<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL [ ], 1999.
Registration No. 333-71345
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
ECHOSTAR DBS CORPORATION
AFFILIATE GUARANTORS LISTED ON SCHEDULE ATTACHED HERETO
(Exact name of Registrant as specified in its charter)
COLORADO 5064 84-1328967
(STATE OF REGISTRANT'S (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
DAVID K. MOSKOWITZ, ESQ.
5701 SOUTH SANTA FE DRIVE SENIOR VICE PRESIDENT, GENERAL COUNSEL
LITTLETON, COLORADO 80120 AND SECRETARY
(303) 723-1000 ECHOSTAR DBS CORPORATION
5701 SOUTH SANTA FE DRIVE
LITTLETON, COLORADO 80120
(303) 723-1000
(ADDRESS, INCLUDING ZIP CODE, (NAME, ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER, INCLUDING AND TELEPHONE NUMBER, INCLUDING AREA
AREA CODE, OF REGISTRANT'S CODE, OF AGENT FOR SERVICE)
PRINCIPAL EXECUTIVE OFFICE)
WITH A COPY TO:
DAVID W. AMBROSIA, ESQ.
WINTHROP, STIMSON, PUTNAM & ROBERTS
ONE BATTERY PARK PLAZA
NEW YORK, NY 10004
(212) 858-1000
-----------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
-----------------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE OF ADDITIONAL REGISTRANT GUARANTORS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRIMARY STANDARD I.R.S.
EXACT NAME OF GUARANTOR REGISTRANTS AS SPECIFIED STATE OF INDUSTRIAL CLASSIFICATION EMPLOYER IDENTIFICATION
IN THEIR RESPECTIVE CHARTERS FORMATION NUMBER NUMBER
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DIRECTSAT CORPORATION DELAWARE 5064 54-1547458
ECHO ACCEPTANCE CORPORATION COLORADO 5064 84-1082359
ECHOSPHERE CORPORATION COLORADO 5064 84-0833457
DISH INSTALLATION NETWORK CORPORATION COLORADO 5064 84-1195952
ECHOSTAR TECHNOLOGIES CORPORATION TEXAS 5064 76-0033570
HT VENTURES, INC. COLORADO 5064 84-1239150
ECHOSTAR INTERNATIONAL CORPORATION COLORADO 5064 84-1258859
SATELLITE SOURCE, INC. COLORADO 5064 84-1045974
ECHOSTAR SATELLITE CORPORATION COLORADO 5064 84-1114039
HOUSTON TRACKER SYSTEMS, INC. COLORADO 5064 84-1462072
ECHOSTAR NORTH AMERICA CORPORATION COLORADO 5064 84-1282886
SKY VISTA CORPORATION COLORADO 5064 84-1469204
ECHOSTAR INDONESIA, INC. COLORADO 5064 84-1253832
DIRECT BROADCASTING SATELLITE CORPORATION COLORADO 5064 84-1328968
ECHOSTAR SATELLITE BROADCASTING CORPORATION COLORADO 5064 84-1337871
DISH, LTD. NEVADA 5064 88-0312499
ECHOSTAR SPACE CORPORATION COLORADO 5064 84-1307367
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The information in this prosepctus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and we are not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL [ ], 1999
PROSPECTUS
ECHOSTAR DBS CORPORATION
Offer To Exchange
$375,000,000 Of Its 9 1/4% Senior Notes Due 2006
Which Have Been Registered Under The Securities Act
For All Outstanding 9 1/4% Senior Notes Due 2006
And
$1,625,000,000 Of Its 9 3/8% Senior Notes Due 2009
Which Have Been Registered Under The Securities Act
For All Outstanding 9 3/8% Senior Notes Due 2009
The exchange offer will expire at 5:00 p.m., New York City time, on
, 1999, unless extended.
THE EXCHANGE NOTES
- - The exchange notes are substantially identical to the old notes that we
issued on January 25, 1999, except for certain transfer restrictions,
registration rights and liquidated damages provisions relating to the old
notes.
MATERIAL TERMS OF THE EXCHANGE OFFER
- - You will receive an equal principal amount of exchange notes for all old
notes that you validly tender and do not validly withdraw.
- - The exchange will not be a taxable exchange for U.S. federal income tax
purposes.
- - We will not receive any proceeds from the exchange offer.
- - You may withdraw tenders of old notes at any time before the expiration of
the exchange offer.
CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 16 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE EXCHANGE NOTES TO BE DISTRIBUTED IN THE EXCHANGE
OFFER, NOR HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary............................................................ 3
Summary Of The Terms Of The Exchange Offer.................................... 6
Summary Description Of The Notes.............................................. 8
Summary Financial Data........................................................ 11
Summary Satellite Data........................................................ 13
The EchoStar Organization..................................................... 14
Risk Factors.................................................................. 16
Use of Proceeds............................................................... 33
The Exchange Offer............................................................ 34
Capitalization................................................................ 43
Selected Financial Data....................................................... 45
Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 48
Business...................................................................... 60
Management.................................................................... 84
Certain Relationships and Related Transactions................................ 90
Security Ownership of Certain Beneficial Owners and Management................ 91
Description of the Notes...................................................... 94
Certain United States Federal Income Tax Considerations....................... 139
United States ERISA Considerations............................................ 142
Plan of Distribution.......................................................... 143
Legal Matters................................................................. 144
Experts....................................................................... 144
Where You Can Find More Information........................................... 144
Index to Financial Statements................................................. F-1
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT WE
HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH AN OFFER TO SELL OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
2
<PAGE>
PROSPECTUS SUMMARY
OUR COMPANY
We are a leading provider of direct broadcast satellite programming
services in the United States, a significant international supplier of digital
satellite receiver systems and a provider of other satellite services.
THE DISH NETWORK
We started offering subscription television services on the DISH Network in
March 1996. As of December 31, 1998, more than 1.9 million households subscribed
to DISH Network programming services. Our market share of new DBS subscribers
has consistently increased and, during the fourth quarter of 1998, we estimate
that we captured almost 40% of all new satellite subscribers. We presently have
four operational direct broadcast satellites, which is more than any other
direct broadcast satellite operator in the United States. Currently, we have the
ability to provide approximately 200 channels of digital television programming
and CD quality audio programming services to the entire "lower 48" continental
United States. We believe that the DISH Network offers programming packages that
have a better "price-to-value" relationship than packages currently offered by
most other subscription television providers, particularly cable TV operators.
As of December 31, 1998, approximately 9 million United States households
subscribed to direct broadcast satellite and other direct-to-home satellite
services. However, we believe that there continues to be significant unsatisfied
demand for high quality, reasonably priced television programming services.
If we successfully close the recently announced transaction with The News
Corporation Limited, its ASkyB subsidiary and MCI WorldCom, we expect to be able
to offer approximately 500 video and audio channels to subscribers in the entire
"lower 48" continental United States that may be received with one dish. See
"Business--Recent Developments--Agreement with News Corporation and MCI" and
"Business--Government Regulation."
ECHOSTAR TECHNOLOGIES CORPORATION
Employees of EchoStar Technologies Corporation, one of our wholly-owned
subsidiaries, internally design and engineer EchoStar receiver systems. Our
satellite receivers have won numerous awards from dealers, retailers and
industry trade publications. We outsource the manufacture of EchoStar receiver
systems to third parties who manufacture the receivers in accordance with our
specifications. In addition to supplying EchoStar receiver systems for the DISH
Network, ETC supplies similar digital satellite receivers to international
satellite TV service operators. Currently, we have two major customers,
Telefonica and Bell Canada, which are subsidiaries of the national telephone
companies in Spain and Canada, respectively. We also offer consulting and
integration services to development stage, international direct-to-home
satellite operators. We are actively soliciting new business for ETC and,
although we are optimistic about future growth opportunities, we cannot provide
any assurance in that regard.
SATELLITE SERVICES
Our Satellite Services business unit primarily leases capacity on our
satellites to customers on either a monthly or hourly basis. Full-time customers
tend to be international services that broadcast foreign language programming to
DISH Network subscribers. Part-time customers are typically Fortune 1000
companies that use our satellite network for business television service to
communicate with employees, customers and suppliers located around the United
States. In addition, we are developing a
3
<PAGE>
wide range of Internet and high-speed data services that we expect to offer to
consumers beginning in mid-1999.
BUSINESS STRATEGY
Our primary objective is to continue to expand our DISH Network subscriber
base and to develop as an integrated, full-service satellite company. To achieve
this objective, we seek to:
- - LEVERAGE OUR SIGNIFICANT SHARE OF DBS SPECTRUM BY OFFERING UNIQUE
PROGRAMMING SERVICES THAT WILL DIFFERENTIATE US FROM OUR COMPETITION. THESE
SERVICES INCLUDE SATELLITE-DELIVERED LOCAL SIGNALS AND OTHER NICHE AND
FOREIGN LANGUAGE SERVICES;
- - OFFER MARKETING PROMOTIONS THAT WILL ENHANCE OUR POSITION AS A LEADING
PROVIDER OF VALUE-ORIENTED PROGRAMMING SERVICES AND RECEIVER SYSTEMS;
- - CONTINUE TO EXPAND DISH NETWORK DISTRIBUTION CHANNELS;
- - DEVELOP THE ETC AND SATELLITE SERVICES BUSINESSES; AND
- - EMPHASIZE ONE-STOP SHOPPING AND SUPERIOR CUSTOMER SERVICE.
Our principal offices are located at 5701 South Santa Fe Drive, Littleton,
Colorado 80120, and our telephone number is (303) 723-1000.
4
<PAGE>
RECENT DEVELOPMENTS
AGREEMENT WITH NEWS CORPORATION AND MCI
We announced an agreement with News Corporation and MCI on November 30,
1998. Under this agreement, among other things that we have described in more
detail in the Business section, our parent company will acquire in exchange for
shares of our common stock valued at $1.17 billion:
- - 28 DBS frequencies at a strategic orbital location;
- - two DBS satellites that will be delivered in orbit at no additional cost to
EchoStar;
- - a digital broadcast operations center in Gilbert, Arizona;
- - a 500,000 unit commitment by an entity affiliated with News Corporation for
the purchase of EchoStar receiver systems from ETC; and
- - a three-year, no fee agreement for the DISH Network to rebroadcast FOX
Broadcasting Company's local station signals. in those markets where FOX
owns the local affiliate.
We need to receive approval from the FCC before we can consummate this
transaction. Our parent company's shareholders also must approve the
transaction. See "Business--Recent Developments--Agreement with News Corporation
and MCI" and "Business--Government Regulation."
ECHOSTAR COMMUNICATIONS TENDER OFFERS
On December 23, 1998, our parent company commenced cash tender offers for
three series of outstanding debt securities that were issued by its
subsidiaries. On January 4, 1999, our parent company also commenced a cash
tender offer for one series of its own debt securities. The tender offers formed
part of a plan to refinance existing indebtedness at more favorable interest
rates and terms. The tender offers for the first three series of notes closed on
January 25, 1999, concurrently with sale of the old notes. More than 99% of the
holders of each issue of debt securities tendered their notes after consenting
to certain amendments to the indentures. Those amendments to the indentures
eliminated substantially all restrictive covenants and amended certain other
provisions. We completed the tender offer for the fourth series of notes on
February 2, 1999. More than 99% of holders of those notes tendered their notes
after consenting to substantially similar amendments to that indenture.
REORGANIZATION
In order to streamline the organization and operations of the EchoStar
group of companies, our parent company reorganized its legal entities as
illustrated under "The EchoStar Organization." We consolidated all direct
broadcast satellites and related FCC licenses into EchoStar Satellite
Corporation, our wholly owned subsidiary. To effect this reorganization, we
merged DirectSat Corporation and Direct Broadcasting Satellite Corporation, the
current owners of our EchoStar II and EchoStar III Satellites, into EchoStar
Satellite Corporation. We currently own EchoStar IV and, like the other
satellites and related FCC licenses (including those acquired in the transaction
with News Corporation and MCI), we plan to transfer those assets to EchoStar
Satellite Corporation. We merged our Dish, Ltd. and EchoStar Satellite
Broadcasting Corporation subsidiaries into our company. The FCC approved our
applications to transfer the assignments of all FCC DBS licenses held by various
subsidiaries to EchoStar Satellite Corporation.
5
<PAGE>
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The exchange offer relates to the exchange of up to $375,000,000 aggregate
principal amount of outstanding 9 1/4% Senior Notes due 2006 and $1,625,000,000
aggregate principal amount of outstanding 93/8% Senior Notes due 2009 for an
equal aggregate principal amount of exchange notes. The form and terms of the
exchange notes are identical in all material respects to the form and terms of
the corresponding outstanding old notes, except that the exchange notes have
been registered under the Securities Act, and therefore will not bear legends
restricting their transfer.
The Exchange Offer............ We are offering to exchange $1,000 principal
amount of our exchange notes which have been
registered under the Securities Act for each
$1,000 principal amount of the applicable series
of outstanding old notes. To be exchanged, an
outstanding old note must be properly tendered
by you and accepted by us. All outstanding old
notes that are validly tendered and not validly
withdrawn will be exchanged. If you wish to
tender your old notes for exchange in the
exchange offer, you must send your documents to
the exchange agent, U.S. Bank Trust National
Association, on or prior to the expiration date.
We will issue registered notes on or promptly
after the expiration of the exchange offer.
Resale of the Exchange Notes.. Based on an interpretation by the staff of the
SEC set forth in no-action letters issued to
third parties, we believe that the exchange
notes may be offered for resale, resold and
otherwise transferred by you without compliance
with the registration and prospectus delivery
provisions of the Securities Act if you are not
our affiliate and the exchange notes issued in
the exchange offer are being acquired by you in
the ordinary course of your business.
You must also represent to us that you are not
participating, do not intend to participate, and
have no arrangement or understanding with any
person to participate in the distribution of the
exchange notes issued to you in the exchange
offer.
Each broker-dealer that is issued exchange notes
in the exchange offer for its own account in
exchange for old notes that were acquired by
such broker-dealer as a result of market-making
or other trading activities must acknowledge
that it will deliver a prospectus meeting the
requirements of the Securities Act, in
connection with any resale of the exchange notes
issued in the exchange offer. If you are a
broker-dealer who purchased such outstanding old
notes directly from us for resale pursuant to
Rule 144A or any other available exemption under
the Securities Act, you may not participate in
the exchange offer.
Expiration Date............... The exchange offer will expire at 5:00 p.m.,
New York City time, , 1999,
unless we decide to extend the expiration date
in the event that we determine that our ability
to proceed with the exchange offer could be
materially impaired due to any
6
<PAGE>
legal or governmental action or new law or any
interpretation of the staff of the SEC. You will
have certain rights against us under the
registration rights agreements executed as part
of the offering of the outstanding old notes if
we fail to consummate the exchange offer.
Special Procedures for
Beneficial Owners............ If you are the beneficial owner of old notes and
your notes are registered in the name of a
broker or other institution, and you wish to
participate in the exchange, you should promptly
contact the person in whose name your old notes
are registered and instruct such person to
tender on your behalf. If you wish to tender on
your own behalf, you must, prior to completing
and executing the letter of transmittal and
delivering your outstanding old notes, either
make appropriate arrangements to register
ownership of the outstanding old notes in your
name or obtain a properly completed bond power
from the registered holder. The transfer of
record ownership may take considerable time.
Guaranteed Delivery Procedure. If you wish to tender your old notes and time
will not permit your required documents to reach
the exchange agent by the expiration date, or
the procedure for book-entry transfer cannot be
completed on time or certificates for registered
old notes cannot be delivered on time, you may
tender your old notes pursuant to the procedures
described in this prospectus under the heading
"The Exchange Offer."
Withdrawal Rights............. You may withdraw the tender of your old notes at
any time before 5:00 p.m., New York City
time, on , 1999, the business day
before the expiration date, unless your old
notes were previously accepted for exchange.
Certain U.S. Federal
Income Tax Consequences....... An exchange of old notes for exchange notes will
not be taxable to you. See "Certain United
States Federal Tax Consequences--the Exchange
Offer."
Use of Proceeds .............. We will not receive any proceeds from the
issuance of exchange notes pursuant to the
exchange offer. We will pay all expenses
incident to the exchange offer.
Exchange Agent................ U.S. Bank Trust National Association can be
reached at Corporate Trust Trustee
Administration, 180 E. 5th Street, St. Paul,
Minnesota 55101. For more information with
respect to the exchange offer, the telephone
number for the exchange agent is (651) 244-8162
and the fax number for the exchange agent is
(651) 244-1537.
7
<PAGE>
SUMMARY DESCRIPTION OF THE NOTES
The exchange offer applies to $375,000,000 aggregate principal amount of 9
1/4% Senior Notes due 2006 and $1,625,000,000 aggregate principal amount of 9
3/8% Senior Notes due 2009. The form and terms of the exchange notes are
substantially identical to the form and terms of the old notes, except that the
exchange notes have been registered under the Securities Act, and therefore,
will not bear legends restricting the transfer thereof. Each series of the
exchange notes will evidence the same debt as the applicable series of old notes
and will be entitled to the benefits of the applicable indenture. See
"Description of the Notes" below. As used in this summary of the notes,
"subsidiaries" refers to our direct and indirect subsidiaries and Direct
Broadcast Satellite Corporation, or, "DBSC," a wholly-owned subsidiary of
EchoStar Communications Corporation.
Securities Offered............ $375.0 million aggregate principal amount of
9 1/4% Senior Notes due 2006, or the "seven year
notes."
$1.625 billion aggregate principal amount of
9 3/8% Senior Notes due 2009, or the "ten year
notes."
Maturity Date................. February 1, 2006 for the seven year notes;
February 1, 2009 for the ten year notes.
Interest Payment Dates........ Interest will accrue at the rate of 9 1/4% per
annum on the seven year notes and 9 3/8% per
annum on the ten year notes, and will be payable
semi-annually in cash on February 1 and August 1
of each year, commencing August 1, 1999.
Ranking....................... The notes rank senior in right of payment to all
of our subordinated indebtedness and PARI PASSU
in right of payment to each other and to all of
our senior indebtedness. Although the notes are
titled "Senior," we have not issued, and do not
have any plans to issue, any indebtedness to
which the notes would be senior.
The notes and the guarantees are effectively
junior to our secured obligations and our
subsidiaries to the extent of the collateral
securing those obligations, including borrowings
under our future secured credit facilities.
As of December 31, 1998, our long-term
indebtedness and our subsidiaries aggregated
approximately $1.55 billion. On a pro forma
basis, after giving effect to issuance of the
notes and application of the net proceeds
therefrom and to the reorganization, our
aggregate consolidated indebtedness as of
December 31, 1998, for purposes of the
indentures relating to the notes, would have
been approximately 2.05 billion. See
"Description of the Notes" and "Capitalization"
below.
Optional Redemption of the
Seven Year Notes.............. Except as set forth below, the seven year notes
are not redeemable at our option prior to
February 1, 2003. Thereafter, the seven year
notes are subject to redemption, at option, in
whole or in part, at the redemption prices set
forth herein. In addition, at any time prior to
8
<PAGE>
February 1, 2002, we may redeem seven year notes
at a redemption price equal to 109.250% of the
principal amount thereof, together with accrued
and unpaid interest thereon to the redemption
date, with the net proceeds of one or more
public or private sales of certain equity
interests of our company, other than proceeds
from a sale to any of our subsidiaries, provided
that:
- at least 65% of the seven year notes remain
outstanding immediately after the
occurrence of such redemption; and
- such redemption occurs within 120 days of
the date of the closing of any such sale.
Optional Redemption of the
Ten Year Notes................ Except as set forth below, the ten year notes
are not redeemable at our option prior to
February 1, 2004. Thereafter, the ten year notes
are subject to redemption, at our option, in
whole or in part, at the redemption prices set
forth herein. In addition, at any time prior to
February 1, 2002, we may redeem ten year notes
at a redemption price equal to 109.375% of the
principal amount thereof, together with accrued
and unpaid interest thereon to the redemption
date, with the net proceeds of one or more
public or private sales of certain equity
interests of our company, other than proceeds
from a sale to any of our subsidiaries,
provided that:
- at least 65% of the ten year notes remain
outstanding immediately after the
occurrence of such redemption; and
- such redemption occurs within 120 days of
the date of the closing of any such sale.
Change of Control............. Upon the occurrence of a change of control as
defined in the "Description of the Notes," we
will be required to make an offer to each holder
of notes to repurchase all or any part of such
holder's notes at a purchase price equal to 101%
of the principal amount thereof, together with
accrued and unpaid interest thereon to the date
of repurchase.
Offer to Purchase............. Upon the occurrence of certain events described
under "Description of the Notes--Certain
Covenants--Excess Proceeds Offer," we will be
required to offer to repurchase a specified
amount of notes at a purchase price equal to
101% of the principal amount thereof, together
with accrued and unpaid interest thereon to the
date of repurchase.
Guarantees.................... The ten year notes and the seven year notes are
guaranteed by substantially all of our
restricted subsidiaries, on a senior basis,
which guarantee ranks PARI PASSU with all senior
unsecured indebtedness of such restricted
subsidiaries. EchoStar Communications and the
subsidiaries of EchoStar Communications that are
not also our subsidiaries, other than DBSC, are
not obligated under or guaranteeing in any
manner our obligations under the ten year notes
and the seven year notes. See "Description of
the Notes--Guarantees."
9
<PAGE>
Certain Other Covenants....... Each indenture restricts, among other things,
the payment of dividends, the repurchase of our
stock and subordinated indebtedness, the making
of certain other restricted payments as defined
in the indentures, the incurrence of certain
indebtedness and the issuance of preferred
stock, certain asset sales, the creation of
certain liens, certain mergers and
consolidations, and transactions with
affiliates, as defined in the indentures.
Registration Rights;
Liquidated Damages............ Pursuant to registration rights agreements
relating to each series of notes among us, the
guarantors and the initial purchasers, we and
the guarantors agreed:
- to file an exchange offer registration
statement on or prior to April 25, 1999,
relating to an exchange offer for the old
notes and guarantees (the exchange offer);
and
- to use our best efforts to cause the
exchange offer registration statement to be
declared effective by the SEC on or prior
to July 24, 1999.
In certain circumstances, we and the guarantors
will be required to provide a shelf registration
statement to cover resales of the notes and
guarantees by the holders thereof. If we and the
guarantors do not comply with our obligations
under a registration rights agreement, we will
be required to pay liquidated damages to holders
of the notes under certain circumstances. See
"Description of the Notes--Registration Rights;
Liquidated Damages." Our filing of the
registration statement of which this prospectus
is a part is intended to satisfy the requirement
to file the exchange offer registration
statement.
10
<PAGE>
SUMMARY FINANCIAL DATA
The following summary financial data and the selected financial data
presented elsewhere in this prospectus for the five years ended December 31,
1998, are derived from the Combined and Consolidated Financial Statements of our
company, audited by Arthur Andersen LLP, independent public accountants. 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," our
company's Combined and Consolidated Financial Statements and the notes thereto,
and other financial information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT RATIOS, SUBSCRIBERS
AND PER SUBSCRIBER DATA)
STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenue.................... $ 179,313 $ 148,520 $ 197,103 $ 475,902 $ 985,909
Operating income (loss).... 13,216 (8,006) (108,865) (224,336) (130,855)
Net income (loss).......... 90 (12,361) (101,676) (323,424) (294,375)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
ACTUAL AS ADJUSTED
------ -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable investment
securities (1)............................................ $ 32,308 $ 292,674
Total assets(2)............................................ 1,470,173 2,826,971
Long-term debt, net of current portion..................... 1,547,891 2,045,805
Total stockholders' equity (deficit)....................... (588,137) 270,747
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
OTHER DATA:
<S> <C> <C> <C> <C> <C>
DISH Network subscribers................. -- -- 350,000 1,040,000 1,940,000
Average monthly revenue per subscriber... $ -- $ -- $ 35.50 $ 38.50 $ 39.25
EBITDA (3)............................... 15,459 (4,892) (65,496) (51,500) (28,698)
Less amortization of subscriber acquisition
costs.................................. -- -- (16,073) (121,428) (18,819)
-------- ------ -------- -------- -------
EBITDA, without add back for amortization
of subscriber acquisition costs........ 15,459 (4,892) (81,569) (172,928) (47,517)
Net cash flows from:
Operating activities................... 24,205 (21,888) (22,836) (7,549) (53,949)
Investing activities................... (338,565) (1,431) (294,962) (306,079) (43,340)
Financing activities................... 325,011 19,764 342,287 337,247 60,538
Ratio of earnings to fixed charges (4)... -- -- -- -- --
Deficiency of earnings to fixed charges (4) $(5,206) $(44,315) $(188,347) $(366,447) $(315,923)
</TABLE>
- -----------
(1) Actual balance at December 31 excludes restricted cash and marketable
investment securities of $77,657, which have been reclassified and included
in the As Adjusted amount because the restrictions were eliminated upon
completion of the tender offers.
