disposition.
The Company accounts for investments in fifty percent or less owned entities
using the equity method. At December 31, 1994 and 1995, these investments were
not material to the combined and consolidated financial statements of the
Company.
FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar because their sales and purchases are predominantly denominated in that
currency. Transactions denominated in currencies other than U.S. dollars are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period end translation) or realized
(upon settlement of the transaction). Net transaction gains (losses) for 1993,
1994 and 1995 were $19,000, $40,000 and $70,000 respectively.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with an original
maturity of ninety days or less to be cash equivalents. Cash equivalents as of
December 31, 1994 and 1995 consist of money market funds, corporate notes and
commercial paper stated at cost which equates to market value.
MARKETABLE INVESTMENT SECURITIES AND RESTRICTED CASH AND MARKETABLE SECURITIES
At December 31, 1994 marketable investment securities were recorded in the
financial statements at amortized cost and were generally held to maturity. At
December 31, 1995, the Company has classified all marketable investment
securities as available-for-sale. Accordingly, these investments are reflected
at market value based on quoted market prices. Related unrealized gains and
losses are reported as a separate component of stockholders' equity, net of
related deferred income taxes of $146,000 at December 31, 1995. The specific
identification method is used to determine cost in computing realized gains and
losses. The major components of marketable investment securities as of December
31, 1994 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
DECEMBER 31, 1994 -----------------------------------
---------------------- UNREALIZED
AMORTIZED MARKET AMORTIZED HOLDING MARKET
COST VALUE COST GAIN (LOSS) VALUE
----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Commercial paper........................... $ 19,976 $ 20,233 $ 1,126 $ -- $ 1,126
Corporate notes............................ 10,992 10,987 12,353 (19) 12,334
Municipal bonds............................ 70 70 -- -- --
Government bonds........................... -- -- 2,038 -- 2,038
Mutual funds............................... -- -- 188 (16) 172
----------- --------- ----------- ----------- ---------
$ 31,038 $ 31,290 $ 15,705 $ (35) $ 15,670
----------- --------- ----------- ----------- ---------
----------- --------- ----------- ----------- ---------
</TABLE>
F-43
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Restricted Cash and Marketable Securities in Escrow as reflected on the
accompanying balance sheets represent net proceeds received from the Notes
Offering, plus interest earned, less amounts expended to date in connection with
the development, construction and launch of EchoStar's Dish Network-SM-. The
escrow funds are held by an escrow agent in an account (the "Escrow Account")
for the benefit of the holders of the 1994 Notes and are invested in certain
debt and other marketable securities, as permitted by the 1994 Indenture, until
disbursed for the express purposes identified in the Notes Offering prospectus.
The major components of Restricted Cash and Marketable Securities as of December
31, 1994 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
DECEMBER 31, 1994 -----------------------------------
------------------------ UNREALIZED
AMORTIZED MARKET AMORTIZED HOLDING MARKET
COST VALUE COST GAIN VALUE
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Commercial paper.......................... $ 94,315 $ 94,909 $ 66,214 $ -- $ 66,214
Corporate notes........................... 8,954 8,954 -- -- --
Government bonds.......................... -- -- 32,904 420 33,324
Municipal bonds........................... 92,513 93,010 -- -- --
Accrued interest.......................... 1,049 1,049 153 -- 153
----------- ----------- ----------- ----- ---------
$ 196,831 $ 197,922 $ 99,271 $ 420 $ 99,691
----------- ----------- ----------- ----- ---------
----------- ----------- ----------- ----- ---------
</TABLE>
Other Restricted Cash includes $11.4 million to satisfy certain covenants
regarding launch insurance required by the 1994 Indenture. The Company is
required to maintain launch insurance and restricted cash totaling $225.0
million for each of EchoStar I and EchoStar II. The Company has obtained $219.3
million of launch insurance on each satellite, and, together with the cash
segregated and reserved on the accompanying balance sheets, has satisfied its
insurance obligations under the 1994 Indenture. In addition, as of December 31,
1995, $15.0 million was in an escrow account established pursuant to a
manufacturing contract for payment to the manufacturer as certain milestones are
reached.
REVENUE RECOGNITION AND TRADE ACCOUNTS RECEIVABLE
Revenue from sales of DTH products is recognized upon shipment to customers.
The Company maintains a reserve for potential losses in collection of its trade
accounts receivable based upon estimates of amounts that may ultimately be
uncollectible. The allowance for doubtful accounts was $186,000 and $1.1 million
as of December 31, 1994 and 1995, respectively.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out ("FIFO") method. Proprietary products
are manufactured by outside suppliers to the Company's specifications; however,
final testing and assembly is performed by the Company. The Company
F-44
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
also distributes non-proprietary products purchased from other manufacturers.
Manufactured inventories include materials, labor and manufacturing overhead.
Cost of other inventories includes parts, contract manufacturers' delivered
price, assembly and testing labor, and related overhead, including handling and
storage costs. The major components of inventory were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
DBS receiver components....................................................... $ -- $ 9,615
Spare parts................................................................... 2,759 2,089
Competitor DBS Receivers...................................................... 2,207 9,404
Finished goods................................................................ 16,946 20,458
Reserve for excess and obsolete inventory..................................... (1,585) (2,797)
--------- ---------
$ 20,327 $ 38,769
--------- ---------
--------- ---------
</TABLE>
OTHER CURRENT ASSETS
Other current assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
DBS inventory deposit......................................................... $ -- $ 10,000
Receivables for funded loans.................................................. 257 437
Other......................................................................... 2,316 2,600
--------- ---------
$ 2,573 $ 13,037
--------- ---------
--------- ---------
</TABLE>
In conjunction with its commitments to purchase DBS satellite receivers
(Note 11), the Company has paid a deposit of $10.0 million to one of its
manufacturers. The deposit will be applied towards future payments for the DBS
satellite receivers as they are delivered during 1996.
Other current assets include receivables for consumer loans funded by EAC
but expected to be reimbursed to EAC on a nonrecourse basis by two unrelated
finance companies, normally within two business days after the credit is
accepted by those companies. Unreimbursed fundings were $257,000 and $437,000 as
of December 31, 1994 and 1995, respectively, all of which were subsequently
reimbursed. Total loans sourced by EAC during 1993, 1994 and 1995 were $85.6
million, $64.7 million and $50.1 million, respectively. In addition, EAC sourced
$8.6 million of leases in 1995.
Loan origination fees charged to the applicable DTH dealers are recognized
in income upon receipt of funding reimbursement from the purchaser of the loans.
EAC also receives a percentage of monthly finance charges billed by the
purchaser of the loans which is recognized in income as it becomes due to EAC.
FCC AUTHORIZATIONS AND ORGANIZATIONAL COSTS
FCC authorizations and organizational costs are recorded at cost and are
amortized using the straight-line method. Amortization periods for FCC
authorization costs are determined at the time the services related to the
applicable FCC authorization commences, or capitalized costs are written off at
the time efforts to provide services are abandoned. FCC authorization costs are
expected to have a useful life of approximately 12 years. Organizational costs
are being amortized over five years.
F-45
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED DEBT ISSUANCE COSTS AND DEBT DISCOUNT
Costs of completing the Notes Offering have been deferred (Note 4) and are
being amortized to interest expense over the term of the 1994 Notes.
Amortization of the original issue discount related to the Notes Offering (Note
5) is also being amortized and included in interest cost incurred so as to
reflect a constant rate of interest on the accredited balance of the 1994 Notes.
DEFERRED PROGRAMMING REVENUE
Deferred programming revenue consists of payments received from consumers
and dealers for satellite television programming to be provided. The revenue is
recognized on a straight-line basis over the period the programming is provided,
which generally does not exceed one year.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The composition of accrued expenses and other current liabilities is as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Accrued satellite contract costs............................................... $ -- $ 15,000
Liability under cash management program........................................ 57 --
Accrued expenses............................................................... 4,667 3,850
Reserve for warranty costs..................................................... 1,400 1,013
Other.......................................................................... 841 1,472
--------- ---------
$ 6,965 $ 21,335
--------- ---------
--------- ---------
</TABLE>
The liability under cash management program represents checks written and
released in excess of balances presently on deposit with certain banks. As
checks clear these bank accounts, the resulting overdrafts are funded daily from
funds available in a concentration account at another bank.
The Company's proprietary products are under warranty against defects in
material and workmanship for one year from the date of original retail purchase.
The reserve for warranty costs is based upon historical units sold and expected
repair costs.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $3.2 million, $2.3
million and $1.9 million for the years ended December 31, 1993, 1994 and 1995,
respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development costs totaled $5.1 million, $5.9 million and $5.0 million for the
years ended December 31, 1993, 1994 and 1995, respectively.
INCOME TAXES
Prior to the December 31, 1993 reorganization (Note 1), the principal
combined entities were Subchapter S corporations and their income was taxable to
the stockholders rather than the companies. The provision for income taxes
reflected only amounts payable to states and foreign tax jurisdictions that did
not recognize Subchapter S status. Effective December 31, 1993, Subchapter S
status terminated and the Company will prospectively file consolidated corporate
federal and state income tax returns. As required by Statement of Financial
Accounting Standards No. 109, "Accounting for
F-46
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes" ("SFAS No. 109"), this change in tax status was recognized by
establishing deferred tax assets and liabilities for temporary differences
between the tax basis and amounts reported in the accompanying combined and
consolidated balance sheets (Note 7).
Under SFAS No. 109, the current provision for income taxes represents actual
or estimated amounts payable or refundable on tax returns filed or to be filed
for each year. Deferred tax assets and liabilities are recorded for the
estimated future tax effects of: (a) temporary differences between the tax basis
of assets and liabilities and amounts reported in the combined and consolidated
balance sheets, and (b) operating loss and tax credit carry forwards. The
overall change in deferred tax assets and liabilities for the period measures
the deferred tax expense for the period. Effects of changes in enacted tax laws
on deferred tax assets and liabilities are reflected as adjustments to tax
expense in the period of enactment. The measurement of deferred tax assets may
be reduced by a valuation allowance based on judgmental assessment of available
evidence if deemed more likely than not that some or all of the deferred tax
assets will not be realized.
EARNINGS PER SHARE
Earnings per share has been calculated based on the weighted average number
of shares of common stock issued and outstanding and, if dilutive, common stock
equivalents (warrants and employee stock options) during the years ended
December 31, 1994 and 1995; and net income has been adjusted for cumulative
dividends on the 8% Series A Cumulative Preferred Stock (the "Series A Preferred
Stock"). Earnings per share for the year ended December 31, 1993 has been
calculated and presented on a pro forma basis as if the shares issued to effect
the December 31, 1993 reorganization (Note 1) were outstanding during each
period.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). The
Company will be required to adopt SFAS No. 121 in 1996 and expects that its
ultimate adoption will not have a significant impact on the Company's financial
position, results of operations or cash flows.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), issued by the FASB in October 1995
and effective for fiscal years beginning after December 15, 1995, encourages,
but does not require, a fair value based method of accounting for employee stock
options or similar equity instruments. It also allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), but requires
pro forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. The Company expects to adopt SFAS
No. 123 in 1996. While the Company is still evaluating SFAS No. 123, it
currently expects to elect to measure compensation cost under APB No. 25 and
comply with the pro forma disclosure requirements. If the Company makes this
election, this statement will have no impact on the Company's results of
operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's financial statement presentation.
F-47
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(3) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Cost includes interest capitalized of $370,000, $5.7 million and $25.8 million
during the years ended December 31, 1993, 1994 and 1995, respectively on the
EchoStar DBS System during construction at the Company's effective borrowing
rate. The major components of property and equipment were as follows (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31,
LIFE (IN ------------------------
YEARS) 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
Construction in progress......................................... -- $ 139,500 $ 303,174
Land............................................................. -- 1,613 1,613
Buildings and improvements....................................... 7-40 8,936 21,006
Furniture, fixtures and equipment................................ 2-12 6,081 17,163
Vehicles......................................................... 7 992 1,310
Tooling.......................................................... 2 1,339 2,039
Furniture and equipment held for sale............................ -- 17,062
Computer equipment held for sale................................. -- 902
----------- -----------
Total property and equipment..................................... 158,461 364,269
Less -- Accumulated depreciation................................. (7,221) (10,269)
----------- -----------
Net property and equipment....................................... $ 151,240 $ 354,000
----------- -----------
----------- -----------
</TABLE>
Construction in progress includes capitalized costs related to the
construction and launch (Note 11) of EchoStar I, which was launched in late
December 1995, EchoStar II, which is scheduled for launch prior to the end of
1996 and EchoStar III.
Construction in progress consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Progress amounts for satellite construction and launch, capitalized
interest, launch insurance, launch and in-orbit tracking, telemetry and
control services:
EchoStar I............................................................... $ 75,613 $ 193,629
EchoStar II.............................................................. 62,438 88,634
EchoStar III............................................................. -- 20,801
Uplink facility.......................................................... 1,449 --
Other.................................................................... -- 110
----------- -----------
$ 139,500 $ 303,174
----------- -----------
----------- -----------
</TABLE>
F-48
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(4) OTHER NONCURRENT ASSETS
The major components of other noncurrent assets were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Deferred debt issuance costs, net of amortization............................. $ 11,891 $ 10,622
FCC authorizations............................................................ 9,519 11,309
SSET convertible subordinated debentures and accrued interest................. 9,029 9,610
DBSI convertible subordinated debentures...................................... -- 1,000
Deferred tax assets, net...................................................... 7,431 12,109
Investment in DBSC............................................................ 4,210 4,111
Long-term note receivable from DBSC........................................... -- 16,000
Warehousing bond.............................................................. 432 468
Prepaid travel................................................................ 315 293
Other......................................................................... 213 136
--------- ---------
$ 43,040 $ 65,658
--------- ---------
--------- ---------
</TABLE>
The merger with DirectSat described in Note 1 was accounted for as a
purchase. DirectSat's assets were valued at $9.0 million by the Company at the
time of the merger and are included in FCC authorizations in the above summary.
DirectSat has been granted a conditional satellite construction permit, specific
orbital slot assignments and frequency assignments by the FCC. The DirectSat
permits conditionally authorize DirectSat to provide DBS service utilizing: (i)
ten even-numbered channels at 119 DEG. WL, the same orbital location that has
been assigned to ESC; (ii) one channel at 110 DEG. WL; and (iii) 11 odd-numbered
channels at 175 DEG. WL. The Company expects to use DirectSat's approved
frequencies at 119 DEG. WL for the EchoStar II satellite.
The Company also purchased $8.75 million of SSET's 6.5% convertible
subordinated debentures which, if converted, would represent approximately 11.6%
of SSET's common stock, based on the number of shares of SSET common stock
outstanding at December 31, 1995. Management estimates that the fair value of
the SSET debentures approximates their carrying value in the accompanying
financial statements based on current interest rates and the conversion features
contained in the debentures. SSET is a reporting company under the Securities
Exchange Act of 1934 engaged in the manufacture and sale of satellite
telecommunications equipment. In March 1994, SSET also sold to the Company for
$1.25 million an approximate 6% ownership interest in the stock of Direct
Broadcasting Satellite Corporation ("DBSC") and certain notes and accounts
receivable from DBSC.
In November 1994, the Company resolved a suit brought by the Company against
DBSC regarding enforceability of the notes and accounts receivable. The
receivables were exchanged for shares of DBSC common stock and the Company
purchased additional DBSC shares for $2,960,000 so that, together with the
shares of DBSC acquired from SSET, the Company presently owns approximately 40%
of the outstanding common stock of DBSC. DBSC's principal assets include an FCC
conditional satellite construction permit and specific orbital slot assignments
for eleven DBS frequencies at 61.5 DEG. WL and eleven DBS frequencies at
175 DEG. WL.
The Company has negotiated the merger of DBSC with a subsidiary of the
Company. The merger has been approved by DBSC shareholders but may not be
completed until the FCC has approved the merger. Assuming FCC approval for
consummation of this merger, the Company will hold, through its
F-49
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(4) OTHER NONCURRENT ASSETS (CONTINUED)
DBSC subsidiary, the permit and slot assignments for these frequencies. In
connection with the merger, the Company expects to issue approximately 675,000
shares of its Class A Common Stock to DBSC shareholders in exchange for all
remaining DBSC stock.
In December 1995, the Company advanced DBSC $16.0 million to make payments
under their satellite construction contract. The Company has a note receivable
from DBSC which bears interest at 11.5% and matures December 29, 2003. Under the
terms of the promissory note, equal installments of principal and interest are
due annually commencing in December 1997. This note is secured by all the assets
of DBSC as defined in the Security Agreement. Management estimates that the fair
value of this note approximates its carrying value in the accompanying financial
statements based on current risk adjusted interest rates.
In 1995 the Company also purchased $1.0 million of DBS Industries, Inc.'s
("DBSI") convertible subordinated debentures which, if converted, would
represent less than 5% of DBSI's common stock, based on the number of shares of
DBSI common stock outstanding at December 31, 1995. The debentures bear interest
at prime plus 2%, adjusted and payable quarterly (10.5% at December 31, 1995),
and mature July 1, 1998. The debentures are secured by 125,000 shares of DBSC's
common stock and 2,000 shares of common stock of E-SAT Corporation which is
currently owned 80% by the Company. DBSI owns a minority interest in DBSC, is a
reporting company under the Securities Exchange Act of 1934 and is engaged in
the development of satellite and radio systems for use in automating the control
and distribution of gas and electric power by utility companies. Management
estimates that the fair value of the DBSI's debentures approximates their
carrying value in the accompanying financial statements based on current
interest rates and the conversion features contained in the debentures. In
January 1996, the Company purchased an additional $3 million of DBSI's
convertible subordinated debentures.
(5) SENIOR SECURED NOTES
On June 7, 1994, Dish, Ltd. completed the Notes Offering of 624,000 units
consisting of $624 million aggregate principal amount of the 12 7/8% Senior
Secured Notes (the "1994 Notes") and 3,744,000 Warrants for the purchase of
Dish, Ltd. Class A Common Stock. Effective with the Merger (Note 1), these
Warrants became exercisable for 2,808,000 Shares of ECC's Class A Common Stock
(Note 9). The Notes Offering resulted in net proceeds to Dish, Ltd. of $323.3
million. At December 31, 1994, the 1994 Notes were reflected in the financial
statements at $334.2 million, net of unamortized discount of $289.8 million. At
December 31, 1995, the 1994 Notes totaled $382.2 million, net of unamortized
discount of $241.8 million. A limited trading market exists for the 1994 Notes.
However, based on information available to the Company, the 1994 Notes traded
for approximately $690 per bond near December 31, 1995. This suggests a current
aggregate market value of the 1994 Notes of approximately $430.6 million.
The 1994 Notes rank senior in right of payment to all subordinated
indebtedness of Dish, Ltd. and PARI PASSU in right of payment with all other
senior indebtedness of Dish, Ltd., subject to the terms of an Intercreditor
Agreement between Dish, Ltd., certain of its principal subsidiaries and certain
creditors thereof. The 1994 Notes are secured by liens on certain assets of
Dish, Ltd., including EchoStar I and EchoStar II and all other components of the
EchoStar DBS System owned by Dish, Ltd. and its subsidiaries. The 1994 Notes are
guaranteed by each material direct subsidiary of Dish, Ltd. (Note 12). Although
the 1994 Notes are titled "Senior": (i) Dish, Ltd. has not issued, and does not
have any current arrangements to issue, any significant indebtedness to which
the 1994 Notes would be senior, however, Senior Secured Notes being offered for
sale subsequent to December 31, 1995, by
F-50
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(5) SENIOR SECURED NOTES (CONTINUED)
EchoStar Satellite Broadcasting Corporation, another wholly owned subsidiary of
ECC, will effectively be subordinated to the 1994 Notes and all other
liabilities of Dish, Ltd. and its subsidiaries; and (ii) at December 31, 1994
and 1995, the 1994 Notes were effectively subordinated to approximately $5.6
million and $5.4 million of mortgage indebtedness, respectively, with respect to
certain assets of Dish, Ltd.'s subsidiaries, not including the EchoStar DBS
System. Further, the 1994 Notes are subordinate to advances under the Credit
Facility (Note 6), and will be ranked PARI PASSU with the security interest of
approximately $30.0 million of contractor financing.
Interest on the 1994 Notes currently is not payable in cash but accrues
through June 1, 1999, with the 1994 Notes accrediting to $624.0 million by that
date. Thereafter, interest on the 1994 Notes will be payable in cash
semi-annually on June 1 and December 1 of each year, commencing December 1,
1999. Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1994 Notes are not redeemable at Dish, Ltd.'s
option prior to June 1, 1999. Thereafter, the 1994 Notes will be subject to
redemption, at the option of Dish, Ltd., in whole or in part, at redemption
prices ranging from 104.828% during the year commencing June 1, 1999 to 100% on
or after June 1, 2002 of principal, together with accrued and unpaid interest
thereon to the redemption date. On each of June 1, 2002 and June 1, 2003, Dish,
Ltd. will be required to redeem 25% of the original aggregate principal amount
of 1994 Notes at a redemption price equal to 100% of the principal amount
thereof, together with accrued and unpaid interest thereon to the redemption
date. The remaining principal of the 1994 Notes will mature on June 1, 2004.
In the event of a change of control and upon the occurrence of certain other
events, as described in the 1994 Indenture, Dish, Ltd. will be required to make
an offer to each holder of 1994 Notes to repurchase all or any part of such
holder's 1994 Notes at a purchase price equal to 101% of the accredited value
thereof on the date of purchase, if prior to June 1, 1999, or 101% of the
aggregate principal amount thereof, together with accrued and unpaid interest
thereon to the date of purchase, if on or after June 1, 1999.
The 1994 Indenture contains restrictive covenants that, among other things,
impose limitations on Dish, Ltd. and its subsidiaries with respect to their
ability to: (i) incur additional indebtedness; (ii) issue preferred stock; (iii)
apply the proceeds of certain asset sales; (iv) create, incur or assume liens;
(v) create dividend and other payment restrictions with respect to Dish, Ltd.'s
subsidiaries; (vi) merge, consolidate or sell assets; (vii) incur subordinated
or junior debt; and (viii) enter into transactions with affiliates. In addition,
Dish, Ltd., may pay dividends on its equity securities only if (1) no default is
continuing under the 1994 Indenture; and (2) after giving effect to such
dividend, Dish, Ltd.'s ratio of total indebtedness to cash flow (calculated in
accordance with the 1994 Indenture) would not exceed 4.0 to 1. Moreover, the
aggregate amount of such dividends generally may not exceed the sum of 50% of
Dish, Ltd.'s consolidated net income (calculated in accordance with the 1994
Indenture) from the date of issuance of the 1994 Notes, plus 100% of the
aggregate net proceeds to Dish, Ltd. from the issuance and sale of certain
equity interests of Dish, Ltd. (including common stock).
F-51
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(6) SHORT-TERM AND LONG-TERM DEBT
LONG-TERM MORTGAGE DEBT
In addition to the 1994 Notes (Note 5), long-term debt consists of the
following as of December 31, 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
8.75% note payable for deferred satellite contract payments due in equal
monthly installments of $677,590, including interest, through February 2001;
secured by substantially all assets of Dish, Ltd., and Dish, Ltd.'s
subsidiaries.................................................................. $ -- $ 32,833
8.0% mortgage note payable due in equal monthly installments of $41,635,
including interest, through May 2008; secured by land and office building..... 4,088 3,909
10.5% mortgage note payable due in equal monthly installments of $9,442,
including interest, through November 1998; final payment of $854,000 due
November 1998; secured by land and warehouse building......................... 927 910
9.9375% mortgage note payable due in equal quarterly principal installments of
$10,625, plus interest, through April 2009; secured by land and office
building...................................................................... 616 574
--------- ---------
Total long-term debt, excluding the 1994 Notes................................. 5,631 38,226
Less current installments...................................................... (238) (4,782)
--------- ---------
Long-term debt, excluding current installments................................. $ 5,393 $ 33,444
--------- ---------
--------- ---------
</TABLE>
Aggregate maturities of the above long-term mortgage debt are as follows:
1996, $4.8 million; 1997, $6.2 million; 1998, $7.6 million; 1999, $7.3 million;
2000, $8.0 million; and thereafter, $4.3 million. In addition, contractor
financing of $28.0 million at the prime rate is available for EchoStar II
payable in installments over five years following the launch (Note 11).