(2) As adjusted to give effect to the notes offering and the application of the
net proceeds thereof and the transaction with News Corporation and MCI.
Consummation of the acquisition under the agreement with News Corporation
and MCI is subject to receipt of regulatory approval and approval of the
shareholders of our parent company. There will be no pro forma effect to
our company's Statement of Operations as a result of the acquisition.
(3) We believe it is common practice in the telecommunications industry for
investment bankers and others to use various multiples of current or
projected EBITDA (earnings before interest, taxes, depreciation and
amortization) for purposes of estimating current or prospective enterprise
value and as one of many measures of operating performance. Conceptually,
11
<PAGE>
EBITDA measures the amount of income generated each period that could be
used to service debt, because EBITDA is independent of the actual leverage
employed by the business; but EBITDA ignores funds needed for capital
expenditures and expansion. Some investment analysts track the relationship
of EBITDA to total debt as one measure of financial strength. However,
EBITDA does not purport to represent cash provided or used by operating
activities and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles.
EBITDA differs significantly from cash flows from operating activities
reflected in the consolidated statement of cash flows. Cash from operating
activities is net of interest and taxes paid and is a more comprehensive
determination of periodic income on a cash (vs. accrual) basis, exclusive
of non-cash items of income and expenses such as depreciation and
amortization. In contrast, EBITDA is derived from accrual basis income and
is not reduced for cash invested in working capital. Consequently, EBITDA
is not affected by the timing of receivable collections or when accrued
expenses are paid. We are aware of no uniform standards for determining
EBITDA and we believe that presentations of EBITDA may not be calculated
consistently by different entities in the same or similar businesses.
EBITDA is shown with and without the add back for amortization of
subscriber acquisition costs, which were deferred through September 1997
and amortized over one year.
(4) For purposes of computing the ratio of earnings to fixed charges, and the
deficiency of earnings to fixed charges, earnings consist of earnings from
continuing operations before income taxes, plus fixed charges. Fixed
charges consist of interest incurred on all indebtedness and the imputed
interest component of rental expense under non-cancelable operating leases.
For the years ended December 31, 1994, 1995, 1996, 1997 and 1998, earnings
were insufficient to cover the fixed charges. On a pro forma basis, using
an assumed effective annual interest rate of 9.6% and assuming that the
tender offers by our parent company had been consummated as of the
beginning of the applicable period, our pro forma earnings would have been
inadequate to cover our pro forma fixed charges for the years ended
December 31, 1997 and 1998, by $341 million and by $251 million,
respectively.
12
<PAGE>
SUMMARY SATELLITE DATA
<TABLE>
<CAPTION>
ECHOSTAR I ECHOSTAR II ECHOSTAR III ECHOSTAR IV(1) ECHOSTAR V (2) ECHOSTAR VI
(2)
<S> <C> <C> <C> <C> <C> <C>
Orbital location. 119 degrees 119 degrees 61.5 degrees WL 148 degrees WL 110 degrees WL 110 degrees WL
WL WL
Transponders..... 16 @ 24 MHz 16 @ 24 MHz 16/32 @ 24 MHz 10/20 @ 24 MHz 16/32 @ 24 MHz 16/32 @ 24
(3)(4) (3)(4) (3) MHz (3)
Approximate channel 128 channels 128 channels 128/256 channels 80/160 channels 160/256 channels 160/256
capacity (5).. channels
Output power..... 130 watts 130 watts 230/120 watts 230/120 watts 220/110 watts 240/120 watts
Expected end of 2011 2011 2012 2010 2014 2014
commercial life
(6)...........
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Coverage area.... Continental United States Eastern and Western and Continental United States,
and certain regions of Central United Central United Alaska, Hawaii, Puerto Rico and
Canada and Mexico States States certain regions of Canada and
Mexico
</TABLE>
- -----------
(1) Permanent authorization to operate EchoStar IV at the 148 degree orbital
location has not yet been obtained; EchoStar IV currently operates under a
special temporary authorization.
(2) Use of EchoStar V and EchoStar VI and the frequencies at the 110 degree
orbital location is contingent upon the closing of the acquisition under
the agreement with News Corporation and MCI and successful launch of
EchoStar V and EchoStar VI. Consummation of this transaction is subject to
receipt of regulatory approval.
(3) The transponders on each of these satellites can be independently switched
to provide a range from 16 transponders operating at 220 or 230 watts of
power each (240 watts in the case of EchoStar VI) to 32 transponders
operating at 110 or 120 watts of power each subject to note 4.
(4) Although EchoStar III has experienced an anomaly, the satellite has not
experienced any loss of capacity to date. See "Risk Factors--We May Be
Unable To Settle Outstanding Claims With Insurers" below. EchoStar IV was
designed to operate a total of 32 transponders in 120 watt mode, or 16
transponders in 230 watt mode. As a result of the failure of the solar
panels on EchoStar IV to properly deploy, EchoStar IV is currently capable
of sustaining a maximum of only 20 transponders. That number will decrease
over time, but based on existing data we expect that approximately 16
transponders will probably be available over the entire expected 12 year
life of the satellite, absent additional failures.
(5) Our parent company's direct broadcast satellite licenses do not allow full
use of that channel capacity. They specifically cover:
(i) 11 of the 16 transponders (a maximum of approximately 88 video
channels) on EchoStar I;
(ii) 10 of the 16 transponders (a maximum of approximately 80 video
channels) on EchoStar II;
(iii) 11 of the 16 transponders (a maximum of approximately 88 video
channels) on EchoStar III;
(iv) 24 of the 32 frequencies at the 148 degree orbital location, where
EchoStar IV currently operates under a special temporary
authorization (in light of EchoStar IV's technical constraints, its
maximum temporarily authorized effective capacity is 160 video
channels); and
(v) a total of 29 transponders at the 110 degree orbital location to be
operated on EchoStar V and EchoStar VI assuming consummation of the
acquisition under the agreement with News Corporation and MCI and
successful launch of the satellites (a maximum of approximately 290
video channels with two satellites operating in high power mode or
232 video channels with one satellite operating over all 29
frequencies in low-power mode) (authorization has not yet been
obtained).
With digital compression, each transponder or frequency can yield 8 or more
video channels (8 in low-power mode, 10 in high-power mode).
(6) We have estimated the expected end of commercial life of each satellite
based on each satellite's actual or expected launch date and the terms of
the construction and launch contracts. The minimum design life is 12 years.
The licenses are issued for ten year periods, and would, unless renewed by
the FCC, expire prior to the end of the minimum design life. See "Risk
Factors - Our Business Depends Substantially On FCC Licenses That Can
Expire Or Be Revoked Or Modified."
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<PAGE>
THE ECHOSTAR ORGANIZATION
The following chart illustrates the EchoStar group's corporate structure
prior to completion of the reorganization and where significant assets and
rights were held. The old notes were guaranteed by DBSC and substantially all of
our direct and indirect wholly owned restricted subsidiaries. The following page
sets forth a chart illustrating the EchoStar group's corporate structure
following consummation of the reorganization
[ORGANIZATION CHART]
<PAGE>
The following chart illustrates the EchoStar group's corporate structure
and where significant assets and rights are held following the reorganization
that took effect after March 31, 1999.
[ORGANIZATION CHART]
<PAGE>
RISK FACTORS
You should carefully consider all of the information contained in this
prospectus, which may be generally applicable to the old notes as well as to the
exchange notes, before deciding whether to tender your old notes and, in
particular, the following factors:
YOUR OLD NOTES WILL BE SUBJECT TO RESTRICTIONS ON TRANSFER AND THE TRADING
MARKET FOR YOUR OLD NOTES MAY BE LIMITED IF YOU DO NOT TENDER
If you do not exchange your old notes for the exchange notes, you will
continue to be subject to the restrictions on transfer of your old notes
described in the legend on your old notes. The restrictions on transfer of your
old notes arise because we issued the old notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, you may only offer or sell
the old notes if they are registered under the Securities Act and applicable
state securities laws, or they are offered and sold pursuant to an exemption
from such requirements. We do not intend to register the old notes under the
Securities Act. In addition, if you exchange your old notes in the exchange
offer for the purpose of participating in a distribution of the exchange notes,
you may be deemed to have received restricted securities and, if so, you 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 we
accept and exchange old notes in the exchange offer, the trading market, if any,
for the remaining old notes would be adversely affected. See "The Exchange
Offer" below.
IF YOU DO NOT PROPERLY TENDER YOUR OLD NOTES, WE MAY NOT ACCEPT YOUR OLD NOTES
AND THE TRADING MARKET FOR THEM MAY BE LIMITED
We will issue the exchange notes in exchange for your old notes only after
we have timely received your old notes, along with a properly completed and duly
executed letter of transmittal and all other required documents. Therefore, if
you want to tender your old notes in exchange for exchange notes, you should
allow sufficient time to ensure timely delivery. Neither the exchange agent nor
we are under any duty to notify you of defects or irregularities with respect to
the tender of your old notes for exchange. The exchange offer will expire at
5:00 p.m. New York City time on , 1999, or on a later extended date and time as
we may decide.
The exchange notes and any old notes having the same maturity that remain
outstanding after consummation of the exchange offer will vote together as a
single class for purposes of determining whether holders of the requisite
percentage of the notes have taken certain actions or exercised certain rights
under the related indenture.
YOU MAY PARTICIPATE IN THE EXCHANGE OFFER ONLY IF YOU MEET THE FOLLOWING
CONDITIONS
Based on interpretations by staff of the SEC, as set forth in no-action
letters issued to third parties, we believe that you may offer for resale,
resell and otherwise transfer the exchange notes without compliance with the
registration and prospectus delivery provisions of the Securities Act, subject
to certain limitations. These limitations include the following:
- - you are not our "affiliate" within the meaning of Rule 405 under the
Securities Act,
- - you acquire your exchange notes in the ordinary course of your business and
- - you have no arrangement with any person to participate in the distribution
of such exchange notes.
16
<PAGE>
However, we have not submitted a no-action letter to the SEC regarding this
exchange offer and we cannot assure you that the SEC would make a similar
determination with respect to the exchange offer as in such other circumstances.
If you are our affiliate, are engaged in or intend to engage in or have any
arrangement or understanding with respect to a distribution of the exchange
notes to be acquired pursuant to the exchange offer, you may not rely on the
applicable interpretations of the staff of the SEC; you must also comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus meeting the requirements under the Securities Act in connection with
any resale of such exchange notes. The letter of transmittal states that by so
acknowledging and delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes where the old
notes exchanged for such exchange notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities. We have agreed
to use our best efforts to make this prospectus available to any participating
broker-dealer for use in connection with any such resale. See "Plan of
Distribution" below. However, to comply with the securities laws of certain
jurisdictions, if applicable, the exchange notes may not be offered or sold
unless they have been registered or qualified for sale in such jurisdictions or
an exemption from registration or qualification is available.
RESTRICTIVE COVENANTS IN THE INDENTURES FOR THE NOTES MAY LIMIT OUR ABILITY TO
OPERATE OUR BUSINESS
The indentures relating to each series of notes contain restrictive
covenants that, among other things, limit our ability and the ability of our
subsidiaries to:
- - incur additional indebtedness;
- - issue preferred stock;
- - sell assets;
- - create, incur or assume liens;
- - create dividend and other payment restrictions with respect to our
subsidiaries;
- - merge, consolidate or sell assets;
- - enter into transactions with affiliates; and
- - pay dividends.
These restrictions may inhibit our ability to manage our business and to
react to changing market conditions. See "Description of the Notes" below.
WE HAVE SUBSTANTIAL INDEBTEDNESS AND WE ARE DEPENDENT ON OUR SUBSIDIARIES'
EARNINGS TO PROVIDE INCOME TO MAKE PAYMENTS ON THE NOTES
We have substantial debt service requirements which makes us vulnerable to
changes in general economic conditions. The indenture for each series of notes
restricts our ability and our subsidiaries' ability to incur additional debt.
Thus it is, and will continue to be, difficult for us and our subsidiaries to
obtain additional debt if required or desired in order to implement our business
strategy.
17
<PAGE>
Since substantially all of our operations are conducted through our
subsidiaries, our ability to service our debt obligations, including our
obligations under the notes, is dependent upon the earnings of our subsidiaries
and the payment of funds by our subsidiaries to us in the form of loans,
dividends or other payments. Some of our subsidiaries may become parties to
other agreements that severely restrict their ability to obtain additional debt
financing for working capital, capital expenditures and general corporate
purposes. As of December 31, 1998, we had outstanding long-term debt (including
both the current and long-term portion) of approximately $1.6 billion. On a pro
forma basis, after giving effect to issuance of the notes and application of the
net proceeds therefrom and to the reorganization, our aggregate consolidated
indebtedness as of December 31, 1998, for purposes of the indentures would have
been approximately $2.05 billion. Although the notes are titled "Senior," we
have not issued, and do not have any plans to issue, any indebtedness to which
the notes would be senior. Our ability to meet our payment obligations will
depend on the success of our business strategy, which is subject to
uncertainties and contingencies beyond our control.
WE EXPECT OPERATING LOSSES THROUGH AT LEAST 2000
Due to the substantial expenditures required to complete construction,
launch and deployment of our direct broadcast satellite system and introduction
of our DISH Network service to consumers, we have sustained significant losses
in recent periods. Our ability to make all payments to you relating to the notes
may eventually be affected if we do not have sufficient income or another source
of cash. Our operating losses were $109 million, $224 million and $131 million
for the years ended December 31, 1996 and 1997, and 1998, respectively. We had
net losses of $102 million, $323 million and $294 million during those same
periods. Improvements in our results of operations are largely dependent upon
our ability to increase our customer base while maintaining our price structure,
effectively managing our costs and controlling subscriber turnover, which is the
rate at which subscribers terminate service. No assurance can be given that we
will be effective with regard to these matters. In addition, we incur
significant acquisition costs to obtain DISH Network subscribers. The high cost
of obtaining new subscribers magnifies the negative effects of subscriber
turnover. See "--Increased Subscriber Turnover Could Affect Our Financial
Performance." We anticipate that we will continue to experience operating losses
through at least 2000. There can be no assurance that such operating losses will
not continue beyond 2000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
WE MAY NEED ADDITIONAL CAPITAL IN ORDER TO CONTINUE GROWING
Our ability to make all payments to you relating to the notes will partly
depend on our ability to continue growing our business, which may require
additional capital. We may require additional funds to acquire DISH Network
subscribers. In addition, we have conditional licenses or applications pending
with the FCC for a two satellite Ku-band system, a two satellite Ka-band system,
a two satellite extended Ku-band system and a six satellite low earth orbit
satellite system. We will need to raise additional funds for the foregoing
purposes. Further, a number of factors, some of which are beyond our control or
ability to predict, could require us to raise additional capital. These factors
include higher than expected subscriber acquisition costs, a defect in or the
loss of any satellite or an increase in the cost of acquiring subscribers due to
additional competition, among other things. We cannot assure you that we will be
able to raise additional capital at the time necessary or on satisfactory terms.
The inability to raise sufficient capital would have a material adverse effect
on our business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
18
<PAGE>
WE MAY BE UNABLE TO PURCHASE NOTES TENDERED UPON A CHANGE OF CONTROL
The indenture for each series of the notes requires us to offer to purchase
the notes from you if we have a "change of control." However, we cannot assure
you that we will have sufficient funds to repurchase the notes upon a change of
control as defined in the "Description of the Notes." If we have insufficient
funds to redeem all notes tendered for purchase upon the occurrence of a change
of control, and we are unable to raise additional capital, there could be an
event of default under the indentures governing the notes. We cannot assure you
that additional capital would be available on acceptable terms, or at all.
WE COMPETE WITH DIRECT BROADCAST SATELLITE AND OTHER SATELLITE SYSTEM OPERATORS
Our ability to make payments to you relating to the notes will partly
depend on our ability to compete in the subscription television industry, which
is highly competitive. We compete with companies offering video, audio, data,
programming and entertainment services, including cable operators and other
satellite operators. Many of these competitors have substantially greater
financial, marketing and other resources than we have.
The most popular satellite TV services are direct broadcast satellites like
ours, which because of their high power, can transmit programming to small
18-inch satellite dishes. One competitor, DIRECTV, Inc., has launched three
direct broadcast satellites and has 27 frequencies at the 101 degree orbital
location that are capable of full coverage of the "lower 48" continental United
States. DIRECTV and USSB, which operates five more frequencies on one of
DIRECTV's satellites, currently offer more than 200 channels of combined video
and audio programming. DIRECTV and USSB are in an advantageous position with
regard to market entry, programming such as DIRECTV's exclusive sports
programming and, possibly, volume discounts for programming offers. In December
1998, DIRECTV's parent executed a definitive merger agreement whereby it would
acquire the business and assets of USSB in a transaction expected to be
completed in mid-1999. In addition to the 5 USSB frequencies at the 101 degree
orbital location, this combination would give DIRECTV access to three additional
frequencies controlled by USSB at the 110 degree orbital location, which is also
a very favorable position for coverage of the United States.
Two other popular types of satellite TV service are medium power, Ku-band
fixed satellite services, that are received on satellite dishes approximately 3
feet in diameter, and low power, C-band services, which is an older technology
received on satellite dishes that are usually 6 feet in diameter or larger. We
also face competition from PrimeStar, Inc., which currently leases a medium
power satellite at the 85 degree orbital location and as of November 30, 1998,
had approximately 2.3 million subscribers. PrimeStar has also applied for FCC
authorization to acquire control over TCI Satellite Entertainment, Inc., a
company that has an authorization for 11 direct broadcast satellite frequencies
at the 119 degree orbital location and has launched a satellite to that
location. In January 1999, DIRECTV's parent announced an agreement whereby it
would acquire both PrimeStar's existing medium power business and its rights to
acquire TCI's direct broadcast satellite assets, subject in each case to
regulatory approvals and customary conditions. In addition, two other satellite
companies in the U.S., including a subsidiary of Loral Space and Communications
Limited, have conditional permits for a comparatively small number of direct
broadcast satellite assignments that can be used to provide service to portions
of the United States.
The FCC has proposed to allocate additional expansion spectrum for direct
broadcast satellite services, and has separately indicated that it may apply to
the International Telecommunication Union for allocation of additional direct
broadcast satellite orbital locations capable of providing service to the United
States. The FCC already has permitted a company, Televisa International, LLC, to
provide satellite TV service in the United States through a Mexican licensed
satellite from an orbital location with
19
<PAGE>
full coverage of the "lower 48" continental United States. We cannot be sure
that these and other recent developments will not create significant additional
competition in the market for subscription television services. See
"Business--Competition For Our DISH Network Business--Other DBS and
Direct-to-Home Satellite System Operators."
WE COMPETE WITH CABLE TELEVISION AND OTHER LAND-BASED SYSTEMS
We encounter substantial competition in the subscription television market
from cable television and other land-based systems. Cable television operators
have a large, established customer base, and many cable operators have
significant investments in, and access to, programming. Cable television service
is currently available to more than 90% of the approximately 98 million U.S.
television households, and approximately 67% of total U.S. households currently
subscribe to cable. Cable television operators currently have an advantage
relative to us by providing local programming as well as by providing service to
multiple television sets within the same household. Cable operators may also
obtain a competitive advantage through bundling their analog video service with
expanded digital video services delivered terrestrially or via satellite,
efficient 2-way high speed data transmission, and telephone service on upgraded
cable systems. For example, some cable companies now offer high speed Internet
access over their upgraded fiber optic systems, and AT&T recently announced that
it would provide telephone service over Time Warner's cable system. As a result
of these and other factors, there can be no assurance that we will be able to
continue to expand our subscriber base or compete effectively against cable
television operators. See "Business--Competition For Our DISH Network
Business--Cable Television."
When fully deployed, new technologies could have a material adverse effect
on the demand for our direct broadcast satellite services. For example, new and
advanced local multi-point distribution services are still in the development
stage. In addition, digital video compression over existing telephone lines, and
digital "wireless cable" are being implemented and supported by entities such as
regional telephone companies which are likely to have greater resources than we
have. Moreover, mergers, joint ventures, and alliances among franchise, wireless
or private cable television operators, regional Bell operating companies and
others may result in providers capable of offering bundled cable television and
telecommunications services in competition with us. For instance, AT&T is in the
process of acquiring cable operator TCI, subject to certain approvals. There can
be no assurance that we will be able to compete successfully with existing
competitors or new entrants in the market for subscription television services.
See "Business--Competition For Our DISH Network Business--Telephone Companies."
CABLE COMPETITORS MAY BLOCK OUR ACCESS TO POPULAR PROGRAMMING
We cannot be certain whether or not cable or other TV service providers
would seek to acquire sports franchises and exclusively distribute the
corresponding programming, which could possibly limit our access to popular
sports programming. For example, on May 19, 1998, we filed a complaint against
Comcast, a major cable provider, seeking access to the sports programming
controlled by Comcast in the Philadelphia area. On January 22, 1999, the FCC
denied this complaint, partly on the basis that Comcast's programming is
delivered terrestrially and therefore is not subject to program access
prohibitions. We cannot be certain whether or not other TV service providers who
control production or distribution of their own programming would switch to
terrestrial transmission of their programming and seek to rely on the FCC's
denial of our complaint against Comcast in order to deny us access to their
programming.
WE DEPEND ON OTHERS TO PRODUCE PROGRAMMING
We depend on third parties to provide us with programming services. Our
programming agreements have remaining terms ranging from one to ten years and
contain various renewal and
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<PAGE>
cancellation provisions. We may not be able to renew these agreements on
favorable terms or at all, or these agreements may be cancelled prior to
expiration of their original term. If any such agreements are not renewed or are
cancelled, we cannot assure you that we would be able to obtain substitute
programming, or that such substitute programming would be comparable in quality
or cost to our existing programming. Our competitors currently offer much of the
same programming that we do. Our ability to compete successfully will depend on
our ability to continue to obtain desirable programming and attractively offer
it to our customers at competitive prices. See "Business--DISH
Network--Components of a DBS System--Programming."
WE DEPEND ON THE CABLE ACT FOR ACCESS TO OTHERS' PROGRAMMING
Any change in the Cable Act and the FCC's rules that permits the cable
industry or programmers to discriminate against competing businesses, such as
ours, in the sale of programming could adversely affect our ability to acquire
programming at all or to acquire programming on a cost-effective basis. Pursuant
to the Cable Television Consumer Protection and Competition Act of 1992 and the
FCC's rules, programming developed by cable-affiliated programmers generally
must be offered to all multi-channel video programming distributors on equal
terms and conditions. The Cable Act and the FCC's rules also prohibit some types
of exclusive programming contracts. We purchase a substantial percentage of our
programming from cable-affiliated programmers. Some of these restrictions on
cable-affiliated programmers will expire in 2002 unless the FCC extends the
rules. In addition, the need to obtain certain retransmission consents and
copyright licenses may limit our strategy to provide local programming in
multiple markets. See "Business--Government Regulation--Regulations--Satellite
Home Viewer Act and Retransmission Consent."
THE FAILURE TO CONSUMMATE THE TRANSACTION WITH NEWS CORPORATION AND MCI MAY
ADVERSELY AFFECT OUR EXPANSION PLANS
Our agreement to acquire satellites from News Corporation and transmission
frequencies from MCI is subject to regulatory approval and other conditions. If
this transaction is not consummated, then we may not be able to secure access to
the 110 degree orbital location on favorable terms or at all, which would
adversely affect our ability to expand our business. It is also possible that
the stay of the News Corporation litigation may expire. According to the terms
of that agreement, we may be required to dismiss the News Corporation litigation
with prejudice even if this transaction is not consummated. See "Business--Legal
Proceedings."
IMPEDIMENTS TO RETRANSMISSION OF LOCAL BROADCAST SIGNALS; OUR LOCAL PROGRAMMING
STRATEGY FACES UNCERTAINTY
Although we believe that the Satellite Home Viewer Act allows us to
retransmit the programs of a local network station to its local market via
satellite, that view is opposed by several other parties. We also believe that
the compulsory copyright license under the Satellite Home Viewer Act and the
retransmission consent rules of the Communications Act may not be sufficient to
permit us to implement our strategy to retransmit such programming in the most
efficient and comprehensive manner and that new legislation may be necessary for
that purpose. We offer programming telecast by local affiliates of national
television networks to several major population centers within the continental
United States. In order to retransmit network station programming, satellite TV
companies usually must have a copyright license and also obtain the
retransmission consent of the network station. Although we have entered into a
retransmission consent agreement covering FOX Network owned and operated
stations in connection with the agreement with News Corporation and MCI, we
cannot be certain whether we will obtain retransmission consents if they are
required from any local affiliate. Our inability to retransmit local
21
<PAGE>
programming could have an adverse effect on our strategy to compete with cable
companies, which provide local programming.
TV NETWORKS OPPOSE OUR STRATEGY OF DELIVERING DISTANT NETWORK SIGNALS
The national networks and local affiliate stations have sued PrimeTime 24
Joint Venture, a satellite company whose signal feeds our parent company had one
time delivered, challenging PrimeTime 24's recently discontinued methods of
selling network programming to consumers, and alleging copyright infringement.
The United States District Court for the Southern District of Florida has
entered nationwide preliminary and permanent injunctions preventing PrimeTime 24
from selling its programming to consumers unless the programming was sold in
accordance with certain stipulations in the injunction. The preliminary
injunction took effect on February 28, 1999, and the permanent injunction is set
to take effect on April 30, 1999. The injunctions cover PrimeTime 24's
"distributors" as well. The plaintiff in the Florida litigation informed us that
it considered us a "distributor" for purposes of that injunction. A federal
district court in North Carolina has also issued an injunction against PrimeTime
24 prohibiting certain distant signal retransmissions to some of the homes in
the Raleigh area.
As a result of several regulatory, political, legal, contractual and
business factors, during July 1998, we began uplinking and distributing network
TV signals directly. CBS and other broadcast networks have informed us that they
believe our method of providing distant network programming violates the
Satellite Home Viewer Act and hence infringes their copyright.
In October 1998, our parent company filed a declaratory judgment action in
the United States District Court for the District of Colorado against the four
major networks. Our parent company has asked the court to enter a judgment
declaring that our method of providing distant network programming does not
violate the Satellite Home Viewer Act and hence does not infringe the networks'
copyrights.
In November 1998, the NBC, CBS, ABC and FOX networks and their affiliate
groups filed a complaint in federal district court in Miami against our parent
company and some of its subsidiaries, alleging copyright infringement with
respect to our delivery of distant network signals. The plaintiffs in that
action have also requested the issuance of a preliminary injunction against us.
On March 12, 1999, DIRECTV and the four major broadcast networks and their
affiliates announced that they had reached a settlement in a similar dispute
with the same parties. Under the terms of the settlement, DIRECTV, stations and
networks have agreed on a timeframe to disconnect distant broadcast network
signals from subscribers predicted to be ineligible based on a modified version
of the method used to determine "unserved households." Under the terms of that
settlement, subscribers will not lose receipt of their distant network signals
if they are predicted to be ineligible to receive those signals but they obtain
consent from the affected affiliate stations to receive their signals via
satellite. We are not sure what effect this development will have on our
business.
On March 24, 1999, we had a hearing in a Denver court on similar matters
with similar parties. If we lose that hearing, it is likely that the
broadcasters would move forward on their lawsuit filed in Miami and would seek
similar remedies against us, including a temporary restraining order requiring
us to stop delivering network signals to subscribers who do not live in
"unserved households." Depending upon the terms, a restraining order could
result in us having to terminate delivery of network signals to a material
portion of our subscriber base, which could result in decreases in subscriber
activations and subscription television services revenue and an increase in
subscriber turnover. If the case is decided against us, we may have to pay
significant damage awards or there may be additional material restrictions on
our sale of network signals.
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The Satellite Home Viewer Act permits us to retransmit distant network
signals only to "unserved households." The determination of whether a household
qualifies as "unserved" for that purpose depends, in part, on whether that
household can receive a signal of "Grade B intensity" as defined by the FCC. On
November 17, 1998, the FCC released a notice of proposed rule making concerning
the term "Grade B intensity" as used in the Satellite Home Viewer Act. The
notice of proposed rule making requested comment, or made tentative proposals
on, possible rules regarding Grade B intensity for purposes of the Satellite
Home Viewer Act. On February 2, 1999, the FCC released its report and order in
that proceeding. Although the FCC declined to change the values of Grade B
intensity, it adopted a method for measuring it at particular households. The
FCC also endorsed a method for predicting "Grade B intensity" at particular
households. We cannot be sure whether these methods are favorable to us or what,
if any, weight the courts will give to the FCC's decision. We also cannot be
certain whether the application of these methods by the courts will result in
termination of distant signal delivery to a material portion of our subscribers
and decreases in future subscriber activations.
OUR BUSINESS RELIES ON THE INTELLECTUAL PROPERTY OF OTHERS AND WE MAY
INADVERTENTLY INFRINGE THEIR PATENTS AND PROPRIETARY RIGHTS
Many of our competitors have and may obtain patents that cover or affect
products or services directly or indirectly related to those that we offer. If
our competitors hold such rights, they can either prevent us from using that
product or service, or they can force us to license from them the right to use
the product or service, thereby increasing our costs in a way that may affect
our net income available for making payments to you on the notes. We cannot
assure you that we are aware of all patents that our products may potentially
infringe. In addition, patent applications in the United States are confidential
until a patent is issued and, accordingly, we cannot evaluate the extent to
which our products may infringe claims contained in pending patent applications.
In general, if a court determines that one or more of our products infringes on
patents held by others, we would be required to cease developing or marketing
those products, to obtain licenses to develop and market those products from the
holders of the patents or to redesign those products in such a way as to avoid
infringing the patent claims. We cannot estimate the extent to which we may be
required in the future to obtain licenses with respect to patents held by others
and the availability and cost of any such licenses. Various parties have
contacted us, claiming patent and other intellectual property rights with
respect to components within our direct broadcast satellite system. We cannot be
certain that we would be able to obtain such licenses on commercially reasonable
terms or, if we were unable to obtain such licenses, that we would be able to
redesign our products to avoid infringement. See "Business--Legal Proceedings"
below.
SATELLITE PROGRAMMING SIGNALS HAVE BEEN PIRATED, WHICH COULD CAUSE US TO LOSE
SUBSCRIBERS AND REVENUE
The delivery of subscription programming requires the use of encryption
technology. Signal theft or "piracy" of C-band services, cable television and
European direct broadcast satellite services has been widely reported. We
recently received reports that our encryption system has been compromised. We
can take a number of different corrective measures to limit the amount of damage
that would be sustained by a breach of our conditional access system including,
as a last resort, complete replacement of the access control system. If our
encryption technology is compromised in a manner that is not promptly corrected,
our revenue and our ability to contract for video and audio services provided by
programmers could be adversely affected. Published reports indicate that the
DIRECTV and USSB encryption systems have been compromised. A Canadian court has
ruled that pirating of DIRECTV programming is not illegal in Canada. This ruling
may encourage the attempted piracy of our programming in Canada, resulting in
lost revenue for us and increased piracy of DIRECTV programming. Piracy of
DIRECTV programming could result in increased sales of DIRECTV receivers at the
expense of loss of potential DISH Network subscribers.
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WE USE ONLY ONE DIGITAL BROADCAST CENTER
We will continue to rely upon a single digital broadcast center located in
Cheyenne, Wyoming for key operations for programming signals, such as reception,
encryption and compression. If a natural or other disaster damaged the digital
broadcast center, we cannot assure you that we would be able to continue to
provide programming services to our customers.
OUR PLANNED SATELLITE LAUNCHES ARE SUBJECT TO RISKS
Launch services are available in very few countries and locations around
the world, and we have a limited choice of launch services providers. If we use
a foreign launch services provider for EchoStar V or EchoStar VI, the satellite
manufacturer must obtain from the United States government a technical data
exchange license and a satellite export license for that satellite. We could
also be subject to other restrictions by the United States government because of
its policy towards the countries where launch services providers are based. We
cannot be certain that these licenses will be obtained on time or at all, or
whether any delay in getting these licenses will not have a materially adverse
effect on our business. Satellites are subject to significant risks, including
launch failure, which may result in incorrect orbital placement or improper
commercial operation. Approximately 15% of all commercial geostationary
satellite launches have resulted in a total or constructive total loss. The
failure rate varies by launch vehicle and satellite manufacturer.
OUR SATELLITES HAVE MINIMUM DESIGN LIVES OF 12 YEARS, BUT COULD FAIL BEFORE THEN
Each of our satellites has a limited useful life. A number of factors
affect the useful lives of the satellites, including the quality of their
construction, the durability of their component parts, the longevity of their
station-keeping on orbit and the efficiency of the launch vehicle used. The
minimum design life of each of EchoStar I, EchoStar II, EchoStar III and
EchoStar IV is 12 years. We can provide no assurance, however, as to the useful
lives of the satellites. Our operating results would be adversely affected if
the useful life of any of these satellites were significantly shorter than 12
years. The satellite construction contracts for our satellites contain no
warranties in the event of a failure of EchoStar I, EchoStar II, EchoStar III or
EchoStar IV following launch. Additionally, moving any of these satellites,
either temporarily or permanently, to another orbital location, could decrease
the orbital life of the satellite by up to six months per movement.
In the event of a failure or loss of any of EchoStar I, EchoStar II, or
EchoStar III, we may relocate EchoStar IV and use the satellite as a replacement
for the failed or lost satellite. Such a relocation would require prior FCC
approval and, among other things, a showing to the FCC that EchoStar IV would
not cause additional interference compared to EchoStar I, EchoStar II, or
EchoStar III. If we choose to use EchoStar IV in this manner, there can be no
assurance that such use would not adversely affect our ability to meet the
operation deadlines associated with our permits. Failure to meet such deadlines
could result in the loss of such permits and would have an adverse effect on our
operations.
ELECTROSTATIC STORM AND SPACE DEBRIS COULD CAUSE DAMAGE TO, OR LOSS OF, OUR
SATELLITES
The loss, damage or destruction of any of our satellites as a result of
electrostatic storm or collision with space debris would have a material adverse
effect on our business. See "--Insurance Coverage Of Satellites Is Limited."
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COMPLEX TECHNOLOGY USED IN OUR BUSINESS COULD FAIL OR BECOME OBSOLETE
New applications and adaptations of existing and new technology, including
compression, conditional access, on screen guides and other matters, and
significant software development, are integral to our direct broadcast satellite
system and may, at times, not function as expected. Technology in the satellite
television industry is in a rapid and continuing state of change as new
technologies develop. We cannot assure you that we and our suppliers will be
able to keep pace with technological developments. In addition, delays in the
delivery of components or other unforeseen problems in our direct broadcast
satellite system may occur that could adversely affect performance or operation
of our direct broadcast satellite system and could have an adverse effect on our
business. Further, in the event that a competitive satellite receiver technology
becomes commonly accepted as the standard for satellite receivers in the United
States, we would be at a significant technological disadvantage. See
"Business--DISH Network--Components of a DBS System--Programming."
INSURANCE COVERAGE OF OUR SATELLITES IS LIMITED
We have procured in-orbit insurance for EchoStar I, EchoStar II and
EchoStar III through June 25, 1999. The insurance policy with respect to
in-orbit operation contains standard commercial satellite insurance provisions,
including a material change in underwriting information clause requiring us to
notify our insurers of any material change in the written underwriting
information provided to the insurers or any change in any material fact or
circumstance concerning our satellite insured under the policy. That
notification permits insurers to renegotiate the terms and conditions if the
result is a material change in risk of loss or insurable interest. A change in
the health status of an insured satellite or any loss occurring after risk has
attached does not entitle the insurers to renegotiate the policy terms. There
can be no assurance that insurance policy renewals will be possible or can be at
rates or on terms favorable to us. For example, if EchoStar I, EchoStar II,
EchoStar III or other similar satellites experience problems while in orbit, the
cost to renew in-orbit insurance could increase significantly or coverage
exclusions for similar problems could be required. See "Business--DISH
Network--Satellite Insurance."
Our satellite insurance contains customary exclusions and does not apply to
loss or damage caused by acts of war or civil insurrection, anti-satellite
devices, nuclear radiation or radioactive contamination or certain willful or
intentional acts designed to cause loss or failure of a satellite. There may be
circumstances in which insurance will not fully reimburse the Company for any
loss. For example, as a result of losing 6 transponders on EchoStar III, our new
insurance policy for EchoStar III contains a deductible of 3 to 6 transponders,
depending on the power mode that we operate in. In addition, insurance will not
reimburse the Company for business interruption, loss of business, profit
opportunity and similar losses that might arise from delay in the launch of any
EchoStar satellite.
WE MAY BE UNABLE TO SETTLE OUTSTANDING CLAIMS WITH INSURERS
EchoStar IV is currently able to use a maximum of only 20 transponders as a
result of a problem with its solar power panels. The number of available
transponders will decrease over time. EchoStar IV has also experienced
transponder problems comparable to those that occurred to EchoStar III which
have resulted in the failure of 3 transponders and the loss of use of a total of
6 transponders. Based on existing data, we expect that approximately 16
transponders will probably be available over the entire expected 12 year life of
the satellite, absent significant additional transponder problems or other
failures. In September 1998, we filed a $219.3 million insurance claim for a
constructive total loss under the launch insurance policy related to EchoStar
IV. However, if we receive $219.3 million, for a constructive total loss on the
satellite, the insurers would obtain the sole right to the benefits of salvage
from EchoStar IV under the terms of the launch insurance policy. Although we
believe we have suffered a total loss of EchoStar IV in accordance with that
definition in the launch insurance policy, we presently intend to negotiate a
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settlement with the insurers that will compensate us for the reduced satellite
transmission capacity and allow us to retain title to the asset. We cannot
assure you that we will receive the amount claimed or, if we receive the full
amount of the claim, that we will retain title to Echostar IV with its reduced
capacity.
WE DEPEND PRIMARILY ON A SINGLE RECEIVER MANUFACTURER
SCI Technology, Inc., a high-volume contract electronics manufacturer, is
currently the primary manufacturer of EchoStar receiver systems. VTech recently
began manufacturing some EchoStar receiver systems for us. JVC manufactures
other consumer electronics products incorporating our receiver systems. If SCI
is unable for any reason to produce receivers in a quantity sufficient to meet
our requirements, it would impair our ability to add additional DISH Network
subscribers and grow our Technology business unit. Likewise, it would adversely
affect our results of operations.
WE HAVE FEWER DISTRIBUTION CHANNELS THAN OUR LARGEST DIRECT BROADCAST SATELLITE
COMPETITOR
We do not currently have manufacturing agreements or arrangements with
consumer products manufacturers other than JVC and Philips, and as of yet, only
JVC is manufacturing consumer electronics equipment incorporating our receivers.
As a result, our receivers, and consequently our programming services, are less
well known to consumers than those of our largest direct satellite broadcast
competitor. Due in part to the lack of product recognition, our receiver systems
are carried for sale in approximately 18,000 retail outlets compared to
approximately 30,000 retail outlets for our largest direct satellite broadcast
competitor.
INCREASED SUBSCRIBER TURNOVER COULD AFFECT OUR FINANCIAL PERFORMANCE
From January 1, 1997, our monthly subscriber turnover, which represents the
number of subscriber disconnects during the period divided by the
weighted-average number of subscribers during the period, has averaged less than
1.25%. If subscriber turnover increases, it would adversely affect our financial
condition and results of operations because we subsidize the cost of EchoStar
receiver systems.
WE MAY BE UNABLE TO MANAGE RAPIDLY EXPANDING OPERATIONS
If we are unable to manage our growth effectively, it could materially
adversely affect our business and results of operations. To manage our growth
effectively, we must continue to develop our internal and external sales force,
installation capability, customer service operations, and information systems,
and maintain our relationships with third party vendors. We will also need to
continue to expand, train and manage our employee base, and our management
personnel will be required to assume even greater levels of responsibility.
WE MAY BE VULNERABLE TO RISKS ASSOCIATED WITH ACQUISITIONS
Acquisitions, including the transaction with News Corporation and MCI,
involve numerous risks, including, among other things, difficulties and expenses
incurred in connection with the acquisition and the subsequent assimilation of
the operations of the acquired company, adverse consequences of conforming the
acquired company's accounting policies to ours, the difficulty in operating
acquired businesses, the diversion of management's attention from other business
concerns and the potential loss of key employees of acquired companies. There
can be no assurance that any acquisition, including the transaction with News
Corporation and MCI, will be successfully integrated into our on-going
operations or that estimated cost savings will be achieved. We have made a
number of acquisitions and will continue to review future acquisition
opportunities. We can provide no assurance that acquisition candidates will
continue to be available on terms and conditions acceptable to us. In addition,
in the event
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that the operations of an acquired business do not meet expectations, we may
need to restructure the acquired business or write-off the value of some or all
of the assets of the acquired business.
WE RELY ON KEY PERSONNEL
We believe that our future success will depend to a significant extent upon
the performance of Charles W. Ergen, Chairman, Chief Executive Officer and
President of our parent company. The loss of Mr. Ergen could have an adverse
effect on our business. We do not maintain "key man" insurance. Although all of
our executives, other than executive officers, have executed agreements limiting
their ability to work for or consult with competitors if they leave us, we do
not have any employment agreements with any of our executive officers.
WE ARE CONTROLLED BY ONE PRINCIPAL STOCKHOLDER
We are a wholly owned subsidiary of EchoStar Communications Corporation.
Although Charles W. Ergen, the Chairman, Chief Executive Officer and President
of EchoStar Communications, currently owns approximately 63% of the total equity
securities of EchoStar Communications (assuming exercise of employee stock
options), he currently possesses approximately 94% of the total voting power.
Furthermore, Mr. Ergen will continue to own a substantial portion of the total
voting power if the transaction with News Corporation and MCI is completed. For
example, if the transaction with News Corporation and MCI had been completed on
March 15, 1999, Mr. Ergen would continue to control approximately 87% of the
total voting power. Thus, Mr. Ergen will continue to have the ability to elect a
majority of the directors of EchoStar Communications and to control all other
matters requiring the approval of its stockholders. In addition, pursuant to a
voting agreement among Mr. Ergen, News Corporation and MCI, News Corporation and
MCI have agreed to vote their shares after consummation of their transaction
with EchoStar Communications in accordance with the recommendation of the Board
of Directors of EchoStar Communications for five years. See "Security Ownership
of Certain Beneficial Owners and Management." For Mr. Ergen's total voting power
in EchoStar Communications to be reduced to below 51%, his percentage ownership
of the equity securities of EchoStar Communications would have to be reduced to
below 10%.
THE REGULATORY REGIME WE OPERATE UNDER COULD CHANGE ADVERSELY
The FCC imposes different rules for "subscription" and "broadcast"
services. We believe that, because we offer a subscription programming service,
we are not subject to many of the regulatory obligations imposed upon broadcast
licensees. However, we cannot be certain whether the FCC will find in the future
that we should be treated as a broadcast licensee with respect to our current
and future operations, and certain parties have requested that we be treated as
a broadcaster. If the FCC determined that we are a broadcast licensee, the FCC
may require us to comply with all regulatory obligations imposed upon broadcast
licensees, which are generally subject to more burdensome regulation than
subscription service providers like us.
Direct broadcast satellite operators like us currently are not subject to
the "must carry" requirements of the Cable Act that require cable operators to
carry all the local broadcast stations in the areas they serve, not just the
four major networks. The cable industry and the broadcasters have argued that
direct broadcast satellite operators should be subject to these requirements,
and the broadcasters also have argued that satellite companies should not be
allowed to distribute local network signals unless they become subject to such
requirements. If the "must carry" requirements of the Cable Act are revised to
include direct broadcast satellite operators, or if new legislation or
regulation of a similar nature is promulgated, our plans to provide local
programming may be adversely affected, and such must carry requirements could
cause the displacement of possibly more attractive programming. Additionally,
the
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FCC recently imposed public interest requirements on direct broadcast satellite
licensees, such as us, to set aside four percent of channel capacity exclusively
for noncommercial programming at below-cost rates. This could also displace
programming for which we could be paid commercial rates and cause us to have
less net income available for making payments on the notes.
The FCC has commenced a rulemaking which seeks to streamline and revise its
rules governing direct broadcast satellite. This rulemaking concerns many new
possible direct broadcast satellite rules. There can be no assurance about the
content and effect of any new direct broadcast satellite rules passed by the
FCC.
FOREIGN OWNERSHIP RESTRICTIONS COULD AFFECT OUR BUSINESS PLAN
The Communications Act, and the FCC's implementing regulations, provide
that, when subsidiaries of a holding company hold certain types of FCC licenses,
foreign nationals or their representatives may not own or vote more than 25% of
the total equity of the holding company, considered on a fully-diluted basis,
except upon an FCC public interest determination. Although the FCC's
International Bureau has ruled that these limitations do not apply to providers
of subscription direct broadcast satellite service like us, the ruling has been
challenged and the question remains open. Furthermore, the limitations will
apply to our licenses for fixed satellite service if we hold ourselves out as a
common carrier or if the FCC decides to treat us as such a carrier. The FCC has
noted that we have proposed to operate one of our authorized fixed satellite
service systems on a common carrier as well as a non-common carrier basis.
We believe that our foreign ownership is under 5%. Our pending transaction
with New Corporation, however, would result in the issuance to an Australian
corporation of stock in excess of these limitations if they apply, and we may
need a separate FCC determination that such ownership is consistent with the
public interest in order to avoid a violation of the Communications Act or the
FCC's rules.
OUR BUSINESS DEPENDS SUBSTANTIALLY ON FCC LICENSES THAT CAN EXPIRE OR BE REVOKED
OR MODIFIED
We have licenses to operate EchoStar I and EchoStar II at the 119 degree
orbital location, which both expire in 2006, and a license to operate EchoStar
III at the 61.5 degree orbital location, which expires in 2008. Also, we have
filed with the FCC an application for a license to operate EchoStar IV as well
as a request for a waiver of the requirement of serving Alaska and Hawaii from
the 148 degree orbital location. The state of Hawaii has requested the FCC to
impose several conditions on these requested authorizations, and we have opposed
many of these conditions. We cannot be sure whether the FCC will grant these
requests or whether it will impose onerous conditions. We currently operate
EchoStar IV at the 148(Degree) WL orbital location under a special temporary
authorization until permanent authority can be obtained to operate that
satellite at the 148(Degree) WL orbital location. Our authorization at
148(Degree) WL requires us to utilize all of our FCC-allocated frequencies at
that location by December 20, 2002, or risk losing those frequencies that we are
not using. Some of our pending and future requests to the FCC for extensions,
waivers and approvals have been, and are expected to continue to be, opposed by
third parties.
In connection with the transaction with News Corporation and MCI, we filed
an application with the FCC to transfer MCI's licenses to our parent company for
our use. Several parties have opposed the application on various grounds
arguing, for example, that foreign ownership limitations and other broadcast
qualification requirements apply and requesting program access conditions with
respect to News Corporation's programming. Other parties requested conditions in
connection with service to Alaska and Hawaii, including requesting service to
Hawaii from the 110 degree orbital location. Some of our affiliates have filed a
still pending request for a wavier of the obligation to serve Alaska and Hawaii.
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We cannot be sure how the FCC or other regulatory authorities would rule on any
of these oppositions or requests. We do not know whether MCI's planned system
can provide service to Hawaii of the type that the state of Hawaii requested,
including, for example, use of 18-24 inch satellite dishes, and it is likely
that this system cannot provide such service. Furthermore, the FCC has not yet
approved some of the telemetry, tracking and control operations of the planned
MCI system that we agreed to acquire, or a pending request for the FCC's
permission to modify the system. MCI's authorization itself is subject to
pending challenges before the FCC. We cannot be certain how the FCC will decide
on these matters.
Our plan to use our authorized frequencies at the 119 degree orbital
location and our requested frequencies at the 110 degree orbital location for a
single consumer satellite dish may be subject to additional regulatory
requirements. The FCC had imposed a one-time rule, applicable only to the
January 1996 direct broadcast satellite auction, which effectively prevented
direct broadcast satellite operators from using channels at more than one
orbital location with full coverage of the continental United States. If the FCC
reimposed this rule, we would not be able to preserve both our requested
authorization at the 110 degree orbital location and our existing licenses at
the 119 degree orbital location. We cannot be sure how the FCC will rule in this
matter.
The telemetry, tracking and control operations of EchoStar I are in an area
of the spectrum called the "C-band." Although the FCC granted us conditional
authority to use these frequencies for telemetry, tracking and control, in
January 1996 a foreign government raised an objection to EchoStar I's use of
these frequencies. We cannot be certain whether that objection will subsequently
require us to relinquish the use of such C-band frequencies for telemetry,
tracking and control purposes. Further, EchoStar II's telemetry, tracking and
control operations are in the "extended" C-band. Our authorization to use these
frequencies expired on January 1, 1999. Although we have timely applied for
extension of that authorization to November 2006, we cannot be sure that the FCC
will grant our request. If we lose the ability to use these frequencies for
controlling either satellite, we would lose the satellite. Recently, the FCC
released a notice of proposed rulemaking that may inhibit future satellite
operations in the "extended" C-band frequencies. The FCC also is no longer
accepting earth station applications in that band. These recent developments
might have negative implications for us.