DEFERRED SATELLITE CONTRACT PAYMENTS
The majority of the purchase price for the satellites is required to be paid
in progress payments, with the remainder payable in the form of non-contingent
payments deferred until EchoStar I and EchoStar II are in orbit, with interest
at the prime rate over a period of five years after the delivery and launch of
each such satellite (the "Deferred Payments"). As security for the portion of
the Deferred Payments due to the contractor (Martin Marietta), Dish, Ltd. has:
(i) granted a security interest in substantially all assets of Dish, Ltd. and
Dish, Ltd.'s subsidiaries (the "Dish, Ltd. subsidiaries"), other than the stock
of the EchoStar subsidiaries and the proceeds derived from the sale of the 1994
Notes, subordinate to the first security interest in the assets of ESC granted
to the Trustee under the 1994 Indenture (Note 5), and to the liens granted to
any commercial bank which provides a revolving credit facility to Dish, Ltd.,
except that such security interest ranks PARI PASSU with the security interest
in the assets of ESC granted for the benefit of the holders of the 1994 Notes
with respect to $30.0 million of the Deferred Payments; and (ii) caused Dish,
Ltd. and its subsidiaries to guarantee payment in full of such Deferred
Payments.
Martin Marietta has a security interest in the EchoStar DBS System which,
with respect to $30.0 million of the Deferred Payments, ranks PARI PASSU with
the lien on such assets granted for the benefit of the holders of the 1994
Notes, and, with respect to the remainder of the Deferred Payments, is
subordinated to the lien on such assets granted for the benefit of the holders
of the 1994 Notes.
F-52
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(6) SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
However, following any default on the Deferred Payments, Martin Marietta is
prohibited from realizing on any of such collateral for a period of at least
five years following consummation of the Notes Offering, and in any event for
180 days following such default. Martin Marietta also has a security interest in
the assets of the Dish, Ltd. subsidiaries other than ESC which lien, with
respect to the assets of certain of the Dish, Ltd. subsidiaries, ranks senior to
the lien on such assets granted for the benefit of the holders of the 1994
Notes.
LONG-TERM NOTES PAYABLE TO STOCKHOLDER
As of December 31, 1993, ESC had a long-term note payable to its principal
stockholder, including cumulative accrued interest at prime, of $14.7 million.
The loan proceeds were used to make payments due pursuant to the satellite
construction project (Note 11). The note accrued interest at 10% per annum from
January 1, 1994 to March 21, 1994. The stockholder exchanged the note together
with accrued but unpaid interest for Series A Preferred Stock on May 6, 1994
(Note 16). The principal stockholder also advanced $4.0 million to EchoStar in
1994 used to fund transactions with SSET (Note 4) which was repaid from proceeds
of the 1994 Notes.
The Company also had a noninterest-bearing note payable to its principal
stockholder at December 31, 1993 of $75,000 which was repaid in January 1994.
BANK CREDIT FACILITY
On May 6, 1994, the principal subsidiaries of Dish, Ltd., except ESC (the
"Borrowers"), entered into an agreement with Bank of America Illinois (the
"Bank"), to provide a revolving credit facility (the "Credit Facility") for
working capital advances and for letters of credit necessary for inventory
purchases and satellite construction payments. The maximum amount available to
the Borrowers under the Credit Facility is the lesser of the "Borrowing Base"
(as defined in the Credit Facility) or $17.0 million, if prior to March 6, 1996,
or $14.5 million, if on or after March 6, 1996. The Borrowing Base includes
specified percentages of eligible receivables, inventory and marketable
investment securities. At December 31, 1995 the Borrowing Base exceeded $17.0
million. Advances under the Credit Facility bear interest at: (i) the Bank's
Reference Rate (as defined in the Credit Facility); (ii) Eurodollar rate plus 2%
per annum or (iii) the secondary CD bid rate plus 2.25% per annum, at the
Borrowers' choice. Advances pursuant to the Credit Facility are secured by
substantially all of the assets of the Borrowers. At December 31, 1995, standby
letters of credit totaled $15.5 million, and there were no documentary letters
of credit or advances outstanding.
The Credit Facility contains customary representations, covenants and
conditions to borrowing. The Credit Facility also contains a number of negative
covenants that restrict the Borrowers from, among other things, incurring
additional indebtedness, creating liens on their assets, providing guarantees,
entering into merger or consolidation transactions, or disposing of their assets
outside the ordinary course of business. Except in certain circumstances
specified in the Credit Facility, the Borrowers are able to pay dividends to
Dish, Ltd. in an amount not to exceed 50% of excess cash flow (as defined in the
Credit Facility) in 1995 and 1996.
(7) INCOME TAXES
As stated in Note 2, the combined entities terminated their Subchapter S
status on December 31, 1993. This change in tax status was recognized by
establishing a net deferred tax asset of $1.9 million on that date for temporary
differences between tax basis and amounts reported in the accompanying combined
and consolidated balance sheet. The current provision for income taxes for 1993
reflects
F-53
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(7) INCOME TAXES (CONTINUED)
only amounts payable to certain states and foreign tax jurisdictions that do not
recognize Subchapter S status. Beginning in 1994, the group filed consolidated
corporate federal and state income tax returns.
The components of the (provision) benefit for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Current (provision) benefit
Federal............................................................... $ -- $ (5,951) $ 1,350
State................................................................. (128) (853) (67)
Foreign............................................................... (429) (925) (301)
--------- --------- ---------
(557) (7,729) 982
--------- --------- ---------
Deferred benefit
Federal............................................................... 1,686 6,342 4,383
State................................................................. 255 988 380
--------- --------- ---------
1,941 7,330 4,763
--------- --------- ---------
Total benefit (provision)........................................... $ 1,384 $ (399) $ 5,745
--------- --------- ---------
--------- --------- ---------
</TABLE>
The types of temporary differences that give rise to a significant portion
of net deferred tax assets and their approximate tax effects as of December 31,
1994 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Current deferred tax assets
Inventory reserves and cost methods.......................................... $ 438 $ 834
Reserve for warranty costs................................................... 532 385
Accrued customer incentives.................................................. 234 --
Accrued employee incentives.................................................. 418 168
Allowance for doubtful accounts.............................................. 106 456
Unrealized holding gain on marketable investment securities.................. -- (153)
Other........................................................................ 112 89
--------- ---------
Net current deferred tax assets............................................ 1,840 1,779
--------- ---------
Noncurrent deferred tax assets
Amortization of original issue discount (included in other noncurrent
assets)..................................................................... 7,431 15,439
Other........................................................................ -- 7
--------- ---------
7,431 15,446
--------- ---------
Noncurrent deferred tax liabilities
Capitalized costs deducted for tax........................................... -- (2,351)
Depreciation................................................................. -- (986)
--------- ---------
-- (3,337)
--------- ---------
Noncurrent net deferred tax assets......................................... 7,431 12,109
--------- ---------
Net deferred tax assets.................................................... $ 9,271 $ 13,888
--------- ---------
--------- ---------
</TABLE>
F-54
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(7) INCOME TAXES (CONTINUED)
No valuation allowance has been provided for the above deferred tax assets
because the Company currently believes it is more likely than not that these
assets will be realized. If future operating results differ materially and
adversely from the Company's current expectations, its judgment regarding the
need for a valuation allowance may change.
PRO FORMA TAX EFFECTS
The combined and consolidated statements of income present, on an unaudited
pro forma basis, net income for 1993 as if the Company had filed consolidated C
Corporation federal and state income tax returns for that year. The pro forma
tax effects assume foreign taxes paid would have been fully creditable against
United States federal taxes payable and that the deferred tax assets established
on December 31, 1993 as described above, would have been provided for as the
related temporary differences arose. The pro forma provisions for income taxes
for 1993 and the actual tax provisions for 1994 and 1995 are reconciled to the
amounts computed by applying the statutory federal tax rate to income before
taxes as follows (amounts in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
---------------- ---------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Statutory rate.............................................................. $(6,557) (35.0)% $(166) (34.0)% $6,031 35.0%
State income taxes, net of federal benefit.................................. (450) (2.4) (88) (18.0) 203 1.2
Tax exempt interest income.................................................. 350 1.9 60 12.3 10 0.1
Research and development credits............................................ 195 1.0 156 31.9 31 0.2
Non-deductible interest expense............................................. -- -- (258) (52.7) (293) (1.7)
Other....................................................................... -- -- (103) (21.1) (237) (1.5)
------- ------- ------ ------- ------ -------
Total (provision) benefit for income taxes (pro forma in 1993).......... (6,462) (34.5)% $(399) (81.6)% $5,745 33.3%
------- ------ ------- ------ -------
------- ------ ------- ------ -------
Less: Historical benefit for income taxes................................... 1,384
-------
Pro forma tax effects....................................................... $(7,846)
-------
-------
</TABLE>
(8) EMPLOYEE BENEFIT PLAN AND EXECUTIVE INCENTIVE BONUS PLANS
The Company has a 401(k) Employee Savings Plan (the "401(k) Plan") for
eligible employees. Voluntary employee contributions to the 401(k) Plan may be
matched 50% by the Company, subject to a maximum annual contribution by the
Company of $1,000 per employee. The Company may also make an annual
discretionary contribution to the plan with approval by the Company's Board of
Directors, subject to the maximum deductible limit provided by the Internal
Revenue Code of 1986, as amended. The Company's total cash contributions to the
401(k) Plan were $572,000, $170,000 and $177,000 for 1993, 1994 and 1995,
respectively. Also in 1995, the Company contributed 55,000 shares of its Class A
Common Stock (fair value of approximately $1.1 million) to the 401(k) Plan as a
discretionary contribution.
During the years ended December 31, 1993, 1994 and 1995, the Company's Board
of Directors declared discretionary bonuses totaling $834,000, $711,000 and
$75,000 respectively. Also, a launch bonus award of 10 shares of the Company's
Class A Common Stock to all full time employees with more than 90 days service
as of December 16, 1995 was awarded. A total of approximately 4,900 shares with
an aggregate value of approximately $78,000 was issued.
F-55
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(9) STOCKHOLDERS' EQUITY
Ownership of each of the subsidiaries was generally uniform at the time of
formation of Dish, Ltd. described in Note 1. As of December 31, 1993, the
stockholders contributed their shares in the subsidiaries for an aggregate of
7,500 shares of Common Stock of Dish, Ltd. Retained earnings that had not been
distributed prior to the reorganization and related termination of Subchapter S
status were constructively distributed to the stockholders and contributed to
Dish, Ltd. as additional paid-in capital.
Dividends declared and paid during the three years ended December 31, 1994,
included amounts to allow the stockholders to pay taxes on Subchapter S income
and for investment in and advances to ESC related to construction of EchoStar I
and EchoStar II (Notes 2, 3 and 6).
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 by
the holder. ECC's principal stockholder owns all outstanding Class B Common
Stock and all other stockholders own Class A Common Stock.
SERIES A PREFERRED STOCK
On May 6, 1994, the Company exchanged 1,616,681 shares of its Preferred
Stock with its principal stockholder in consideration for the cancellation of a
note, plus accrued and unpaid interest thereon. Approximately 5%, or 80,834
shares, of the Preferred Stock were subsequently sold to another stockholder and
officer of the Company. The principal stockholder has pledged all of his
Preferred Stock to Martin Marietta as collateral security for contractor
financing (Note 6).
Each share of the Preferred Stock is convertible, at the option of the
holder, into one share of Class A Common Stock, subject to adjustment from time
to time upon the occurrence of certain events, including, among other things:
(i) dividends or distributions on Class A Common Stock payable in Class A Common
Stock or certain other capital stock; (ii) subdivisions, combinations or certain
reclassifications of Class A Common Stock; and (iii) issuances of Class A Common
Stock or rights, warrants or options to purchase Class A Common Stock at a price
per share less than the liquidation preference per share. In the event of the
liquidation, dissolution or winding up of EchoStar, the holders of Preferred
Stock would be entitled to receive an amount equal to approximately $10.64 per
share as of December 31, 1995.
The aggregate liquidation preference for all outstanding shares of Series A
Preferred Stock is limited to the principal amount represented by the note, plus
accrued and unpaid dividends thereon. Each share of Series A Preferred Stock is
entitled to receive dividends equal to eight percent 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 and is
entitled to the equivalent of ten votes for each share of Class A Common Stock
into which it is convertible. Except as otherwise 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.
All accrued dividends payable to Mr. Ergen on his Dish, Ltd. Series A
Preferred Stock through the date of the Exchange ($1.4 million), and all accrued
dividends payable to the remaining holder of Dish,
F-56
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(9) STOCKHOLDERS' EQUITY (CONTINUED)
Ltd. Series A Preferred Stock through the date of the Merger ($107,000), will
remain obligations of Dish, Ltd. (Note 1); however, no additional dividends will
accrue with respect to the Dish, Ltd. Series A Preferred Stock. The 1994
Indenture places significant restrictions of payment of those dividends, and
dividends are not expected to be paid in the foreseeable future. Through
December 31, 1995, additional accrued dividends payable to Mr. Ergen by ECC on
the ECC Series A Preferred Stock totaled $588,000.
Cumulative but unpaid dividends totaled $938,000 and approximately $2.1
million at December 31, 1994 and 1995, respectively, including amounts which
remain the obligation of Dish, Ltd.
WARRANTS
The Warrants issued in connection with the Notes Offering were valued at
$26.1 million. The 1994 Notes and the Warrants became separately transferable
and exercisable effective December 1, 1994.
Each Warrant entitles the registered holder thereof, at such holder's
option, to purchase from ECC one share of Class A Common Stock at a purchase
price of $0.01 per share (the "Exercise Price"). The Exercise Price with respect
to all of the Warrants was paid in advance and, therefore, no additional amounts
are payable upon exercise of the Warrants.
Effective with the Merger (Note 1), or subsequently, all Warrants were
exercised and 2,808,000 Shares (as adjusted for the Exchange Ratio) of ECC's
Class A Common Stock were issued.
(10) STOCK OPTIONS
In April 1994, the Company adopted a stock incentive plan (the "Stock
Incentive Plan") to provide incentive to attract and retain officers, directors
and key employees. ECC assumed all outstanding options for the purchase of Dish,
Ltd. common stock effective with the Exchange and Merger and has reserved up to
10.0 million shares of its Class A Common Stock for granting awards under the
Stock Incentive Plan. Awards available under the Stock Incentive Plan include:
(i) common stock purchase options; (ii) stock appreciation rights; (iii)
restricted stock and restricted stock units; (iv) performance awards; (v)
dividend equivalents; and (vi) other stock-based awards. All options granted
through December 31, 1995 have included exercise prices not less than the fair
market value of the Shares at the date of grant and vest as determined by the
Company's Board of Directors, generally at the rate of 20% per year.
F-57
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(10) STOCK OPTIONS (CONTINUED)
The following summarizes the activity relating to options for the years
ended December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
------- ---------------
(IN THOUSANDS EXCEPT
FOR PER SHARE DATA)
<S> <C> <C>
Incentive stock options --
Options outstanding at beginning of year................................. -- 745
Granted.................................................................. 745 420
Exercised................................................................ -- (4)
Terminated............................................................... -- (44)
------- ---------------
Options outstanding at end of year....................................... 745 1,117
------- ---------------
------- ---------------
Options exercisable at end of year....................................... -- 141
------- ---------------
------- ---------------
Price of granted options................................................. $ 9.33 $11.87 - $20.25
------- ---------------
------- ---------------
Price range of outstanding options....................................... $ 9.33 $ 9.33 - $20.25
------- ---------------
------- ---------------
Price of terminated options.............................................. $ -- $ 9.33 - $20.25
------- ---------------
------- ---------------
</TABLE>
In March 1994, the Company entered into an employment agreement with one of
its executive officers. The officer was granted an option, containing certain
conditions to vesting, to purchase 322,208 shares of Class A Common Stock of the
Company for $1.0 million at any time prior to December 31, 1999, subject to
certain limitations. One-half of this option became exercisable on December 31,
1994 and the remainder became exercisable on December 31, 1995. The option was
not granted pursuant to the Stock Incentive Plan.
Effective March 1995, the Company granted an additional option to a key
employee to purchase 33,000 shares of Class A Common Stock, which vests 50% in
March 1996 and 50% in March 1997. The exercise price for each share of Class A
Common Stock is $11.87 per share. The option was not granted pursuant to the
Stock Incentive Plan.
(11) OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
The Company has contracted with Martin Marietta Corporation ("Martin
Marietta") for the construction and delivery of high powered DBS satellites, and
for related services. EchoStar I was shipped to China on November 16, 1995 and
EchoStar II is expected to be delivered in the summer of 1996. Penalties of up
to $5.0 million are payable by Martin Marietta in the event of delays in the
delivery of EchoStar I by Martin Marietta. As of December 31, 1995, those
penalties totaled $3.2 million, which amount has been deducted from the
Company's deferred satellite payment obligation (Note 6).
The Company also has contracts with China Great Wall Industry Corporation
("Great Wall") for the launch of up to seven satellites, using LM-2E or LM-3C
launch vehicles, from a launch base in China. EchoStar I was launched on
December 28, 1995. The EchoStar I and EchoStar II launch contract (the "Great
Wall Launch Contract") calls for the launch of EchoStar II during July through
September 1996.
F-58
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(11) OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
A significant delay in the delivery or launch of EchoStar II would adversely
affect the Company's operations. In June 1995, another subsidiary of ECC
contracted with Lockheed-Khrunichev-Energia-International, Inc. ("LKE") for the
launch of a satellite, using a Proton launch vehicle, from a launch base in the
Russian Federation.
The Company has filed applications with the Federal Communications
Commission ("FCC") for authorization to construct, launch and operate a domestic
fixed satellite service system ("FSS System") and a two satellite Ka-band
satellite system. No assurances can be given that the Company applications will
be approved by the FCC or that, if approved, the Company will successfully
develop the FSS System or the Ka-band satellite system. The Company believes
that establishment of the FSS System or the Ka-band system would enhance its
competitive position in the DTH industry. In the event the Company's FSS or
Ka-band satellite system applications are approved by the FCC, or if the Company
commits to a third launch with Great Wall, additional debt or equity financing
would be required. Financing alternatives related to the FSS and Ka-band
satellite systems are currently being pursued by the Company. No assurances can
be given that financing will be available, or that it will be available on terms
favorable to the Company.
LEASES
Future minimum lease payments under noncancelable operating leases as of
December 31, 1995, are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31 --
1996..................................................... $ 1,061
1997..................................................... 686
1998..................................................... 275
1999..................................................... 147
2000..................................................... 24
Thereafter............................................... 2
---------
Total minimum lease payments........................... $ 2,195
---------
---------
</TABLE>
Total rental expense for operating leases was $1.2 million in 1993, $1.4
million in 1994 and $1.2 million in 1995.
PURCHASE COMMITMENTS
The Company has entered into agreements with various manufacturers to
purchase DBS satellite receivers and related components manufactured based on
Dish, Ltd. supplied specifications and necessary to receive DBS programming
proposed to be offered by the Company upon commencement of operations of
EchoStar's Dish Network-SM-. As of December 31, 1995, the remaining commitments
total approximately $502.9 million. At December 31, 1995, the total of all
outstanding purchase order commitments with domestic and foreign suppliers was
$515.8 million. All but $11.1 million of the purchases related to these
commitments are expected to be made during 1996 and the remainder is expected to
be made during 1997. The Company expects to finance these purchases from
available cash and sales of inventory, including the sale of DBS receiver
systems and related products.
OTHER RISKS AND CONTINGENCIES
Equipment sold by the Company includes, as an integral component,
descrambler modules purchased from an unrelated entity under a nonexclusive
right and license which expires in 2001.
F-59
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(11) OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has agreed to indemnify its stockholders for any adjustments to
their individual income tax returns resulting from adjustments to taxable income
or tax credits for years prior to 1994 during which the Company elected to be
taxed as Subchapter S corporations. The indemnities cover additions to tax,
interest and penalties, as well as attorneys' and accountants' fees and
expenses, if any.
The Company is subject to 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 these actions will not materially affect the
financial position, results of operations or liquidity of the Company.
(12) SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
The 1994 Notes are fully, unconditionally and jointly and severally
guaranteed by all subsidiaries of Dish, Ltd., except FlexTracker and certain de
minimis domestic and foreign subsidiaries. Summarized financial information for
Dish, Ltd. and the subsidiary guarantors is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income Statement Data --
Revenue........................................................ $ 217,360 $ 187,044 $ 163,228
Expenses....................................................... 199,398 174,164 171,646
----------- ----------- -----------
Operating income (loss)........................................ 17,962 12,880 (8,418)
Other income (expense)......................................... 543 (12,707) (9,911)
----------- ----------- -----------
Net income (loss) before income taxes.......................... 18,505 173 (18,329)
(Provision) benefit for income taxes........................... 1,384 (433) 6,182
----------- ----------- -----------
Net income (loss)............................................ $ 19,889 $ (260) $ (12,147)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Balance Sheet Data --
Current assets........................................................ $ 80,914 $ 81,959
Property and equipment, net........................................... 151,211 333,160
Other noncurrent assets............................................... 239,560 143,866
------------ ------------
Total assets........................................................ $ 471,685 $ 558,985
------------ ------------
------------ ------------
Current liabilities................................................... $ 28,094 $ 50,710
Long-term liabilities................................................. 340,014 415,662
Stockholders' equity.................................................. 103,577 92,613
------------ ------------
Total liabilities and stockholders' equity.......................... $ 471,685 $ 558,985
------------ ------------
------------ ------------
</TABLE>
Upon consummation of the merger with DirectSat, DirectSat became, by virtue
of the merger, a guarantor of the 1994 Notes on a full, unconditional and joint
and several basis, in addition to the guarantees of the previous subsidiaries.
F-60
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(13) OPERATIONS IN GEOGRAPHIC AREAS
The Company sells its products on a worldwide basis and has established
operations in Europe and the Pacific Rim. Information about the Company's
operations in different geographic areas as of December 31, 1993, 1994 and 1995
and for the years then ended, were as follows (in thousands):
<TABLE>
<CAPTION>
UNITED OTHER
1993 STATES EUROPE INTERNATIONAL TOTAL
- --------------------------------------------- --------- ------- -------- --------
<S> <C> <C> <C> <C>
Total revenue................................ $175,453 $25,825 $19,663 $220,941
--------- ------- -------- --------
--------- ------- --------
Export sales................................. $ 8,005
---------
---------
Operating income............................. $ 16,551 $ 96 $ 1,557 $ 18,204
--------- ------- --------
--------- ------- --------
Other income (expense), net.................. 530
--------
Net income before income taxes............... $ 18,734
--------
--------
Identifiable assets.......................... $ 84,656 $ 7,272 $10,478 $102,406
--------- ------- --------
--------- ------- --------
Corporate assets............................. 4,070
--------
Total assets................................. $106,476
--------
--------
<CAPTION>
1994
- ---------------------------------------------
<S> <C> <C> <C> <C>
Total revenue................................ $137,233 $24,072 $29,678 $190,983
--------- ------- -------- --------
--------- ------- -------- --------
Export sales................................. $ 7,188
---------
---------
Operating income............................. $ 10,811 $ 1,244 $ 1,161 $ 13,216
--------- ------- --------
--------- ------- --------
Other income (expense), net.................. (12,727)
--------
Net income before income taxes............... $ 489
--------
--------
Identifiable assets.......................... $ 77,172 $ 6,397 $ 2,359 $ 85,928
--------- ------- --------
--------- ------- --------
Corporate assets............................. 386,564
--------
Total assets................................. $472,492
--------
--------
<CAPTION>
1995
- ---------------------------------------------
<S> <C> <C> <C> <C>
Total revenue................................ $110,629 $31,351 $21,910 $163,890
--------- ------- -------- --------
--------- ------- -------- --------
Export sales................................. $ 6,317
---------
---------
Operating income (loss)...................... $ (7,860) $ 146 $ (257) $ (7,971)
--------- ------- --------
--------- ------- --------
Other income (expense), net.................. (9,260)
--------
Net income before income taxes............... $(17,231)
--------
--------
Identifiable assets.......................... $ 63,136 $10,088 $ 3,788 $ 77,012
--------- ------- --------
--------- ------- --------
Corporate assets............................. 546,079
--------
Total assets................................. $623,091
--------
--------
</TABLE>
F-61
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(14) VALUATION AND QUALIFYING ACCOUNTS
The Company's valuation and qualifying accounts as of December 31, 1993,
1994 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Assets:
Allowance for doubtful accounts.............. $ 92 $ 305 $ -- $ (51) $ 346
Loan loss reserve............................ 25 52 29 (56) 50
Reserve for inventory........................ 1,425 136 -- (158) 1,403
Liabilities:
Reserve for warranty costs................... 1,600 326 -- (576) 1,350
Other reserves............................... 110 -- -- (17) 93
Year ended December 31, 1994:
Assets:
Allowance for doubtful accounts.............. $ 346 $ 8 $ -- $ (168) $ 186
Loan loss reserve............................ 50 75 -- (30) 95
Reserve for inventory........................ 1,403 329 -- (147) 1,585
Liabilities:
Reserve for warranty costs................... 1,350 508 -- (458) 1,400
Other reserves............................... 93 -- -- -- 93
Year ended December 31, 1995:
Assets:
Allowance for doubtful accounts.............. $ 186 $ 1,160 $ -- $ (240) $ 1,106
Loan loss reserve............................ 95 19 -- (36) 78
Reserve for inventory........................ 1,585 1,511 -- (299) 2,797
Liabilities:
Reserve for warranty costs................... 1,400 562 -- (949) 1,013
Other reserves............................... 93 -- -- (1) 92
</TABLE>
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly results of operations are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
----------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Total revenue..................................... $ 46,993 $ 42,748 $ 48,958 $ 52,284
Operating income.................................. 4,359 2,573 3,481 2,803
Net income (loss)................................. 2,893 678 (1,619) (1,862)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
----------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Total revenue..................................... $ 40,413 $ 39,252 $ 43,606 $ 40,619
Operating (loss) income........................... (698) 768 341 (8,382)
Net loss.......................................... (2,240) (1,787) (360) (7,099)
</TABLE>
F-62
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(15) QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
In the fourth quarter of 1995, the Company incurred operating and net losses
principally as a result of expenses incurred related to development of the
EchoStar DBS System and lower sales volumes at reduced gross margins. The
Company also increased reserves related to inventory and trade accounts
receivable in the fourth quarter of 1995.