All of our authorizations for satellite systems that are not yet
operational, including the licenses that we expect to get from MCI, are subject
to construction and progress obligations, milestones, reporting and other
requirements. The FCC has indicated that it may revoke, terminate, condition or
decline to extend or renew such authorizations if we fail to comply with
applicable Communications Act requirements. If we fail to file adequate reports
or to demonstrate progress in the construction of our satellite systems, the FCC
has stated that it may cancel our authorizations for those systems. We have not
filed, or timely filed, all required reports or other filings, and some of our
construction permits have expired, in connection with our authorized systems
with the FCC. We cannot be certain whether or not the FCC would cancel our
authorizations.
WE MAY BE IN DEFAULT ON CERTAIN OBLIGATIONS
We used satellite vendor financing in connection with the purchase of each
of our current satellites. Under the terms of that financing, we deferred paying
a portion of the purchase price for the satellites until after the satellites
were in orbit. As of December 31, 1998, we had $17.1 million in principal amount
outstanding of these deferred payments relating to EchoStar I, $17.4 million
relating to EchoStar II, $12.2 million relating to EchoStar III and $13.0
million relating to EchoStar IV. The outstanding deferred payments relating to
EchoStar I and EchoStar II are secured by substantially all of the assets of
Dish, Ltd. (one of our wholly-owned subsidiaries) and its subsidiaries (subject
to certain restrictions) and are guaranteed by our parent company. The
consummation of the offering of the old notes and the exchange notes and the
reorganization might result in breaches of certain covenants in favor
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of the holders of these outstanding deferred payments, in particular the holders
of outstanding deferred payments relating to EchoStar I and EchoStar II. We
believe that, if there is a breach of such covenants, we may be liable to the
holders of such outstanding deferred payments for damages, if any, arising out
of such breach, including possibly the obligation to repay such outstanding
deferred payments prior to their scheduled maturity together with the economic
equivalent of interest through the scheduled maturity date.
WE MAY BECOME LIABLE IN A PENDING FEE DISPUTE
In connection with the News Corporation litigation that arose in 1997, our
parent company has a contingent fee arrangement with its lawyers, which provides
for the lawyers to be paid a percentage of any net recovery obtained in its
dispute with News Corporation. Although they have not been specific, the lawyers
have asserted that they may be entitled to receive payments in excess of $80
million to $100 million under this fee arrangement in connection with the
settlement of the dispute with News Corporation. Our parent company intends to
vigorously contest the lawyers' interpretation of the fee arrangement, which it
believes significantly overstates the magnitude of its liability thereunder.
If the lawyers and our parent company are unable to resolve this fee
dispute under the fee arrangement, the fee dispute would be resolved under
arbitration. We cannot be certain about the outcome of negotiations or
arbitration regarding this fee dispute. As the holder of the assets acquired in
the transaction with News Corporation and MCI, we would pay any fee that is
payable under the fee arrangement.
UNDER FRAUDULENT CONVEYANCE STATUTES, A COURT MAY VOID OR SUBORDINATE OUR
OBLIGATIONS UNDER THE NOTES OR OUR SUBSIDIARY GUARANTORS' OBLIGATIONS UNDER
THEIR GUARANTEES
We have used a portion of the net proceeds of the old notes to make a
distribution to our parent company for repaying a series of debt securities of
our parent company. See "Use of Proceeds." It is possible that our creditors may
challenge the incurrence of indebtedness represented by the notes as a
fraudulent conveyance under relevant federal and state statutes and, if the
court finds that we were insolvent at the time we issued the old notes, a court
could hold that our obligations on the notes may be voided or are subordinate to
our other obligations. Our obligations under the notes are guaranteed, jointly
and severally, by DBSC and certain of our subsidiary guarantors. It is possible
that the creditors of a subsidiary guarantor may challenge its guarantee as a
fraudulent conveyance and the same result could apply with respect to the
subsidiary guarantor. In addition, it is possible that the amount for which a
subsidiary guarantor is liable under its guarantee may be limited. The measure
of insolvency for purposes of the foregoing may vary depending on the law of the
jurisdiction that is being applied. Generally, however, a court would consider a
company insolvent if the sum of its debts was greater than all of its property
at a fair valuation or if the present fair saleable value of its property was
less than the amount that will be required to pay its probable liability on its
existing debts as they become absolute and mature. The indenture provides that
the obligations of the subsidiary guarantors under the subsidiary guarantees are
limited to amounts that will not result in the subsidiary guarantees being a
fraudulent conveyance under the applicable law. See "Description of the
Notes--Guarantees" below.
FAILURE OF YEAR 2000 COMPLIANCE INITIATIVES COULD ADVERSELY AFFECT US
The Year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. Thus, as the century
date approaches, date sensitive systems may recognize the year 2000 as 1900 or
not at all. The inability to recognize or properly treat the year 2000 may cause
computer systems to process critical financial and operational information
incorrectly. If our Year 2000 remediation plan is not successful or is not
completed in a timely manner, the Year 2000 issue could significantly disrupt
our ability to transact business with our customers and suppliers, and could
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have a material impact on our operations. Even if our Year 2000 remediation plan
is successful or completed on time, there can be no assurance that the systems
of other companies with which our systems interact will be timely converted, or
that any such failure to convert by another company would not have an adverse
effect on our business or operations. We cannot estimate the potential adverse
impact that may result from non-compliance with the year 2000 issue by the
software and equipment vendors and others with whom we conduct business.
ACTUAL RESULTS OF OUR OPERATIONS MAY DIFFER FROM THOSE CONTAINED IN
FORWARD-LOOKING STATEMENTS
All statements contained in this prospectus, as well as statements made in
press releases and oral statements that may be made by our parent company or by
officers, directors or employees acting on its behalf, that are not statements
of historical fact constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve known and unknown risks, uncertainties and other factors that
could cause our actual results of operations to be materially different from
historical results or from any future results expressed or implied by the
forward-looking statements. Among the factors that could cause actual results to
differ materially is a total or partial loss of a satellite due to operational
failures, space debris or otherwise. Our business could also be adversely
affected by a decrease in sales of digital equipment and related services to
international service providers, a decrease in DISH Network subscriber growth or
an increase in subscriber acquisition costs. Our strategy of providing local
channels to customers could be adversely affected by impediments to the
retransmission of local or distant broadcast network signals, or lower than
expected demand for our delivery of local broadcast network signals. In general
our entire business could be adversely affected by an unexpected business
interruption due to the failure of third-parties to remediate year 2000 issues
or our inability to retain or obtain necessary authorizations from the FCC. Our
subscriber base and our planned growth in numbers of subscribers would be
adversely affected by an increase in competition from cable, direct broadcast
satellite, other satellite system operators and other providers of subscription
television services or the introduction of new technologies and competitors into
the subscription television business. We could face a newly adverse competitive
environment from a merger of existing direct broadcast satellite competitors or
a change in the regulations governing the subscription television service
industry. The outcome of any litigation in which we or our parent company may be
involved could adversely affect our income or even our ability to offer some
types of popular programming or services. Our plan to expand our number of
channels would be adversely affected by failure to consummate the transaction
with News Corporation and MCI whereby our parent company would issue equity
securities in exchange for two satellites that have not yet been completed, or
by the failure of such satellites to be successfully launched or to become
operational or a delay in such launch or operation. Also our business can be
adversely affected by general business and economic conditions and other risk
factors described from time to time in reports filed with the SEC by us or our
parent company.
In addition to statements that explicitly describe such risks and
uncertainties, you are urged to consider statements that include the terms
"believes," "belief," "expects," "plans," "anticipates," "intends" or the like
to be uncertain and forward-looking. All cautionary statements made in this
prospectus should be read as being applicable to all forward-looking statements
wherever they appear. In this connection, you should consider the risks
described in this prospectus.
THE ABSENCE OF A PUBLIC MARKET COULD REDUCE LIQUIDITY OF YOUR INVESTMENT IN THE
NOTES
We are offering the exchange notes to the holders of the old notes. We
offered and sold the old notes in January 1999 to a limited number of
institutional investors. The old notes are eligible for trading in the Portal
Market.
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The exchange notes will constitute a new issue of securities for which
there is no established trading market. If a trading market does not develop or
is not maintained, you may experience difficulty in reselling the exchange notes
or may be unable to sell them at all. If a market for the exchange notes
develops, any such market may be discontinued at any time and the exchange notes
could trade at prices that may be lower than their initial price, depending on
many factors, including prevailing interest rates, the markets for companies
offering similar services and our financial performance. The initial purchasers
of the old notes have made a market in the old notes. Although there is
currently no market for the exchange notes, the initial purchasers have advised
us that they currently intend to make a market in the exchange notes. However,
they are not obligated to do so, and they may discontinue any such market-making
with respect to the old notes and the exchange notes at any time without notice.
In addition, such market-making activity will be subject to the limits imposed
by the Securities Act and the Securities Exchange Act of 1934, as amended and
may be limited during the exchange offer and the pendency of any shelf
registration statement. See "Description of the Notes--Registration Rights;
Liquidated Damages" below. Accordingly, we cannot assure you that a market for
the old notes and the exchange notes will develop or, if developed, will be
liquid. We do not intend to apply for listing of any of the notes on any
securities exchange or for quotation through the Nasdaq National Market or any
other securities quotation service.
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USE OF PROCEEDS
We will receive no cash proceeds from the exchange offer. The exchange
offer is intended to satisfy some of our obligations under the registration
rights agreements for the notes. We will issue exchange notes in exchange for
old notes in the same principal amount, and for the same terms and form as the
old notes, except that there will be no registration rights or liquidated
damages relating to the exchange notes. The old notes surrendered in exchange
for the exchange notes will be retired and canceled and cannot be reissued.
Accordingly, we will not incur any new debt by issuing the exchange notes.
The gross proceeds to us from the old notes offering were approximately
$2.0 billion, with net proceeds to us of approximately $1.8 billion. We used
a portion of the net proceeds from the old notes offering to repurchase the
12 7/8% notes, 13 1/8% notes and 12 1/2% notes, to fund a distribution to our
parent company for a repurchase of its Senior Preferred Exchange Notes and to
repay our parent company's loans to DBSC. We will use the remaining portion
to fund subscriber acquisition and marketing expenses as well as general
corporate purposes.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The sole purpose of the exchange offer is to fulfill the obligations of the
Company and the guarantors with respect to the registration of the old notes. We
originally issued and sold the old notes on January 25, 1999. We did not
register those sales under the Securities Act, in reliance upon the exemption
provided in section 4(2) of the Securities Act and Rule 144A and Regulation S
promulgated under the Securities Act. In connection with the sale of the old
notes, we agreed to file with the SEC an exchange offer registration statement
relating to the exchange offer. Under the exchange offer registration statement,
exchange notes, consisting of another series of our notes and containing
substantially identical terms to the old notes, except as set forth in this
prospectus, will be offered in exchange for old notes.
We and our guarantors will file with the SEC a shelf registration statement
to cover resales by you of your old notes if you satisfy certain conditions
relating to the provision of information in connection with the shelf
registration statement under the following conditions:
(1) the applicable exchange offer is not permitted by applicable law or
SEC policy; or
(2) you are a holder of "transfer restricted securities" and you notify us
within the specified time period that:
- you are prohibited by law or SEC policy from participating in the
exchange offer;
- you may not resell the exchange notes acquired by you in the
exchange offer to the public without delivering a prospectus and
this prospectus is not appropriate or available for such resales;
or
- you are a broker-dealer and you own old notes acquired directly
from us or our affiliate.
"Transfer restricted securities" means each old note until the
earliest of:
- the date on which a holder exchanges an old note in the exchange
offer and that holder is entitled to resell it to the public
without complying with prospectus delivery requirements;
- the date on which a broker-dealer disposes of an old note
pursuant to the "Plan of Distribution" described by the exchange
offer registration statement, including delivery of the
prospectus contained in that exchange offer registration
statement;
- the date on which an old note has been effectively registered
under the Securities Act and disposed of in accordance with the
shelf registration statement; or
- the date on which an old note may be distributed to the public
pursuant to Rule 144(k) under the Securities Act. See
"Description of the Notes--Registration Rights; Liquidated
Damages."
You will be required to make certain representations to us, as described in
the registration rights agreement, in order to participate in the exchange offer
and, if you wish to include your old notes in the
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shelf registration statement, you must deliver information to be used in
connection with the shelf registration statement and you must provide comments
on the shelf registration statement within the time periods set forth in the
registration rights agreement. You must comply with these procedures in order to
benefit from the provisions regarding liquidated damages described below.
HOW TO DETERMINE IF YOU ARE ELIGIBLE TO PARTICIPATE IN THE EXCHANGE OFFER
We hereby offer to exchange, upon the terms and subject to the conditions
set forth in this prospectus and in the letter of transmittal accompanying it,
$1,000 in principal amount of exchange notes for each $1,000 in principal amount
of our old notes that you hold. The terms of the exchange notes are
substantially identical to the terms of the old notes for which they may be
exchanged pursuant to this exchange offer, except that the exchange notes will
generally be freely transferable by you, and you will not be entitled to certain
registration rights and certain liquidated damages provisions which are
applicable to the old notes under the registration rights agreement. Each series
of exchange notes will evidence the same debt as the corresponding old notes and
will be entitled to the benefits of its respective indenture. See "Description
of the Notes" below.
We are not making the exchange offer to, nor will we accept surrenders for
exchange from, holders of outstanding old notes in any jurisdiction in which
this exchange offer or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction.
We are not making the exchange offer conditional upon any minimum aggregate
principal amount of old notes being tendered or accepted for exchange.
Based on our view of interpretations set forth in no-action letters issued
by the staff of the SEC to third parties, we believe that you may resell or
transfer exchange notes issued pursuant to the exchange offer in exchange for
the old notes, unless you are an "affiliate" of the Company, a broker-dealer who
acquired old notes directly from the Company or a broker-dealer who acquired old
notes as a result of market-making or other trading activities. We believe that
you may resell or transfer such exchange notes without compliance with the
registration and prospectus delivery provisions of the Securities Act only if
such exchange notes are acquired in the ordinary course of your business and you
are not engaged in, and do not intend to engage in, and have no arrangement or
understanding with any person to participate in, a distribution of such exchange
notes.
If our belief is inaccurate and you transfer any note issued to you in the
exchange offer without delivering a prospectus meeting the requirement of the
Securities Act or without an exemption from registration of your old notes from
such requirements, you may incur liability under the Securities Act. We do not
assume or indemnify you against such liability.
If you are a broker-dealer that resells exchange notes that were received
by you for your own account pursuant to the exchange offer, and if you
participate in a distribution of the exchange notes, you 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 you
may be deemed to be underwriting compensation under the Securities Act. If you
are a broker-dealer who acquires old notes as a result of market-making or other
trading activities, you may use this prospectus, as supplemented or amended, in
connection with resales of the exchange notes. We have agreed that, for a period
of one year after the exchange offer is consummated, we will make this
prospectus available to any broker-dealer for use in connection with any such
resale. If you tender old notes in the exchange offer for the purpose of
participating in a distribution of the exchange notes, or if you cannot rely
upon such interpretations, you must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction.
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If you are tendering old notes, you 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
January 25, 1999. If your old notes are accepted for exchange, you will be
deemed to have waived the right to have interest accrue, or to receive any
payment in respect of interest, on the old notes from January 25, 1999, to the
date of the issuance of the exchange notes. Interest on the exchange notes is
payable semiannually in arrears on February 1 and August 1 of each year,
commencing August 1, 1999, accruing from January 25, 1999.
INFORMATION ABOUT THE EXPIRATION DATE OF THE EXCHANGE OFFER AND CHANGES TO IT
The exchange offer expires on the expiration date, which is 5:00 p.m.,
Eastern time, on ___________________ unless we, in our sole discretion, extend
the period during which the exchange offer is open. If we extend the period for
the exchange offer, the term "expiration date" means the latest time and date on
which the exchange offer, as so extended, expires. We reserve the right to
extend the exchange offer at any time and from time to time prior to the
expiration date by giving written notice to U.S. Bank Trust National
Association, which is the exchange agent, and by timely public announcement
communicated by no later than 5:00 p.m. on the next business day following the
expiration date, unless 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. We expressly reserve the right to terminate the exchange offer
and not accept for exchange any old notes for any reason, including if any of
the events set forth below under "--Conditions to the Exchange Offer" have
occurred and have not been waived by us. We also reserve the right to amend the
terms of the exchange offer in any manner, whether before or after any tender of
the old notes. If we terminate or amend the exchange offer, we will notify the
exchange agent in writing and will either issue a press release or give written
notice to you as a holder of the old notes as promptly as practicable. Unless we
terminate the exchange offer prior to 5:00 p.m., Eastern time, on the expiration
date, we will exchange the exchange notes for old notes on the exchange date.
We will mail this prospectus and the related letter of transmittal and
other relevant materials to you as a record holder of old notes and we will
furnish these items to brokers, banks and similar persons whose names, or the
names of whose nominees, appear on the lists of holders for subsequent
transmittal to beneficial owners of old notes.
HOW TO TENDER YOUR OLD NOTES
If you tender to us any of your old notes pursuant to one of the procedures
set forth below, that tender will constitute an agreement between you and us in
accordance with the terms and subject to the conditions described below and in
the letter of transmittal.
HOW TO DETERMINE IF YOU ARE ELIGIBLE TO PARTICIPATE IN THE EXCHANGE OFFER
You may tender old notes by properly completing and signing the letter of
transmittal or a facsimile of it. All references in this prospectus to the
"letter of transmittal" are deemed to include a facsimile of the letter. You
must deliver it, together with the certificate or certificates representing the
old notes that you are tendering and any required signature guarantees, or a
timely confirmation of a book-entry transfer pursuant to the procedure described
below, to the exchange agent at its address set forth on
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the back cover of this prospectus on or prior to the expiration date. You may
also tender old notes by complying with the guaranteed delivery procedures
described below.
Your signature does not need to be guaranteed if your old notes are
registered in your name, the exchange notes will registered in your name and you
sign the letter of transmittal. In any other case, the tendered old notes must
be endorsed or accompanied by written instruments of transfer in form
satisfactory to us and duly executed by the registered holder. Also, the
signature on the endorsement or instrument of transfer must be guaranteed by an
"eligible institution," such as a bank, broker, dealer, credit union, savings
association, clearing agency or other institution that is a member of a
recognized signature guarantee medallion program within the meaning of Rule
17Ad-15 under the Exchange Act. If the exchange notes 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 such an "eligible institution."
If your old notes are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and you wish to tender old
notes, you should contact the registered holder promptly and instruct the holder
to tender old notes on your behalf. If you wish to tender your old notes
yourself, you must, prior to completing and executing the letter of transmittal
and delivering your old notes, either make appropriate arrangements to register
ownership of the old notes in your name or follow the procedures described in
the immediately preceding paragraph. Transferring record ownership from someone
else's name to your name may take considerable time.
HOW TO TENDER IF YOU HOLD YOUR OLD NOTES THROUGH A BROKER OR OTHER INSTITUTION
AND YOU DO NOT HAVE THE ACTUAL OLD NOTES
Any financial institution that is a participant in DTC's systems may make
book-entry delivery of your old notes by causing DTC to transfer your old notes
into the exchange agent's account at DTC in accordance with DTC's procedures for
transfer. Although you may deliver your old notes through book-entry transfer at
DTC, you still must send the letter of transmittal, with any required signature
guarantees and any other required documents, to the exchange agent at the
address specified on the back cover of this prospectus on or prior to the
expiration date and the exchange agent must receive these documents on time. If
you will not be able to send all the documents on time, you can still tender
your old notes by using the guaranteed delivery procedures described below.
YOU ASSUME THE RISK OF CHOOSING THE METHOD OF DELIVERY OF OLD NOTES AND ALL
OTHER DOCUMENTS. IF YOU SEND YOUR OLD NOTES AND YOUR DOCUMENT BY MAIL, WE
RECOMMEND THAT YOU USE REGISTERED MAIL, RETURN RECEIPT REQUESTED, YOU OBTAIN
PROPER INSURANCE, AND YOU MAIL THESE ITEMS SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE
EXPIRATION DATE.
If you do not provide your taxpayer identification number (social security
number or employer identification number, as applicable) and certify that such
number is correct, the exchange agent will withhold 31% of the gross proceeds
otherwise payable to you pursuant to the exchange offer, unless an exemption
applies under the applicable law and regulations concerning "backup withholding"
of federal income tax. You should complete and sign the main signature form and
the Substitute Form W-9 included as part of the letter of transmittal, so as to
provide the information and certification necessary to avoid backup withholding,
unless an applicable exemption exists and is proven in a manner satisfactory to
us and the exchange agent.
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HOW TO USE THE GUARANTEED DELIVERY PROCEDURES IF YOU WILL NOT HAVE ENOUGH TIME
TO SEND ALL DOCUMENTS TO US
If you desire to accept the exchange offer, and time will not permit a
letter of transmittal or old notes to reach the exchange agent before the
expiration date, you may tender your old notes if the exchange agent has
received at its office listed on the letter of transmittal on or prior to the
expiration date a letter, telegram or facsimile transmission from an eligible
institution setting forth: your name and address, the principal amount of the
old notes being tendered, the names in which the old notes are registered and,
if possible, the certificate numbers of the old notes to be tendered.
The eligible institution's correspondence to the exchange agent must state
that the tender is being made thereby and guarantee that within three New York
Stock Exchange trading days after the date of execution of such correspondence
by the eligible institution, the old notes, in proper form for transfer, will be
delivered by the eligible institution together with a properly completed and
duly executed letter of transmittal and any other required documents. We may, at
our option, reject the tender if your old notes and accompanying documents are
not tendered by either the above-described method or by a timely book-entry
confirmation, and deposited with the exchange agent within the time period set
forth above. Copies of a notice of guaranteed delivery that may be used by
eligible institutions for the purposes described in this paragraph are available
from the exchange agent.
Your tender will be deemed to be received as of the date when the exchange
agent receives your properly completed letter of transmittal, accompanied by
either the old notes or a timely book-entry confirmation. We will issue exchange
notes in exchange for old notes tendered pursuant to a notice of guaranteed
delivery or correspondence to similar effect as described above by an eligible
institution only against deposit of the letter of transmittal, any other
required documents and either the tendered old notes or a timely book-entry
confirmation.
WE RESERVE THE RIGHT TO DETERMINE VALIDITY OF ALL TENDERS
All questions as to the validity, form, eligibility, including time of
receipt, and acceptance for exchange of your tender of old notes will be
determined by us, whose determination will be final and binding. We reserve the
absolute right to reject any or all of your tenders that are not in proper form
or the acceptances for exchange of which may, in the opinion of our counsel, be
unlawful. We also reserve the absolute right to waive any of the conditions of
the exchange offer or any defect or irregularities in tenders of any particular
holder whether or not similar defects or irregularities are waived in your case.
Neither we, the exchange agent nor any other person will be under any duty to
give you notification of any defects or irregularities in tenders nor shall any
of us incur any liability for failure to give you any such notification. Our
interpretation of the terms and conditions of the exchange offer, including the
letter of transmittal and its instructions, will be final and binding.
TO PARTICIPATE, YOU MUST COMPLETE THE LETTER OF TRANSMITTAL CERTIFYING
INFORMATION ABOUT YOURSELF
By tendering old notes and executing the letter of transmittal, you certify
that the following:
- you are not our "affiliate";
- you are not a broker-dealer that owns old notes acquired directly from
us or our affiliate; and
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- you are acquiring the exchange notes offered hereby in the ordinary
course of your business and that you have no arrangement with any
person to participate in the distribution of such exchange notes.
If you cannot certify the foregoing, you may certify that you are an affiliate
of us or of the initial purchasers of the old notes, and you will comply with
the registration and prospectus delivery requirements of the Securities Act to
the extent applicable to you.
By tendering old notes for exchange, you will exchange, assign and transfer
the old notes to us and irrevocably appoint the exchange agent as your agent and
attorney-in-fact to cause the old notes to be assigned, transferred and
exchanged. You will also represent and warrant that you have full power and
authority to tender, exchange, assign and transfer the old notes and to acquire
exchange notes issuable upon the exchange of such tendered old notes. The letter
of transmittal requires you to agree that, when the old notes are accepted for
exchange, we will acquire good and unencumbered title to them, free and clear of
all liens, restrictions, charges and encumbrances and that they are not subject
to any adverse claim.
You will also warrant that you will, upon our request, execute and deliver
any additional documents that we believe are necessary or desirable to complete
the exchange, assignment and transfer of your tendered old notes. You must
further agree that acceptance of any tendered old notes by us and the issuance
of exchange notes in exchange for them will constitute performance in full by us
of our obligations under the registration rights agreement and that we will have
no further obligations or liabilities under that agreement, except in certain
limited circumstances. All authority conferred by you will survive your death or
incapacity and every obligation of you shall be binding upon your heirs, legal
representatives, successors, assigns, executors and administrators.
IF YOU TENDER OLD NOTES PURSUANT TO THE EXCHANGE OFFER, YOU MAY WITHDRAW THEM AT
ANY TIME PRIOR TO THE EXPIRATION DATE
For your withdrawal to be effective, your written or fax notice of
withdrawal must be timely received by the exchange agent prior to the expiration
date at its address set forth on the back cover of this prospectus. Your notice
of withdrawal must specify the following information:
- 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 you are withdrawing your election to have such old
notes exchanged; and
- The name of the registered holder of such old notes (which may be a
person or entity other than you, such as your broker-dealer).
Your notice of withdrawal must be signed in the same manner as the original
signature of the letter of transmittal, including any required signature
guarantees. If your notice of withdrawal cannot be so signed, it must be
accompanied by evidence satisfactory to us that you now hold 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.
We will determine all questions as to the validity of
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notices of withdrawals, including time of receipt, and our determination will be
final and binding on all parties.
HOW YOUR OLD NOTES WILL BE EITHER EXCHANGED FOR EXCHANGE NOTES OR RETURNED TO
YOU
On the exchange date, we will determine which old notes were validly
tendered and we will issue exchange notes in exchange for them. The exchange
agent will act as your agent for the purpose of receiving exchange notes from us
and causing the old notes to be given to you in exchange for exchange notes
promptly after acceptance of the tendered old notes. If your old notes are not
accepted for exchange by us, they will be returned without expense to you. If
you tender your old notes by book-entry transfer into the exchange agent's
account at DTC pursuant to the procedures described above, but your old notes
are not accepted for exchange, your non-exchanged old notes will be credited to
an account maintained with DTC. In either case, we will return your
non-exchanged old notes to you promptly following the expiration of the exchange
offer.
WE MAY MODIFY OR TERMINATE THE EXCHANGE OFFER UNDER SOME CIRCUMSTANCES
We are not required to issue exchange notes in respect of any properly
tendered old notes that we have not previously accepted and we may terminate the
exchange offer or, at our option, we may modify or otherwise amend the exchange
offer. If we terminate the exchange offer, it will be by oral or written notice
to the exchange agent and by timely public announcement communicated no later
than 5:00 p.m. on the next business day following the expiration date, unless
otherwise required by applicable law or regulation, by making a release to the
Dow Jones News Service. We may terminate the exchange offer in the following
circumstances:
- Any court or governmental agency brings a legal action seeking to
prohibit the exchange offer or assessing or seeking any damages as a
result of the exchange offer, or resulting in a material delay in our
ability to accept any of the old notes for exchange offer; or
- Any law or legal action is brought or threatened by any government or
governmental authority, domestic or foreign, that in our sole
judgment, might directly or indirectly result in any of the
consequences referred to above; or, if in our sole judgment, such
activity might result in the holders of exchange notes having
obligations with respect to resales and transfers of exchange notes
that are greater than those described in the interpretations of the
staff of the SEC referred to on the cover page of this prospectus, or
would otherwise make it inadvisable to proceed with the exchange
offer; or
- A material adverse change has occurred in our business, condition
(financial or otherwise), operations or prospects.
The foregoing conditions are for our sole benefit and we may assert them
with respect to all or any portion of the exchange offer regardless of the
circumstances giving rise to such condition. We also reserve the right to waive
these conditions in whole or in part at any time or from time to time in our
discretion. Our failure at any time to exercise any of the foregoing rights will
not be deemed a waiver of any such right, and each right will be deemed an
ongoing right that we may assert at any time or from time to time. In addition,
we have reserved the right, notwithstanding the satisfaction of each of the
foregoing conditions, to terminate or amend the exchange offer.
Any determination by us concerning the fulfillment or nonfulfillment of any
conditions will be final and binding upon all parties.
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In addition, we 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 that
time any stop order is threatened or in effect with respect to the registration
statement that this prospectus is a part of, or if qualification of the
indentures is required under the Trust Indenture Act of 1939.
WHERE TO SEND YOUR DOCUMENTS FOR THE EXCHANGE OFFER
U.S. Bank Trust National Association has been appointed as the exchange
agent for the exchange offer. You must send your letter of transmittal to the
exchange agent at:
U.S. Bank Trust National Association
180 East Fifth Street
St. Paul, Minnesota 55101
Telephone: (651) 244-8162
Facsimile: (651) 244-1537
Attention: Corporate Trust Trustee Administration
IF YOU SEND YOUR DOCUMENTS TO ANY OTHER ADDRESS OR FAX NUMBER, THEY WILL
NOT BE VALIDLY DELIVERED AND YOU WILL NOT RECEIVE EXCHANGE NOTES IN EXCHANGE FOR
YOUR OLD NOTES. WE WILL RETURN YOUR OLD NOTES TO YOU.
WE ARE PAYING OUR COSTS FOR THE EXCHANGE OFFER
We have not retained any dealer-manager or similar agent in connection with
the exchange offer and will not make any payments to brokers, dealers or others
for soliciting acceptances of the exchange offer. We will, however, pay the
exchange agent reasonable and customary fees for its services and will reimburse
it for reasonable out-of-pocket expenses. We will also pay brokerage houses and
other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding tenders for their customers. We will pay the
expenses incurred in connection with the exchange offer, including the fees and
expenses of the exchange agent and printing, accounting, investment banking and
legal fees. We estimate that these fees are approximately $250,000.
NO PERSON HAS BEEN AUTHORIZED TO GIVE YOU ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS TO YOU IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS
IF ANYONE ELSE GIVES YOU INFORMATION OR REPRESENTATIONS ABOUT THE EXCHANGE
OFFER, YOU SHOULD NOT RELY UPON THAT INFORMATION OR REPRESENTATION OR ASSUME
THAT IT HAS BEEN AUTHORIZED BY US. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY EXCHANGE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN OUR AFFAIRS SINCE THE RESPECTIVE
DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. 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 THAT
JURISDICTION. HOWEVER, WE MAY, AT OUR DISCRETION, TAKE SUCH ACTION AS WE MAY
DEEM NECESSARY TO MAKE THE EXCHANGE OFFER IN ANY SUCH JURISDICTION AND EXTEND
THE EXCHANGE OFFER TO HOLDERS OF OLD NOTES IN SUCH JURISDICTION. IN ANY
JURISDICTION WHERE THE SECURITIES LAWS OR BLUE SKY LAWS REQUIRE THE EXCHANGE
OFFER TO BE MADE BY A LICENSED BROKER OR DEALER, THE EXCHANGE OFFER IS BEING
MADE ON BEHALF OF US BY ONE OR MORE REGISTERED BROKERS OR DEALERS THAT ARE
LICENSED UNDER THE LAWS OF THAT JURISDICTION.
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THERE ARE NO DISSENTER OR APPRAISAL RIGHTS
HOLDERS OF OLD NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS
IN CONNECTION WITH THE EXCHANGE OFFER.
FEDERAL INCOME TAX CONSEQUENCES TO YOU
The exchange of old notes for exchange notes by you will not be a taxable
exchange for federal income tax purposes, and you should not recognize any
taxable gain or loss or any interest income as a result of the exchange. See
"Certain United States Federal Income Tax Considerations" below.
THIS IS THE ONLY EXCHANGE OFFER THAT WE ARE REQUIRED TO MAKE
Your participation in the exchange offer is voluntary and you should
carefully consider whether to accept the terms and conditions of it. You are
urged to consult your financial and tax advisors in making your own decisions on
what action to take with respect to the exchange offer. If you do not tender
your old notes in the exchange offer, you will continue to hold such old notes
and you will be entitled to all the rights and limitations applicable to the old
notes under the indenture All non-exchanged old notes will continue to be
subject to the restriction on transfer set forth in the indenture. If old notes
are tendered and accepted in the exchange offer, the trading market, if any, for
any remaining old notes could be much less liquid. See "Risk Factors--Your Old
Notes Will Be Subject To Restrictions On Transfer And The Trading Market For
Your Old Notes May Be Limited If You Do Not Tender."
We may in the future seek to acquire non-exchanged old notes in the open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. We have no present plan to acquire any old notes that are not
exchanged in the exchange offer.
42
<PAGE>
CAPITALIZATION
The following table sets forth the combined and consolidated capitalization
of our company, on a historical basis as of December 31, 1998, and the combined
and consolidated capitalization of our company on an adjusted basis assuming
consummation of the acquisition under the agreement with News Corporation and
MCI and giving effect to the offering of the old notes and the application of
the net proceeds thereof. The historical information in this table is derived
from the Combined and Consolidated Financial Statements of our company, and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our company's Combined and
Consolidated Financial Statements and the notes thereto included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents, and marketable investment securities $ 32,308 $ 292,674
Restricted cash and marketable investment securities 77,657 ---(1)
--------------- ------------------
Total cash, cash equivalents, and marketable investment securities 109,965 292,674(2)
Total assets $ 1,470,173 $ 2,826,971(2)
--------------- ------------------
--------------- ------------------
Long-term debt (net of current portion):
Mortgages and notes payable $ 43,450 $ 43,450
Notes payable to ECC, including accrued interest 59,812 ---
12 7/8% notes issued in 1994 571,674 1,390
13 1/8% notes issued in 1996 497,955 950
12 1/2% notes issued in 1997 375,000 15
9 1/4% Senior Notes due 2006 --- 375,000
9 3/8% Senior Notes due 2009 --- 1,625,000
--------------- -----------------
Total long-term debt 1,547,891 2,045,805
Stockholder's equity (deficit):
Common Stock, $.01 par value, 3,000 shares authorized, issued and
outstanding --- ---
Additional paid-in capital 145,164 1,515,164(3)
Accumulated deficit (733,301) (1,244,417)(4)
---------------- ------------------
Total stockholder's equity (deficit) (588,137) 270,747
Total capitalization $ 959,754 $ 2,316,552
--------------- ------------------
--------------- ------------------
</TABLE>
- -----------
(1) Restrictions on cash held in escrow under the terms of indentures were
removed upon the prepayment of the applicable notes. The restricted cash
balances as of December 31, 1998 have been reclassified and included in the
"as adjusted" amount of cash, cash equivalents and marketable investment
securities. The restriction on the insurance receivable of $106 million
(not shown) was also removed.
(2) The increase in our total assets includes a net increase in cash available
to us for working capital of approximately $186 million as a result of the
notes (see "Use of Proceeds"), plus $1.17 billion of assets to be acquired
by ECC pursuant to the acquisition under the agreement with News
Corporation and MCI and contributed to our company.
43
<PAGE>
(3) The increase in the company's additional paid-in capital consists of $200
million in cash to be contributed to our company by ECC and additional
assets valued at $1.17 billion, to be acquired by ECC in the acquisition
under the agreement with News Corporation and MCI and contributed to our
company.
(4) The increase in accumulated deficit results from (a) a distribution of the
offering proceeds to ECC of approximately $269 million to retire the Senior
Preferred Exchange Notes, including related costs of that tender offer, (b)
interest expense of approximately $13.6 million from December 31, 1998
through January 25, 1999, the date of consummation of the tender offers and
debt to be repurchased and paid, and (c) the estimated extraordinary loss
of approximately $229 million (approximately $203 million of tender
premiums and consent fees and approximately $26 million associated with the
write-off of unamortized deferred financing costs and other transaction-
related costs) the Company expects to report in 1999 upon the early
retirement of the 12 7/8% notes, the 13 1/8% notes and the 12 1/2% notes.
44
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of, and for each of the five years
in the period ended December 31, 1998, have been derived from, and are qualified
by reference to, our company's Combined and Consolidated Financial Statements
which have been audited by Arthur Andersen LLP, independent public accountants.
This data should be read in conjunction with our company's Combined and
Consolidated Financial Statements and related notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT RATIOS, SUBSCRIBERS AND PER SUBSCRIBER DATA)
STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenue:
DISH Network........................ $ --- $ --- $ 57,888 $341,808 $ 682,109
DTH equipment sales and integration
services........................ --- 35,816 77,390 90,263 253,841
Satellite services.................. --- --- 5,822 11,135 22,304
C-band and other.................... 179,313 112,704 56,003 32,696 27,655
--------- --------- ---------- -------- ----------
Total revenue......................... 179,313 148,520 197,103 475,902 985,909
Costs and Expenses:
DISH Network operating expenses..... --- --- 42,409 193,170 396,992
Cost of sales--DTH equipment and
integration services............ --- 30,404 75,984 60,918 174,615
Cost of Sales--C-band and other ..... 133,635 84,846 42,345 23,909 16,496
Marketing expenses.................. 2,346 1,786 53,168 183,345 331,680
General and administrative.......... 27,873 36,376 48,693 66,060 94,824
Depreciation and amortization....... 2,243 3,114 43,369 172,836 102,157
--------- --------- ---------- -------- ----------
Total costs and expenses............ 166,097 156,526 305,968 700,238 1,116,764
--------- --------- ---------- -------- ----------
Operating income (loss)............. $ 13,216 $ (8,006) $ (108,865) $(224,336) $ (130,855)
--------- --------- ---------- -------- ----------
--------- --------- ---------- -------- ----------
Net income (loss)................... $ 90 $ (12,361) $ (101,676) $(323,424) $ (294,375)
--------- --------- ---------- -------- ----------
--------- --------- ---------- -------- ----------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, DECEMBER 31, 1998
------------------ -----------------
AS ADJUSTED
1994 1995 1996 1997 ACTUAL (2)
---- ---- ---- ---- ------ ---
BALANCE SHEET DATA: (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and
marketable investment
securities (1).............. $ 48,544 $ 14,161 $ 57,247 $ 65,965 $ 32,308 $ 292,674
Total assets.................... 472,492 559,297 1,085,545 1,431,774 1,470,173 2,826,971
Long-term obligations, net of
current portion:
9 1/4% Senior Notes due 2006.... --- --- --- --- --- 375,000
9 3/8% Senior Notes due 2009.... --- --- --- --- --- 1,625,000
1994 notes...................... 334,206 382,218 437,127 499,863 571,674 1,390
1996 notes...................... --- --- 386,165 438,512 497,955 950
1997 notes...................... --- --- --- 375,000 375,000 15
Mortgages and other notes payable,
net of current portion...... 5,393 33,444 51,428 51,846 43,450 43,450
Notes payable to ECC, including
accumulated interest........ --- --- 12,000 54,597 59,812 ---
Other long-term obligations..... --- --- 7,037 19,500 33,358 33,358
Total stockholder's equity (deficit) 103,808 92,892 (6,673) (313,770) (588,137) 270,747
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
OTHER DATA:
<S> <C> <C> <C> <C> <C>
DISH Network subscribers................... --- --- 350,000 1,040,000 1,940,000
Average monthly revenue per subscriber..... $ --- $ --- $ 35.50 $ 38.50 $ 39.25
EBITDA (3)................................. 15,459 (4,892) (65,496) (51,500) (28,698)
Less amortization of subscriber acquisition
costs.................................. --- --- (16,073) (121,428) (18,819)
---------- ---------- ------------ ---------- ------------
EBITDA, without add back for amortization of
subscriber acquisition costs........... 15,459 (4,892) (81,569) (172,928) (47,517)
Net cash flows from:
Operating activities....................... 24,205 (21,888) (22,836) (7,549) (53,949)
Investing activities....................... (338,565) (1,431) (294,962) (306,079) (43,340)
Financing activities....................... 325,011 19,764 342,287 337,247 60,538
Ratio of earnings to fixed charges (4)..... --- --- --- --- ---
Deficiency of earnings to fixed charges (4) $ (5,206) $ (44,315) $ (188,347) $ (366,447) $ (315,923)
</TABLE>
- -----------
(1) Excludes restricted cash and marketable investment securities.
(2) Gives effect to the notes offering and the application of the net proceeds
thereof and is pro forma for the acquisition under the agreement with News
Corporation and MCI. Consummation of the acquisition under the agreement
with News Corporation and MCI is subject to receipt of regulatory approval
and approval of ECC's shareholders. There is no pro forma effect to our
company's Statements of Operations as a result of the acquisition.
(3) We believe it is common practice in the telecommunications industry for
investment bankers and others to use various multiples of current or
projected EBITDA (earnings before interest, taxes, depreciation and
amortization) for purposes of estimating current or prospective enterprise
value and as one of many measures of operating performance. Conceptually,
EBITDA measures the amount of income generated each period that could be
used to service debt, because EBITDA is independent of the actual leverage
employed by the business; but EBITDA ignores funds needed for capital
expenditures and expansion. Some investment analysts track the relationship
of EBITDA to total debt as one measure of financial strength. However,
EBITDA does not purport to represent cash provided or used by operating
activities and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles.
EBITDA differs significantly from cash flows from operating activities
reflected in the consolidated statement of cash flows. Cash from operating
activities is net of interest and taxes paid and is a more comprehensive
determination of periodic income on a cash (vs. accrual) basis, exclusive
of non-cash items of income and
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<PAGE>
expenses such as depreciation and amortization. In contrast, EBITDA is
derived from accrual basis income and is not reduced for cash invested in
working capital. Consequently, EBITDA is not affected by the timing of
receivable collections or when accrued expenses are paid. We are aware of
no uniform standards for determining EBITDA and we believe that
presentations of EBITDA may not be calculated consistently by different
entities in the same or similar businesses. EBITDA is shown with and
without add back of amortization of subscriber acquisition costs, which
were deferred through September 1997 and amortized over one year.
(4) For purposes of computing the ratio of earnings to fixed charges, and the
deficiency of earnings to fixed charges, earnings consist of earnings from
continuing operations before income taxes, plus fixed charges. Fixed
charges consist of interest incurred on all indebtedness and the imputed
interest component of rental expense under non-cancelable operating leases.
For the years ended December 31, 1994, 1995, 1996, 1997 and 1998, earnings
were insufficient to cover the fixed charges. On a pro forma basis using an
assumed effective interest rate of 9.6% and assuming that the tender offers
had been consummated as of the beginning of the applicable period, our pro
forma earnings would have been inadequate to cover our pro forma fixed
charges for the years ended December 31, 1997 and 1998, by $341 million and
by $251 million, respectively.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our operations include three interrelated business units--the DISH Network,
Technology and Satellite Services. Our principal business strategy is to
continue to develop our subscription television service in the United States to
provide consumers with a competitive alternative to cable television service.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997.
REVENUE. Total revenue for the year ended December 31, 1998 was $986
million, an increase of $510 million compared to total revenue for the year
ended December 31, 1997 of $476 million. The increase in total revenue was
primarily attributable to DISH Network subscriber growth combined with increased
revenue from our ETC and Satellite Services business units. We expect that our
revenues will continue to increase as the number of DISH Network subscribers
increases.
DISH Network subscription television services revenue totaled $669 million
for the year ended December 31, 1998, an increase of $370 million or 124%
compared to 1997. This increase was directly attributable to the increase in the
number of DISH Network subscribers. Average DISH Network subscribers for the
year ended December 31, 1998 increased approximately 120% compared to 1997. As
of December 31, 1998, we had approximately 1.9 million DISH Network subscribers
compared to 1.04 million at December 31, 1997. Monthly revenue per subscriber
approximated $39.25 and $38.50 during the years ended December 31, 1998 and
1997, respectively. DISH Network subscription television services revenue
principally consists of revenue from basic, premium and pay-per-view
subscription television services. DISH Network subscription television services
will continue to increase to the extent we are successful in increasing the
number of DISH Network subscribers and maintaining or increasing revenue per
subscriber.
For the year ended December 31, 1998, DTH equipment sales and integration
services totaled $254 million, an increase of $164 million compared to 1997. DTH
equipment sales consist of sales of digital set-top boxes and other digital
satellite broadcasting equipment by us to international DTH service operators.
We currently have agreements to provide equipment to DTH service operators in
Spain and Canada. The increase in DTH equipment sales and integration services
revenue was primarily attributable to an increase in the volume of set-top boxes
sold.
Substantially all of our ETC revenues have resulted from sales to two
international DTH providers. As a result, our ETC business currently is
economically dependent on these two DTH providers. Our future revenue from the
sale of DTH equipment and integration services in international markets depends
largely on the success of these DTH operators and continued demand for our
digital set-top boxes. Due to an expected decrease in demand combined with a
decrease in the sales price of digital set-top boxes attributable to increased
competition, we expect that our DTH equipment and integration services revenue
will decline during 1999 as compared to 1998. Such revenue may decline in 1999
by as much as 50% as compared to 1998.
During July 1998, Telefonica, one of the two DTH service providers
described above, announced its intention to merge with Sogecable (Canal Plus
Satellite), one of its primary competitors. In October 1998, Telefonica
announced that the merger negotiations had been suspended. Subsequently,
negotiations between Telefonica and Canal Plus Satellite have resumed. Although
we have binding purchase orders from Telefonica for 1999 deliveries of DTH
equipment, we cannot yet predict what impact, if any, consummation of this
merger might have on our future sales to Telefonica. As part of the 110
acquisition with News Corporation and MCI, we received a minimum order from a
subsidiary of News
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<PAGE>
Corporation for 500,000 set-top boxes. Although we continue to actively pursue
additional distribution and integration service opportunities internationally,
no assurance can be given that any such additional negotiations will be
successful.
Satellite services revenue totaled $22 million during 1998, an increase of
$11 million as compared to 1997. These revenues principally include fees charged
to content providers for signal carriage and revenues earned from business
television customers. The increase in satellite services revenue was primarily
attributable to increased business television revenue due to the addition of new
full-time business television customers. Satellite services revenue is expected
to increase during 1999 to the extent we are successful in increasing the number
of our business television customers and developing and implementing new
services.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses totaled
$397 million during 1998, an increase of $204 million or 106%, compared to 1997.
The increase in DISH Network operating expenses was consistent with, and
primarily attributable to, the increase in the number of DISH Network
subscribers. DISH Network operating expenses represented 59% and 65% of
subscription television services revenue during 1998 and 1997, respectively.
Although we expect DISH Network operating expenses as a percentage of
subscription television services revenue to decline modestly from 1998 levels in
future periods, this expense to revenue ratio could increase.
Subscriber-related expenses totaled $298 million during 1998, an increase
of $154 million compared to 1997. Such expenses, which include programming
expenses, copyright royalties, residuals payable to retailers and distributors,
and billing, lockbox and other variable subscriber expenses, represented 45% of
subscription television services revenues during 1998 compared to 48% during
1997. The decrease in subscriber-related expenses as a percentage of
subscription television services revenue resulted primarily from a decrease in
programming expenses on a per subscriber basis, which resulted from a change in
product mix combined with price discounts received from certain content
providers.
Customer service center and other expenses principally consist of costs
incurred in the operation of our DISH Network customer service centers, such as
personnel and telephone expenses, as well as subscriber equipment installation
and other operating expenses. Customer service center and other expenses totaled
$72 million during 1998, an increase of $37 million as compared to 1997. The
increase in customer service center and other expenses resulted from increased
personnel and telephone expenses to support the growth of the DISH Network.
Customer service center and other expenses totaled 11% of subscription
television services revenue during 1998 compared to 12% of subscription
television services revenue during 1997. Although we expect customer service
center and other expenses as a percentage of subscription television services
revenue to remain near 1998 levels in the future, this expense to revenue ratio
could increase.
Satellite and transmission expenses include expenses associated with the
operation of our digital broadcast center, contracted satellite telemetry,
tracking and control services, and satellite in-orbit insurance. Satellite and
transmission expenses totaled $26 million during 1998, an $11 million increase
compared to 1997. This increase resulted from higher satellite and other digital
broadcast center operating expenses due to an increase in the number of
operational satellites. We expect satellite and transmission expenses to
continue to increase in the future as additional satellites are placed in
service.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales - DTH
equipment and integration services totaled $175 million during 1998, an increase
of $114 million compared to 1997. This increase is consistent with the increase
in DTH equipment revenue. Cost of sales - DTH equipment and integration services
principally includes costs associated with digital set-top boxes and related
components sold to international DTH operators. As a percentage of DTH equipment
revenue, cost of sales represented
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<PAGE>
69% and 68% during 1998 and 1997, respectively. We expect that cost of sales may
increase as a percentage of DTH equipment revenue in the future due to price
pressure resulting from increased competition from other providers of DTH
equipment.