(16) PARENT ONLY FINANCIAL INFORMATION
The following financial information reflects the condensed parent only
balance sheets, statements of income and cash flows for ECC, reflecting the
assumed consummation of the Exchange and Merger retroactive to January 1, 1993.
The Exchange and Merger described in Note 1 was accounted for as a
reorganization of entities under common control.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
--------- --------- ----------
(IN THOUSANDS, EXCEPT SHARES AND
PER SHARE DATA)
<S> <C> <C> <C>
Income Statement Data --
Equity in earnings (losses) of subsidiaries................................. $ 20,118 $ 90 $ (12,361)
Other income................................................................ -- -- 1,321
--------- --------- ----------
Net income (loss) before income taxes....................................... 20,118 90 (11,040)
Provision for income taxes.................................................. -- -- (446)
--------- --------- ----------
Net income (loss)......................................................... $ 20,118 $ 90 $ (11,486)
--------- --------- ----------
--------- --------- ----------
Loss Attributable to Common Shares............................................ $ (848) $ (12,691)
--------- ----------
--------- ----------
Weighted Average Common Shares Outstanding.................................... 32,442 35,562
--------- ----------
--------- ----------
Loss Per Common and Common Equivalent Share................................... $ (0.03) $ (0.36)
--------- ----------
--------- ----------
Pro Forma (Unaudited) Net Income and Earnings
Per Common Share (Note 7)
Historical net income before income taxes................................... $ 20,118
Pro forma income tax effects.............................................. (7,846)
---------
Pro forma net income...................................................... $ 12,272
---------
---------
Pro forma common shares outstanding....................................... 32,221
---------
---------
Pro forma earnings per common share....................................... $ 0.38
---------
---------
</TABLE>
F-63
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(16) PARENT ONLY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Balance Sheet Data --
Current assets:
Cash and cash equivalents.......................................................... $ -- $ 7,802
Marketable investment securities................................................... -- 15,460
Advances to affiliates............................................................. -- 19,545
Other current assets............................................................... -- 191
----------- -----------
Total current assets............................................................. -- 42,998
----------- -----------
Investments in subsidiaries:
Restricted (Note 12)............................................................... 103,577 92,613
Unrestricted....................................................................... 231 280
----------- -----------
103,808 92,893
Other non current assets............................................................. -- 21,111
----------- -----------
Total assets..................................................................... $ 103,808 $ 157,002
----------- -----------
----------- -----------
Current liabilities.................................................................. $ -- $ 316
Stockholders' Equity:
Preferred Stock, 20,000,000 shares authorized, 1,616,681 shares of Series A
Cumulative Preferred Stock issued and outstanding, including accrued dividends of
$938,000 and $2,143,000, respectively............................................. 15,990 17,195
Class A Common Stock, $.01 par value, 200,000,000 shares authorized, 3,739,400 and
10,535,003 shares issued and outstanding, respectively............................ 38 105
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 Purchase Warrants..................................................... 26,133 714
Additional paid-in capital......................................................... 62,197 151,674
Unrealized holding gain on available-for-sale securities, net...................... -- 239
Retained earnings (deficit)........................................................ (848) (13,539)
----------- -----------
Total stockholders' equity....................................................... 103,808 156,686
----------- -----------
Total liabilities and stockholders' equity....................................... $ 103,808 $ 157,002
----------- -----------
----------- -----------
</TABLE>
F-64
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(16) PARENT ONLY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
---------- --------- ----------
<S> <C> <C> <C>
Cash Flows Data --
Cash flows from operating activities:
Net income (loss)......................................................... $ 20,118 $ 90 $ (11,486)
Adjustments --
Equity in (earnings) losses of subsidiaries............................. (20,118) (90) 12,361
Changes in --
Other current assets.................................................. -- -- (191)
Current liabilities................................................... -- -- 316
---------- --------- ----------
Net cash flows from operating activities.......................... -- -- 1,000
---------- --------- ----------
Cash flows from investing activities:
Advances to affiliates...................................................... -- -- (19,545)
Purchases of marketable investment securities, net.......................... -- -- (15,475)
Increase in noncurrent assets............................................... -- -- (21,111)
---------- --------- ----------
Net cash flows from investing activities.......................... -- -- (56,131)
---------- --------- ----------
Cash flows from financing activities:
Net proceeds from issuance of Class A Common Stock.......................... -- -- 62,933
---------- --------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS..................................... -- -- 7,802
CASH AND CASH EQUIVALENTS, beginning of period................................ -- -- --
---------- --------- ----------
CASH AND CASH EQUIVALENTS, end of period...................................... $ -- $ -- $ 7,802
---------- --------- ----------
---------- --------- ----------
</TABLE>
(17) SUBSEQUENT EVENTS
In March 1996, ECC announced that its wholly owned subsidiary, EchoStar
Satellite Broadcasting Corporation ("ESB"), is considering a private offering
(the "Offering") pursuant to Rule 144A under the Securities Act of 1933 of
Senior Secured Discount Notes due 2004 (the "Senior Secured Notes") expected to
provide net proceeds to ESB of $250.0 million. ESB was formed on January 24,
1996 for the purpose of the Offering. ECC will contribute all of the outstanding
capital stock of its wholly owned subsidiary, Dish, Ltd., to ESB.
EchoStar DBS Corporation ("EDC") was formed under Colorado law in January
1996 for purposes of participating in a Federal Communications Commission
auction ("FCC Auction") held on January 24 through January 26, 1996. EDC was
required to post a $10.0 million deposit to participate in the FCC Auction for
28 DBS frequencies at 110 DEG. WL and post a $2.0 million deposit to participate
in the FCC Auction for 24 DBS frequencies at 148 DEG. WL. EDC is a wholly owned
subsidiary of ECC.
On January 26, 1996, EDC submitted the winning bid of $52.3 million dollars
for 24 DBS frequencies at 148 DEG. WL. Previous deposits made with the FCC were
applied to satisfy the 20% down payment. The balance of the bid price must be
remitted to the FCC upon grant of the construction permit, which could occur as
early as April 1996.
Funds necessary to pay the balance of the purchase price are expected to be
provided by ECC from the proceeds of the Senior Secured Notes.
F-65
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EchoStar Satellite Broadcasting Corporation:
We have audited the accompanying balance sheet of ECHOSTAR SATELLITE
BROADCASTING CORPORATION (a Colorado corporation and wholly owned subsidiary of
EchoStar Communications Corporation) as of January 24, 1996. This balance sheet
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of EchoStar Satellite Broadcasting
Corporation as of January 24, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 23, 1996.
F-66
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION
BALANCE SHEET
JANUARY 24, 1996
ASSETS
<TABLE>
<S> <C>
Cash............................................................................... $ 1,000
---------
---------
STOCKHOLDER'S EQUITY
Common stock, $.01 par value, 1,000 shares authorized, issued and outstanding...... $ 1,000
Retained earnings.................................................................. --
---------
Total stockholder's equity..................................................... $ 1,000
---------
---------
</TABLE>
EchoStar Satellite Broadcasting Corporation (the "Issuer") was formed under
Colorado law in January 1996 for purposes of effecting an offering of Senior
Secured Discount Notes (the "Offering"), and is a wholly owned subsidiary of
EchoStar Communications Corporation ("ECC"). ECC will transfer to the Issuer all
of the capital stock of its wholly owned subsidiary Dish, Ltd. Dish, Ltd. is
primarily engaged in the design, assembly, marketing and worldwide distribution
of direct to home ("DTH") satellite television products. Dish, Ltd. is currently
developing a high powered direct broadcast satellite ("DBS") system.
As of January 24, 1996, the only transaction of the Issuer was the issuance
of 1,000 shares of common stock to ECC for $1,000.
F-67
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EchoStar DBS Corporation:
We have audited the accompanying balance sheet of ECHOSTAR DBS CORPORATION
(a Colorado corporation and wholly owned subsidiary of EchoStar Communications
Corporation) as of January 19, 1996. This balance sheet is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of EchoStar DBS Corporation as of
January 19, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 23, 1996.
F-68
<PAGE>
ECHOSTAR DBS CORPORATION
BALANCE SHEET
JANUARY 19, 1996
ASSETS
<TABLE>
<S> <C>
Cash.......................................................................... $ 1,000
FCC Auction deposits.......................................................... 12,000,000
-----------
Total assets.............................................................. $12,001,000
-----------
-----------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Note payable to EchoStar Communications Corporation......................... $12,000,000
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value, 1,000 shares authorized, issued and
outstanding................................................................ 1,000
Retained earnings........................................................... --
-----------
Total liabilities and stockholder's equity................................ $12,001,000
-----------
-----------
</TABLE>
FORMATION OF ECHOSTAR DBS CORPORATION
EchoStar DBS Corporation ("EDC") was formed under Colorado law in January
1996 for purposes of participating in a Federal Communications Commission
auction ("FCC Auction") held on January 24 through January 26, 1996. EDC was
required to post a $10.0 million deposit to participate in the FCC Auction for
28 Direct Broadcast Satellite ("DBS") frequencies at 110 DEG. WL and post a $2.0
million deposit to participate in the FCC Auction for 24 DBS frequencies at
148 DEG. WL. EDC is a wholly owned subsidiary of EchoStar Communications
Corporation ("ECC").
As of January 18, 1996, the only transactions of EDC were the sale of 1,000
shares of common stock to ECC, the execution of the note payable described
below, and the deposit of the loan proceeds with the FCC.
On January 26, 1996, EDC submitted the winning bid of $52.3 million for 24
DBS frequencies at 148 DEG. WL. Previous deposits made with the FCC will be
applied to satisfy the 20% down payment. The balance of the bid price must be
remitted to the FCC upon grant of the construction permit, which could occur as
early as April 1996.
Funds necessary to pay the balance of the purchase price are expected to be
provided by ECC from an Offering of Senior Secured Discount Notes by EchoStar
Satellite Broadcasting Corporation, another wholly owned subsidiary of ECC.
EDC's common stock will be pledged as part of the collateral for the Senior
Secured Discount Notes and EDC will be a guarantor of the Senior Secured
Discount Notes.
NOTE PAYABLE TO ECHOSTAR
On January 19, 1996, EDC borrowed $12.0 million from ECC. The loan proceeds
were used to make deposits on January 19, 1996, related to the FCC Auction
described above. The note payable is due December 31, 1996, with interest
payable quarterly to ECC at the prime rate.
F-69
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Direct Broadcasting Satellite Corporation (Colorado):
We have audited the accompanying balance sheet of DIRECT BROADCASTING
SATELLITE CORPORATION (a Colorado corporation and wholly owned subsidiary of
EchoStar Communications Corporation) as of December 31, 1995. This balance sheet
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Direct Broadcasting Satellite
Corporation (Colorado) as of December 31, 1995, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 23, 1996.
F-70
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION (COLORADO)
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
<TABLE>
<S> <C>
Cash............................................................................... $ 1,000
---------
---------
STOCKHOLDER'S EQUITY
Common stock, $.01 par value, 1,000 shares authorized, issued and outstanding...... $ 1,000
Retained earnings.................................................................. --
---------
Total stockholder's equity..................................................... $ 1,000
---------
---------
</TABLE>
Direct Broadcasting Satellite Corporation (Colorado) ("DBSC (Colorado)") was
formed in December 1995 by EchoStar Communications Corporation ("ECC") for
purposes of effecting a merger with Direct Broadcasting Satellite Corporation
("DBSC"), a Delaware corporation. In December 1995, ECC acquired approximately
40% of the outstanding common stock of DBSC from ECC's wholly owned subsidiary,
Dish, Ltd., for $4,210,000. This amount represented the cost to Dish, Ltd. of
the DBSC common stock. DBSC holds a conditional satellite construction permit
and specific orbital slot assignments for 11 DBS frequencies at each of
61.5 DEG. WL and 175 DEG. WL.
In 1996, ECC expects to acquire the remaining 60% interest in DBSC in
exchange for the issuance of approximately 675,000 shares of its Class A Common
Stock to DBSC shareholders. This acquisition will be accounted for as a purchase
and recorded at the fair value of the ECC Class A Common Stock issued to the
DBSC shareholders. In connection with the acquisition, ECC will merge DBSC with
DBSC (Colorado). The merger has been approved by DBSC shareholders but may not
be completed until the FCC has approved the merger.
As of January 24, 1996, the only transaction of DBSC (Colorado) was the
issuance of 1,000 shares of common stock to ECC for $1,000.
Following the merger, ECC will also assign to DBSC the construction contract
for EchoStar III, a high powered DBS satellite scheduled for launch in 1997.
DBSC will provide a non-recourse guarantee of Senior Secured Notes to be offered
by EchoStar Satellite Broadcasting Corporation, another wholly owned subsidiary
of ECC.
F-71
<PAGE>
The following financial statements of Direct Broadcasting Satellite
Corporation ("DBSC") are included as part of the Registration Statement in
connection with a pending merger of DBSC with a wholly owned subsidiary of
EchoStar Communications Corporation (the "Merger"), and are included for
informational purposes only. No assurances can be given that the Merger will be
consummated, or if consummated, the date that such consummation will occur.
F-72
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Direct Broadcasting Satellite Corporation
Washington, D.C.
We have audited the accompanying balance sheets of Direct Broadcasting
Satellite Corporation, a development stage company, as of March 31, 1995, and
December 31, 1995, and the related statements of income and cash flows for each
of the two years ended March 31, 1995 and the nine months ended December 31,
1995 and the statements of stockholders' equity for each of the five years ended
March 31, 1995 and the nine months ended December 31, 1995. See Note 2. These
financial statements are the responsibility of the Company's 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 audits 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 financial position of Direct Broadcasting
Satellite Corporation, as of March 31, 1995 and December 31, 1995, and the
results of its operations and its cash flows for the two years in the period
ended March 31, 1995 and the nine months ended December 31, 1995, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. The Corporation's recurring
operating losses raise substantial doubt about its ability to continue as a
going concern at December 31, 1995. Management's plans in regard to these
matters are described in Note 1 of the notes to financial statements. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
REGARDIE, BROOKS & LEWIS,
CHARTERED CERTIFIED PUBLIC ACCOUNTANTS
Bethesda, Maryland,
January 23, 1996.
F-73
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, 1995 1995
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash............................................................................ $ 119,892 $ 72,950
Money Market Funds --
Crestfunds, Inc. -- Cash Reserves Fund........................................ 2,131,988 285,978
Pacific Horizon Prime Fund.................................................... -- 7,081
-------------- --------------
Total current assets........................................................ 2,251,880 366,009
-------------- --------------
PROPERTY AND EQUIPMENT, AT COST:
Satellite development in process (Note 4)....................................... 372,625 17,882,707
Computer equipment.............................................................. 5,073 5,073
Less: Accumulated depreciation.................................................. (1,725) (2,730)
-------------- --------------
Cost less accumulated depreciation............................................ 375,973 17,885,050
-------------- --------------
OTHER ASSETS:
FCC license (Note 3)............................................................ 687,136 865,571
Unamortized loan costs.......................................................... -- 67,058
Deferred tax benefit (Note 7)................................................... -- --
Security deposits............................................................... 2,575 2,575
-------------- --------------
Total other assets............................................................ 689,711 935,204
-------------- --------------
Total assets................................................................ $ 3,317,564 $ 19,186,263
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 79,589 $ 140,958
Unsecured notes payable (Note 6A)............................................... -- 500,000
Accrued interest................................................................ -- 237,226
Unsecured note payable (Note 6B) (in arrears)................................... 350,000 325,000
Accrued interest in arrears (Note 6)............................................ 340,537 341,074
Due to shareholder.............................................................. 7,380 3,024
-------------- --------------
Total current liabilities................................................... 777,506 1,547,282
-------------- --------------
LONG-TERM DEBT:
Secured note payable (Note 5)................................................... -- 16,000,000
Unsecured notes payable (Note 6A)............................................... 500,000 --
Accrued interest (Notes 5 & 6).................................................. 199,680 10,082
-------------- --------------
Total long-term debt.......................................................... 699,680 16,010,082
-------------- --------------
Total liabilities........................................................... 1,477,186 17,557,364
-------------- --------------
COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 3,000,000 shares authorized; shares issued and
outstanding, 1,618,138 and 1,620,138, respectively............................. 16,181 16,201
Additional paid in capital...................................................... 5,833,066 5,849,046
Accumulated deficit (Note 1).................................................... (2,755,808) (2,755,808)
Accumulated deficit during development stage.................................... (1,253,061) (1,480,540)
-------------- --------------
Total stockholders' equity.................................................... 1,840,378 1,628,899
-------------- --------------
Total liabilities and stockholders' equity.................................. $ 3,317,564 $ 19,186,263
-------------- --------------
-------------- --------------
</TABLE>
See the accompanying report of independent public accountants.
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31 APRIL 1, 1990
-------------------------- NINE MONTHS ENDED (INCEPTION) TO
1994 1995 DECEMBER 31, 1995 DECEMBER 31, 1995
------------ ------------ ----------------- -----------------
(NOTE 2) (NOTE 1)
<S> <C> <C> <C> <C>
REVENUE:
Gain on settlement of indebtedness........... $ -- $ -- $ 31,656 $ 31,656
Investment income............................ -- 31,988 56,071 88,059
------------ ------------ ----------------- -----------------
Total revenue.............................. -- 31,988 87,727 119,715
------------ ------------ ----------------- -----------------
OPERATING EXPENSES:
Interest expense............................. 131,103 85,031 59,739 612,256
Legal fees................................... 12,769 151,972 23,251 385,892
Consulting fees.............................. 36,370 148,303 167,654 417,327
Professional services........................ 1,800 16,210 6,566 34,021
Rent......................................... 2,206 19,369 24,975 46,550
Taxes and licenses........................... 3,722 520 455 7,034
Other administrative expenses................ 13,440 32,765 31,561 94,445
Depreciation................................. 154 1,571 1,005 2,730
------------ ------------ ----------------- -----------------
Total operating expenses................. 201,564 455,741 315,206 1,600,255
------------ ------------ ----------------- -----------------
NET LOSS BEFORE INCOME TAXES................... (201,564) (423,753) (227,479) (1,480,540)
PROVISION FOR INCOME TAXES (Note 7)............ -- -- -- --
------------ ------------ ----------------- -----------------
NET LOSS....................................... $ (201,564) $ (423,753) $ (227,479) $ (1,480,540)
------------ ------------ ----------------- -----------------
------------ ------------ ----------------- -----------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING..... 901,555 1,272,701 1,618,583 1,024,845
------------ ------------ ----------------- -----------------
------------ ------------ ----------------- -----------------
LOSS PER COMMON SHARE.......................... $ (0.23) $ (0.33) $ (0.14) $ (1.44)
------------ ------------ ----------------- -----------------
------------ ------------ ----------------- -----------------
</TABLE>
See the accompanying report of independent public accountants.
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FIVE YEARS ENDED MARCH 31, 1995
AND THE NINE MONTH PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
COMMON STOCK ADDITIONAL DURING TOTAL
---------------------- PAID IN ACCUMULATED DEVELOPMENT STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT STAGE EQUITY
--------- ----------- ---------- ------------ ------------ ------------
(NOTE 1)
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1990................ 709,888 $ 7,099 $1,127,742 $(2,755,808) $ -- $(1,620,967)
Issuance of common stock --
October 15, 1990 at $0.01 per
share............................... 150,000 1,500 (1,500) -- -- --
Net loss for the period April 1, 1990
through March 31, 1991................ -- -- -- -- (384,427) (384,427)
--------- ----------- ---------- ------------ ------------ ------------
Balance at March 31, 1991................ 859,888 8,599 1,126,242 (2,755,808) (384,427) (2,005,394)
--------- ----------- ---------- ------------ ------------ ------------
Net loss for the period April 1, 1991
through March 31, 1992................ -- -- -- -- (125,826) (125,826)
--------- ----------- ---------- ------------ ------------ ------------
Balance at March 31, 1992................ 859,888 8,599 1,126,242 (2,755,808) (510,253) (2,131,220)
--------- ----------- ---------- ------------ ------------ ------------
Net loss for the period April 1, 1992
through March 31, 1993................ -- -- -- -- (117,491) (117,491)
--------- ----------- ---------- ------------ ------------ ------------
Balance at March 31, 1993................ 859,888 8,599 1,126,242 (2,755,808) (627,744) (2,248,711)
--------- ----------- ---------- ------------ ------------ ------------
Issuance of common stock --
December 21, 1993 at $2.00 per
share............................... 125,000 1,250 248,750 -- -- 250,000
Net loss for the period April 1, 1993
through March 31, 1994................ -- -- -- -- (201,564) (201,564)
--------- ----------- ---------- ------------ ------------ ------------
Balance at March 31, 1994................ 984,888 9,849 1,374,992 (2,755,808) (829,308) (2,200,275)
--------- ----------- ---------- ------------ ------------ ------------
Issuance of common stock --
April 12, 1994 at $3.00 per share.... 25,000 250 74,750 -- -- 75,000
June 13, 1994 at $4.00 per share..... 18,750 187 74,813 -- -- 75,000
August 5, 1994 at $4.00 per share.... 6,250 63 24,937 -- -- 25,000
November 15, 1994 at $7.14 per share,
net................................. 583,250 5,832 4,283,574 -- -- 4,289,406
Net loss for the period April 1, 1994
through March 31, 1995................ -- -- -- -- (423,753) (423,753)
--------- ----------- ---------- ------------ ------------ ------------
Balance at March 31, 1995................ 1,618,138 16,181 5,833,066 (2,755,808) (1,253,061) 1,840,378
--------- ----------- ---------- ------------ ------------ ------------
Issuance of Common Stock --
November 16, 1995 at $8.00 per
share............................... 2,000 20 15,980 -- -- 16,000
Net loss for the period April 1, 1995
through December 31, 1995........... -- -- -- -- (227,479) (227,479)
--------- ----------- ---------- ------------ ------------ ------------
Balance at December 31, 1995............. 1,620,138 $ 16,201 $5,849,046 $(2,755,808) $(1,480,540) $1,628,899
--------- ----------- ---------- ------------ ------------ ------------
--------- ----------- ---------- ------------ ------------ ------------
</TABLE>
See the accompanying report of independent public accountants.