MARKETING EXPENSES. Marketing expenses totaled $332 million during 1998, an
increase of $149 million or 81%, compared to 1997. The increase in marketing
expenses was primarily attributable to the increase in subscriber promotion
subsidies. Subscriber promotion subsidies include the excess of transaction
costs over transaction proceeds at the time of sale of EchoStar receiver
systems, activation allowances paid to retailers, and other promotional
incentives. During all of 1998 we recognized subscriber promotion subsidies as
incurred. These expenses totaled $284 million during 1998, an increase of $135
million over 1997. This increase resulted from increased subscriber activations
and the immediate recognition of all subscriber promotion subsidies incurred in
1998, because promotions were changed to eliminate the requirement for new
subscribers to prepay for programming. During 1997, a portion of such expenses
were initially deferred and amortized over the related prepaid subscription
term, generally one year. Advertising and other expenses totaled $48 million
during 1998, an increase of $13 million over 1997.
During 1998, our subscriber acquisition costs, inclusive of acquisition
marketing expenses, totaled $314 million, or approximately $285 per new
subscriber activation. Comparatively, our 1997 subscriber acquisition costs,
inclusive of acquisition marketing expenses and deferred subscriber acquisition
costs, totaled $252 million, or approximately $340 per new subscriber
activation. The decrease in our subscriber acquisition costs, on a per new
subscriber activation basis, principally resulted from decreases in the
manufactured cost of EchoStar receiver systems. We expect that our subscriber
acquisition costs, on a per new subscriber activation basis, will increase in
the near-term as we introduce aggressive marketing promotions to acquire new
subscribers. For example, during 1999 we introduced the PrimeStar bounty
program. Our subscriber acquisition costs under this program are significantly
higher than those under our other marketing programs. To the extent that we
either extend the duration of the PrimeStar bounty program or begin to offer
similar bounty programs for other competitors' subscribers, our subscriber
acquisition costs, both in the aggregate and on a per new subscriber activation
basis, will materially increase.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
totaled $95 million during 1998, an increase of $29 million as compared to 1997.
The increase in G&A expenses was principally attributable to increased personnel
expenses to support the growth of the DISH Network. G&A expenses as a percentage
of total revenue decreased to 10% during 1998 compared to 14% during 1997.
Although we expect that G&A expenses as a percentage of total revenue will
approximate 1998 levels or decline modestly in the future, this expense to
revenue ratio could increase.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION ("EBITDA").
EBITDA was negative $29 million and negative $52 million, during 1998 and 1997,
respectively. EBITDA, without the add back for amortization of subscriber
acquisition costs, was negative $48 million for 1998 compared to negative $173
million for 1997. This improvement in EBITDA principally resulted from increases
in our ETC and DISH Network revenues. We believe our ability to repay our
existing debt will be significantly influenced by our ability to continue to
improve reported EBITDA. However, EBITDA does not purport to represent cash
provided or used by operating activities and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles.
During the fourth quarter of 1998, we introduced the DISH Network One-Rate
Plan. Under the DISH Network One-Rate Plan, consumers are eligible to receive a
rebate of up to $299 on the purchase of certain EchoStar receiver systems.
Consequently, the costs of acquiring subscribers who qualify for the DISH
Network One-Rate Plan are materially higher than for other DISH Network
subscribers. The rebate is
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contingent upon the subscriber's one-year commitment to subscribe to the
America's Top 100 CD programming package and two premium channel packages,
committing the subscriber to a monthly programming payment of at least $48.98.
The consumer must pay the entire sales price of the system at the time of
purchase, but is not required to prepay for the programming. After receiving the
subscriber's first full programming payment (equal to $97.96 for two months of
programming), we issue a rebate of up to $299 to the subscriber. Although
subscriber acquisition costs are materially higher under the DISH Network
One-Rate Plan, we believe that these customers are more profitable because of
the higher average revenue per subscriber. In addition, we believe that these
customers represent lower credit risk and therefore may be marginally less
likely to churn than other DISH Network subscribers. Although there can be no
assurance as to the ultimate duration of the DISH Network One-Rate Plan, it will
continue through at least April 1999.
Our subscriber acquisition costs, both in the aggregate and on a per
subscriber basis, will increase in direct relation to the participation rate in
the DISH Network One-Rate Plan. While we presently expect approximately
one-third of our new subscriber activations to result from the DISH Network
One-Rate Plan during the duration of the promotion, the actual consumer
participation level could be significantly higher. To the extent that actual
consumer participation levels exceed present expectations and subscriber
acquisition costs materially increase, our EBITDA results will be negatively
impacted because subscriber acquisition costs are expensed as incurred.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
during 1998, including amortization of subscriber acquisition costs of $19
million, aggregated $102 million, a $71 million decrease compared to 1997. The
decrease in depreciation and amortization expenses principally resulted from a
decrease in amortization of subscriber acquisition costs of $102 million,
partially offset by an increase in depreciation related to the commencement of
operation of EchoStar III, EchoStar IV and other depreciable assets placed in
service during 1998. Promotional programs changed in October 1997 and we ceased
deferral of subscriber acquisition costs after that date. All previously
deferred costs were fully amortized during 1998
OTHER INCOME AND EXPENSE. Other expense, net totaled $163 million during
1998, an increase of $64 million as compared to 1997. The increase in other
expense resulted primarily from interest expense associated with our 12 1/2%
Senior Secured Notes due 2002 issued in June 1997, combined with increased
interest expense resulting from increased accreted balances on our 12 7/8%
Senior Secured Discount Notes due 2004 issued in 1994 and our 13 1/8% Senior
Secured Discount Notes due 2004 issued in 1996.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO THE YEAR ENDED DECEMBER 31, 1996.
REVENUE. Total revenue in 1997 was $476 million, an increase of 141%, or
$279 million, as compared to total revenue of $197 million in 1996. The increase
in total revenue in 1997 was primarily attributable to the operation of the DISH
Network during the entirety of 1997, combined with DISH Network subscriber
growth.
DISH Network subscription television services revenue totaled $299 million
during 1997, an increase of $249 million compared to 1996. This increase was
directly attributable to the operation of the DISH Network during the entirety
of 1997, combined with the increase in the number of DISH Network subscribers.
Average monthly revenue per subscriber approximated $38.50 during 1997 compared
to approximately $35.50 in 1996. The increase in monthly revenue per subscriber
was primarily due to additional channels added upon commencement of operations
of EchoStar II.
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Other DISH Network revenue totaled $43 million in 1997, an increase of $35
million compared to 1996. Other DISH Network revenue primarily consists of
incremental revenues over advertised subscription rates realized from our 1996
promotion, a marketing promotion whereby consumers were able to purchase a
standard EchoStar receiver system for $199, conditioned upon the consumer's
prepaid one-year subscription to a programming package for approximately $300,
as well as installation revenue and loan origination and participation income.
In 1997, we recognized incremental revenues related to our 1996 promotion of
approximately $39 million, an increase of $34 million over 1996.
During 1997, DTH equipment sales and integration services totaled $90
million. We currently have agreements for the sale of digital satellite
broadcasting equipment using our proprietary technology to two international DTH
service operators. We realized revenues of $74 million related to these
agreements during 1997. Of this amount, $59 million related to sales of digital
set-top boxes and other DTH equipment while $15 million resulted from the
provision of integration services, such as revenue from uplink center design,
construction oversight, and other project integration services. DBS accessory
sales totaled $10 million during 1997, an $8 million increase compared to 1996.
DTH equipment sales and integration services revenue totaled $77 million
during 1996. These revenues consisted primarily of sales of EchoStar receiver
systems and related accessories prior to the August 1996 nationwide rollout of
our 1996 promotion.
Satellite services revenue totaled $11 million during 1997, an increase of
$5 million, or 91%, compared to 1996. The increase in satellite services revenue
was primarily attributable to an increase in the number of content providers,
increased usage by our business television customers, and an entire year of
operation in 1997.
C-band and other revenue totaled $33 million for 1997, a decrease of $23
million compared to $56 million in 1996. Other revenue principally related to
domestic and international sales of C-band products and net domestic C-band
programming revenues. This decrease resulted from the world-wide decrease in
demand for C-band products and services. Effective January 1, 1998, we ceased
operation of our C-band programming business.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses totaled
$193 million during 1997, an increase of $151 million as compared to 1996. The
increase in DISH Network operating expenses was primarily attributable to
operation of the DISH Network during the entirety of 1997 and the increase in
the number of DISH Network subscribers.
Subscriber-related expenses totaled $144 million in 1997, an increase of
$121 million compared to 1996. Such expenses totaled 48% of subscription
television services revenues, compared to 46% of subscription television
services revenues during 1996.
Satellite and transmission expenses increased $8 million in 1997 compared
to 1996 primarily as a result of the operation of the DISH Network, including
EchoStar II, during the entirety of 1997.
Customer service center and other operating expenses totaled $35 million in
1997, an increase of $22 million as compared to 1996. The increase in customer
service center and other operating expenses was directly attributable to the
operation of the DISH Network during the entirety of 1997, combined with the
increase in the number of DISH Network subscribers.
COST OF SALES--DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales--DTH
equipment and integration services totaled $61 million during 1997, a decrease
of $15 million, or 20%, as compared to 1996. During 1997, cost of sales--DTH
equipment and integration services principally represented costs
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<PAGE>
associated with set-top boxes and related components sold to international DTH
operators. For 1996, cost of sales--DTH equipment and integration services
totaled $76 million and represented costs of EchoStar receiver systems sold
prior to the August 1996 rollout of the 1996 Promotion.
COST OF SALES--C-BAND AND OTHER. Cost of sales--C-band and other totaled
$24 million during 1997, a decrease of $18 million compared to 1996. This
decrease was consistent with the decrease in related revenues and resulted from
the world-wide decrease in the demand for C-band products and services.
MARKETING EXPENSES. Marketing expenses totaled $183 million for 1997, an
increase of $130 million as compared to 1996. The increase in marketing expenses
was primarily attributable to the increase in subscriber promotion subsidies.
These costs totaled $149 million during 1997, an increase of $114 million over
1996. This increase resulted from the commencement of our 1997 promotion, a
marketing promotion that maintained the suggested retail price for a standard
EchoStar receiver system at $199, but eliminated the requirement for the
coincident purchase of an extended subscription commitment, and the increase in
the number of EchoStar receiver systems sold during 1997. Advertising and other
expenses increased $17 million to $35 million during 1997 as a result of
increased marketing activity and operation of the DISH Network during the
entirety of 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. G&A expenses totaled $66 million for
1997, an increase of $17 million as compared to 1996. The increase in G&A
expenses was principally attributable to increased personnel expenses to support
the growth of the DISH Network. G&A expenses as a percentage of total revenue
decreased to 14% during 1997 as compared to 25% during 1996.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA was
negative $52 million for 1997, as compared to negative EBITDA of $65 million for
1996. This improvement in EBITDA resulted from the factors affecting revenue and
expenses discussed above. EBITDA does not purport to represent cash provided by
or used by operating activities and should not be considered in isolation or as
a substitute for measures of performance prepared in accordance with generally
accepted accounting principles.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for
1997, including amortization of subscriber acquisition costs of $121 million,
aggregated $173 million in 1997, an increase of $130 million, as compared to
1996. The increase in depreciation and amortization expenses principally
resulted from amortization of subscriber acquisition costs (increase of $105
million) and depreciation of EchoStar II, which was placed in service during the
fourth quarter of 1996.
OTHER INCOME AND EXPENSE. Other expense, net totaled $99 million during
1997, an increase of $51 million as compared to 1996. The increase in other
expense resulted primarily from interest expense associated with our 12 1/2%
notes, and increases in interest expense associated with the 12 7/8% notes
and the 13 1/8% notes due to higher accreted balances thereon. These
increases in interest expense were partially offset by increases in
capitalized interest. Capitalized interest, primarily related to satellite
construction, totaled $43 million during 1997, compared to $32 million during
1996.
INCOME TAX BENEFIT. The $55 million decrease in the income tax benefit
during 1997 principally resulted from ECC's decision to increase its valuation
allowance sufficient to fully offset net deferred tax assets arising during the
year. Realization of these assets is dependent on ECC generating sufficient
taxable income prior to the expiration of the net operating loss carryforwards.
ECC's net deferred tax assets, $67 million at each of December 31, 1996 and
1997, principally relate to temporary differences for amortization of original
issue discount on the 12 7/8% notes and 13 1/8% notes, net operating loss
carryforwards, and various accrued expenses which are not deductible until paid.
If future operating
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results differ materially and adversely from ECC's current expectations, its
judgment regarding the magnitude of its valuation allowance may change.
LIQUIDITY AND CAPITAL RESOURCES
CASH SOURCES
Since inception, we have financed the development of our EchoStar DBS
system and the related commercial introduction of the DISH Network service
primarily through the sale of debt securities. From May 1994 through December
31, 1998, we have raised total gross cash proceeds of approximately $1.1 billion
from the sale of debt securities. Since 1995, our parent company has raised
total gross cash proceeds of approximately $449 million from the sale of certain
of its securities. The following summarizes the net proceeds we have raised from
sales of our debt securities:
- our 1994 notes offering in June 1994 of 12 7/8% Senior Secured
Discount Notes and 3.7 million Common Stock Warrants resulting in
net proceeds of approximately $323 million;
- our 1996 notes offering in March 1996 13 1/8% Senior Secured Discount
Notes resulting in aggregate net proceeds of approximately $337
million;
- our 1997 notes offering in June 1997 of 12 1/2% Senior Secured Notes
resulting in net proceeds of approximately $363 million;
As of December 31, 1998, our unrestricted cash, cash equivalents and
marketable investment securities totaled $32 million compared to $66 million as
of December 31, 1997. For the years ended December 31, 1996, 1997 and 1998, we
reported net cash flows from operating activities of ($23 million), ($8
million), and ($54 million), respectively.
Our working capital and capital expenditure requirements were substantial
during the three-year period ended December 31, 1998. Such expenditures
principally related to the ongoing development of the EchoStar DBS system and
the related commercial introduction of the DISH Network service in March 1996.
Capital expenditures, including expenditures for satellite systems under
construction and FCC authorizations, totaled $215 million, $222 million and $154
million during 1996, 1997 and 1998, respectively.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied from existing cash and investment
balances and cash generated from operations. Our ability to generate positive
future operating and net cash flows is dependent upon our ability to continue to
rapidly expand our DISH Network subscriber base, retain existing DISH Network
subscribers and our ability to grow our ETC and Satellite Services businesses.
There can be no assurance that we will be successful in achieving our goals. The
amount of capital required to fund our 1999 working capital and capital
expenditure needs will vary, dependent upon the level of success we experience
relative to our goals. Our working capital and capital expenditure requirements
could increase materially in the event of increased competition for subscription
television customers, significant satellite failures, or in the event of a
general economic downturn, among other factors.
SUBSCRIBER ACQUISITION COSTS
As previously described, we subsidize the cost of EchoStar receiver systems
in order to attract new DISH Network subscribers. Consequently, our subscriber
acquisition costs are significant. During 1998, our aggregate subscriber
acquisition costs, which include subscriber promotion subsidies and acquisition
marketing expenses, approximated $285 per new subscriber activation. We expect
that our future subscriber acquisition costs will increase as a result of
promotions such as the DISH Network One-
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Rate Plan and other promotional programs including bounty promotions that target
the subscribers of other satellite television providers. To the extent that we
either extend the duration of the PrimeStar bounty program or begin to offer
similar bounty programs for other competitors' subscribers, our subscriber
acquisition costs, both in the aggregate and on a per new subscriber activation
basis, will materially increase. Funds necessary to meet these subscriber
acquisition costs will be satisfied from existing cash and investment balances
to the extent available. We may, however, be required to raise additional
capital in the future to meet these requirements. There can be no assurance that
additional financing will be available on acceptable terms, or at all.
OBLIGATIONS
On December 23, 1998, we commenced cash tender offers as part of a plan to
refinance our indebtedness at more favorable interest rates and terms. We
offered to purchase for cash any and all of the outstanding 12 7/8% notes,
13 1/8% notes and 12 1/2% notes.
The tender offers for the 12 7/8% notes, 13 1/8% notes and 12 1/2% notes
were consummated on January 25, 1999, concurrently with the offering of both
the 9 1/4% Senior Notes due 2006 and the 9 1/4% Senior Notes due 2009 with
holders of more than 99% of each issue of debt securities tendering their
notes and consenting to certain amendments to the indentures governing the
notes that eliminated substantially all of the restrictive covenants and
amended certain other provisions. During the first quarter of 1999, we will
record an extraordinary loss of approximately $229 million (approximately
$203 million of tender premiums and consent fees and approximately $26
million associated with the write-off of unamortized deferred financing costs
and other transaction-related costs) resulting from the early retirement of
the notes pursuant to the tender offers.
Interest accrues at a rate of 9 1/4% and 9 3/8% on the seven and ten year
notes, respectively. Interest on the seven and ten year notes is payable
semi-annually in cash in arrears on February 1 and August 1 of each year,
commencing August 1, 1999. Although the seven and ten year notes have lower
interest rates than our previous debt securities, because of tender premiums and
consent and other fees that we incurred to retire our previous debt, it will be
several years before we reach break-even from an economic perspective.
FUTURE CAPITAL REQUIREMENTS
As of December 31, 1998, we had approximately $1.6 billion of outstanding
long-term debt, substantially all of which was retired upon consummation of the
tender offers and the concurrent sale of the seven and ten year notes. At
December 31, 1998, on a pro forma basis after giving effect to consummation of
the tender offers, the concurrent issuance of the notes, and the consummation of
the 110 acquisition, our unrestricted cash and outstanding long-term debt
(including both the current and long-term portions) would have been
approximately $293 million and $2.07 billion, respectively. Beginning in 1999,
we will have semi-annual cash debt service requirements of approximately $94
million related to the notes. There will be no scheduled principal payment or
sinking fund requirements prior to maturity of the notes.
We utilized $91 million of satellite vendor financing for our first four
satellites. As of December 31, 1998, approximately $60 million of such satellite
vendor financing was outstanding. The satellite vendor financing bears interest
at 8 1/4% and is payable in equal monthly installments over five years following
launch of the respective satellite.
On February 26, 1999, our parent company announced that it had sent a
letter to the Board of Directors of PrimeStar expressing its desire and
willingness to make an offer to purchase PrimeStar's
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high-powered DBS assets. These assets consist of two high-powered DBS
satellites, Tempo I and Tempo II, and 11 of the 32 DBS frequencies at the
119(degree) WL orbital location, the same location as EchoStar I and EchoStar
II. The letter stated that we are ready, willing and able to make an offer to
pay $600 million of total consideration (including assumed liabilities) for
these assets. The deadline for a response to this letter has since expired. If
we are able to reach an agreement to acquire the PrimeStar high-powered DBS
assets in the future, we believe that we would be able to procure additional
financing to complete the transaction.
As a result of the 110 acquisition with News Corporation and MCI, we expect
to incur approximately $35 million during 1999 for capital expenditures related
to digital encoders required by the Cheyenne digital broadcast center to
accommodate the expansion to approximately 500 video and audio channels. In
addition, we expect to expend over $100 million, and perhaps more than $125
million, during 1999 and 2000 in one-time expenses associated with repositioning
subscriber satellite dishes toward the 110(degree) WL orbital location. If we
were able to acquire the high-powered assets of PrimeStar described above, we
may not be required to reposition subscriber satellite dishes.
As a result of the anomalies experienced by EchoStar III and EchoStar IV
(see "Notes to Consolidated Financial Statements" and "Business - DISH Network -
Satellites"), and in order to fully exploit certain of our remaining
FCC-allocated DBS frequencies, we intend to deploy one or more additional DBS
satellites. If the 110 acquisition is consummated, it would provide for the
deployment of two additional DBS satellites at 110(degree) WL. We are also
evaluating other contingency plans. All of these possible deployments are
subject to several FCC approvals. There can be no assurance that net insurance
proceeds will be sufficient to fully cover the costs to deploy replacement DBS
satellites.
In addition to our DBS business plan, we have licenses, or applications
pending with the FCC, for a two satellite FSS Ku-band satellite system, a two
satellite FSS Ka-band satellite system, and a proposed modification thereof and
a Low Earth Orbit Mobile-Satellite Service G-satellite system. We would need to
raise additional capital for the foregoing purposes. Further, there may be a
number of factors, some of which are beyond our control or ability to predict,
that could require us to raise additional capital. These factors include
unexpected increases in operating costs and expenses, a defect in or the loss of
any satellite, or an increase in the cost of acquiring subscribers due to
additional competition, among other things. There can be no assurance that
additional debt, equity or other financing, if required, will be available on
terms acceptable to us, or at all.
If cash generated from our operations is not sufficient to meet our debt
service requirements or other obligations, we would be required to obtain
cash from other financing sources. There can be no assurance that such
financing would be available on terms acceptable to us, or if available, that
the proceeds of such financing would be sufficient to enable us to meet all
of our obligations. We are required to retire the remaining 12 7/8% notes, 13
1/8% notes, and 12 1/2% notes when they mature, and the indentures governing
those notes will remain outstanding (although with substantially all of the
restrictive covenants having been eliminated) until such time.
YEAR 2000 READINESS DISCLOSURE
We have assessed and continue to assess the impact of the Year 2000 issue
on our computer systems and operations. The Year 2000 issue exists because many
computer systems and applications currently use two-digit date fields to
designate a year. Thus, as the century date approaches, date sensitive systems
may recognize the year 2000 as 1900 or not at all. The inability to recognize or
properly treat the year 2000 may cause computer systems to process critical
financial and operational information incorrectly. If our Year 2000 remediation
plan is not successful or is not completed in a timely manner, the Year 2000
issue could significantly disrupt our ability to transact business with our
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customers and suppliers, and could have a material impact on our operations.
Even if our Year 2000 remediation plan is successful or completed on time, there
can be no assurance that the systems of other companies with which our systems
interact will be timely converted, or that any such failure to convert by
another company would not have an adverse effect on our business or operations.
We have established a five-phase plan to address potential Year 2000
issues:
- INVENTORY - the identification of all relevant hardware, embedded
software, system software and application software to establish the
scope of subsequent phases;
- ASSESSMENT - the process of evaluating the current level of Year 2000
readiness of all components identified in the inventory phase,
defining actions necessary to retire, replace or otherwise correct all
non-conforming components and estimating resources and timelines
required by action plans;
- REMEDIATION - the correction of previously identified Year 2000
issues;
- VALIDATION/TESTING - the evaluation of each component's performance as
the date is rolled forward to January 1, 2000 and other dates and
times relating to the Year 2000 issue; and
- IMPLEMENTATION - the process of updating components and correcting
Year 2000 issues in the production operating environment of a system.
In connection with this effort, we have segregated our computer systems and
corresponding Year 2000 readiness risk into three categories: internal financial
and administrative systems, service-delivery systems, and third-party systems.
INTERNAL FINANCIAL AND ADMINISTRATIVE SYSTEMS
With respect to our internal financial and administrative systems, we have
completed the inventory phase of the Year 2000 readiness plan by identifying all
systems with potential Year 2000 problems. We are currently in the process of
assessing these systems by communicating with our outside software and hardware
vendors and reviewing their certifications of Year 2000 readiness, as well as
reviewing internal custom programming codes. We expect to have the assessment
phase substantially completed by April 1999.
Upon completion of the assessment phase, we will begin the remediation and
validation/testing phases. During the remediation phase, we will attempt to
correct all problems detected while performing the assessment phase. During the
validation/testing phase, we will create a parallel environment of all internal
and administrative systems. We will run tests on the parallel environment to
assess its reaction to changes in dates and times relating to the Year 2000
issue. We currently expect the remediation and validation/testing phases to be
complete by June 1999.
Once all known problems are corrected within the parallel environment, we
will make changes to the actual operating environment of our internal financial
and administrative systems during the implementation phase. We currently expect
to complete the implementation phase by August 1999. Upon successful completion
of the implementation phase we will be able to certify our Year 2000 readiness.
While there can be no assurance, we currently believe that our internal
financial and administrative systems are Year 2000 ready.
SERVICE-DELIVERY SYSTEMS
We have defined service-delivery systems as all internal systems necessary
to deliver DISH Network programming to our subscribers. During the inventory
phase we initially identified our set-top
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boxes, compression and conditional access systems at our digital broadcast
center, DBS satellites and third-party billing system as systems with potential
Year 2000 issues.
Given the interdependent nature of the receiver and broadcast systems used
to deliver our service, we previously implemented a smaller, offline version of
our overall system to aid in the evaluation and test of hardware and software
changes that normally occur over time. This system gives us the ability to
perform "real-time" testing of the various elements of the system by simulating
the year 2000 rollover, and confirming system operation. This ability to perform
accurate offline simulations has provided a tremendous benefit to our Year 2000
test process.
We have completed initial testing of our set-top receivers. During these
tests, the dates in the broadcast system, and hence the set-top receivers were
rolled forward to each of the dates and times affected by the Year 2000 issue.
We deemed these initial tests successful, as no problems were detected during
thorough testing of the set-top receivers when the dates were rolled forward.