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995,
AND THE NINE MONTH PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, APRIL 1, 1990
--------------------- NINE MONTHS ENDED (INCEPTION) TO
1994 1995 DECEMBER 31, 1995 DECEMBER 31, 1995
--------- ---------- ----------------- -----------------
(NOTE 2) (NOTE 1)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $(201,564) $ (423,753) $ (227,479) $ (1,480,540)
Adjustments to reconcile net loss to net cash applied
to operating activities:
Depreciation....................................... 154 1,571 1,005 2,730
Gain on settlement of indebtedness................. -- -- (31,656) (31,656)
Noncash consulting fees............................ -- -- 16,000 16,000
(Decrease) increase in accounts payable............ (51,331) 5,416 3,268 (49,074)
Increase in accrued interest payable............... 131,103 64,311 59,739 589,297
Increase (decrease) due to shareholders............ 1,667 4,378 (4,356) (5,230)
--------- ---------- ----------------- -----------------
Net cash applied to operating activities......... (119,971) (348,077) (183,479) (958,473)
--------- ---------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of furniture and equipment............... (3,089) (1,984) -- (5,073)
Increase in satellite development costs.............. (63,500) (41,750) (17,517,375) (17,872,625)
Increase in FCC license.............................. (106,097) (371,630) (170,017) (665,244)
--------- ---------- ----------------- -----------------
Net cash used in investing activities............ (172,686) (415,364) (17,687,392) (18,542,942)
--------- ---------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in secured notes payable.................... -- -- 16,000,000 16,000,000
Issuance of common stock............................. 250,000 3,134,999 -- 3,384,999
Increase notes payable............................... 76,250 -- -- 652,500
Increase in contract payable......................... -- -- -- 62,500
Payment of contract payable.......................... -- -- -- (62,500)
Payment of note payable.............................. -- (152,500) (15,000) (167,500)
Increase in security deposit......................... (1,463) (1,112) -- (2,575)
--------- ---------- ----------------- -----------------
Net cash provided by financing activities........ 324,787 2,981,387 15,985,000 19,867,424
--------- ---------- ----------------- -----------------
NET INCREASE (DECREASE) IN CASH........................ 32,130 2,217,946 (1,885,871) 366,009
CASH AT BEGINNING OF YEAR.............................. 1,804 33,934 2,251,880 --
--------- ---------- ----------------- -----------------
CASH AT END OF YEAR.................................... $ 33,934 $2,251,880 $ 366,009 $ 366,009
--------- ---------- ----------------- -----------------
--------- ---------- ----------------- -----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest............... $ -- $ 20,719 $ -- $ 22,958
--------- ---------- ----------------- -----------------
--------- ---------- ----------------- -----------------
SUPPLEMENTAL SCHEDULE OF NONCASH AND FINANCING
ACTIVITIES:
Additional common stock was issued upon the
conversion of notes payable in the amount of
$700,000, plus related accrued interest totaling
$629,406............................................ $ -- $1,329,406 $ -- $ 1,329,406
Additional common stock was issued in exchange for
consulting services................................. -- -- 16,000 16,000
Disclosure of accounting policy:
For the purposes of the statement of cash flows, the
Company considers money market funds to be cash
equivalents
</TABLE>
See the accompanying report of independent public accountants.
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995 AND DECEMBER 31, 1995
(1) ORGANIZATION
Direct Broadcasting Satellite Corporation (the "Company" or "DBSC"), a
development stage company, was incorporated January 23, 1981 in the state of
Delaware. It is constructing satellites, and plans to operate a direct-to-home,
multi-channel satellite broadcast television service. Funding of the Company's
operations has been obtained through the private placement of common stock and
issuance of convertible debt, demand notes and accounts payable.
On December 21, 1995, the Company and EchoStar Communications Corporation
("EchoStar"), a 39.8% shareholder, agreed to a merger, subject to receipt of
requisite government approval. EchoStar holds direct broadcasting satellite
authorizations for 21 channels at 119 DEG. W.L. Under the terms of the Merger
Agreement, (1) the Company and EchoStar agreed to merge DBSC into a wholly-owned
subsidiary of EchoStar, and (2) the Company's shareholders will be entitled to
receive at their option $7.99 in cash or .67417 EchoStar shares for each of the
Company's 975,148 shares not already owned by EchoStar.
EchoStar also agreed, at its sole discretion, to loan the Company up to
$150,000,000 for expenses associated with the construction, launch, and
insurance of the Company's spacecraft. On December 29, 1995, the Company drew
down $16 million under its loan purchase agreement with EchoStar and paid
Lockheed Martin Corporation $16 million on the same day.
Without the EchoStar or other financing, the Company's ability to meet its
existing obligations and proceed with the construction of the satellite is
doubtful. In such case, the ultimate realization of the capitalized FCC license
application costs, as well as the deferred satellite development costs, are
doubtful, and the continuance of the Company as an operating entity would be
uncertain.
The Company's development activities were dormant for a period of years
ended March 31, 1990. During the year ended March 31, 1991, the Company began
development of two new satellites. In accordance with SFAS No. 7, development
stage activities for presentation purposes on the statements of income and
statements of stockholders' equity are for the period April 1, 1990 to December
31, 1995. Prior development stage activity losses amounting to $2,755,808 are
reflected in stockholders' equity as accumulated deficit.
(2) SIGNIFICANT ACCOUNTING POLICIES
Effective April 1, 1995, the Company changed its fiscal year to December 31
from March 31. All balances for the nine months ended December 31, 1995 include
activity from April 1, 1995 to December 31, 1995.
Loan costs will be amortized over the 8-year life of the $16 million secured
note, effective January 1, 1996.
Management uses estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could differ from those
estimates.
(3) FCC LICENSE
The Company's application for authority to construct and operate a direct
broadcast satellite system was approved by the Federal Communications Commission
("FCC") and a conditional construction permit for two spacecraft was released on
August 15, 1989. On November 10, 1993, the FCC found that the Company had
complied with the necessary due diligence requirements and assigned
F-78
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND DECEMBER 31, 1995
(3) FCC LICENSE (CONTINUED)
specific orbit/spectrum resources to the Company. On December 8, 1995, the FCC
staff granted the Company an extension of time through November 1998, to
construct and launch two spacecrafts. Pursuant to a FCC request, on January 31,
1994 the Company submitted certain technical data to the FCC and asked for
launch authority.
On June 30, 1995, the Company notified the FCC that it had signed a
spacecraft contract modification and sought approval thereof. The FCC has not
yet acted on either request. Certain costs incurred in connection with filing
the FCC license application and maintaining the authority have been capitalized.
Amortization periods for these costs will be determined at the time the services
related to the applicable FCC license commences, or capitalized costs will be
written off at the time efforts to provide services are abandoned. FCC licenses
are expected to have a useful life of approximately 12 years.
(4) SATELLITE DEVELOPMENT COSTS
The Company has entered into a contract for the construction of two
satellites. The contract, as amended May 31, 1995, provides for periodic,
non-refundable payments over a period extending to October 30, 2003, as well as
cancellation penalties if the contract is terminated before the satellites are
launched. As of December 31, 1995, payments made under the terms of the contract
totaled $17,838,500. The contract calls for additional payments of $30,000,000
in the year ending December 31, 1996. The total commitment under the contract is
in excess of $160 million.
At December 31, 1995, total satellite development costs amounted to
$17,882,707, including capitalized interest of $10,082.
During construction and prior to launch, the Company has granted to the
Contractor a full security interest in all hardware, software and work in
process (collectively "Security") related to the two satellites. In the event of
certain defaults by the Company, the Contractor shall immediately assume
ownership of the entire Security.
(5) SECURED NOTE PAYABLE
On December 29, 1995, the Company borrowed $16,000,000, per the terms of a
note purchase agreement and a security agreement between EchoStar and the
Company. The promissory note is secured by an assignment, pledge and grant of
security interest in all the estate, right, title, and interest of the Company,
whether now owned or hereafter acquired, in, to and under (1) the Satellites and
DBS Rights, (2) all agreements, contracts and documents related to the
Satellites, DBS Rights, and business of the Company, (3) all income and revenues
from all business operations, and (4) all tangible and/or intangible property of
the Company, including the Satellites. However, the security in the Satellites
is subordinate to the security interest in and to the Satellites held by Martin
Marietta.
Interest accrues at Chase Manhattan Bank prime rate plus 3 percent as of the
date of the loan. Principal and interest is payable in equal installments
beginning on December 29, 1997, and ending on December 29, 2003. The December
29, 1997 installment related to the $16,000,000 loan will be approximately
$3,713,300, including interest at 11.5%.
(6) UNSECURED NOTES PAYABLE
A. UNSECURED NOTE PAYABLE
Note payable in the amount of $500,000 is payable 90 days after the
successful launch and check-out of the Company's first Direct Broadcast
Satellite-Broadcast Satellite System, or on demand in
F-79
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND DECEMBER 31, 1995
(6) UNSECURED NOTES PAYABLE (CONTINUED)
certain other limited circumstances. Interest is payable at Chase Manhattan Bank
prime rate plus 1% per annum or 4% after maturity, or in the event of default.
At December 31, 1995, the note payable and the related accrued interest were
payable on demand. At March 31, 1995, both the principal and interest were
classified as long-term debt since the launching of the satellite was not within
one year of the balance sheet date.
B. CONVERTIBLE NOTES PAYABLE
Convertible notes payable at December 31, 1995 amounted to $325,000, and at
March 31, 1995 amounted to $350,000. At December 31, 1995, notes totalling
$100,000 accrue interest at 75% of Chase Manhattan Bank prime rate, and notes
totalling $225,000 accrue interest at 100% of the prime rate.
Until November 15, 1994, notes totalling $475,000 accrue interest at 75% of
Chase Manhattan Bank prime rate, and notes totalling $500,000 accrue interest at
100% of the prime rate. The notes were issued on various dates from October 1,
1982 to March 6, 1984 and were due 24 months from date of issue. Interest
payments have not been made over the years. However, interest has been accrued
and is reflected in the accompanying financial statements. Both the principal
and interest are classified as currently payable since the notes are in arrears.
The notes provide that until they are paid in full, a note holder at his
option may convert principal into shares of the authorized common stock of the
Company as follows: $100,000 of principal at $6.67 per share, and $225,000 of
principal at $8.33 per share. On November 15, 1994, certain notes were converted
to common stock.
(7) INCOME TAXES
Effective April 1, 1992, the Company adopted SFAS No. 109, "Accounting for
Income Taxes", which requires an asset and liability approach to financial
accounting and reporting for income taxes. The difference between the financial
statement and tax bases of assets and liabilities are computed for those
differences that have future tax consequences using the currently enacted tax
laws and rates that apply to the periods in which they are expected to affect
taxable income. Valuation allowances are established, if necessary, to reduce
the deferred tax asset to the amount that will more likely than not be realized.
Income tax expense is the current tax payable or refundable for the period, plus
or minus the net change in the deferred tax assets and liabilities.
The adoption of SFAS No. 109 did not have an effect on the Company's
financial statements because the deferred income tax benefit has been offset by
a valuation allowance of equal amount. The valuation allowance was established
to reduce the deferred tax benefit to the amount that will more likely than not
be realized. This reduction is necessary due to the uncertainty of the Company's
ability to utilize all of the future tax deduction resulting from net operating
losses.
The gross deferred income tax benefit was approximately $849,382 at December
31, 1995, and $781,002 at March 31, 1995.
The deferred income tax benefit results primarily from net operating losses
for tax purposes. The net operating loss carryover to future years is $2,202,393
at December 31, 1995, none of which will expire until the year 1999. In
addition, the Company has not claimed as a tax deduction accrued interest
payable of $578,300. For income tax purposes, the Company reports its net income
(loss) on the cash basis.
F-80
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1995 AND DECEMBER 31, 1995
(8) CONTINGENT LIABILITIES
In 1982, the Company entered into agreements with two French corporations
pursuant to which each corporation, in exchange for the Company's commitment to
procure satellite hardware, paid to a satellite launch provider, for the benefit
of the Company, a launch reservation fee of $100,000. The first agreement, as
amended, specified that payment of the $100,000 plus interest of 13% per annum
was due on December 31, 1983. The second agreement provided that the Company was
obligated to issue 6,000 (as adjusted) shares of common stock no later than two
years from the date of the agreement.
No equipment was procured from either corporation, no shares of common stock
have been issued nor has the Company returned the $100,000 payment to either
corporation. The Company has not determined whether either obligation is
currently enforceable under French law. The Company is unaware of any request
for payment or for the issuance of the Company's shares from August 3, 1987 to
date.
(9) STOCKHOLDERS' EQUITY
In November 1994, the Company resolved a suit brought by EchoStar against
the Company regarding enforceability of certain notes and accounts payable of
the Company. Pursuant to the settlement, the payables were exchanged for shares
of the Company's common stock and EchoStar purchased additional shares of the
Company for $2,960,000 so that, together with the shares of DBSC previously
acquired, EchoStar presently owns approximately 40% of the outstanding common
stock of DBSC. As part of this settlement the Company issued an option to sell
at a fixed price of $2,000,000 the greater of 11.3% of its issued and
outstanding common stock at the date of exercise, or 333,333 shares of common
stock, and an Optional Merger Election, whereby the Company or the Purchaser's
wholly owned subsidiary can elect to merge with each other provided certain
conditions precedent have been met. On December 21, 1995, the Company and
EchoStar entered into a Merger Agreement. See Note 1.
Legal fees expense has been charged $125,000 for costs incurred in
connection with the above transaction.
(10) RELATED PARTY TRANSACTIONS
Consulting fees are paid to certain shareholders and officers.
F-81
<PAGE>
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
DISH, LTD. AND SUBSIDIARIES
F-82
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 13,949 $ 2,155
Marketable investment securities.......................... 210 212
Trade accounts receivable, net............................ 10,435 13,131
Inventories............................................... 38,769 27,298
Income tax receivable..................................... 3,870 4,504
Deferred tax assets....................................... 1,834 4,415
Other current assets...................................... 12,791 12,429
------------ -----------
Total current assets.................................. 81,858 64,144
RESTRICTED CASH AND MARKETABLE SECURITIES:
1994 Notes escrow......................................... 73,291 63,617
Other..................................................... 26,400 41,900
PROPERTY AND EQUIPMENT, net................................. 333,199 333,231
OTHER NONCURRENT ASSETS..................................... 44,547 45,142
------------ -----------
Total assets.......................................... $559,295 $548,034
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................................... $ 19,063 $ 12,280
Deferred programming revenue.............................. 5,563 7,416
Accrued expenses and other current liabilities............ 21,335 6,688
Notes payable and current portion of long-term debt....... 4,782 4,783
------------ -----------
Total current liabilities............................. 50,743 31,167
LONG-TERM DEFERRED PROGRAMMING REVENUE...................... -- 3,790
1994 NOTES, net............................................. 382,218 395,333
LONG-TERM MORTGAGE DEBT AND NOTE PAYABLE, excluding current
portion.................................................... 33,444 32,421
------------ -----------
Total liabilities..................................... 466,405 462,711
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDER'S EQUITY (Note 1):
Preferred Stock, 20,000,000 and no shares authorized,
1,616,681 and no shares of Series A Cumulative Preferred
Stock issued and outstanding, including accrued dividends
of $1,555,000 and $0, respectively....................... 16,607 --
Class A Common Stock, $.01 par value, 200,000,000 and no
shares authorized, 6,470,599 and no shares issued and
outstanding, respectively................................ 65 --
Class B Common Stock, $.01 par value, 100,000,000 and no
shares authorized, 29,804,401 and no shares issued and
outstanding, respectively . 298 --
Common Stock, $.01 par value, none and 1,000 shares
authorized, issued and outstanding, respectively......... -- --
Additional paid-in capital................................ 89,495 106,465
Unrealized holding gains on available-for-sale securities,
net of deferred taxes.................................... 251 (26)
Retained earnings (deficit)............................... (13,826) (21,116)
------------ -----------
Total stockholder's equity............................ 92,890 85,323
------------ -----------
Total liabilities and stockholder's equity............ $559,295 $548,034
------------ -----------
------------ -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-83
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
REVENUE:
DTH products and technical services...................................................... $ 36,277 $ 36,741
Programming.............................................................................. 3,871 3,913
Loan origination and participation income................................................ 265 372
--------- ---------
Total revenue........................................................................ 40,413 41,026
--------- ---------
EXPENSES:
DTH products and technical services...................................................... 29,445 32,750
Programming.............................................................................. 3,432 3,283
Selling, general and administrative...................................................... 7,871 10,571
Depreciation............................................................................. 363 3,330
--------- ---------
Total expenses....................................................................... 41,111 49,934
--------- ---------
OPERATING LOSS............................................................................. (698) (8,908)
--------- ---------
OTHER INCOME (EXPENSE):
Interest income.......................................................................... 3,638 1,708
Interest expense, net of amounts capitalized............................................. (6,563) (4,941)
Other, net............................................................................... 28 (1)
--------- ---------
Total other income (expense)......................................................... (2,897) (3,234)
--------- ---------
NET LOSS BEFORE INCOME TAXES............................................................... (3,595) (12,142)
BENEFIT FOR INCOME TAXES................................................................... 1,355 4,852
--------- ---------
NET LOSS................................................................................... $ (2,240) $ (7,290)
--------- ---------
--------- ---------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-84
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
RETAINED
EARNINGS
(DEFICIT)
AND
ADDITIONAL UNREALIZED TOTAL
PREFERRED COMMON PAID-IN HOLDING STOCKHOLDER'S
STOCK STOCK CAPITAL LOSSES EQUITY
SHARES OF ----------- ----------- ----------- ----------- -------------
COMMON STOCK
OUTSTANDING
-------------
(NOTE 1)
<S> <C> <C> <C> <C> <C> <C>
BALANCES, at December 31, 1995......... 36,275 $ 16,607 $ 363 $ 89,495 $ (13,575) $ 92,890
Exchange of Common Stock (Note 1).... (36,274) (16,607) (363) 16,970 --
Unrealized holding losses on
available-for-sale securities,
net................................. (277) (277)
Net loss............................. (7,290) (7,290)
------------- ----------- ----------- ----------- ----------- -------------
BALANCES, at March 31, 1996............ 1 $ -- $ -- $ 106,465 $ (21,142) $ 85,323
------------- ----------- ----------- ----------- ----------- -------------
------------- ----------- ----------- ----------- ----------- -------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-85
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................... $ (2,240) $ (7,290)
Adjustments to reconcile net loss to net cash flows from operating activities --
Depreciation......................................................................... 363 3,330
Provision for doubtful accounts...................................................... 111 610
Benefit for deferred taxes........................................................... (2,493) (2,800)
Amortization of deferred debt issuance costs on 1994 Notes........................... 315 315
Amortization of discount on 1994 Notes, net of amounts capitalized................... 6,131 4,189
Equity in earnings of joint venture.................................................. (15) --
Change in reserve for excess and obsolete inventory.................................. 233 227
Long-term deferred programming revenue............................................... -- 3,790
Other, net........................................................................... 26 (170)
Changes in working capital items --
Trade accounts receivable.......................................................... (728) (2,081)
Inventories........................................................................ (4,238) 11,244
Income tax receivable.............................................................. -- (634)
Other current assets............................................................... (730) 362
Liability under cash management program............................................ (57) --
Trade accounts payable............................................................. (1,061) (6,783)
Deferred programming revenue....................................................... (657) 1,853
Accrued expenses................................................................... 1,221 109
Other current liabilities.......................................................... 38 244
---------- ----------
Net cash flows from operating activities....................................... (3,781) 6,515
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities.......................................... (15,211) (2)
Sales of marketable investment securities.............................................. 27,777 --
Purchases of restricted marketable investment securities............................... -- (15,500)
Purchases of property and equipment.................................................... (538) (2,715)
Investment earnings placed in escrow................................................... (2,714) (1,057)
Funds released from escrow account..................................................... 16,257 10,285
Expenditures for satellite systems under construction.................................. (19,621) (7,928)
Expenditures for FCC authorizations.................................................... -- (370)
---------- ----------
Net cash flows from investing activities....................................... 5,950 (17,287)
---------- ----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-86
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgage indebtedness and note payable..................................... $ (57) $ (1,022)
--------- ---------
Net cash flows from financing activities............................................. (57) (1,022)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... 2,112 (11,794)
CASH AND CASH EQUIVALENTS, beginning of period............................................. 17,506 13,949
--------- ---------
CASH AND CASH EQUIVALENTS, end of period................................................... $ 19,618 $ 2,155
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized....................................... $ 106 $ 354
Cash paid for income taxes............................................................... 39 --
Cumulative Series A Preferred Stock dividends............................................ 301 --
Satellite launch payment for EchoStar II applied to EchoStar I launch.................... -- 15,000
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-87
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND MARCH 31, 1996
(1) ORGANIZATION AND PRESENTATION OF FINANCIAL STATEMENTS
Dish, Ltd. ("Dish") successfully launched its first direct broadcast
satellite ("DBS"), EchoStar I, in December 1995 and, on March 4, 1996, began
broadcasting its DBS programming (the "Dish Network-SM-") to the entire
continental United States. The Dish Network-SM- currently includes over 100
channels of high quality digital video and audio programming and will expand to
approximately 200 digital video and audio channels following the successful
launch of a second DBS satellite, DirectSat I ("EchoStar II"), currently
scheduled in the fall of 1996.
In addition to its DBS business, Dish is engaged in the design, manufacture,
distribution and installation of satellite direct to home ("DTH") products,
domestic distribution of DTH programming and consumer financing of Dish's
domestic DTH products and services. In the first quarter of 1996, Dish's
ultimate parent corporation, EchoStar Communications Corporation ("EchoStar")
formed a wholly owned subsidiary, Dish Network Credit Corporation ("DNCC"), for
the purpose of providing consumer financing for EchoStar's domestic DTH products
and services. At that time, Dish's subsidiary that previously provided these
services ceased new loan origination activities. In future periods, Dish's
revenue from loan origination and participation income will decline.
In January 1996, Dish's Articles of Incorporation were amended whereby
EchoStar exchanged all previously outstanding capital stock of Dish for 1,000
shares of Dish's new $.01 par value Common Stock. The accompanying March 31,
1996 balance sheet reflects this exchange.
In January 1996, EchoStar formed a wholly owned subsidiary, EchoStar
Satellite Broadcasting Corporation ("ESB"), for the purpose of completing a
private offering (the "1996 Notes Offering"), pursuant to Rule 144A of the
Securities Act of 1933, as amended (the "Securities Act"), of 13 1/8% Senior
Secured Discount Notes due 2004 (the "1996 Notes"), resulting in net proceeds of
approximately $337.0 million. The 1996 Notes Offering was consummated in March
1996. Proceeds from the 1996 Notes Offering will be used for: (i) continued
development, marketing and distribution of the Dish Network-SM-; (ii) EchoStar's
purchase of DBS frequencies at 148 DEG. WL; (iii) construction, launch and
insurance of EchoStar III and EchoStar IV; (iv) additional launch costs of
EchoStar II; and (v) other general corporate purposes. The additional
frequencies were acquired by EchoStar at a public auction held by the Federal
Communications Commission ("FCC") in January 1996 (the "FCC Auction"). In
connection with the 1996 Notes Offering, EchoStar contributed all of the
outstanding capital stock of Dish to ESB. This transaction has been accounted
for as a reorganization of entities under common control whereby Dish has been
treated as the predecessor to ESB. ESB is subject to all, and EchoStar is
subject to certain of, the terms and conditions of the Indenture related to the
1996 Notes (the "1996 Notes Indenture"). On April 24, 1996, ESB filed a
Registration Statement on Form S-1 under the Securities Act to exchange the 1996
Notes for publicly registered notes.
In June 1995, EchoStar completed an offering of its Class A Common Stock,
resulting in net proceeds of approximately $63.0 million (the "Equity
Offering"). In June 1994, Dish completed an offering of 12 7/8% Senior Secured
Discount Notes due 2004 (the "1994 Notes") and Warrants (collectively, the "1994
Notes Offering"), resulting in net proceeds of approximately $323.3 million.
Dish and most of its subsidiaries are subject to the terms and conditions of the
Indenture related to the 1994 Notes (the "1994 Notes Indenture").
EchoStar presently owns approximately 40% of the outstanding common stock of
Direct Broadcasting Satellite Corporation ("DBSC"). DBSC's principal assets
include an FCC conditional satellite construction permit and specific orbital
slot assignments for eleven DBS frequencies at 61.5 DEG. WL and eleven DBS
frequencies at 175 DEG. WL (the "DBS Rights"). EchoStar intends to merge DBSC
with Direct Broadcasting Satellite Corporation ("New DBSC"), a wholly owned
subsidiary of EchoStar (the
F-88
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(1) ORGANIZATION AND PRESENTATION OF FINANCIAL STATEMENTS (CONTINUED)
"DBSC Merger"). The DBSC Merger has been approved by DBSC shareholders but will
not be consummated until the FCC has approved the DBSC Merger. Although no
assurances can be given, EchoStar expects the FCC to issue an order with respect
to the DBSC Merger in the near future. Assuming FCC approval of the DBSC Merger,
EchoStar will hold, through New DBSC, DBSC's DBS Rights. On April 16, 1996,
EchoStar filed a Registration Statement on Form S-4 under the Securities Act
covering 658,000 shares of EchoStar Class A Common Stock that are intended to be
issued in connection with the DBSC Merger.
The accompanying consolidated financial statements include only the accounts
of Dish and its subsidiaries and exclude all accounts of Dish's parent, ESB, and
its ultimate parent, EchoStar.
Unless otherwise stated herein, or the context otherwise requires,
references herein to Dish shall include Dish and all of its direct and indirect
subsidiaries, and EchoStar shall include EchoStar, ESB, Dish and all of their
direct and indirect wholly owned subsidiaries.
The accompanying unaudited condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 1996
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the Combined and
Consolidated Financial Statements and footnotes thereto included in Dish, Ltd.'s
Annual Report on Form 10-K for the year ended December 31, 1995. Certain prior
year amounts have been reclassified to conform with the current year
presentation.
SIGNIFICANT RISKS AND UNCERTAINTIES
Execution of EchoStar's business strategy to launch and operate DBS
satellites has dramatically changed its operating results and financial
position. As of March 31, 1996, EchoStar expects to expend approximately an
additional $520 million through 1999 to build, launch and support its first four
satellites (Note 6), assuming receipt of all required FCC licenses and permits.
EchoStar consummated the 1994 Notes Offering, the 1996 Notes Offering and the
Equity Offering to satisfy these capital requirements. Annual interest expense
on the 1994 and 1996 Notes and depreciation of the investment in the satellites
and related assets will each be of a magnitude that exceeds historical levels of
income before taxes. Beginning in 1995 EchoStar reported significant net losses
and expects net losses to continue for the foreseeable future. EchoStar's plans
also include the construction and launch of two fixed service satellites,
additional DBS satellites and marketing campaigns (including receiver
subsidization if conditions warrant) to promote its DBS products and services.
EchoStar may need to raise significant additional funds for construction and
launch of additional satellites, and there can be no assurance that necessary
funds will be available or, if available, they will be available on terms
favorable to EchoStar. However, management believes, but can give no assurance,
that demand for its DBS products and services will result in sufficient cash
flow which, together with other sources of capital, will be sufficient to
satisfy future planned expenditures. Significant delays or launch failures in
EchoStar's satellite launch program may have significant adverse consequences to
EchoStar's operating results and financial condition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management estimates and
assumptions that affect the reported amounts of
F-89
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(1) ORGANIZATION AND PRESENTATION OF FINANCIAL STATEMENTS (CONTINUED)
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.
(2) SUPPLEMENTAL ANALYSIS
CASH AND CASH EQUIVALENTS
Dish considers all liquid investments purchased with an original maturity of
ninety days or less to be cash equivalents. Cash equivalents as of December 31,
1995 and March 31, 1996 consist of money market funds, corporate notes and
commercial paper stated at cost which equates to market value.
RESTRICTED CASH AND MARKETABLE SECURITIES
Dish classifies all marketable investment securities as available-for-sale.
Accordingly, these investments are reflected at market value based on quoted
market prices. Related unrealized gains and losses are reported as a separate
component of stockholder's equity, net of related deferred income taxes. The
specific identification method is used to determine cost in computing realized
gains and losses.
Restricted Cash and Marketable Securities in escrow as reflected on the
accompanying balance sheets represent the remaining net proceeds received from
the 1994 Notes Offering, plus interest earned, less amounts expended to date in
connection with the development, construction and launch of the Dish
Network-SM-. These proceeds are held in a separate escrow account (the "1994
Escrow Account") for the benefit of the holders of the 1994 Notes and are
invested in certain debt and other marketable securities, as permitted by the
1994 Notes Indenture, until disbursed for the express purposes identified in the
1994 Notes Offering Prospectus.
Other Restricted Cash includes $11.4 million to satisfy certain covenants
regarding launch insurance required by the 1994 Notes Indenture. Dish is
required to maintain launch insurance and Restricted Cash totalling $225.0
million for each of EchoStar I and EchoStar II. Dish has obtained $219.3 million
of launch insurance on each satellite, and, together with the cash segregated
and reserved on the accompanying balance sheets, has satisfied its insurance
obligations under the 1994 Notes Indenture. In addition, as of March 31, 1996,
$15.0 million was in an escrow account established pursuant to a DBS satellite
receiver manufacturing contract for payment to the manufacturer as certain
milestones are reached and $15.5 million was in an escrow account for the
purpose of cash collateralizing certain standby letters of credit (Note 4). The
major components of Restricted Cash and Marketable Securities are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
----------------------------------- ---------------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING MARKET AMORTIZED HOLDING MARKET
COST GAIN VALUE COST GAIN (LOSS) VALUE
----------- ----------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial paper...................... $ 66,214 $ -- $ 66,214 $ 70,311 $ -- $ 70,311
Government bonds...................... 32,904 420 33,324 34,900 (26) 34,874
Accrued interest...................... 153 -- 153 332 -- 332
----------- ----- --------- ----------- --- -----------
$ 99,271 $ 420 $ 99,691 $ 105,543 $ (26) $ 105,517
----------- ----- --------- ----------- --- -----------
----------- ----- --------- ----------- --- -----------
</TABLE>
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out ("FIFO") method. Proprietary products
are manufactured by outside suppliers to Dish's specifications. Dish also
distributes non-proprietary products purchased from other manufacturers.
F-90
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(2) SUPPLEMENTAL ANALYSIS (CONTINUED)
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. The major components of inventory were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Finished goods................................................................ $ 20,458 $ 17,957
DBS receiver components....................................................... 9,615 9,728
Competitor DBS Receivers...................................................... 9,404 559
Spare parts................................................................... 2,089 2,078
Reserve for excess and obsolete inventory..................................... (2,797) (3,024)
------------ -----------
$ 38,769 $ 27,298
------------ -----------
------------ -----------
</TABLE>
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The composition of accrued expenses and other current liabilities is as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Accrued EchoStar I launch costs............................................... $ 15,000 $ --
Accrued expenses.............................................................. 3,850 3,959
Reserve for warranty costs.................................................... 1,013 1,013
Other......................................................................... 1,472 1,716
------------ -----------
$ 21,335 $ 6,688
------------ -----------
------------ -----------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Cost includes interest capitalized on the EchoStar DBS System during
construction at EchoStar's effective borrowing rate. The major components of
property and equipment were as follows (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE DECEMBER 31, MARCH 31,
(IN YEARS) 1995 1996
---------- ------------ -----------
<S> <C> <C> <C>
Construction in progress........................................ -- $ 282,373 $ 81,322
EchoStar I satellite............................................ 12 -- 198,143
Furniture, fixtures and equipment............................... 2-12 17,163 21,329
Buildings and improvements...................................... 7-40 21,006 21,109
Tooling and other............................................... 2 2,039 3,470
Land............................................................ -- 1,613 1,613
Vehicles........................................................ 7 1,310 1,325
Furniture and equipment held for sale........................... 17,062 17,614
Computer equipment held for sale................................ 902 885
------------ -----------
Total property and equipment................................ 343,468 346,810
Less -- Accumulated depreciation................................ (10,269) (13,579)
------------ -----------
Net property and equipment.................................. $ 333,199 $ 333,231
------------ -----------
------------ -----------
</TABLE>
Construction in progress principally includes capitalized costs related to
EchoStar II, which is scheduled for launch in the fall of 1996.
F-91
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(2) SUPPLEMENTAL ANALYSIS (CONTINUED)
Construction in progress consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Progress amounts for satellite construction, launch, launch insurance,
capitalized interest, launch and in-orbit tracking, telemetry and control
services:
EchoStar I.................................................................. $ 193,629 $ --
EchoStar II................................................................. 88,634 81,133
Other....................................................................... 110 189
------------ -----------
$ 282,373 $ 81,322
------------ -----------
------------ -----------
</TABLE>
OTHER NONCURRENT ASSETS
The major components of other noncurrent assets were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Deferred tax assets, net...................................................... $ 12,109 $ 12,497
FCC authorizations, net of amortization....................................... 11,309 11,681
1994 Notes deferred debt issuance costs, net of amortization.................. 10,622 10,307
SSET convertible subordinated debentures and accrued interest................. 9,610 9,758
Other, net.................................................................... 897 899
------------ -----------
$ 44,547 $ 45,142
------------ -----------
------------ -----------
</TABLE>
(3) LONG-TERM DEBT
1994 NOTES
On June 7, 1994, Dish completed the 1994 Notes Offering of 624,000 units
consisting of $624 million aggregate principal amount of the 1994 Notes and
3,744,000 Warrants. The 1994 Notes Offering resulted in net proceeds to Dish of
approximately $323.3 million. Interest on the 1994 Notes currently is not
payable in cash but accrues through June 1, 1999, with the 1994 Notes accreting
to $624 million by that date. Thereafter, interest on the 1994 Notes will be
payable in cash semi-annually on June 1 and December 1 of each year, commencing
December 1, 1999. At March 31, 1996, the 1994 Notes were reflected in the
accompanying financial statements at $395.3 million, net of unamortized discount
of $228.7 million.
(4) BANK CREDIT FACILITY AND LETTERS OF CREDIT
On May 6, 1994, the principal subsidiaries of Echostar, except EchoStar
Satellite Corporation ("ESC") (the "Borrowers"), entered into an agreement with
Bank of America Illinois to provide a revolving credit facility (the "Credit
Facility") for working capital advances and for letters of credit necessary for
inventory purchases and satellite construction payments. The Credit Facility
expired in May 1996 and EchoStar does not currently intend to arrange a new
credit facility. Instead, EchoStar is using available cash to collateralize its
letter of credit obligations, which historically has been the only significant
use of the Credit Facility. At March 31, 1996, EchoStar had cash collateralized
$15.5 million of certain standby letters of credit for trade purchases which is
included in restricted cash and marketable securities in the accompanying
financial statements (Note 2).
F-92
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(5) INCOME TAXES
The components of the benefit for income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Current (provision) benefit
Federal.......................................................................... $ (767) $ 1,971
State............................................................................ (194) 203
Foreign.......................................................................... (177) (122)
--------- ---------
(1,138) 2,052
--------- ---------
Deferred benefit
Federal.......................................................................... 2,050 2,568
State............................................................................ 443 232
--------- ---------
2,493 2,800
--------- ---------
Total benefit.................................................................. $ 1,355 $ 4,852
--------- ---------
--------- ---------
</TABLE>
Dish's deferred tax assets (approximately $16.9 million at March 31, 1996)
relate principally to temporary differences for amortization of original issue
discount on the 1994 Notes and various accrued expenses which are not deductible
until paid. No valuation allowance has been provided because Dish currently
believes it is more likely than not that these deferred assets will ultimately
be realized. If future operating results differ materially and adversely from
Dish's current expectations, its judgment regarding the need for a valuation
allowance may change.
(6) OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
EchoStar has contracted with Martin Marietta Corporation ("Martin Marietta")
for the construction and delivery of high powered DBS satellites and for related
services. Penalties are payable by Martin Marietta as a result of delays in the
delivery of EchoStar I by Martin Marietta and may be payable with respect to
EchoStar II or EchoStar III. As of November 19, 1995, the date that EchoStar I
was delivered by Martin Marietta to China, those penalties totaled approximately
$3.2 million with respect to EchoStar I. Penalties of $2.0 million are payable
by Martin Marietta in the event that EchoStar II is not delivered by May 15,
1996. Thereafter, delays in the delivery of EchoStar II would result in PER DIEM
additional penalties up to a maximum of $5.0 million in the aggregate. Beginning
August 1, 1997, a PER DIEM penalty of $3,333, to a maximum of $100,000, is
payable if EchoStar III is not delivered by July 31, 1997. Beginning September
1, 1997, additional delays in the delivery of EchoStar III would result in
additional PER DIEM penalties of $33,333, up to a maximum of $5.0 million in the
aggregate.
EchoStar has entered into a contract with Arianespace, Inc. ("Arianespace")
to launch Echo-Star II from Korou, French Guiana in the fall of 1996 (the
"Arianespace Contract"). The launch is scheduled to be performed on a dedicated
Ariane 42P launch vehicle. The Arianespace Contract provides the potential for
the EchoStar launch to occur before the fall of 1996 if earlier scheduled
launches are accelerated or delayed. The Arianespace Contract contains
provisions entitling either party to delay the launch in limited circumstances,
subject to the payment of penalties in some cases. As of March 31, 1996,
EchoStar has paid Arianespace approximately $4.4 million pursuant to the
Arianespace Contract. All remaining payments are payable monthly and will be due
prior to the launch.
F-93
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(6) OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
EchoStar II was previously scheduled to be launched by the same launch
provider as EchoStar I, China Great Wall Industry Corporation ("Great Wall").
EchoStar I was successfully launched by Great Wall in December 1995. EchoStar
notified Great Wall of its decision to terminate the launch of EchoStar II with
Great Wall. EchoStar applied $15.0 million previously paid Great Wall in
connection with this launch to the final $15.0 million owed Great Wall related
to the launch of EchoStar I. In May 1996, EchoStar received a refund of the
remaining $4.5 million previously paid Great Wall in connection with the second
launch.
EchoStar has entered into a contract for launch services with Lockheed
Martin Commercial Launch Services, Inc. ("Lockheed") for the launch of EchoStar
III from Cape Canaveral Air Station, Florida during the fall of 1997, subject to
delay or acceleration in certain circumstances (the "Lockheed Contract"). The
Lockheed Contract provides for launch of the satellite utilizing an Atlas IIAS
launch vehicle. EchoStar has made an initial payment to Lockheed of $5.0 million
and the remaining cost is payable in installments in accordance with the payment
schedule set forth in the Lockheed Contract, which requires that substantially
all payments be made to Lockheed prior to the launch.
EchoStar has contracted with Lockheed-Khrunichev-Energia-International, Inc.
("LKE") for the launch of EchoStar IV during 1998 from the Kazakh Republic, a
territory of the former Soviet Union, utilizing a Proton launch vehicle (the
"LKE Contract"). Either party may request a delay in the relevant launch period,
subject to the payment of penalties based on the length of the delay and the
proximity of the request to the launch date. EchoStar has paid LKE $20.0 million
pursuant to the LKE Contract. No additional payments are currently required to
be made to LKE until 1997.
PURCHASE COMMITMENTS
Dish has entered into agreements with various manufacturers to purchase DBS
satellite receivers and related components manufactured based on Dish's supplied
specifications. As of March 31, 1996 the remaining commitments total as much as
$622.2 million. At March 31, 1996, the total of all outstanding purchase order
commitments with domestic and foreign suppliers was as much as $641.3 million.
All but approximately $85.9 million of the purchases related to these
commitments are expected to be made during 1996 and the remainder is expected to
be made during 1997. EchoStar expects to finance these purchases from available
cash, marketable investment securities and sales of inventory, including the
sale of EchoStar Receiver Systems and related products.
OTHER RISKS AND CONTINGENCIES
EchoStar is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position, results of operations or liquidity of EchoStar.
F-94
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(7) SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
The 1994 Notes are fully, unconditionally and jointly and severally
guaranteed by all subsidiaries of Dish, except for certain de minimis domestic
and foreign subsidiaries. Summarized financial information for Dish and the
subsidiary guarantors is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
Income Statement Data --
Revenue....................................................................... $ 40,076 $ 40,973
Expenses...................................................................... 40,730 49,910
--------- ----------
Operating loss................................................................ (654) (8,937)
Other income (expense), net................................................... (2,892) (3,147)
--------- ----------
Net loss before income taxes.................................................. (3,546) (12,084)
Benefit for income taxes...................................................... 1,348 4,848
--------- ----------
Net loss.................................................................... $ (2,198) $ (7,236)
--------- ----------
--------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Balance Sheet Data --
Current assets............................................................ $ 81,959 $ 64,321
Property and equipment, net............................................... 333,160 333,191
Other noncurrent assets................................................... 143,866 150,285
------------ -----------
Total assets............................................................ $ 558,985 $ 547,797
------------ -----------
------------ -----------
Current liabilities....................................................... $ 50,710 $ 34,943
Long-term liabilities..................................................... 415,662 427,754
Stockholder's equity...................................................... 92,613 85,100
------------ -----------
Total liabilities and stockholder's equity.............................. $ 558,985 $ 547,797
------------ -----------
------------ -----------
</TABLE>
F-95
<PAGE>
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
F-96
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
(UNAUDITED)
-----------
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 21,754 $ 164,813
Marketable investment securities................................................. 15,670 212
Trade accounts receivable, net................................................... 9,179 10,072
Inventories...................................................................... 38,769 27,298
Income tax receivable............................................................ 3,554 4,806
Deferred tax assets.............................................................. 1,779 3,973
Other current assets............................................................. 13,037 15,468
------------ -----------
Total current assets........................................................... 103,742 226,642
RESTRICTED CASH AND MARKETABLE SECURITIES:
1994 Notes escrow................................................................ 73,291 63,617
1996 Notes escrow................................................................ -- 169,970
Other............................................................................ 26,400 41,900
PROPERTY AND EQUIPMENT, net........................................................ 354,000 359,821
OTHER NONCURRENT ASSETS............................................................ 65,658 102,721
------------ -----------
Total assets................................................................... $ 623,091 $ 964,671
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable........................................................... $ 19,063 $ 13,599
Deferred programming revenue..................................................... 5,563 7,416
Accrued expenses and other current liabilities................................... 21,335 7,072
Notes payable and current portion of long-term debt.............................. 4,782 4,783
------------ -----------
Total current liabilities...................................................... 50,743 32,870
LONG-TERM DEFERRED PROGRAMMING REVENUE............................................. -- 3,790
1994 NOTES, net.................................................................... 382,218 395,333
1996 NOTES, net.................................................................... -- 350,890
LONG-TERM MORTGAGE DEBT AND NOTE PAYABLE, excluding current portion................ 33,444 32,421
------------ -----------
Total liabilities.............................................................. 466,405 815,304
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred Stock, 20,000,000 shares authorized, 1,616,681 shares of Series A
Cumulative Preferred Stock issued and outstanding, including accrued dividends
of $2,143,000 and $2,444,000, respectively...................................... 17,195 17,496
Class A Common Stock, $.01 par value, 200,000,000 shares authorized, 10,535,003
and 10,621,116 shares issued and outstanding, respectively...................... 105 106
Class B Common Stock, $.01 par value, 100,000,000 shares authorized, 29,804,401
shares issued and outstanding................................................... 298 298
Common Stock Purchase Warrants................................................... 714 20
Class C Common Stock, 100,000,000 shares authorized, none outstanding............ -- --
Additional paid-in capital....................................................... 151,674 152,487
Unrealized holding gains on available-for-sale securities, net of deferred
taxes........................................................................... 239 21
Retained earnings (deficit)...................................................... (13,539) (21,061)
------------ -----------
Total stockholders' equity..................................................... 156,686 149,367
------------ -----------
Total liabilities and stockholders' equity..................................... $ 623,091 $ 964,671
------------ -----------
------------ -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-97
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
REVENUE:
DTH products and technical services.................................................. $ 36,277 $ 36,741
Programming.......................................................................... 3,871 3,913
Loan origination and participation income............................................ 265 813
--------- ----------
Total revenue...................................................................... 40,413 41,467
--------- ----------
EXPENSES:
DTH products and technical services.................................................. 29,445 32,750
Programming.......................................................................... 3,432 3,283
Selling, general and administrative.................................................. 7,871 10,733
Depreciation......................................................................... 363 3,330
--------- ----------
Total expenses..................................................................... 41,111 50,096
--------- ----------
OPERATING LOSS......................................................................... (698) (8,629)
--------- ----------
OTHER INCOME (EXPENSE):
Interest income...................................................................... 3,638 2,677
Interest expense, net of amounts capitalized......................................... (6,563) (6,043)
Other, net........................................................................... 28 (17)
--------- ----------
Total other income (expense)....................................................... (2,897) (3,383)
--------- ----------
NET LOSS BEFORE INCOME TAXES........................................................... (3,595) (12,012)
BENEFIT FOR INCOME TAXES............................................................... 1,355 4,791
--------- ----------
NET LOSS............................................................................... $ (2,240) $ (7,221)
--------- ----------
--------- ----------
NET LOSS ATTRIBUTABLE TO COMMON SHARES................................................. $ (2,541) $ (7,522)
--------- ----------
--------- ----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................................. 33,544 40,376
--------- ----------
--------- ----------
LOSS PER COMMON AND COMMON EQUIVALENT SHARE............................................ $ (0.08) $ (0.19)
--------- ----------
--------- ----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-98
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
RETAINED
EARNINGS
(DEFICIT)
SHARES OF COMMON AND
COMMON STOCK ADDITIONAL UNREALIZED TOTAL
STOCK PREFERRED COMMON PURCHASE PAID-IN HOLDING STOCKHOLDERS'
OUTSTANDING STOCK STOCK WARRANTS CAPITAL LOSSES EQUITY
----------- --------- ------ --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, at December 31, 1995............. 40,339 $17,195 $403 $ 714 $151,674 $(13,300) $156,686
Series A Cumulative Preferred Stock
dividends............................... 301 301
Issuance of Class A Common Stock......... 13 113 113
Common Stock Purchase Warrants
exercised............................... 74 1 (694) 693 --
Employee Incentive Funded by Issuance of
Class A Common Stock.................... 7 7
Unrealized holding losses on
available-for-sale securities, net...... (218) (218)
Net loss................................. (7,522) (7,522)
----------- --------- ------ --------- ---------- ---------- -------------
BALANCES, at March 31, 1996................ 40,426 $17,496 $404 $ 20 $152,487 $(21,040) $149,367
----------- --------- ------ --------- ---------- ---------- -------------
----------- --------- ------ --------- ---------- ---------- -------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-99
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................... $ (2,240) $ (7,221)
Adjustments to reconcile net loss to net cash flows from operating activities --
Depreciation......................................................................... 363 3,330
Provision for doubtful accounts...................................................... 111 621
Benefit for deferred taxes........................................................... (2,493) (1,371)
Amortization of deferred debt issuance costs on 1994 Notes........................... 315 315
Amortization of discount on 1994 Notes, net of amounts capitalized................... 6,131 4,189
Amortization of discount on 1996 Notes, net of amounts capitalized................... -- 843
Equity in (earnings) losses of joint venture......................................... (15) 25
Change in reserve for excess and obsolete inventory.................................. 233 227
Long-term deferred programming revenue............................................... -- 3,790
Other, net........................................................................... 26 (163)
Changes in working capital items --
Trade accounts receivable.......................................................... (728) (1,514)
Inventories........................................................................ (4,238) 11,244
Income tax receivable.............................................................. -- (1,252)
Other current assets............................................................... (730) (2,431)
Liability under cash management program............................................ (57) --
Trade accounts payable............................................................. (1,061) (5,464)
Deferred programming revenue....................................................... (657) 1,853
Accrued expenses................................................................... 1,221 97
Other current liabilities.......................................................... 38 640
--------- ---------
Net cash flows from operating activities......................................... (3,781) 7,758
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities.......................................... (15,211) (2)
Sales of marketable investment securities.............................................. 27,777 15,479
Purchases of restricted marketable investment securities............................... -- (15,500)
Purchases of property and equipment.................................................... (538) (2,715)
Offering proceeds and investment earnings placed in escrow............................. (2,714) (178,452)
Funds released from escrow accounts.................................................... 16,257 17,785
Investment in convertible subordinated debentures from DBSI............................ -- (3,000)
Long-term note receivable from DBSC.................................................... -- (7,500)
Expenditures for satellite systems under construction.................................. (19,621) (13,292)
Deposit on FCC authorization........................................................... -- (10,459)
Expenditures for FCC authorizations.................................................... -- (3,177)
--------- ---------
Net cash flows from investing activities......................................... 5,950 (200,833)
--------- ---------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-100
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgage indebtedness and note payable................................... $ (57) $ (1,022)
Stock options exercised................................................................ -- 113
Net proceeds from issuance of 1996 Notes............................................... -- 337,043
--------- ---------
Net cash flows from financing activities......................................... (57) 336,134
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................................ 2,112 143,059
CASH AND CASH EQUIVALENTS, beginning of period........................................... 17,506 21,754
--------- ---------
CASH AND CASH EQUIVALENTS, end of period................................................. $ 19,618 $ 164,813
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized..................................... $ 106 $ 354
Cash paid for income taxes............................................................. 39 --
Cumulative Series A Preferred Stock dividends.......................................... 301 301
Satellite launch payment for EchoStar II applied to EchoStar I launch.................. -- 15,000
Employee incentives funded by issuance of Class A Common Stock......................... -- 7
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-101
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND MARCH 31, 1996
(1) ORGANIZATION AND PRESENTATION OF FINANCIAL STATEMENTS
EchoStar Communications Corporation ("EchoStar") successfully launched its
first direct broadcast satellite ("DBS"), EchoStar I, in December 1995 and, on
March 4, 1996, began broadcasting its DBS programming (the "Dish Network-SM-")
to the entire continental United States. The Dish Network-SM- currently includes
over 100 channels of high quality digital video and audio programming and will
expand to approximately 200 digital video and audio channels following the
successful launch of a second DBS satellite, DirectSat I ("EchoStar II"),
currently scheduled in the fall of 1996.