These tests also affirm the integrity of the broadcast systems supplying the
set-top receivers with critical operational system information. As new
technology and software are integrated into our set-top receivers, we will
perform additional testing to attempt to ensure continued Year 2000 readiness.
In addition to the practical testing performed above, we have completed an
independent inventory and assessment of the systems at our digital broadcast
center and are currently in the remediation phase of our Year 2000 readiness
plan. The remediation phase of the plan is expected to be complete by April
1999. We expect to perform validation and testing of communications between our
digital broadcast center and our DBS satellites during the third quarter of
1999. The validation and testing of our digital broadcast center is not expected
to cause interruption of programming to DISH Network subscribers.
During the assessment of our DBS satellites, we determined that our
satellites do not operate under a calendar-driven system. Therefore, we do not
expect changes in dates and times to affect the operation of our DBS satellites.
We are currently working with the vendor of our third-party billing system
to attempt to ensure its Year 2000 readiness. This vendor has indicated it has
completed all remediation activities and is currently in the final stages of
testing/validation. Subsequent to completion of its testing/validation
activities, the vendor has indicated it will contractually certify its Year 2000
readiness during the second quarter of 1999, however we cannot provide any
assurance in this regard.
THIRD-PARTY SYSTEMS
We also are currently assessing our vulnerability to unexpected business
interruptions due to the failure of third-parties to remediate Year 2000
readiness issues associated with products or services on which our business
relies. In connection with this assessment, we sent letters to third-party
business partners, suppliers and vendors which we deemed significant requesting
that they certify their Year 2000 readiness. To date, we have received responses
from approximately 70% of these vendors. We are presently in the process of
contacting our critical suppliers and vendors who have either not responded or
have not responded adequately to our requests for proof of certification. We
presently expect to complete this process by April 1999 and will continue to
follow-up on unresolved issues thereafter. There can be no assurance that
third-parties who have responded, or will respond, to our request regarding Year
2000 readiness have responded, or will respond, accurately or satisfactorily, or
that anticipated Year 2000 actions set forth in their responses will be properly
conducted.
CONTINGENCY PLANNING
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We also are involved in limited contingency planning. In the event that
previously undetected Year 2000 issues arise, contingency plans will be used to
try to mitigate potential system problems. Our internal financial and
administrative and service-delivery contingency plan includes making back-up
copies of certain systems as well as using standby power generators at our
digital broadcasting center. With respect to other third-party systems, we will
continue to contact our critical vendors in order to obtain certification of
their Year 2000 readiness. However, no assurance can be made that such
contingency plans will resolve any Year 2000 problems that may occur, in a
manner which is satisfactory or desirable to us.
COSTS
We have not yet determined the full cost of our Year 2000 readiness plan
and its related impact on our financial condition. In the ordinary course of
business, we have made capital expenditures over the past few years to improve
our systems, for reasons other than Year 2000 remediation. Because these
upgrades also resulted in improved Year 2000 readiness, replacement and
remediation costs have not been material. We currently have budgeted $300,000
for the completion of our Year 2000 readiness plan. While there can be no
assurance, we believe our costs to successfully mitigate the Year 2000 issue
will not be material to our operations. No assurance can be made, however, as to
the total cost for the Year 2000 plan until the plan has been completed.
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BUSINESS
GENERAL
Our parent company's common stock is publicly traded on the Nasdaq National
Market. We conduct substantially all of our operations through our subsidiaries.
We operate three business units:
- - The DISH Network -- our direct broadcast satellite, or DBS, subscription
television service in the United States. As of December 31, 1998, we had
approximately 1.9 million DISH Network subscribers.
- - EchoStar Technologies Corporation -- our engineering division, which is
principally responsible for the design of digital set-top boxes, or
satellite receivers, necessary for consumers to receive DISH Network
programming, and set-top boxes sold to international direct-to-home
satellite operators. We also provide uplink center design, construction
oversight and other project integration services for international
direct-to-home ventures.
- - Satellite Services -- our division that provides video, audio and data
services to business television customers and other satellite users.
RECENT DEVELOPMENTS
AGREEMENT WITH NEWS CORPORATION LIMITED AND MCI
On November 30, 1998, we announced an agreement with MCI, News Corporation
and its American Sky Broadcasting, LLC subsidiary, pursuant to which in exchange
for shares of our parent company's common stock issued to News Corporation and
MCI, we would acquire or receive:
- - the rights to 28 frequencies at the 110(Degree) West Longitude orbital
location from which we could transmit programming to the entire continental
United States;
- - two DBS satellites constructed by Space Systems/Loral, delivered in-orbit,
and currently expected to be launched in 1999;
- - a recently-constructed digital broadcast operations center located in
Gilbert, Arizona;
- - a worldwide license agreement to manufacture and distribute set-top boxes
internationally using News Data System, News Corporation's
encryption/decoding technology;
- - a commitment by an affiliated entity of News Corporation to purchase from
ETC a minimum of 500,000 set-top boxes; and
- - a three-year, no fee retransmission consent agreement for DISH Network to
rebroadcast FOX Network owned-and-operated local station signals to their
respective markets.
We will not incur any of the costs associated with the construction, launch
or insurance (including launch insurance and one year of in-orbit insurance) of
the two DBS satellites. We and MCI also agreed that MCI will have the
non-exclusive right to bundle DISH Network service with MCI's telephony service
offerings on mutually agreeable terms. In addition, we agreed to carry the FOX
News Channel on the DISH Network. We started carrying these signals in January
1999 and we received standard program launch support payments in exchange for
carrying the programming.
The number of shares of our parent company's stock that would be issued in
the transaction depends on the average closing price of that stock over a 20 day
period. If that average closing price exceeds $39.00 per share, the number of
the newly issued shares will be determined by dividing $1.17 billion by that
average price. In a table set forth under "Security Ownership Of Certain
Beneficial Owners and Management," below, we describe the number of shares and
the percentage of the class of shares that may
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be issued in this transaction. Throughout this document, we refer to the above
transaction as the "110 acquisition."
Subject to FCC approval, if we combine the capacity of the two newly
acquired satellites with our four current satellites, we expect that DISH
Network will have the capacity to provide more than 500 channels of programming,
Internet and high-speed data services and high definition television nationwide
to a subscriber's single 18-inch satellite dish. We also believe that this
transaction would position us to offer a one-dish solution for
satellite-delivered local programming to major markets across the country. Since
we plan to use many of those channels for local programming, no particular
consumer could subscribe to all 500 channels, but all of those channels would be
capable of being received from a single dish. We also expect to be able to begin
small dish service to Alaska, Hawaii, Puerto Rico and the United States
territories in the Caribbean. However, we expect to expend over $100 million,
and perhaps more than $125 million during 1999 and 2000 in one-time expenses
associated with repositioning subscriber satellite dishes to face the new
orbital location.
In connection with this agreement, the litigation with News Corporation
described below under "Legal Proceedings" has been stayed and will be dismissed
with prejudice upon closing or if the transaction is terminated for reasons
other than the breach by, or failure to fulfill a condition within the control
of, News Corporation or MCI, or in certain other limited circumstances.
During December 1998, the Department of Justice provided antitrust
clearance for the transaction to proceed. Both the FCC and our shareholders
still must approve the transaction before we can close. Charles W. Ergen, our
controlling shareholder, has agreed to vote in favor of the transaction, so
shareholder approval is assured. During December 1998 we asked the FCC to
approve the transaction. That approval has not yet been provided and we can not
predict when the FCC will act on our request. To the best of our knowledge, we
do not need to obtain any other regulatory approvals prior to consummating the
transaction. See " -- Government Regulation" below.
DISH NETWORK
We started offering subscription television services on the DISH Network in
March 1996. As of December 31, 1998, more than 1.9 million households subscribed
to DISH Network programming services. We added 100,000 new DISH Network
subscribers during each of the five months ended February 1999. There can be no
assurance, however, that we will be able to sustain this growth rate in the
future. Our market share of new DBS subscribers has consistently increased and,
during the fourth quarter of 1998, we estimate that we captured almost 40% of
all new satellite subscribers. We presently have four operational DBS
satellites. Currently, we have the ability to provide approximately 200 channels
of digital television programming and CD quality audio programming services to
the entire continental United States. We believe that the DISH Network offers
programming packages that have a better "price-to-value" relationship than
packages currently offered by most other subscription television providers,
particularly cable TV operators. As of December 31, 1998, approximately 9
million United States households subscribed to direct broadcast satellite and
other direct-to-home satellite services. However, we believe that there
continues to be significant unsatisfied demand for high quality, reasonably
priced television programming services.
Since 1994, we have dedicated significant resources to develop the DISH
Network and our related DBS system. Our DBS system presently includes
FCC-allocated DBS licenses, four operational DBS satellites, digital satellite
receivers, a digital broadcast operations center, customer service facilities,
and other assets used in our operations.
"DBS" describes a satellite service with frequency allocation and wide
spacing between satellites that generally permits higher powered transmissions
than other satellite services and allows for reception
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with a small, 18-24 inch satellite dish. We believe that DBS provides the most
cost-efficient national point to multi-point transport of video and audio
services available today.
We presently have four operational DBS satellites in geostationary orbit
approximately 22,500 miles above the equator. Satellites are located in orbital
positions, or slots, that are designated by their longitude. An orbital position
describes both a physical location and an assignment of spectrum in the
applicable frequency band. The FCC has divided each orbital position into 32
frequency channels. Each transponder on our satellites can exploit one frequency
channel. Through digital compression technology, we can currently transmit
approximately eight digital video channels from each transponder. We are
licensed by the FCC to operate 56 frequencies at the orbital positions where our
satellites are currently located, including 21 frequencies at the 119(Degree) WL
orbital location capable of providing service to the entire continental United
States. See " -- Government Regulation -- Regulations -- DBS Rules."
COMPONENTS OF A DBS SYSTEM
In order to provide programming services to DISH Network subscribers, we
have entered into agreements with programmers, who deliver their programming
content to our digital broadcast operations center in Cheyenne, Wyoming, via
commercial satellites, fiber optics or microwave transmissions. We monitor those
signals for quality, and can add promotional messages, public service
programming or other information. Equipment at our digital broadcast operations
center then digitizes, compresses, encrypts and combines the signal with other
necessary data, such as conditional access information. We then "uplink" or
transmit the signals to one of our DBS satellites where it is then broadcast
directly to DISH Network subscribers.
In order to receive DISH Network programming, a subscriber needs:
- - a satellite antenna, sometimes referred to as a "dish," and related
components;
- - an integrated receiver/decoder, sometimes referred to as a "satellite
receiver" or "set-top box"; and
- - a television set.
Set-top boxes communicate with our authorization center through telephone
lines to report the purchase of pay-per-view movies and other events.
We use digital video and audio compression to maximize the amount of
programming we can offer to consumers. We use conditional access technology to
encrypt the programming so only those who pay can receive the programming. We
use microchips placed on credit card-sized access cards, or "smart cards" to
control access to authorized programming content. These smart cards, which can
be updated or replaced periodically, are a key element in preserving the
security of our conditional access system. When a consumer orders a particular
channel, we send a message by satellite that instructs the smart card to permit
decryption of the programming for viewing by that consumer. The programming is
then decompressed and sent to the consumer's television.
CONDITIONAL ACCESS SYSTEM. We own 50% of NagraStar LLC, a joint venture
that provides us with "smart cards" that control access to DISH Network
programming. NagraStar purchases these smart cards from Nagra Plus SA, a Swiss
company that owns the other 50% of NagraStar LLC. The access control system is
central to the security network that prevents unauthorized viewing of
programming. Other DBS operators' access control systems have been commercially
pirated. We recently received data that suggests that our access control system
may also have been compromised. We are presently evaluating the data to
determine the corrective measures that are necessary. Though there can be no
assurance, we do not presently believe that the potential compromise will
materially affect future results of operations.
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PROGRAMMING. We currently offer more than 200 channels of digital
television programming and CD-quality audio programming to consumers in the
continental United States from our EchoStar I and EchoStar II satellites.
EchoStar III has the FCC-licensed capacity to provide almost 100 additional
channels to consumers in the Eastern and Central United States time zones.
EchoStar IV has the FCC-licensed and operational capacity to provide almost 100
additional channels to consumers in the Mountain and Pacific United States time
zones. Currently we use those satellites to provide local network programming,
data, business television and other "niche" services. Any particular consumer
could only subscribe to a small percentage of those niche services. If we
consummate the 110 acquisition and successfully deploy two new DBS satellites,
we expect to be able to offer a total of over 500 channels of digital video and
audio programming broadcast nationwide, including satellite-delivered local
programming. Since we plan to use many of those channels for local programming,
no particular consumer could subscribe to all 500 channels, but all of those
channels would be capable of being received from a single dish. See " --
Government Regulation -- Regulations -- Satellite Home Viewer Act and
Retransmission Consent."
We use a "value-based" strategy in structuring the content and pricing of
programming packages available from the DISH Network. For example, we sell our
entry-level "America's Top 40" programming package, which includes 40 of the
most popular cable channels, to consumers for $19.99 per month. We estimate
cable operators charge over $30 per month, on average, for their entry-level
expanded basic service that consists of approximately 55 analog channels. We
believe that our "America's Top 100 CD" programming package, which we sell for
$28.99 per month, also compares favorably to similar cable television
programming. We believe that our America's Top 100 CD package is similar to an
expanded basic cable package plus a digital music service. Based on cable
industry statistics, we estimate that cable operators would charge in excess of
$40 per month for a similar package. Similarly, we offer up to seven premium
movie channels for only $10.99 per month, which is about the same as cable
subscribers typically pay for one or two movie channels.
We are expanding our offerings to include Internet and high-speed data
services. For example, we recently entered into an agreement with WebTV
Networks, Inc., which is wholly-owned by Microsoft Corporation, to provide
Internet TV. This service integrates DISH Network's digital satellite television
programming with Internet TV services from WebTV. This product also provides for
digital video recording, an advanced electronic program guide, broadband data
delivery and video games. The vast majority of the data delivery and video game
services are provided through telephone lines and are not delivered via
satellite. While we are currently only able to provide a limited number of
one-way data services via satellite, we are working to further develop this
technology. There can be no assurance that we will be able to cost-effectively
develop this technology, or at all. We believe we will be able to increase our
subscriber base and average revenue per subscriber by offering these and other
similar services.
LOCAL STRATEGY. In order to provide the strongest possible competition to
cable, and thereby maximize our potential market, we are working on solutions to
seamlessly provide local broadcast network channels to our subscribers. Subject
to eligibility conditions, we currently offer satellite-delivered local network
signals to consumers in some of the largest markets in the continental United
States, including Atlanta, Boston, Chicago, Dallas/Ft. Worth, Denver, Los
Angeles, Miami, New York, Phoenix, Pittsburgh, Salt Lake City, San Francisco and
Washington, D.C. Under existing regulation, we can only broadcast these signals
to "unserved households" in the local areas from which those channels originate.
See "-- Government Regulation." Presently, a subscriber must install a second
18-inch satellite dish to receive our satellite-delivered local network
programming in most markets. Therefore, we are still at a competitive
disadvantage compared to cable operators because many consumers do not want to
install a second satellite dish. We may be able to implement a one-dish solution
for local programming in 20 or more major markets around the United States if,
among other things, we are able to consummate the 110 acquisition and effect
changes in existing legislation.
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ECHOSTAR RECEIVER SYSTEMS. EchoStar receiver systems include an 18-inch
satellite dish, a digital satellite receiver that descrambles signals for
television viewing, a remote control, and other related components. DISH Network
reception equipment cannot be utilized with competitors' systems. We offer a
number of set-top box models. Our standard system comes with an infrared remote
control, an on-screen program guide, and the ability to switch between DISH
Network and off-air local programming using the remote control. Our mid-level
model has all of the basic features but also includes a UHF remote control that
allows subscribers to control their EchoStar receiver system from up to 150 feet
away through walls, and a high-speed data port. Our premium model includes
additional features such as on-screen caller identification capability, event
timers to automatically tune into or record selected programming and one-touch
VCR recording.
Although we internally design and engineer our receiver systems, we do not
manufacture these systems. Rather, we outsource the manufacturing process to
high-volume contract electronics manufacturers. SCI Technology, Inc.
manufactures the majority of our receiver systems. During 1998, VTech
Communications, Ltd. began manufacturing our set-top boxes. JVC Company of
America also manufactures other consumer electronics products, including a
digital VCR, that also incorporates an EchoStar receiver system.
INSTALLATION. Currently, third-parties perform the majority of EchoStar
receiver system installations. We also offer installation services from 21 of
our own locations throughout the United States. We currently intend to invest to
expand our installation business during 1999.
CUSTOMER SERVICE CENTER. We currently operate customer service centers in
Thornton, Colorado, Littleton, Colorado and McKeesport, Pennsylvania. These
centers field all of our customer service calls. Potential and existing
subscribers can call a single telephone number to receive assistance for
hardware, programming, installation and technical support.
DIGITAL BROADCAST OPERATIONS CENTER. Our digital broadcast operations
center is located in Cheyenne, Wyoming. We would acquire a second digital
broadcast operations center in Gilbert, Arizona, if we are able to consummate
the 110 acquisition. We plan to begin utilizing the second facility as our
customer base expands and the added expense can be justified. Almost all of the
functions necessary to provide satellite-delivered services occur at the digital
broadcast operations center. The digital broadcast operations center uses fiber
optic lines and downlink antennas to receive programming and other data at the
center. The digital broadcast operations center uplinks programming content to
our DBS satellites via large uplink antennas. The digital broadcast operations
center also maintains a number of large uplink antennas and other equipment
necessary to modulate and demodulate the programming and data signals. All
compression and encryption of the DISH Network's programming signals are
performed by equipment at our digital broadcast operations center.
SUBSCRIBER MANAGEMENT. We presently use a third-party software system for
DISH Network subscriber management and billing functions. We are currently
negotiating a new, multi-year contract for subscriber management services and
expect to sign a contract during the first half of 1999.
SALES AND MARKETING
EchoStar receiver systems and DISH Network programming services are
currently sold by approximately 18,000 independent distributors, retail stores
and consumer electronics stores. The majority of DISH Network satellite systems
were purchased by subscribers from our independent dealers. These independent
dealers are primarily local retailers who specialize in TV and home
entertainment systems. We intend to enhance consumer awareness of our products
by forming alliances with nationally recognized
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distributors of other consumer electronics products. We formed a strategic
alliance with JVC in May 1997. JVC now distributes our receiver systems under
the JVC label through certain of its nationwide retailers.
Through our direct sales efforts, customers can call a single telephone
number (1-800-333-DISH) 24 hours a day, seven days a week, to order EchoStar
receiver systems, activate programming services, schedule installation and
obtain technical support. We believe that we are presently the only DBS provider
to offer a comprehensive, single-point customer service function.
We offer our distributors and retailers a competitive residual, or
commission, program. The program pays qualified distributors and retailers an
activation bonus, along with a fixed monthly residual for programming services
provided over the period that the respective DISH Network subscriber remains
active.
We use regional and national broadcast and print advertising to promote the
DISH Network. We also offer point-of-sale literature, product display,
demonstration kiosks and signage for retail outlets. We provide guides to our
dealers and distributors at nationwide educational seminars and directly by
mail, that describe DISH Network products and services. Our mobile sales and
marketing team visits retail outlets regularly to reinforce training and ensure
that point-of-sale needs are quickly fulfilled. Additionally, we dedicate one
DISH Network channel to providing information about special services and
promotions that we offer from time to time.
Our future success in the subscription television industry depends on our
ability to acquire and retain DISH Network subscribers, among other factors.
Beginning in 1996, to stimulate subscriber growth we reduced the retail price
charged to consumers for EchoStar receiver systems. Accordingly, since August
1996, we have sold our receiver systems to DISH Network subscribers below the
manufactured cost. We developed these marketing promotions to rapidly build our
subscriber base, expand retail distribution of our products, and build consumer
awareness of the DISH Network brand. These programs emphasize our long-term
business strategy of maximizing future revenue by selling DISH Network
programming to the largest possible subscriber base and rapidly increasing the
size of that subscriber base. Since we subsidize our receivers, we incur
significant costs each time we acquire a new subscriber. Assuming subscriber
turnover remains at or near existing levels, we believe that we will be able to
fully recoup the up-front costs of subscriber acquisition from future
subscription television services.
Our marketing strategy is based on current competitive conditions. If
competition increases, or we determine for any other reason that it is necessary
to increase our subscriber acquisition costs to attract new customers, our
profitability and costs of operation could be adversely affected.
SATELLITES
EchoStar I and EchoStar II each have 16 transponders that operate at 130
watts of power. Subject to the anomalies described below, EchoStar III and
EchoStar IV each have 32 transponders that operate at approximately 120 watts
per channel, switchable to 16 transponders operating at over 230 watts per
channel. Each transponder is capable of transmitting multiple digital video,
audio and data channels. Each of our satellites was designed to operate for a
minimum of 12 years. From these four satellites, we have the capacity to provide
a total of over 400 channels of video and audio programming.
During 1998, 3 transponders on EchoStar III malfunctioned, resulting in the
failure of a total of 6 transponders on the satellite. While a maximum of 32
transponders can be operated at any time, the satellite was equipped with a
total of 44 transponders to provide redundancy. As a result of this redundancy
and because we are only licensed by the FCC to operate 11 transponders at
61.5(degree) WL, where the satellite is located, the transponder anomaly has not
resulted in a loss of service to date. The satellite manufacturer,
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Lockheed Martin, has advised us that it believes it has identified the root
cause of the failures, and that while further transponder failures are possible,
Lockheed Martin does not believe it is likely that the operational capacity of
EchoStar III will be reduced below 32 transponders. Lockheed Martin also
believes it is unlikely that our ability to operate at least the 11 licensed
transponders on the satellite will be affected. We will continue to evaluate the
performance of EchoStar III and may be required to modify our loss assessment as
new events or circumstances develop.
The time for filing a claim for a loss under the satellite insurance policy
that covered EchoStar III at the time of the transponder failures has passed.
While the insurance carriers were notified of the anomaly, as a result of the
built-in redundancy on the satellite and Lockheed Martin's conclusions with
respect to further failures, no claim for loss was filed. During the anomaly
investigation, we obtained a $200 million in-orbit insurance policy on EchoStar
III at standard industry rates, which was renewed through June 25, 1999.
However, the policy contains a three-transponder deductible if the satellite is
operating at 120 watts per transponder, or a six-transponder deductible if the
satellite is operating at 230 watts per transponder. As such, the policy would
not cover transponder failures unless transponder capacity is reduced to less
than 26 transponders in the 120 watt mode or 13 transponders in the 230 watt
mode, during the coverage period. As a result of the deductible, we could
potentially experience uninsured losses of capacity on EchoStar III. Although
there can be no assurance, we expect that in-orbit insurance can be procured on
more traditional terms in the future if no further failures occur in the
interim. If further failures do occur, we may not be able to obtain additional
insurance on EchoStar III on commercially reasonable terms. We do not maintain
insurance for lost profit opportunity.
As a result of the failure of the solar power panels on EchoStar IV to
properly deploy, there is currently only sufficient available power on the
satellite to operate approximately 20 transponders. The number of available
transponders will decrease over time. Based on current data, we expect that
approximately 16 transponders will probably be available over the entire 12-year
design life of the satellite, absent significant additional anomalies or other
failures. In addition to the failure of the solar power panels, EchoStar IV also
experienced an anomaly similar to that experienced by EchoStar III. Like
EchoStar III, this additional anomaly has not yet resulted in a loss of
operational satellite capacity and Lockheed Martin advises that no such loss is
expected. In September 1998, we filed a $219.3 million insurance claim for a
constructive total loss, as defined in the launch insurance policy, related to
EchoStar IV. However, if we received $219.3 million for a constructive total
loss on the satellite, the insurers would obtain the sole right to the benefits
of salvage from EchoStar IV under the terms of the launch insurance policy.
Although we believe we have suffered a constructive total loss of EchoStar IV in
accordance with that definition in the launch insurance policy, we presently
intend to negotiate a settlement with the insurers that will compensate us for
the reduced satellite transmission capacity and allow us to retain title to the
asset. During the third quarter of 1998, we recorded a $106 million impairment
provision related to the failure of the solar power panels that represents our
best estimate of the amount of capacity we lost as a result of the solar power
panels not properly deploying. We also recorded a $106 million insurance
receivable. That amount reflects our judgment that it is probable the insurance
recovery will be at least equal to the amount of the impairment loss.
We will acquire two additional DBS satellites if we consummate the 110
acquisition. EchoStar V will have 32 transponders that will operate at
approximately 110 watts per channel, switchable to 16 transponders operating at
approximately 220 watts per channel. EchoStar VI would also be equipped with 32
transponders that would operate at approximately 120 watts per channel,
switchable to 16 transponders operating at approximately 240 watts per channel.