In addition to its DBS business, EchoStar is engaged in the design,
manufacture, distribution and installation of satellite direct to home ("DTH")
products, domestic distribution of DTH programming and consumer financing of
EchoStar's domestic DTH products and services.
In January 1996, EchoStar formed a wholly owned subsidiary, EchoStar
Satellite Broadcasting Corporation ("ESB"), for the purpose of completing a
private offering (the "1996 Notes Offering"), pursuant to Rule 144A of the
Securities Act of 1933, as amended (the "Securities Act"), of 13 1/8% Senior
Secured Discount Notes due 2004 (the "1996 Notes"), resulting in net proceeds of
approximately $337.0 million. The 1996 Notes Offering was consummated in March
1996. Proceeds from the 1996 Notes Offering will be used for: (i) continued
development, marketing and distribution of the Dish Network-SM-; (ii) EchoStar's
purchase of DBS frequencies at 148 DEG. WL; (iii) construction, launch and
insurance of EchoStar III and EchoStar IV; (iv) additional launch costs of
EchoStar II; and (v) other general corporate purposes. The additional
frequencies were acquired by EchoStar at a public auction held by the Federal
Communications Commission ("FCC") in January 1996 (the "FCC Auction"). In
connection with the 1996 Notes Offering, EchoStar contributed all of the
outstanding capital stock of its wholly owned subsidiary, Dish, Ltd., to ESB.
This transaction has been accounted for as a reorganization of entities under
common control whereby Dish, Ltd. has been treated as the predecessor to ESB.
ESB is subject to all, and EchoStar is subject to certain of, the terms and
conditions of the Indenture related to the 1996 Notes (the "1996 Notes
Indenture"). On April 24, 1996, ESB filed a Registration Statement on Form S-1
under the Securities Act to exchange the 1996 Notes for publicly registered
notes.
In June 1995, EchoStar completed an offering of its Class A Common Stock,
resulting in net proceeds of approximately $63.0 million (the "Equity
Offering"). Dish Ltd. owns the majority of EchoStar's operating subsidiaries. In
June 1994, Dish, Ltd. completed an offering of 12 7/8% Senior Secured Discount
Notes due 2004 (the "1994 Notes") and Warrants (collectively, the "1994 Notes
Offering"), resulting in net proceeds of approximately $323.3 million. Dish Ltd.
and most of its subsidiaries are subject to the terms and conditions of the
Indenture related to the 1994 Notes (the "1994 Notes Indenture").
Unless otherwise stated herein, or the context otherwise requires,
references herein to EchoStar shall include EchoStar and all of its direct and
indirect wholly owned subsidiaries.
The accompanying unaudited condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 1996
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the Combined and
F-102
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(1) ORGANIZATION AND PRESENTATION OF FINANCIAL STATEMENTS (CONTINUED)
Consolidated Financial Statements and footnotes thereto included in EchoStar
Communications Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995. Certain prior year amounts have been reclassified to conform
with the current year presentation.
SIGNIFICANT RISKS AND UNCERTAINTIES
Execution of EchoStar's business strategy to launch and operate DBS
satellites has dramatically changed its operating results and financial
position. As of March 31, 1996, EchoStar expects to expend approximately an
additional $520 million through 1999 to build, launch and support its first four
satellites (Note 6), assuming receipt of all required FCC licenses and permits.
EchoStar consummated the 1994 Notes Offering, the 1996 Notes Offering and the
Equity Offering to satisfy these capital requirements. Annual interest expense
on the 1994 and 1996 Notes and depreciation of the investment in the satellites
and related assets will each be of a magnitude that exceeds historical levels of
income before taxes. Beginning in 1995 EchoStar reported significant net losses
and expects net losses to continue for the foreseeable future. EchoStar's plans
also include the construction and launch of two fixed service satellites,
additional DBS satellites and marketing campaigns (including receiver
subsidization if market conditions warrant) to promote its DBS products and
services. EchoStar may need to raise significant additional funds for
construction and launch of additional satellites, and there can be no assurance
that necessary funds will be available or, if available, that they will be
available on terms favorable to EchoStar. However, management believes, but can
give no assurance, that demand for its DBS products and services will result in
sufficient cash flow which, together with other sources of capital, will be
sufficient to satisfy future planned expenditures. Significant delays or launch
failures in EchoStar's satellite launch program may have significant adverse
consequences to EchoStar's operating results and financial condition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management 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 revenue and expenses for each reporting
period. Actual results could differ from those estimates.
(2) SUPPLEMENTAL ANALYSIS
CASH AND CASH EQUIVALENTS
EchoStar considers all liquid investments purchased with an original
maturity of ninety days or less to be cash equivalents. Cash equivalents as of
December 31, 1995, and March 31, 1996 consist of money market funds, corporate
notes and commercial paper stated at cost which equates to market value.
RESTRICTED CASH AND MARKETABLE SECURITIES
EchoStar classifies all marketable investment securities as
available-for-sale. Accordingly, these investments are reflected at market value
based on quoted market prices. Related unrealized gains and losses are reported
as a separate component of stockholders' equity, net of related deferred income
taxes. The specific identification method is used to determine cost in computing
realized gains and losses.
Restricted Cash and Marketable Securities in Escrow Accounts as reflected on
the accompanying balance sheets represent the remaining net proceeds received
from the 1994 Notes Offerings, and a portion of the proceeds from the 1996 Notes
Offering, plus interest earned, less amounts expended to date in connection with
the development, construction and launch of the Dish Network-SM-. These
F-103
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(2) SUPPLEMENTAL ANALYSIS (CONTINUED)
proceeds are held in separate escrow accounts (the "1994 Escrow Account" and the
"1996 Escrow Account", respectively) for the benefit of the holders of the 1994
and 1996 Notes and are invested in certain debt and other marketable securities,
as permitted by the respective Indentures, until disbursed for the express
purposes identified in the 1994 Notes Offering Prospectus and the 1996 Notes
Offering Memorandum, as the case may be.
Other Restricted Cash includes $11.4 million to satisfy certain covenants
regarding launch insurance required by the 1994 Notes Indenture. EchoStar is
required to maintain launch insurance and Restricted Cash totalling $225.0
million for each of EchoStar I and EchoStar II. EchoStar has obtained $219.3
million of launch insurance on each satellite, and, together with the cash
segregated and reserved on the accompanying balance sheets, has satisfied its
insurance obligations under the 1994 Notes Indenture. In addition, as of March
31, 1996, $15.0 million was in an escrow account established pursuant to a DBS
satellite receiver manufacturing contract for payment to the manufacturer as
certain milestones are reached and $15.5 million was in an escrow account for
the purpose of cash collateralizing certain standby letters of credit (Note 4).
The major components of Restricted Cash and Marketable Securities are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
----------------------------------- -------------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING MARKET AMORTIZED HOLDING MARKET
COST GAIN VALUE COST GAIN VALUE
----------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial paper....................... $ 66,214 $ -- $ 66,214 $ 70,600 $ -- $ 70,600
Government bonds....................... 32,904 420 33,324 204,411 49 204,460
Accrued interest....................... 153 -- 153 427 -- 427
----------- ----- --------- ----------- ----- -----------
$ 99,271 $ 420 $ 99,691 $ 275,438 $ 49 $ 275,487
----------- ----- --------- ----------- ----- -----------
----------- ----- --------- ----------- ----- -----------
</TABLE>
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out ("FIFO") method. Proprietary products
are manufactured by outside suppliers to EchoStar's specifications. EchoStar
also distributes non-proprietary products purchased from other manufacturers.
Manufactured inventories include materials, labor and manufacturing overhead.
Cost of other inventories includes parts, contract manufacturers' delivered
price, assembly and testing labor, and related overhead, including handling and
storage costs. The major components of inventory were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Finished goods................................................................ $ 20,458 $ 17,957
DBS receiver components....................................................... 9,615 9,728
Competitor DBS Receivers...................................................... 9,404 559
Spare parts................................................................... 2,089 2,078
Reserve for excess and obsolete inventory..................................... (2,797) (3,024)
------------ -----------
$ 38,769 $ 27,298
------------ -----------
------------ -----------
</TABLE>
F-104
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(2) SUPPLEMENTAL ANALYSIS (CONTINUED)
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The composition of accrued expenses and other current liabilities is as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Accrued EchoStar I launch costs............................................... $ 15,000 $ --
Accrued expenses.............................................................. 3,850 3,947
Reserve for warranty costs.................................................... 1,013 1,013
Other......................................................................... 1,472 2,112
------------ -----------
$ 21,335 $ 7,072
------------ -----------
------------ -----------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Cost includes interest capitalized on the EchoStar DBS System during
construction at EchoStar's effective borrowing rate. The major components of
property and equipment were as follows (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE (IN DECEMBER 31, MARCH 31,
YEARS) 1995 1996
---------- ------------ -----------
<S> <C> <C> <C>
Construction in progress........................................ -- $ 303,174 $ 107,912
EchoStar I satellite............................................ 12 -- 198,143
Furniture, fixtures and equipment............................... 2-12 17,163 21,329
Buildings and improvements...................................... 7-40 21,006 21,109
Tooling and other............................................... 2 2,039 3,470
Land............................................................ -- 1,613 1,613
Vehicles........................................................ 7 1,310 1,325
Furniture and equipment held for sale........................... 17,062 17,614
Computer equipment held for sale................................ 902 885
------------ -----------
Total property and equipment................................ 364,269 373,400
Less-Accumulated depreciation................................... (10,269) (13,579)
------------ -----------
Net property and equipment.................................. $ 354,000 $ 359,821
------------ -----------
------------ -----------
</TABLE>
Construction in progress includes capitalized costs related to the
construction and launch of EchoStar II, which is scheduled for launch in the
fall of 1996 and DBSC I ("EchoStar III") which is scheduled for launch prior to
the end of 1997.
F-105
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(2) SUPPLEMENTAL ANALYSIS (CONTINUED)
Construction in progress consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Progress amounts for satellite construction, launch, launch insurance,
capitalized interest, launch and in-orbit tracking, telemetry and control
services:
EchoStar I................................................................ $ 193,629 $ --
EchoStar II............................................................... 88,634 81,133
EchoStar III launch....................................................... 20,801 5,058
EchoStar IV launch........................................................ -- 21,532
Other..................................................................... 110 189
------------ -----------
$ 303,174 $ 107,912
------------ -----------
------------ -----------
</TABLE>
OTHER NONCURRENT ASSETS
The major components of other noncurrent assets were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Long-term note receivable from DBSC......................................... $ 16,000 $ 23,500
FCC authorizations, net of amortization..................................... 11,309 15,288
1996 Notes deferred debt issuance costs, net of amortization................ -- 13,004
1994 Notes deferred debt issuance costs..................................... 10,622 10,307
Deferred tax assets, net.................................................... 12,109 11,420
Deposit on FCC authorization................................................ -- 10,459
SSET convertible subordinated debentures and accrued interest............... 9,610 9,758
Investment in DBSC.......................................................... 4,111 4,086
DBSI convertible subordinated debentures.................................... 1,000 4,000
Other, net.................................................................. 897 899
------------ -----------
$ 65,658 $ 102,721
------------ -----------
------------ -----------
</TABLE>
EchoStar presently owns approximately 40% of the outstanding common stock of
Direct Broadcasting Satellite Corporation ("DBSC"). DBSC's principal assets
include an FCC conditional satellite construction permit and specific orbital
slot assignments for eleven DBS frequencies at 61.5 DEG. WL and eleven DBS
frequencies at 175 DEG. WL (the "DBS Rights"). EchoStar intends to merge DBSC
with Direct Broadcasting Satellite Corporation ("New DBSC"), a wholly owned
subsidiary of EchoStar (the "DBSC Merger"). The DBSC Merger has been approved by
DBSC shareholders but will not be consummated until the FCC has approved the
DBSC Merger. Although no assurances can be given, EchoStar expects the FCC to
issue an order with respect to the DBSC Merger in the near future. Assuming FCC
approval of the DBSC Merger, EchoStar will hold, through New DBSC, DBSC's DBS
Rights. On April 16, 1996, EchoStar filed a Registration Statement on Form S-4
under the Securities Act covering 658,000 shares of EchoStar Class A Common
Stock that are intended to be issued in connection with the DBSC Merger.
F-106
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(2) SUPPLEMENTAL ANALYSIS (CONTINUED)
EARNINGS PER SHARE
Earnings per share have been calculated based on the weighted average number
of shares of common stock issued and outstanding and, if dilutive, common stock
equivalents (warrants and employee stock options) during the three months ended
March 31, 1995 and 1996. Net loss has been adjusted for cumulative dividends on
the 8% Series A Cumulative Preferred Stock.
(3) LONG-TERM DEBT
1994 NOTES
On June 7, 1994, Dish, Ltd. completed the 1994 Notes Offering of 624,000
units consisting of $624.0 million aggregate principal amount of the 1994 Notes
and 3,744,000 Warrants. The 1994 Notes Offering resulted in net proceeds to
Dish, Ltd. of approximately $323.3 million. Interest on the 1994 Notes currently
is not payable in cash but accrues through June 1, 1999, with the 1994 Notes
accreting to $624.0 million by that date. Thereafter, interest on the 1994 Notes
will be payable in cash semi-annually on June 1 and December 1 of each year,
commencing December 1, 1999. At March 31, 1996, the 1994 Notes were reflected in
the accompanying financial statements at $395.3 million, net of unamortized
discount of $228.7 million.
1996 NOTES
On March 25, 1996, ESB completed the 1996 Notes Offering consisting of
$580.0 million aggregate principal amount of the 1996 Notes. The 1996 Notes
Offering resulted in net proceeds to ESB of approximately $337.0 million.
Interest on the 1996 Notes currently is not payable in cash but accrues through
March 15, 2000, with the 1996 Notes accreting to $580.0 million by that date.
Thereafter, interest on the 1996 Notes will be payable in cash semi-annually on
March 15 and September 15 of each year, commencing September 15, 2000. At March
31, 1996, the 1996 Notes were reflected in the accompanying financial statements
at $350.9 million, net of unamortized discount of $229.1 million.
(4) BANK CREDIT FACILITY AND LETTERS OF CREDIT
On May 6, 1994, the principal subsidiaries of EchoStar, except EchoStar
Satellite Corporation ("ESC") (the "Borrowers"), entered into an agreement with
Bank of America Illinois, to provide a revolving credit facility (the "Credit
Facility") for working capital advances and for letters of credit necessary for
inventory purchases and satellite construction payments. The Credit Facility
expired in May 1996 and EchoStar does not currently intend to arrange a new
credit facility. Instead, EchoStar is using available cash to collateralize its
letter of credit obligations, which have historically been the only significant
use of the Credit Facility. At March 31, 1996, EchoStar had cash collateralized
$15.5 million of certain standby letters of credit for trade purchases which is
included in restricted cash and marketable securities in the accompanying
financial statements (Note 2).
F-107
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(5) INCOME TAXES
The components of the benefit for income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Current (provision) benefit
Federal.......................................................................... $ (767) $ 3,202
State............................................................................ (194) 340
Foreign.......................................................................... (177) (122)
--------- ---------
(1,138) 3,420
--------- ---------
Deferred benefit
Federal.......................................................................... 2,050 1,281
State............................................................................ 443 90
--------- ---------
2,493 1,371
--------- ---------
Total benefit................................................................ $ 1,355 $ 4,791
--------- ---------
--------- ---------
</TABLE>
EchoStar's deferred tax assets (approximately $15.4 million at March 31,
1996) relate principally to temporary differences for amortization of original
issue discount on the 1994 and 1996 Notes and various accrued expenses which are
not deductible until paid. No valuation allowance has been provided because
EchoStar currently believes it is more likely than not that these deferred
assets will ultimately be realized. If future operating results differ
materially and adversely from EchoStar's current expectations, its judgment
regarding the need for a valuation allowance may change.
(6) OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
EchoStar has contracted with Martin Marietta Corporation ("Martin Marietta")
for the construction and delivery of high powered DBS satellites and for related
services. Penalties are payable by Martin Marietta as a result of delays in the
delivery of EchoStar I by Martin Marietta and may be payable with respect to
EchoStar II or EchoStar III. As of November 19, 1995, the date that EchoStar I
was delivered by Martin Marietta to China, those penalties totaled approximately
$3.2 million with respect to EchoStar I. Penalties of $2.0 million are payable
by Martin Marietta in the event that EchoStar II is not delivered by May 15,
1996. Thereafter, delays in the delivery of EchoStar II would result in PER DIEM
additional penalties up to a maximum of $5.0 million in the aggregate. Beginning
August 1, 1997, a PER DIEM penalty of $3,333, to a maximum of $100,000, is
payable if EchoStar III is not delivered by July 31, 1997. Beginning September
1, 1997, additional delays in the delivery of EchoStar III would result in
additional PER DIEM penalties of $33,333, up to a maximum of $5.0 million in the
aggregate.
EchoStar has entered into a contract with Arianespace, Inc. ("Arianespace")
to launch EchoStar II from Korou, French Guiana in the fall of 1996 (the
"Arianespace Contract"). The launch is scheduled to be performed on a dedicated
Ariane 42P launch vehicle. The Arianespace Contract provides the potential for
the EchoStar launch to occur before the fall of 1996 if earlier scheduled
launches are accelerated or delayed. The Arianespace Contract contains
provisions entitling either party to delay the launch in limited circumstances,
subject to the payment of penalties in some cases. As of March 31, 1996,
EchoStar has paid Arianespace approximately $4.4 million pursuant to the
Arianespace Contract. All remaining payments are payable monthly and will be due
prior to the launch.
F-108
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(6) OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
EchoStar II was previously scheduled to be launched by the same launch
provider as EchoStar I, China Great Wall Industry Corporation ("Great Wall").
EchoStar I was successfully launched by Great Wall in December 1995. EchoStar
notified Great Wall of its decision to terminate the launch of EchoStar II with
Great Wall. EchoStar applied $15.0 million previously paid Great Wall in
connection with this launch to the final $15.0 million owed Great Wall related
to the launch of EchoStar I. In May 1996, EchoStar received a refund of the
remaining $4.5 million previously paid Great Wall in connection with the second
launch.
EchoStar has entered into a contract for launch services with Lockheed
Martin Commercial Launch Services, Inc. ("Lockheed") for the launch of EchoStar
III from Cape Canaveral Air Station, Florida during the fall of 1997, subject to
delay or acceleration in certain circumstances (the "Lockheed Contract"). The
Lockheed Contract provides for launch of the satellite utilizing an Atlas IIAS
launch vehicle. EchoStar has made an initial payment to Lockheed of $5.0 million
and the remaining cost is payable in installments in accordance with the payment
schedule set forth in the Lockheed Contract, which requires that substantially
all payments be made to Lockheed prior to the launch.
EchoStar has contracted with Lockheed-Khrunichev-Energia-International, Inc.
("LKE") for the launch of EchoStar IV during 1998 from the Kazakh Republic, a
territory of the former Soviet Union, utilizing a Proton launch vehicle (the
"LKE Contract"). Either party may request a delay in the relevant launch period,
subject to the payment of penalties based on the length of the delay and the
proximity of the request to the launch date. EchoStar has paid LKE $20.0 million
pursuant to the LKE Contract. No additional payments are currently required to
be made to LKE until 1997.
PURCHASE COMMITMENTS
EchoStar has entered into agreements with various manufacturers to purchase
DBS satellite receivers and related components manufactured based on EchoStar's
supplied specifications. As of March 31, 1996 the remaining commitments total as
much as $622.2 million. At March 31, 1996, the total of all outstanding purchase
order commitments with domestic and foreign suppliers was as much as $641.3
million. All but approximately $85.9 million of the purchases related to these
commitments are expected to be made during 1996 and the remainder is expected to
be made during 1997. EchoStar expects to finance these purchases from available
cash, marketable investment securities and sales of inventory, including the
sale of EchoStar Receiver Systems and related products.
OTHER RISKS AND CONTINGENCIES
EchoStar is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position, results of operations or liquidity of EchoStar.
(7) SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
The 1994 Notes are fully, unconditionally and jointly and severally
guaranteed by all subsidiaries of Dish, Ltd., except for certain de minimis
domestic and foreign subsidiaries (collectively, the "1994 Notes Guarantors").
The 1996 Notes are initially guaranteed by EchoStar on a subordinated basis.
On and after the Dish Guarantee Date (as defined in the 1996 Notes Indenture),
the 1996 Notes will be guaranteed by Dish, Ltd., which guarantee will rank PARI
PASSU with all senior unsecured indebtedness of Dish, Ltd. On and after the date
upon which the DBSC Merger is consummated, the 1996 Notes will be
F-109
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(7) SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS (CONTINUED)
guaranteed by New DBSC, which guarantee will rank pari passu with all senior
unsecured indebtedness of New DBSC. If the DBSC Merger is not consummated, New
DBSC will not be required to guarantee the 1996 Notes. There can be no assurance
that the DBSC Merger will be approved by the FCC or that it will be consummated.
The net assets of Dish, Ltd. exceed the net assets of the 1994 Notes
Guarantors by approximately $277,000 and $223,000 as of December 31, 1995 and
March 31, 1996, respectively. Summarized consolidated financial information for
Dish, Ltd. is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
-------------------------
1995 1996
------------ -----------
<S> <C> <C>
Income Statement Data --
Revenue................................................................... $ 40,413 $ 41,026
Expenses.................................................................. 41,111 49,934
------------ -----------
Operating loss............................................................ (698) (8,908)
Other income (expense), net............................................... (2,897) (3,234)
------------ -----------
Net loss before income taxes.............................................. (3,595) (12,142)
Benefit for income taxes.................................................. 1,355 4,852
------------ -----------
Net loss.............................................................. $ (2,240) $ (7,290)
------------ -----------
------------ -----------
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Balance Sheet Data --
Current assets............................................................ $ 81,858 $ 64,144
Property and equipment, net............................................... 333,199 333,231
Other noncurrent assets................................................... 144,238 150,659
------------ -----------
Total assets.......................................................... $ 559,295 $ 548,034
------------ -----------
------------ -----------
Current liabilities......................................................... $ 50,743 $ 31,167
Long-term liabilities....................................................... 415,662 431,544
Stockholder's equity........................................................ 92,890 85,323
------------ -----------
Total liabilities and stockholder's equity............................ $ 559,295 $ 548,034
------------ -----------
------------ -----------
</TABLE>
F-110
<PAGE>
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
ECHOSTAR SATELLITE BROADCASTING CORPORATION
AND SUBSIDIARIES
F-111
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents......................................................................... $ 13,949 $162,651
Marketable investment securities.................................................................. 210 212
Trade accounts receivable, net.................................................................... 10,435 20,629
Inventories....................................................................................... 38,769 27,298
Income tax receivable............................................................................. 3,870 4,504
Deferred tax assets............................................................................... 1,834 4,600
Other current assets.............................................................................. 12,791 12,599
------------ -----------
Total current assets.......................................................................... 81,858 232,493
RESTRICTED CASH AND MARKETABLE SECURITIES:
1994 Notes escrow................................................................................. 73,291 63,617
1996 Notes escrow................................................................................. -- 169,970
Other............................................................................................. 26,400 41,900
PROPERTY AND EQUIPMENT, net......................................................................... 333,199 333,231
OTHER NONCURRENT ASSETS............................................................................. 44,547 58,146
------------ -----------
Total assets.................................................................................. $559,295 $899,357
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Trade accounts payable............................................................................ $ 19,063 $ 12,280
Deferred programming revenue...................................................................... 5,563 7,416
Accrued expenses and other current liabilities.................................................... 21,335 7,437
Notes payable and current portion of long-term debt............................................... 4,782 4,783
------------ -----------
Total current liabilities..................................................................... 50,743 31,916
LONG-TERM DEFERRED PROGRAMMING REVENUE.............................................................. -- 3,790
1994 NOTES, net..................................................................................... 382,218 395,333
1996 NOTES, net..................................................................................... -- 350,890
LONG-TERM MORTGAGE DEBT AND NOTE PAYABLE, excluding current portion................................. 33,444 32,421
------------ -----------
Total liabilities............................................................................. 466,405 814,350
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDER'S EQUITY (Note 1):
Preferred Stock, 20,000,000 and no shares authorized, 1,616,681 and no shares of Series A
Cumulative Preferred Stock issued and outstanding, including accrued dividends of $1,555,000 and
$0, respectively................................................................................. 16,607 --
Class A Common Stock, $.01 par value, 200,000,000 and no shares authorized, 6,470,599 and no
shares issued and outstanding, respectively...................................................... 65 --
Class B Common Stock, $.01 par value, 100,000,000 and no shares authorized, 29,804,401 and no
shares issued and outstanding, respectively...................................................... 298 --
Common Stock, $.01 par value, none and 1,000 shares authorized, issued and outstanding,
respectively..................................................................................... -- --
Additional paid-in capital........................................................................ 89,495 106,466
Unrealized holding gains on available-for-sale securities, net of deferred taxes.................. 251 21
Retained earning (deficit)........................................................................ (13,826) (21,480)
------------ -----------
Total stockholder's equity.................................................................... 92,890 85,007
------------ -----------
Total liabilities and stockholder's equity.................................................... $559,295 $899,357
------------ -----------
------------ -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-112
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
REVENUE:
DTH products and technical services..................................................... $ 36,277 $ 36,741
Programming............................................................................. 3,871 3,913
Loan origination and participation income............................................... 265 372
--------- ----------
Total revenue....................................................................... 40,413 41,026
--------- ----------
EXPENSES:
DTH products and technical services..................................................... 29,445 32,750
Programming............................................................................. 3,432 3,283
Selling, general and administrative..................................................... 7,871 10,571
Depreciation............................................................................ 363 3,330
--------- ----------
Total expenses...................................................................... 41,111 49,934
--------- ----------
OPERATING LOSS............................................................................ (698) (8,908)
--------- ----------
OTHER INCOME (EXPENSE):
Interest income......................................................................... 3,638 1,974
Interest expense, net of amounts capitalized............................................ (6,563) (5,784)
Other, net.............................................................................. 28 (1)
--------- ----------
Total other income (expense)........................................................ (2,897) (3,811)
--------- ----------
NET LOSS BEFORE INCOME TAXES.............................................................. (3,595) (12,719)
BENEFIT FOR INCOME TAXES.................................................................. 1,355 5,065
--------- ----------
NET LOSS.................................................................................. $ (2,240) $ (7,654)
--------- ----------
--------- ----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-113
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
RETAINED
EARNINGS
(DEFICIT)
AND
SHARES OF ADDITIONAL UNREALIZED TOTAL
COMMON STOCK PREFERRED COMMON PAID-IN HOLDING STOCKHOLDER'S
OUTSTANDING STOCK STOCK CAPITAL LOSSES EQUITY
------------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, at December 31, 1995......... 36,275 $ 16,607 $ 363 $ 89,495 $ (13,575) $ 92,890
Issuance of Common Stock (Note 1).... 1 1 1
Reorganization of Entities Under
Common Control (Note 1)............. (36,275) (16,607) (363) 16,970 --
Unrealized holding losses on
available-for-sale securites, net... (230) (230)
Net loss............................. (7,654) (7,654)
------------- ----------- ----------- ----------- ----------- -------------
BALANCES, at March 31, 1996............ 1 $ -- $ -- $ 106,466 $ (21,459) $ 85,007
------------- ----------- ----------- ----------- ----------- -------------
------------- ----------- ----------- ----------- ----------- -------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
F-114
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1995 1996
---------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................................................. $ (2,240) $ (7,654)
Adjustments to reconcile net loss to net cash flows from operating activities --
Depreciation........................................................................ 363 3,330
Provision for doubtful accounts..................................................... 111 610
Benefit for deferred taxes.......................................................... (2,493) (3,013)
Amortization of deferred debt issuance costs on 1994 Notes.......................... 315 315
Amortization of discount on 1994 Notes, net of amounts capitalized.................. 6,131 4,189
Amortization of discount on 1996 Notes, net of amounts capitalized.................. -- 843
Equity in earnings of joint venture................................................. (15) --
Change in reserve for excess and obsolete inventory................................. 233 227
Long-term deferred programming revenue.............................................. -- 3,790
Other, net.......................................................................... 26 (170)
Changes in working capital items --
Trade accounts receivable......................................................... (728) (9,579)
Inventories....................................................................... (4,238) 11,244
Income tax receivable............................................................. -- (634)
Other current assets.............................................................. (730) 192
Liability under cash management program........................................... (57) --
Trade accounts payable............................................................ (1,061) (6,783)
Deferred programming revenue...................................................... (657) 1,853
Accrued expenses.................................................................. 1,221 858
Other current liabilities......................................................... 38 244
---------- ------------
Net cash flows from operating activities...................................... (3,781) (138)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities......................................... (15,211) (2)
Sales of marketable investment securities............................................. 27,777 --
Purchases of restricted marketable investment securities.............................. -- (15,500)
Purchases of property and equipment................................................... (538) (2,715)
Offering proceeds and investment earnings placed in escrow............................ (2,714) (178,452)
Funds released from escrow accounts................................................... 16,257 17,785
Expenditures for satellite systems under construction................................. (19,621) (7,928)
Expenditures for FCC authorizations................................................... -- (370)
---------- ------------
Net cash flows from investing activities...................................... 5,950 (187,182)
---------- ------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-115
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1995 1996
--------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgage indebtedness and note payable................................... $ (57) $ (1,022)
Proceeds from issuance of Common Stock................................................. -- 1
Net proceeds from issuance of 1996 Notes............................................... -- 337,043
--------- -----------
Net cash flows from financing activities....................................... (57) 336,022
--------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................................ 2,112 148,702
CASH AND CASH EQUIVALENTS, beginning of period........................................... 17,506 13,949
--------- -----------
CASH AND CASH EQUIVALENTS, end of period................................................. $ 19,618 $ 162,651
--------- -----------
--------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized..................................... $ 106 $ 354
Cash paid for income taxes............................................................. 39 --
Cumulative Series A Preferred Stock dividends.......................................... 301 --
Satellite launch payment for EchoStar II applied to EchoStar I launch.................. -- 15,000
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-116
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND MARCH 31, 1996
(1) ORGANIZATION AND PRESENTATION OF FINANCIAL STATEMENTS
EchoStar Satellite Broadcasting Corporation ("ESB") is a wholly owned
subsidiary of EchoStar Communications Corporation ("EchoStar"). ESB was formed
in January 1996 for the purpose of completing a private offering (the "1996
Notes Offering"), pursuant to Rule 144A of the Securities Act of 1933, as
amended (the "Securities Act"), of 13 1/8% Senior Secured Discount Notes due
2004 (the "1996 Notes"), resulting in net proceeds of approximately $337.0
million. The 1996 Notes Offering was consummated in March 1996. In connection
with the 1996 Notes Offering, EchoStar contributed all of the outstanding
capital stock of its wholly owned subsidiary, Dish, Ltd., to ESB. This
transaction has been accounted for as a reorganization of entities under common
control. Accordingly, Dish, Ltd. has been treated as the predecessor to ESB and
the historical financial statements of ESB are those of Dish, Ltd. ESB is
subject to all, and EchoStar is subject to certain of, the terms and conditions
of the Indenture related to the 1996 Notes (the "1996 Notes Indenture"). On
April 24, 1996, ESB filed a Registration Statement on Form S-1 under the
Securities Act to exchange the 1996 Notes for publicly registered notes.
ESB successfully launched its first direct broadcast satellite ("DBS"),
EchoStar I, in December 1995 and, on March 4, 1996, began broadcasting its DBS
programming (the "Dish Network-SM-") to the entire continental United States.
The Dish Network-SM- currently includes over 100 channels of high quality
digital video and audio programming and will expand to approximately 200 digital
video and audio channels following the successful launch of a second DBS
satellite, DirectSat I ("EchoStar II"), currently scheduled in the fall of 1996.
In addition to its DBS business, ESB is engaged in the design, manufacture,
distribution and installation of satellite direct to home ("DTH") products,
domestic distribution of DTH programming and consumer financing of ESB's
domestic DTH products and services. In the first quarter of 1996, EchoStar
formed a wholly owned subsidiary, Dish Network Credit Corporation ("DNCC"), for
the purpose of providing consumer financing for EchoStar's domestic DTH products
and services. At that time, ESB's subsidiary that previously provided these
services ceased new loan origination activities. In future periods ESB's revenue
from loan origination and participation income will decline.
Proceeds from the 1996 Notes Offering will be used for: (i) continued
development, marketing and distribution of the Dish Network-SM-; (ii) EchoStar's
purchase of DBS frequencies at 148 DEG. WL; (iii) construction, launch and
insurance of EchoStar III and EchoStar IV; (iv) additional launch costs of
EchoStar II; and (v) other general corporate purposes. The additional
frequencies were acquired by EchoStar at a public auction held by the Federal
Communications Commission ("FCC") in January 1996 (the "FCC Auction").
In June 1995, EchoStar completed an offering of its Class A Common Stock,
resulting in net proceeds of approximately $63.0 million (the "Equity
Offering"). In June 1994, Dish, Ltd. completed an offering of 12 7/8% Senior
Secured Discount Notes due 2004 (the "1994 Notes") and Warrants (collectively,
the "1994 Notes Offering"), resulting in net proceeds of approximately $323.3
million. Dish Ltd. and most of its subsidiaries are subject to the terms and
conditions of the Indenture related to the 1994 Notes (the "1994 Notes
Indenture").
EchoStar presently owns approximately 40% of the outstanding common stock of
Direct Broadcasting Satellite Corporation ("DBSC"). DBSC's principal assets
include an FCC conditional satellite construction permit and specific orbital
slot assignments for eleven DBS frequencies at 61.5 DEG. WL and eleven DBS
frequencies at 175 DEG. WL (the "DBS Rights"). EchoStar intends to merge DBSC
with Direct Broadcasting Satellite Corporation ("New DBSC"), a wholly owned
subsidiary of EchoStar (the "DBSC Merger"). The DBSC Merger has been approved by
DBSC shareholders but will not be
F-117
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(1) ORGANIZATION AND PRESENTATION OF FINANCIAL STATEMENTS (CONTINUED)
consummated until the FCC has approved the DBSC Merger. Although no assurances
can be given, EchoStar expects the FCC to issue an order with respect to the
DBSC Merger in the near future. Assuming FCC approval of the DBSC Merger,
EchoStar will hold, through New DBSC, DBSC's DBS Rights. On April 16, 1996,
EchoStar filed a Registration Statement on Form S-4 under the Securities Act
covering 658,000 shares of EchoStar Class A Common Stock that are intended to be
issued in connection with the DBSC Merger.
The accompanying consolidated financial statements include only the accounts
of ESB and its subsidiaries and exclude all accounts of ESB's parent, EchoStar.
Unless otherwise stated herein, or the context otherwise requires,
references herein to ESB shall include ESB and all of its direct and indirect
subsidiaries, and EchoStar shall include EchoStar, ESB and all of their direct
and indirect wholly owned subsidiaries.
The accompanying unaudited condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 1996
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the Combined and
Consolidated Financial Statements and footnotes thereto included in Dish, Ltd.'s
Annual Report on Form 10-K for the year ended December 31, 1995. Certain prior
year amounts have been reclassified to conform with the current year
presentation.
SIGNIFICANT RISKS AND UNCERTAINTIES
Execution of EchoStar's business strategy to launch and operate DBS
satellites has dramatically changed its operating results and financial
position. As of March 31, 1996, EchoStar expects to expend approximately an
additional $520 million through 1999 to build, launch and support its first four
satellites (Note 6), assuming receipt of all required FCC licenses and permits.
EchoStar consummated the 1994 Notes Offering, the 1996 Notes Offering and the
Equity Offering to satisfy these capital requirements. Annual interest expense
on the 1994 and 1996 Notes and depreciation of the investment in the satellites
and related assets will each be of a magnitude that exceeds historical levels of
income before taxes. Beginning in 1995 EchoStar reported significant net losses
and expects net losses to continue for the foreseeable future. EchoStar's plans
also include the construction and launch of two fixed service satellites,
additional DBS satellites and marketing campaigns (including receiver
subsidization if market conditions warrant) to promote its DBS products and
services. EchoStar may need to raise significant additional funds for
construction and launch of additional satellites and there can be no assurance
that necessary funds will be available or, if available, that they will be
available on terms favorable to EchoStar. However, management believes, but can
give no assurance, that demand for its DBS products and services will result in
sufficient cash flow which, together with other sources of capital, will be
sufficient to satisfy future planned expenditures. Significant delays or launch
failures in EchoStar's satellite launch program may have significant adverse
consequences to EchoStar's operating results and financial condition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management estimates and
assumptions that affect the reported amounts of
F-118
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(1) ORGANIZATION AND PRESENTATION OF FINANCIAL STATEMENTS (CONTINUED)
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.
(2) SUPPLEMENTAL ANALYSIS
CASH AND CASH EQUIVALENTS
ESB considers all liquid investments purchased with an original maturity of
ninety days or less to be cash equivalents. Cash equivalents as of December 31,
1995, and March 31, 1996 consist of money market funds, corporate notes and
commercial paper stated at cost which equates to market value.
RESTRICTED CASH AND MARKETABLE SECURITIES
ESB classifies all marketable investment securities as available-for-sale.
Accordingly, these investments are reflected at market value based on quoted
market prices. Related unrealized gains and losses are reported as a separate
component of stockholder's equity, net of related deferred income taxes. The
specific identification method is used to determine cost in computing realized
gains and losses.
Restricted Cash and Marketable Securities in Escrow Accounts as reflected on
the accompanying balance sheets represent the remaining net proceeds received
from the 1994 Notes Offering and a portion of the proceeds from the 1996 Notes
Offering, plus interest earned, less amounts expended to date in connection with
the development, construction and launch of the Dish Network-SM-. These proceeds
are held in separate escrow accounts (the "1994 Escrow Account" and the "1996
Escrow Account", respectively), for the benefit of the holders of the 1994 and
1996 Notes and are invested in certain debt and other marketable securities, as
permitted by the respective Indentures, until disbursed for the express purposes
identified in the 1994 Notes Offering Prospectus or the 1996 Notes Offering
Memorandum, as the case may be.
Other Restricted Cash includes $11.4 million to satisfy certain covenants
regarding launch insurance required by the 1994 Notes Indenture. ESB is required
to maintain launch insurance and Restricted Cash totalling $225.0 million for
each of EchoStar I and EchoStar II. ESB has obtained $219.3 million of launch
insurance on each satellite, and, together with the cash segregated and reserved
on the accompanying balance sheets, has satisfied its insurance obligations
under the 1994 Notes Indenture. In addition, as of March 31, 1996, $15.0 million
was in an escrow account established pursuant to a DBS satellite receiver
manufacturing contract for payment to the manufacturer as certain milestones are
reached and $15.5 million was in an escrow account for the purpose of cash
collateralizing certain standby letters of credit (Note 4).
The major components of Restricted Cash and Marketable Securities are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
----------------------------------- -------------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING MARKET AMORTIZED HOLDING MARKET
COST GAIN VALUE COST GAIN VALUE
----------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial paper....................... $ 66,214 $ -- $ 66,214 $ 70,600 $ -- $ 70,600
Government bonds....................... 32,904 420 33,324 204,411 49 204,460
Accrued interest....................... 153 -- 153 427 -- 427
----------- ----- --------- ----------- ----- -----------
$ 99,271 $ 420 $ 99,691 $ 275,438 $ 49 $ 275,487
----------- ----- --------- ----------- ----- -----------
----------- ----- --------- ----------- ----- -----------
</TABLE>
F-119
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(2) SUPPLEMENTAL ANALYSIS (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out ("FIFO") method. Proprietary products
are manufactured by outside suppliers to ESB's specifications. ESB also
distributes non-proprietary products purchased from other manufacturers.
Manufactured inventories include materials, labor and manufacturing overhead.
Cost of other inventories includes parts, contract manufacturers' delivered
price, assembly and testing labor, and related overhead, including handling and
storage costs. The major components of inventory were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Finished goods................................................................ $ 20,458 $ 17,957
DBS receiver components....................................................... 9,615 9,728
Competitor DBS Receivers...................................................... 9,404 559
Spare parts................................................................... 2,089 2,078
Reserve for excess and obsolete inventory..................................... (2,797) (3,024)
------------ -----------
$ 38,769 $ 27,298
------------ -----------
------------ -----------
</TABLE>
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The composition of accrued expenses and other current liabilities is as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Accrued EchoStar I launch costs............................................... $ 15,000 $ --
Accrued expenses.............................................................. 3,850 4,708
Reserve for warranty costs.................................................... 1,013 1,013
Other......................................................................... 1,472 1,716
------------ -----------
$ 21,335 $ 7,437
------------ -----------
------------ -----------
</TABLE>
F-120
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(2) SUPPLEMENTAL ANALYSIS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Cost includes interest capitalized on the EchoStar DBS System during
construction at ESB's effective borrowing rate. The major components of property
and equipment were as follows (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE DECEMBER 31, MARCH 31,
(IN YEARS) 1995 1996
------------- ------------ -----------
<S> <C> <C> <C>
Construction in progress........................................ -- $ 282,373 $ 81,322
EchoStar I satellite............................................ 12 -- 198,143
Furniture, fixtures and equipment............................... 2-12 17,163 21,329
Buildings and improvements...................................... 7-40 21,006 21,109
Tooling and other............................................... 2 2,039 3,470
Land............................................................ -- 1,613 1,613
Vehicles........................................................ 7 1,310 1,325
Furniture and equipment held for sale........................... 17,062 17,614
Computer equipment held for sale................................ 902 885
------------ -----------
Total property and equipment.............................. 343,468 346,810
Less-Accumulated depreciation................................... (10,269) (13,579)
------------ -----------
Net property and equipment................................ $ 333,199 $ 333,231
------------ -----------
------------ -----------
</TABLE>
Construction in progress principally includes capitalized costs related to
EchoStar II, which is scheduled for launch in the fall of 1996.
Construction in progress consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Progress amounts for satellite construction, launch, launch insurance,
capitalized interest, launch and in-orbit tracking, telemetry and control
services:
EchoStar I.................................................................. $ 193,629 $ --
EchoStar II................................................................. 88,634 81,133
Other....................................................................... 110 189
------------ -----------
$ 282,373 $ 81,322
------------ -----------
------------ -----------
</TABLE>
F-121
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(2) SUPPLEMENTAL ANALYSIS (CONTINUED)
OTHER NONCURRENT ASSETS
The major components of other noncurrent assets were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Deferred tax assets, net...................................................... $ 12,109 $ 12,497
FCC authorizations, net of amortization....................................... 11,309 11,681
1996 Notes deferred debt issuance costs....................................... -- 13,004
1994 Notes deferred debt issuance costs, net of amortization.................. 10,622 10,307
SSET convertible subordinated debentures and accrued interest................. 9,610 9,758
Other, net.................................................................... 897 899
------------ -----------
$ 44,547 $ 58,146
------------ -----------
------------ -----------
</TABLE>
(3) LONG-TERM DEBT
1994 NOTES
On June 7, 1994, Dish, Ltd. completed the 1994 Notes Offering of 624,000
units consisting of $624.0 million aggregate principal amount of the 1994 Notes
and 3,744,000 Warrants. The 1994 Notes Offering resulted in net proceeds to
Dish, Ltd. of approximately $323.3 million. Interest on the 1994 Notes currently
is not payable in cash but accrues through June 1, 1999, with the 1994 Notes
accreting to $624.0 million by that date. Thereafter, interest on the 1994 Notes
will be payable in cash semi-annually on June 1 and December 1 of each year,
commencing December 1, 1999. At March 31, 1996, the 1994 Notes were reflected in
the accompanying financial statements at $395.3 million, net of unamortized
discount of $228.7 million.
1996 NOTES
On March 25, 1996, ESB completed the 1996 Notes Offering consisting of
$580.0 million aggregate principal amount of the 1996 Notes. The 1996 Notes
Offering resulted in net proceeds to ESB of approximately $337.0 million.
Interest on the 1996 Notes currently is not payable in cash but accrues through
March 15, 2000, with the 1996 Notes accreting to $580.0 million by that date.
Thereafter, interest on the 1996 Notes will be payable in cash semi-annually on
March 15 and September 15 of each year, commencing September 15, 2000. At March
31, 1996, the 1996 Notes were reflected in the accompanying financial statements
at $350.9 million, net of unamortized discount of $229.1 million.
(4) BANK CREDIT FACILITY AND LETTERS OF CREDIT
On May 6, 1994, the principal subsidiaries of EchoStar, except EchoStar
Satellite Corporation ("ESC") (the "Borrowers"), entered into an agreement with
Bank of America Illinois, to provide a revolving credit facility (the "Credit
Facility") for working capital advances and for letters of credit necessary for
inventory purchases and satellite construction payments. The Credit Facility
expired in May 1996 and EchoStar does not currently intend to arrange a new
credit facility. Instead, EchoStar is using available cash to collateralize its
letter of credit obligations, which have historically been the only significant
use of the Credit Facility. At March 31, 1996, EchoStar had cash collateralized
$15.5 million of certain standby letters of credit for trade purchases which is
included in restricted cash and marketable securities in the accompanying
financial statements (Note 2).
F-122
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(5) INCOME TAXES
The components of the benefit for income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Current (provision) benefit
Federal.......................................................................... $ (767) $ 1,971
State............................................................................ (194) 203
Foreign.......................................................................... (177) (122)
--------- ---------
(1,138) 2,052
--------- ---------
Deferred benefit
Federal.......................................................................... 2,050 2,764
State............................................................................ 443 249
--------- ---------
2,493 3,013
--------- ---------
Total benefit.................................................................. $ 1,355 $ 5,065
--------- ---------
--------- ---------
</TABLE>
ESB's deferred tax assets (approximately $17.1 million at March 31, 1996)
relate principally to temporary differences for amortization of original issue
discount on the 1994 and 1996 Notes and various accrued expenses which are not
deductible until paid. No valuation allowance has been provided because ESB
currently believes it is more likely than not that these deferred assets will
ultimately be realized. If future operating results differ materially and
adversely from ESB's current expectations, its judgment regarding the need for a
valuation allowance may change.
(6) OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
EchoStar has contracted with Martin Marietta Corporation ("Martin Marietta")
for the construction and delivery of high powered DBS satellites and for related
services. Penalties are payable by Martin Marietta as a result of delays in the
delivery of EchoStar I by Martin Marietta and may be payable with respect to
EchoStar II or EchoStar III. As of November 19, 1995, the date that EchoStar I
was delivered by Martin Marietta to China, those penalties totaled approximately
$3.2 million with respect to EchoStar I. Penalties of $2.0 million are payable
by Martin Marietta in the event that EchoStar II is not delivered by May 15,
1996. Thereafter, delays in the delivery of EchoStar II would result in PER DIEM
additional penalties up to a maximum of $5.0 million in the aggregate. Beginning
August 1, 1997, a PER DIEM penalty of $3,333, to a maximum of $100,000, is
payable if EchoStar III is not delivered by July 31, 1997. Beginning September
1, 1997, additional delays in the delivery of EchoStar III would result in
additional PER DIEM penalties of $33,333, up to a maximum of $5.0 million in the
aggregate.
EchoStar has entered into a contract with Arianespace, Inc. ("Arianespace")
to launch EchoStar II from Korou, French Guiana in the fall of 1996 (the
"Arianespace Contract"). The launch is scheduled to be performed on a dedicated
Ariane 42P launch vehicle. The Arianespace Contract provides the potential for
the EchoStar launch to occur before the fall of 1996 if earlier scheduled
launches are accelerated or delayed. The Arianespace Contract contains
provisions entitling either party to delay the launch in limited circumstances,
subject to the payment of penalties in some cases. As of March 31, 1996,
EchoStar has paid Arianespace approximately $4.4 million pursuant to the
Arianespace Contract. All remaining payments are payable monthly and will be due
prior to the launch.
F-123
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(6) OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
EchoStar II was previously scheduled to be launched by the same launch
provider as EchoStar I, China Great Wall Industry Corporation ("Great Wall").
EchoStar I was successfully launched by Great Wall in December 1995. EchoStar
notified Great Wall of its decision to terminate the launch of EchoStar II with
Great Wall. EchoStar applied $15.0 million previously paid Great Wall in
connection with this launch to the final $15.0 million owed Great Wall related
to the launch of EchoStar I. In May 1996, EchoStar received a refund of the
remaining $4.5 million previously paid Great Wall in connection with the second
launch.
EchoStar has entered into a contract for launch services with Lockheed
Martin Commercial Launch Services, Inc. ("Lockheed") for the launch of EchoStar
III from Cape Canaveral Air Station, Florida during the fall of 1997, subject to
delay or acceleration in certain circumstances (the "Lockheed Contract"). The
Lockheed Contract provides for launch of the satellite utilizing an Atlas IIAS
launch vehicle. EchoStar has made an initial payment to Lockheed of $5.0 million
and the remaining cost is payable in installments in accordance with the payment
schedule set forth in the Lockheed Contract, which requires that substantially
all payments be made to Lockheed prior to launch.
EchoStar has contracted with Lockheed-Khrunichev-Energia-International, Inc.
("LKE") for the launch of EchoStar IV during 1998 from the Kazakh Republic, a
territory of the former Soviet Union, utilizing a Proton launch vehicle (the
"LKE Contract"). Either party may request a delay in the relevant launch period,
subject to the payment of penalties based on the length of the delay and the
proximity of the request to the launch date. EchoStar has paid LKE $20.0 million
pursuant to the LKE Contract. No additional payments are currently required to
be made to LKE until 1997.
PURCHASE COMMITMENTS
ESB has entered into agreements with various manufacturers to purchase DBS
satellite receivers and related components manufactured based on ESB's supplied
specifications. As of March 31, 1996 the remaining commitments total as much as
$622.2 million. At March 31, 1996, the total of all outstanding purchase order
commitments with domestic and foreign suppliers was as much as $641.3 million.
All but approximately $85.9 million of the purchases related to these
commitments are expected to be made during 1996 and the remainder is expected to
be made during 1997. EchoStar expects to finance these purchases from available
cash, marketable investment securities and sales of inventory, including the
sale of EchoStar Receiver Systems and related products.
OTHER RISKS AND CONTINGENCIES
EchoStar is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position, results of operations or liquidity of EchoStar.
(7) SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
The 1994 Notes are fully, unconditionally and jointly and severally
guaranteed by all subsidiaries of Dish, Ltd., except for certain de minimis
domestic and foreign subsidiaries.
The 1996 Notes are initially guaranteed by EchoStar on a subordinated basis.
On and after the Dish Guarantee Date (as defined in the 1996 Notes Indenture),
the 1996 Notes will be guaranteed by Dish, Ltd., which guarantee will rank PARI
PASSU with all senior unsecured indebtedness of Dish, Ltd. On and after the date
upon which the DBSC Merger is consummated, the 1996 Notes will be
F-124
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(7) SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS (CONTINUED)
guaranteed by New DBSC, which guarantee will rank PARI PASSU with all senior
unsecured indebtedness of New DBSC. If the DBSC Merger is not consummated, New
DBSC will not be required to guarantee the 1996 Notes. There can be no assurance
that the DBSC Merger will be approved by the FCC or that it will be consummated.
The net assets of Dish, Ltd. exceed the net assets of the 1994 Notes
Guarantors by approximately $277,000 and $223,000 as of December 31, 1995 and
March 31, 1996, respectively. Summarized consolidated financial information for
Dish, Ltd. is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
Income Statement Data --
Revenue....................................................................... $ 40,413 $ 41,026
Expenses...................................................................... 41,111 49,934
Operating loss................................................................ (698) (8,908)
Other income (expense), net................................................... (2,897) (3,234)
Net loss before income taxes.................................................. (3,595) (12,142)
Benefit for income taxes...................................................... 1,355 4,852
--------- ----------
Net loss.................................................................... $ (2,240) $ (7,290)
--------- ----------
--------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
Balance Sheet Data --
Current assets............................................................ $ 81,858 $ 64,144
Property and equipment, net............................................... 333,199 333,231
Other noncurrent assets................................................... 144,238 150,659
------------ -----------
Total assets............................................................ $ 559,295 $ 548,034
------------ -----------
------------ -----------
Current liabilities....................................................... $ 50,743 $ 31,167
Long-term liabilities..................................................... 415,662 431,544
Stockholder's equity...................................................... 92,890 85,323
------------ -----------
Total liabilities and stockholder's equity.............................. $ 559,295 $ 548,034
------------ -----------
------------ -----------
</TABLE>
F-125
<PAGE>
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
DIRECT BROADCASTING SATELLITE CORPORATION
(DELAWARE)
(A DEVELOPMENT STAGE COMPANY)
The following supplemental quarterly financial information of Direct
Broadcasting Satellite Corporation ("DBSC") is included as part of the
Registration Statement in connection with a pending merger of DBSC with a wholly
owned subsidiary of EchoStar Communications Corporation (the "Merger"), and is
included for informational purposes only. No assurances can be given that the
Merger will be consummated, or if consummated, the date that such consummation
will occur.
F-126
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------- -------------
<S> <C> <C>
(AUDITED) (UNAUDITED)
CURRENT ASSETS:
Cash.......................................................................... $ 72,950 $ 18,857
Money Market Funds --
Crestfunds, Inc. -- Cash Reserves Fund...................................... 285,978 199,497
Pacific Horizon Prime Fund.................................................. 7,081 2,516,577
------------- -------------
Total current assets...................................................... 366,009 2,734,931
------------- -------------
PROPERTY AND EQUIPMENT, AT COST:
Satellite development in process (Note 4)..................................... 17,882,707 23,396,333
Computer equipment............................................................ 5,073 5,073
Less: Accumulated depreciation................................................ (2,730) (2,998)
------------- -------------
Cost less accumulated depreciation............................................ 17,885,050 23,398,408
------------- -------------
OTHER ASSETS:
FCC license (Note 3).......................................................... 865,571 927,770
Unamortized loan costs........................................................ 67,058 64,963
Deferred tax benefit (Note 7)................................................. -- --
Security deposits............................................................. 2,575 2,575
------------- -------------
Total other assets.......................................................... 935,204 995,308
------------- -------------
Total assets.............................................................. $ 19,186,263 $ 27,128,647
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 140,958 $ 124,139
Unsecured note payable (Note 6A).............................................. 500,000 500,000
Accrued interest.............................................................. 237,226 249,027
Unsecured notes payable (Note 6B) (in arrears)................................ 325,000 325,000
Accrued interest in arrears (Note 6).......................................... 341,074 347,794
Due to shareholder............................................................ 3,024 2,182
------------- -------------
Total current liabilities................................................... 1,547,282 1,548,142
------------- -------------
LONG-TERM DEBT:
Secured notes payable (Note 5)................................................ 16,000,000 23,500,000
Accrued interest (Notes 5 & 6)................................................ 10,082 523,708
------------- -------------
Total long-term debt........................................................ 16,010,082 24,023,708
------------- -------------
Total liabilities........................................................... 17,557,364 25,571,850
------------- -------------
COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 3,000,000 shares authorized; 1,620,138 shares
issued and outstanding....................................................... 16,201 16,201
Additional paid in capital.................................................... 5,849,046 5,849,046
Accumulated deficit (Note 1).................................................. (2,755,808) (2,755,808)
Accumulated deficit during development stage.................................. (1,480,540) (1,552,642)
------------- -------------
Total stockholders' equity.................................................. 1,628,899 1,556,797
------------- -------------
Total liabilities and stockholders' equity.................................. $ 19,186,263 $ 27,128,647
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-127
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, APRIL 1, 1990
------------------------ (INCEPTION TO)
1995 1996 MARCH 31, 1996
----------- ----------- --------------
<S> <C> <C> <C>
REVENUE:
Gain on settlement of indebtedness.................................. $ -- $ -- $ 31,656
Investment income................................................... 19,480 13,015 101,074
----------- ----------- --------------
Total revenue..................................................... 19,480 13,015 132,730
----------- ----------- --------------
OPERATING EXPENSES:
Interest income..................................................... 19,320 18,520 630,776
Legal fees.......................................................... -- 7,303 393,195
Consulting fees..................................................... 42,303 36,000 453,327
Professional services............................................... 4,660 6,650 40,671
Rent................................................................ 7,226 6,800 53,350
Taxes and licenses.................................................. -- 670 7,704
Other administrative expenses....................................... 7,811 6,810 101,255
Depreciation and amortization....................................... 691 2,364 5,094
----------- ----------- --------------
Total operating expenses.......................................... 82,011 85,117 1,685,372
----------- ----------- --------------
NET LOSS BEFORE INCOME TAXES.......................................... (62,531) (72,102) (1,552,642)
PROVISION FOR INCOME TAXES (Note 7)................................... -- -- --
----------- ----------- --------------
NET LOSS.............................................................. $ (62,531) $ (72,102) $ (1,552,642)
----------- ----------- --------------
----------- ----------- --------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................ 1,618,138 1,620,138 1,049,565
----------- ----------- --------------
----------- ----------- --------------
LOSS PER COMMON SHARE................................................. $ (.04) $ (.04) $ (1.48)
----------- ----------- --------------
----------- ----------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-128
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL DEFICIT DURING TOTAL
---------------------- PAID-IN ACCUMULATED DEVELOPMENT STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT STAGE EQUITY
----------- --------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995....... 1,620,138 $ 16,201 $ 5,849,046 $ (2,755,808) $ (1,480,540) $ 1,628,899
Net loss......................... (72,102) (72,102)
----------- --------- ------------- -------------- -------------- -------------
Balance at March 31, 1996.......... 1,620,138 $ 16,201 $ 5,849,046 $ (2,755,808) $ (1,552,642) $ 1,556,797
----------- --------- ------------- -------------- -------------- -------------
----------- --------- ------------- -------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-129
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, APRIL 1, 1990
----------------------------- (INCEPTION TO)
1995 1996 MARCH 31, 1996
------------- -------------- ---------------
<S> <C> <C> <C>
(NOTE 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................... $ (62,531) $ (72,102) $ (1,552,642)
Adjustments to reconcile net loss to net cash applied to
operating activities:
Depreciation and amortization................................ 691 2,364 5,094
Gain on settlement of indebtedness........................... -- -- (31,656)
Noncash consulting fees...................................... -- -- 16,000
Increase (decrease) in accounts payable...................... 3,235 2,747 (46,327)
Increase in accrued interest payable......................... 19,319 18,521 607,818
Increase (decrease) due to shareholders...................... 7,380 (842) (6,072)
------------- -------------- ---------------
Net cash applied to operating activities................... (31,906) (49,312) (1,007,785)
------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of furniture and equipment......................... -- -- (5,073)
Increase in satellite development costs........................ (21,000) (5,000,000) (22,872,625)
Increase in FCC license........................................ (101,544) (14,708) (679,952)
------------- -------------- ---------------
Net cash used in investing activities........................ (122,544) (5,014,708) (23,557,650)
------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in secured notes payable.............................. -- 7,500,000 23,500,000
Issuance of common stock....................................... -- -- 3,384,999
Increase notes payable......................................... -- -- 652,500
Increase in contract payable................................... -- -- 62,500
Payment on contract payable.................................... -- -- (62,500)
Increase in loan costs......................................... -- (67,058) (67,058)
Payment of notes payable....................................... -- -- (167,500)
Increase in security deposit................................... (380) -- (2,575)
------------- -------------- ---------------
Net cash provided by financing activities.................... (380) 7,432,942 27,300,366
------------- -------------- ---------------
NET INCREASE (DECREASE) IN CASH.................................. (154,830) 2,368,922 2,734,931
CASH AT BEGINNING OF PERIOD...................................... 2,406,710 366,009 --
------------- -------------- ---------------
CASH AT END OF PERIOD............................................ $ 2,251,880 $ 2,734,931 $ 2,734,931
------------- -------------- ---------------
------------- -------------- ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest......................... $ -- $ -- $ 22,958
SUPPLEMENTAL SCHEDULE OF NONCASH AND FINANCING ACTIVITIES:
Additional common stock was issued upon the conversion of notes
payable in the amount of $700,000, plus relate accrued
interest totaling $629,406.................................... -- -- 1,329,406
Additional common stock was issue in exchange for consulting
services...................................................... -- -- 16,000
Disclosure of accounting policy:
For the purposes of the statement of cash flows, the Company
considers money market funds to be cash equivalents.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-130
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND MARCH 31, 1996
(1) ORGANIZATION
Direct Broadcasting Satellite Corporation (the "Company" or "DBSC"), a
development stage company, was incorporated January 23, 1981 in the State of
Delaware. It is constructing satellites, and plans to operate a direct-to-home,
multi-channel satellite broadcast television service. Funding of the Company's
operations has been obtained through the private placement of common stock and
issuance of convertible debt, demand notes and accounts payable.
On December 21, 1995, the Company and EchoStar Communications Corporation
("EchoStar"), a 39.8% shareholder, agreed to a merger, subject to receipt of
requisite government approval. Echostar holds direct broadcasting satellite
authorizations for 21 channels at 119 DEG. W.L. Under the terms of the Merger
Agreement, (1) the Company and EchoStar agreed to merge DBSC into a wholly-owned
subsidiary of EchoStar, and (2) the Company's shareholders will be entitled to
receive at their option, $7.99 in cash or .67417 EchoStar shares for each of the
Company's 975,148 shares not already owned by EchoStar.
Echostar also agreed, at its sole discretion, to loan the Company up to
$150,000,000 for expenses associated with the construction, launch, and
insurance of the Company's spacecraft. On December 29, 1995, the Company drew
down $16 million under its loan purchase agreement with EchoStar and paid
Lockheed Martin Corporation $16 million on the same day. During the three months
ended March 31, 1996, the Company drew down an additional $7.5 million under the
agreement.
Without the Echostar or other financing, the Company's ability to meet its
existing obligations and proceed with the construction of the satellite is
doubtful. In such case, the ultimate realization of the capitalized FCC license
application costs, as well as the deferred satellite development costs, are
doubtful, and the continuance of the Company as an operating entity would be
uncertain.
The Company's development activities were dormant for a period of years
ended March 31, 1990. During the year ended March 31, 1991, the Company began
development of two new satellites. In accordance with SFAS No. 7, development
stage activities for presentation purposes on the statements of income and cash
flow are for the period April 1, 1990 to March 31, 1996. Prior development stage
activity losses amounting to $2,755,808 are reflected in stockholders' equity as
accumulated deficit.
(2) SIGNIFICANT ACCOUNTING POLICIES
Effective April 1, 1995, the Company changed its fiscal year to December 31
from March 31.
Loan costs are being amortized over the 8-year life of the secured notes,
effective January 1, 1996.
Management uses estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could differ from those
estimates.
Losses per share have been computed based on the weighted average number of
shares of common stock outstanding during each three month period.
(3) FCC LICENSE
The Company's application for authority to construct and operate a direct
broadcast satellite system was approved by the Federal Communications Commission
("FCC") and a conditional construction permit for two spacecraft was released on
August 15, 1989. On November 10, 1993, the FCC found that the Company had
complied with the necessary due diligence requirements and assigned specific
orbit/spectrum resources to the Company. On December 8, 1995, the FCC staff
granted the
F-131
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(3) FCC LICENSE (CONTINUED)
Company an extension of time through November 1998, to construct and launch two
spacecrafts. Pursuant to a FCC request, on January 31, 1994 the Company
submitted certain technical data to the FCC and asked for launch authority.
On June 30, 1995, the Company notified the FCC that it had signed a
spacecraft contract modification and sought approval thereof. Certain costs
incurred in connection with filing the FCC license application and maintaining
the authority have been capitalized. Amortization periods for these costs will
be determined at the time the services related to the applicable FCC license
commences, or capitalized costs will be written off at the time efforts to
provide services are abandoned. FCC licenses are expected to have a useful life
of approximately 12 years.
(4) SATELLITE DEVELOPMENT COSTS
The Company has entered into a contract for the construction of two
satellites. The contract, as amended May 31, 1995, provides for periodic,
non-refundable payments over a period extending to October 30, 2003, as well as
cancellation penalties if the contract is terminated before the satellites are
launched. As of March 31, 1996, payments made under the terms of the contract
totaled $22,838,500. The contract calls for additional payments of $52,500,000
in the year ending December 31, 1996. The total commitment under the contract is
in excess of $160 million.
At March 31, 1996, total satellite development costs amounted to
$23,396,333, including capitalized interest of $523,708.
During construction and prior to launch, the Company has granted to the
Contractor a full security interest in all hardware, software and work in
process (collectively "Security") related to the two satellites. In the event of
certain defaults by the Company, the Contractor shall immediately assume
ownership of the entire Security.
(5) SECURED NOTES PAYABLE
On December 29, 1995, the Company borrowed $16,000,000, and during the three
months ended March 31, 1996, borrowed $7,500,000, per the terms of a note
purchase agreement and a security agreement between EchoStar and the Company.
The promissory notes are secured by an assignment, pledge and grant of security
interest in all the estate, right, title and interest of the Company, whether
now owned or hereafter acquired, in, to and under (1) the Satellites and DBS
Rights, (2) all agreements, contracts and documents related to the Satellites,
DBS Rights, and business of the Company, (3) all income and revenues from all
business operations, and (4) all tangible and/or intangible property of the
Company, including the Satellites. However, the security in the Satellites is
subordinate to the security interest in and to the Satellites held by Martin
Marietta.
Interest accrues at Chase Manhattan Bank prime rate plus 3 percent as of the
date of each loan draw. Principal and interest is payable in seven equal annual
installments beginning two years after each loan draw. The December 29, 1997
installment related to the $16,000,000 loan will be approximately $3,713,300,
including interest at 11.5%. The annual installments related to the $7,500,000
of additional loans will be approximately $1,725,027, starting in February 1998,
including interest at 11.25%.
(6) UNSECURED NOTES PAYABLE
A. UNSECURED NOTE PAYABLE.
F-132
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(6) UNSECURED NOTES PAYABLE (CONTINUED)
A note payable in the amount of $500,000 is payable 90 days after the
successful launch and check-out of DBSC's first Direct Broadcast
Satellite-Broadcast Satellite System, or on demand in certain other limited
circumstances. Interest is payable at Chase Manhattan Bank prime rate plus 1%
per annum or 4% after maturity, or in event of default. As of December 31, 1995,
the note payable and the related accrued interest were payable on demand.
B. CONVERTIBLE NOTES PAYABLE.
Convertible notes payable amounted to $325,000 at December 31, 1995 and
March 31, 1996. Notes totalling $100,000 accrue interest at 75% of Chase
Manhattan Bank prime rate, and notes totalling $225,000 accrue interest at 100%
of the prime rate.
The notes provide that until they are paid in full, a note holder at his
option may convert principal into shares of the authorized common stock of the
Company as follows: $100,000 of principal at $6.67 per share, and $225,000 of
principal at $8.33 per share.
(7) INCOME TAXES
Effective April 1, 1992, the Company adopted SFAS No. 109, "Accounting for
Income Taxes", which requires an asset and liability approach to financial
accounting and reporting for income taxes. The difference between the financial
statement and tax bases of assets and liabilities are computed for those
differences that have future tax consequences using the currently enacted tax
laws and rates that apply to the periods in which they are expected to affect
taxable income. Valuation allowances are established, if necessary, to reduce
the deferred tax asset to the amount that will more likely than not be realized.
Income tax expense is the current tax payable or refundable for the period, plus
or minus the net change in the deferred tax assets and liabilities.
The adoption of Statement 109 did not have an effect on the Company's
financial statements because the deferred income tax benefit has been offset by
a valuation allowance of equal amount. The valuation allowance was established
to reduce the deferred tax benefit to the amount that will more likely than not
be realized. This reduction is necessary due to the uncertainty of the Company's
ability to utilize all of the future tax deduction resulting from net operating
losses.
The gross deferred income tax benefit was approximately $849,382 at December
31, 1995, and $868,146 at March 31, 1996.
The deferred income tax benefit results primarily from net operating losses
for tax purposes. The net operating loss carryover to future years is $2,202,393
at December 31, 1995, and $2,250,483 at March 31, 1996, none of which will
expire until the year 1999. In addition, the Company has not claimed as a tax
deduction accrued interest payable of $596,821. For income tax purposes, the
Company reports its net income (loss) on the cash basis.
(8) CONTINGENT LIABILITIES
In 1982, the Company entered into agreements with two French corporations
pursuant to which each corporation, in exchange for the Company's commitment to
procure satellite hardware, paid to a satellite launch provider, for the benefit
of the Company, a launch reservation fee of $100,000. The first agreement, as
amended, specified that payment of the $100,000 plus interest of 13% per annum
was due on December 31, 1983. The second agreement provided that the Company was
obligated to issue 6,000 (as adjusted) shares of common stock no later than two
years from the date of the agreement.
F-133
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
(8) CONTINGENT LIABILITIES (CONTINUED)
No equipment was procured from either corporation, no shares of common stock
have been issued nor has the Company returned the $100,000 payment to either
corporation. The Company has not determined whether either obligation is
currently enforceable under French law. The Company is unaware of any request
for payment or for the issuance of the Company's shares from August 3, 1987 to
date.
(9) RELATED PARTY TRANSACTIONS
Consulting fees are paid to certain shareholders and officers.
F-134
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE ISSUER
OR BY THE INITIAL PURCHASERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN SECURITIES
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 7
Risk Factors................................... 20
Use of Proceeds................................ 34
The Exchange Offer............................. 35
Capitalization................................. 43
Selected Financial Data........................ 44
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 46
Business....................................... 59
Management..................................... 89
Certain Relationships and Related
Transactions.................................. 95
Security Ownership of Certain Beneficial Owners
and Management................................ 96
Description of Certain Indebtedness............ 98
Description of Exchange Notes.................. 100
Certain United States Federal Income Tax
Considerations................................ 132
Plan of Distribution........................... 134
Notice to Investors............................ 135
Independent Experts............................ 138
Legal Matters.................................. 138
Index to Financial Statements.................. F-1
</TABLE>
PROSPECTUS
$580,000,000
ECHOSTAR SATELLITE
BROADCASTING CORPORATION
OFFER TO EXCHANGE $1,000 PRINCIPAL AMOUNT OF ITS
13 1/8% SENIOR SECURED DISCOUNT NOTES DUE 2004 WHICH
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR EACH
$1,000 PRINCIPAL AMOUNT OF ITS OUTSTANDING 13 1/8%
SENIOR SECURED DISCOUNT NOTES DUE 2004
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
FIRST TRUST NATIONAL ASSOCIATION
BY FACSIMILE:
(612) 244-1537
CONFIRMATION BY TELEPHONE:
(612) 244-1197
BY MAIL/HAND DELIVERY/OVERNIGHT DELIVERY:
FIRST TRUST NATIONAL ASSOCIATION
180 EAST FIFTH STREET
ST. PAUL, MINNESOTA 55101
ATTN: PHYLLIS MEATH
SPECIALIZED FINANCE GROUP
JUNE 28, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