EchoStar V and EchoStar VI would each have a minimum design life of 12 years. We
would not incur any costs in connection with the launch and first year of
in-orbit insurance for EchoStar V and EchoStar VI. Notwithstanding FCC approval
of the 110 acquisition and successful launch of EchoStar V and VI, we would only
be able to exploit 29 of the 32 frequencies at 110(Degree) WL.
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SATELLITE LAUNCHES
We expect to launch EchoStar V this summer and EchoStar VI during the
fourth quarter of 1999. The launches could include any combination of United
States Atlas launches, Ariane launches through the European Space Agency and
Proton launches from Russia.
SATELLITE INSURANCE
We have procured in-orbit insurance for EchoStar I, EchoStar II and
EchoStar III through June 25, 1999. We may not be able to renew these policies
or, if we do, we cannot be certain that renewals will be at rates or on terms
favorable to us. For example, if EchoStar I, EchoStar II, EchoStar III or other
similar satellites experience anomalies while in orbit, the cost to renew
in-orbit insurance could increase significantly or coverage exclusions for
similar anomalies could be required. Further, although we have in-orbit coverage
for 365 days after launch of EchoStar IV, we do not know if we will be able to
obtain in-orbit insurance for EchoStar IV thereafter as a result of the
anomalies experienced by the satellite. The in-orbit insurance policies for
EchoStar I, EchoStar II and EchoStar III and the launch insurance policy for
EchoStar IV include standard commercial satellite insurance provisions. These
provisions include, among other things, a material change in underwriting
information clause that requires us to notify our insurers of any material
change in the written underwriting information provided to the insurers or any
change in any material fact or circumstance concerning our satellites insured
under the policy. A notification permits the insurers to renegotiate the terms
and conditions if the result is a material change in risk of loss or insurable
interest. A change in the health status of an insured satellite or any loss
occurring after risk has attached does not entitle the insurers to renegotiate
the policy terms.
The satellite insurance policies for EchoStar I, EchoStar II, EchoStar III
and EchoStar IV contain customary exclusions, including:
- - acts of war or similar actions;
- - loss or damage caused by anti-satellite devices;
- - insurrection and similar acts;
- - governmental confiscation;
- - nuclear reaction or radioactive contamination;
- - willful or intentional acts by us or our contractors designed
to cause loss or failure of a satellite;
- - claims for lost revenue and incidental and consequential damages;
- - third-party claims against us; and
- - business interruption, loss of business and similar losses that might arise
from delay in the launch of any satellite.
In addition to the above exclusions, the current insurance policy for
EchoStar III also excludes additional occurrences of the same or similar
anomalies. If one of our satellites does not perform to specifications following
launch, there may be circumstances in which insurance will not fully reimburse
us for any loss.
COMPETITION FOR OUR DISH NETWORK BUSINESS
Our industry is highly competitive. Our competition includes companies that
offer video, audio, data, programming and other entertainment services,
including cable television, wireless cable, direct-to-home satellite, other DBS
companies and companies that are developing new technologies. Many of our
competitors have access to substantially greater financial and marketing
resources than we have. We believe that quality and variety of programming,
quality of picture and service, and cost are the key bases of competition.
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CABLE TELEVISION. The United States cable television industry currently
serves over 65 million subscribers. As an established provider of subscription
television services, cable television is a formidable competitor in the overall
market for television households. Cable television systems generally offer 30 to
80 analog channels of video programming. Cable television operators currently
have a competitive advantage over us because they can provide local programming
and service to multiple television sets within the same household without using
another receiver. Many cable television operators are in the process of
upgrading their distribution systems to expand their existing channel capacity
for purposes of providing digital product offerings similar to those offered by
DBS providers. In addition, such expanded capacity may be used to provide
interactive and other new services.
Many of the largest cable systems in the United States have announced plans
to offer access to telephony services through their existing cable equipment,
and have entered into agreements with major telephony providers to further these
efforts. In some cases, certain cable systems have actually commenced commercial
offerings of such services, the expansion of which could have a negative impact
on the demand for DBS services. If such trials are successful, many consumers
may find cable service to be more attractive than DBS service.
Since a subscriber needs to have direct line of sight to the satellite to
receive DBS service, some households may not be able to receive DISH Network
programming. Additionally, the initial cost required to receive DISH Network
programming may deter some potential customers from switching to DISH Network
service. Additionally, a subscriber must buy an EchoStar receiver system to
receive DISH Network programming. Cable operators lease their equipment to the
consumer with little, if any, initial hardware payment required. This also may
deter some potential customers from switching to DISH Network service.
Additionally, cable operators pay substantially lower royalty rates for the
retransmission of distant network and superstation signals than we do.
OTHER DBS AND DIRECT-TO-HOME SATELLITE SYSTEM OPERATORS. Several other
companies have DBS licenses and are positioned to compete with us for home
satellite subscribers. DIRECTV, Inc. operates three DBS satellites and has 27
channel assignments at an orbital location that provides coverage to the entire
continental United States. United States Satellite Broadcasting Corporation, or
USSB, owns and operates an additional five transponders on one of DIRECTV's
satellites and presently offers a programming service complementary to DIRECTV's
service. DIRECTV and USSB together offer more than 200 channels of DBS video
programming. As of December 31, 1998, DIRECTV had approximately 4.5 million
subscribers, approximately one-half of whom also subscribed to USSB programming.
In December 1998, DIRECTV's parent executed a definitive merger agreement to
acquire the business and assets of USSB in a transaction expected to be
completed in mid-1999, subject to obtaining regulatory and shareholder
approvals. This transaction will give DIRECTV access to additional DBS
frequencies which will enable them to further expand their service offering.
We also compete with PrimeStar, Inc. As of December 31, 1998, PrimeStar had
approximately 2.3 million subscribers. PrimeStar offers approximately 150
channels of medium power satellite service. In January 1999, DIRECTV's parent
announced an agreement to purchase the satellite television business of
PrimeStar, which is comprised of a medium power satellite business and their
rights to acquire Tele-Communications, Inc.'s DBS assets, subject in each case
to regulatory approvals and customary conditions.
Two other satellite companies have conditional permits for a comparatively
small number of DBS frequency assignments that could be used to provide service
to portions of the United States. If the number of DBS operators increases in
the future, DISH Network subscriber growth could be adversely affected.
TELEPHONE COMPANIES. Certain telecommunications carriers, including long
distance telephone companies, could become significant competitors in the future
as they have expressed an interest in, and in
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some instances made substantial investments to become, subscription television
and information providers. For instance, AT&T recently acquired
Tele-Communications, Inc. Other telephone companies are also actively engaged in
the video programming distribution business.
VHF/UHF BROADCASTERS. Most areas of the United States can receive
traditional terrestrial VHF/UHF television broadcasts of between three and ten
channels. These broadcasters are often low to medium power operators with a
limited coverage area and provide local, network and syndicated programming. The
local content nature of the programming may be important to the consumer, and
VHF/UHF programming is typically provided free of charge. The FCC has allocated
additional digital spectrum to licensed broadcasters. At least during a
transition period, each existing television station will be able to retain its
present analog frequencies and also transmit programming on a digital channel
that may permit multiple programming services per channel.
ECHOSTAR TECHNOLOGIES CORPORATION
Employees of EchoStar Technologies Corporation, one of our wholly-owned
subsidiaries, internally design and engineer EchoStar receiver systems. Our
satellite receivers have won numerous awards from dealers, retailers and
industry trade publications. We outsource the manufacture of EchoStar receiver
systems to third parties who manufacture the receivers in accordance with our
specifications. In addition to supplying EchoStar receiver systems for the DISH
Network, ETC supplies similar digital satellite receivers to international
satellite TV service operators. We also offer consulting and integration
services to development stage, international direct-to-home satellite operators.
We are actively soliciting new business for ETC and, while we are optimistic
about future growth opportunities, we cannot provide any assurance in that
regard.
Our ETC division resulted from the development of the DISH Network. We
believe that we have an opportunity to grow this business in the future. The
employees who design EchoStar receiver systems for the DISH Network are the same
as those who design the set-top boxes sold to international direct-to-home
satellite TV customers. Consequently, international ETC projects may result in
improvements in design and economies of scale in the production of EchoStar
receiver systems for the DISH Network.
Currently, we provide digital set-top boxes to two international
direct-to-home satellite TV providers, one in Canada and one in Spain. A
substantial portion of our ETC revenue in 1997 and 1998 resulted from sales to
these two direct-to-home satellite TV providers. As a result, our ETC business
currently is economically dependent upon these two providers. If we are able to
consummate the 110 acquisition, we would receive a minimum order from a
subsidiary of News Corporation for 500,000 set-top boxes. Although we continue
to actively pursue other similar distribution and integration service
opportunities, we have not executed additional agreements. Our future revenue in
this area depends largely on the success of the direct-to-home satellite TV
operators we supply in Canada and Spain, which in turn, depends on other
factors, such as the level of consumer acceptance of direct-to-home satellite TV
products and the intensity of competition for international subscription
television subscribers.
COMPETITION FOR OUR ETC BUSINESS
We compete with a substantial number of foreign and domestic companies,
many of which have significantly greater resources, financial or otherwise, than
we have. We expect new competitors to enter this market because of rapidly
changing technology. Our ability to anticipate these technological changes and
introduce enhanced products expeditiously will be a significant factor in our
ability to remain competitive. Existing competitors' actions and new entrants
may have a material adverse impact on our revenues. We do not know if we will be
able to successfully introduce new products and technologies on a timely basis
in order to remain competitive.
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SATELLITE SERVICES
Our Satellite Services division primarily leases capacity on our satellites
to customers on either a monthly or hourly basis. Full-time customers tend to be
international services that broadcast foreign language programming to DISH
Network subscribers. Part-time customers are typically Fortune 1000 companies
that use our satellite network for business television service to communicate
with employees, customers and suppliers located around the United States. In
addition, we are developing a wide range of Internet and high-speed data
services that we expect to offer to consumers beginning in mid-1999.
COMPETITION FOR OUR SATELLITE SERVICES BUSINESS
We compete with a number of other companies, including those using similar
and different technologies, to provide Satellite Services. Many of these
competitors have substantially greater financial and other resources than we
have. Our principal competitors include other satellite system operators, cable
television system operators, Internet service providers, and telephone
companies. We believe that we can compete with these other companies based on
our knowledge and experience in the direct-to-home satellite TV and DBS
industry, our technological leadership and new product capabilities, the quality
of our video, audio and data transmissions, the quality of service provided, and
cost.
GOVERNMENT REGULATION
THE FOLLOWING SUMMARY OF REGULATORY DEVELOPMENTS AND LEGISLATION IS NOT
INTENDED TO DESCRIBE ALL PRESENT AND PROPOSED GOVERNMENT REGULATION AND
LEGISLATION AFFECTING THE VIDEO PROGRAMMING DISTRIBUTION INDUSTRY. GOVERNMENT
REGULATIONS THAT ARE CURRENTLY THE SUBJECT OF JUDICIAL OR ADMINISTRATIVE
PROCEEDINGS, LEGISLATIVE HEARINGS OR ADMINISTRATIVE PROPOSALS COULD CHANGE OUR
INDUSTRY, IN VARYING DEGREES. WE CANNOT PREDICT EITHER THE OUTCOME OF THESE
PROCEEDINGS OR ANY POTENTIAL IMPACT THEY MIGHT HAVE ON THE INDUSTRY OR ON OUR
OPERATIONS. THIS SECTION SETS FORTH A BRIEF SUMMARY OF REGULATORY ISSUES
PERTAINING TO OUR OPERATIONS.
We are required to obtain authorizations and permits from the FCC and other
similar foreign regulatory agencies to construct, launch and operate our
satellites and other components of our DBS system. Additionally, as a private
operator of a United States satellite system, we are subject to the regulatory
authority of the FCC and the Radio Regulations promulgated by the International
Telecommunication Union. We also have to obtain import and general destination
export licenses from the United States Department of Commerce to deliver
products to overseas destinations. Finally, we must abide by United States
export control regulations when we choose to launch our satellites outside the
United States.
FCC PERMITS AND LICENSES
The FCC has jurisdiction and review power over the following general areas:
- - assigning frequencies and authorizations;
- - ensuring compliance with the terms and conditions of such assignments and
authorizations, including required timetables for construction and
operation of satellites and other due diligence requirements;
- - authorizing individual satellites and earth stations;
- - avoiding interference with other radio frequency emitters;
- - ensuring compliance with applicable provisions of the Communications Act.
Like other DBS operators, we received our FCC authorizations conditioned on
satisfaction of ongoing due diligence, construction, reporting and other
obligations. We cannot be certain that we will be able to comply with all of the
FCC's due diligence obligations. Moreover, the FCC could determine we have not
complied with such due diligence obligations. The FCC has declared that it will
carefully monitor
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the reports required to be filed by satellite service permittees. If we do not
file adequate reports or are not able to demonstrate timely progress in the
construction of our satellite service system, we could lose our authorizations.
We have not filed, or not timely filed, all required reports or filings with the
FCC. Therefore, there is a risk that the FCC could determine that we have not
complied fully with due diligence requirements and could revoke or place
conditions on our current licenses.
Some of our permits and extension requests have been, and may continue to
be, contested in FCC proceedings and in court by several companies with adverse
interests. Those companies include Dominion Video Satellite, Inc., PrimeStar,
Tempo Satellite Inc., DIRECTV, GE American Communications, Inc. and others.
The FCC issues DBS licenses for ten year periods, which is less than the
useful life of a healthy DBS satellite. Upon expiration of the initial license
term, the FCC has the option to renew the satellite operator's license or
authorize the operator to operate for a period of time on special temporary
authority, or decline to renew the license. If the FCC declined to renew the
operator's license, the operator would be required to cease operations and the
frequencies would revert to the FCC. The FCC usually grants special temporary
authorizations for periods of up to 180 days. These authorizations are usually
subject to several other conditions. We also must obtain FCC authorization to
operate our earth stations, including the earth stations necessary to uplink
programming to our satellites.
Our licenses to operate EchoStar I and EchoStar II both will expire in
2006. Our license to operate EchoStar III over 11 channels at 61.5(Degree) WL
will expire in 2008. EchoStar IV was originally licensed to operate at our
119(Degree) WL orbital location, however, that satellite experienced
malfunctions, as discussed above, that required us to change our plans. We
currently operate EchoStar IV at the 148(Degree) WL orbital location under a
special temporary authorization until permanent authority can be obtained to
operate that satellite at the 148(Degree) WL orbital location. Our authorization
at 148(Degree) WL requires us to utilize all of our FCC-allocated frequencies at
that location by December 20, 2002, or risk losing those frequencies that we are
not using. As a result of the anomalies previously discussed, EchoStar IV cannot
exploit all of our frequencies at the 148(Degree) WL orbital location.
APPROVALS RELATED TO THE 110 ACQUISITION
We are required to obtain FCC approval before we can consummate the 110
acquisition. We have requested FCC approval for the assignment of all FCC
authorizations involved in the transaction. The FCC has placed these
applications on public notice. The comment cycle ended February 4, 1999. Several
parties have opposed the application on various grounds or have requested
conditions, including, without limitation the following:
- - arguing that alien ownership limitations and other broadcast qualification
requirements apply;
- - requesting program access conditions for News Corporation's programming;
and
- - requesting conditions in connection with service to Alaska and Hawaii.
Our applications are still pending and we cannot be sure how the FCC might
rule on any of these oppositions or requests. Although we have requested
expedited action on the applications, we cannot be sure that the FCC will grant
them or that it will grant them expeditiously.
In 1995, the FCC imposed a one-time rule that applied only to those DBS
operators that purchased DBS satellite frequencies at an auction in January
1996. The rule effectively prevented a DBS operator from using channels at more
than one location from which it is possible to serve the entire continental
United States. If the FCC re-imposed this rule, we would not be able to obtain
the frequencies from News Corporation and MCI because it would give us two
locations from which we could provide service to the
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entire continental United States. Although we believe the application that we
filed with the FCC includes compelling reasons that this rule should not be
re-imposed, we do not know how the FCC will rule. Furthermore, MCI's
authorization is subject to still pending challenges before the full FCC, and we
do not know how the FCC will rule on these challenges. Moreover, if the FCC
approves the 110 acquisition, we may be required to obtain further FCC approval
to transmit programming from both locations to a single consumer satellite dish.
Furthermore, the FCC is still reviewing an application for minor
modifications to MCI's authorization. The FCC must approve all of these
modifications prior to the deployment of satellites to that location. We do not
know whether the FCC will approve these modifications or that it will do so
timely. Moreover, MCI has not yet received FCC authorization in connection with
certain types of telemetry, tracking and control operations of its proposed
system.
The state of Hawaii has requested the FCC to condition the assignment of
the MCI license on our ability to provide service to 18-24 inch satellite
dishes. The two satellites that we will acquire if we consummate the 110
acquisition will have spot beams to enable us to provide service to Alaska and
Hawaii. However, these satellites probably will not be able to provide service
to substantial portions of Hawaii and Alaska with a dish as small as requested
by Hawaii with the same degree of reliability as exists for our service
generally, particularly in areas with heavy and consistent precipitation.
IN-ORBIT AUTHORIZATIONS
We use specific C-band frequencies to control EchoStar I. The FCC
conditionally approved the use of these frequencies to control EchoStar I in
1995. The condition stated that the coordination process with Canada and Mexico
had not been completed. In January 1996, the Ministry of Communications and
Transportation of Mexico notified the FCC that EchoStar I's telemetry, tracking
and control operations could cause unacceptable interference to Mexican
satellites. Although it is unlikely, the FCC could subsequently require us to
relinquish the use of such C-band frequencies for telemetry, tracking and
control purposes. If that happened, we might not be able to control the
satellite, which could result in a total loss of the satellite unless we were
able to move it to another location.
We use "extended" C-band frequencies to control EchoStar II. In 1996, we
received conditional authority from the FCC to use these frequencies. The
condition stated that we could use those frequencies until January 1, 1999
provided that their use would not cause harmful interference. The FCC indicated
it would review the suitability of those frequencies for telemetry, tracking and
control operations in January 1999. We have timely filed a request to extend the
authorization to November 2006. We do not know whether the FCC will extend that
authorization. If the FCC refuses to extend our authorization, we might not be
able to control EchoStar II, which could result in a total loss of the satellite
unless we were able to move it to another location. Recently, the FCC released a
notice of proposed rulemaking that may inhibit future satellite operations in
the "extended" C-band frequencies. The FCC also is no longer accepting earth
station applications in that band. These recent developments might have negative
implications for us.
INTERNATIONAL TELECOMMUNICATION UNION STANDARDS
Our DBS system also must conform to the ITU broadcasting satellite service
plan. If any of our operations are not consistent with this plan, the ITU will
only provide authorization on a non-interference basis pending successful
modification of the plan or the agreement of all affected administrations to the
non-conforming operations. Accordingly, unless and until the ITU modifies its
broadcasting satellite service plan to include the technical parameters of DBS
applicants' operations, our satellites, along with those of other DBS operators,
must not cause harmful electrical interference to other assignments that are in
conformance with the plan. Further, DBS satellites are not presently entitled to
any protection from other satellites that are
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in conformance with the plan. To our knowledge, the United States government has
filed modification requests with the ITU for EchoStar I, II and III. The ITU has
requested certain technical information in order to process the requested
modifications. We have cooperated, and continue to cooperate, with the FCC in
the preparation of its responses to the ITU requests. We cannot predict when the
ITU will act upon these requests for modification or if they will be granted.
AUTHORIZATIONS AND FREQUENCIES THAT WE COULD LOSE
We also have conditional authorizations for several other DBS and fixed
service satellites that are not operational. One permit for 10 unspecified
western frequencies was set to expire on August 15, 1995. Although we filed a
timely extension request, the FCC has deferred a decision on that request
pending the FCC's analysis of our due diligence for that permit. The FCC has not
yet assigned the frequencies related to that permit because in 1992 it held that
we had not completed contracting for these western assignments -- the first
prong of the required diligence -- and asked us to submit amended contract
documentation. Although we submitted such documentation, the FCC has not yet
ruled on this matter, and we cannot be sure that the FCC will rule in our favor.
We also have a conditional permit for one frequency at the 110(Degree) WL
orbital location and a total of 11 western frequencies at the 175(Degree) WL
orbital location that is set to expire on August 15, 1999. That expiration date
is pursuant to an extension granted by the FCC's International Bureau in 1996.
That extension was subject to the condition that we make significant progress
toward construction and operation of a DBS system substantially in compliance
with, or ahead of, the most recent timetable that we submitted to the FCC. The
FCC's International Bureau also urged us to expedite construction and launch of
additional satellites for our DBS system at these frequencies. PrimeStar filed a
request with the FCC that is still pending requesting that the FCC reverse the
International Bureau's grant of an extension.
We also have a conditional permit for 11 additional frequencies at
175(Degree) WL, which was set to expire on November 30, 1998. That expiration
date was set pursuant to an extension granted by the FCC's International Bureau
in 1995. When it granted the extension, the FCC reserved the right to cancel the
permit if we failed to progress toward operation of the DBS system in accordance
with the timetable that we submitted to the FCC. That extension also is subject
to a still pending challenge by PrimeStar.
While we have timely filed requests for extension of all the western
permits, we cannot be sure how the FCC will act with respect to these requests.
OTHER LICENSES AND CONDITIONAL AUTHORIZATIONS
We also have received licenses and conditional authorizations from the FCC
to operate satellites in the Ka-band, Ku-band and extended Ku-band frequencies.
Use of those licenses and conditional authorizations are subject to certain
technical and due diligence requirements, including the requirement to construct
and launch additional satellites. The granting of those licenses has been
challenged by parties with interests that are adverse to ours. If we
successfully construct and launch Ku-band, extended Ku-band, Ka-band or low
earth orbit satellites, we might be able to use those satellites to complement
the DISH Network, or for a variety of other uses. It is possible that the
Ku-band and Ka-band orbital locations requested by us and others could permit
construction of satellites with sufficient power to allow reception of satellite
signals by relatively small dishes. As these projects are in the early stages of
development and are currently being challenged by several companies with
interests adverse to ours, there can be no assurance that the FCC will sustain
these licenses, or grant the pending applications, or that we will be able to
successfully capitalize on any resulting business opportunities.
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REGULATIONS
DBS RULES. Once the FCC grants a conditional construction permit, the
permittee must proceed with due diligence in constructing the system. The FCC
has adopted specific milestones that must be met in order to retain the permit,
unless the FCC determines that an extension or waiver is appropriate. Permittees
must file semi-annual reports on the status of their due diligence efforts. The
due diligence milestones require holders of conditional permits to complete
contracting for construction of their systems within one year of grant of the
permit. Additionally, the satellites must be operational within six years of
grant. For permits issued after January 19, 1996, permittees must complete
construction of the first satellite in their system within four years of grant
of the permit. The FCC also may impose other conditions on the grant of the
permit. The holders of new DBS authorizations issued on or after January 19,
1996 must also provide DBS service to Alaska and Hawaii. We are presently not
able to satisfy this requirement with EchoStar IV. Accordingly, we have
requested a waiver of that requirement. The state of Hawaii has requested many
conditions to such a waiver, and we have opposed several of these conditions.
Those holding DBS permits as of January 1996 must provide DBS service to Hawaii
or Alaska from at least one of their DBS satellites or they will have to
relinquish their western assignments.
Subject to applicable regulations governing non-DBS operations, a licensee
may make unrestricted use of its assigned frequencies for non-DBS purposes
during the first five years of the ten-year license term. After the first five
years, the licensee may continue to provide non-DBS service as long as at it
dedicates at least one-half of its total capacity at a given orbital location to
providing DBS service. Further, the FCC indicated its desire to streamline and
revise its rules governing DBS satellites. We cannot be sure about the content
and effect any new DBS rules might have on our business.
CERTAIN OTHER COMMUNICATIONS ACT PROVISIONS. As a distributor of television
programming, we are also affected by numerous laws and regulations, including
the Communications Act.
We believe that we remain free to set prices and serve customers according
to our business judgment, without rate regulation or the statutory obligation
under Title II of the Communications Act to avoid undue discrimination among
customers. Even if, under a future interpretation of the 1996 Act, we were
classified as a telecommunications carrier subject to Title II, we believe that
such reclassification would not likely increase substantially the regulatory
burdens imposed on us or have an adverse impact on our DBS operations, although
we cannot be certain.
We believe that, because we are engaged in a subscription television
programming service, we are not subject to many of the regulatory obligations
imposed upon broadcast licensees. However, the FCC could determine in the future
that we should be treated as a broadcast licensee. In fact, certain parties have
requested such treatment. If the FCC determined that we are a broadcast
licensee, we could be required to comply with all regulatory obligations imposed
upon broadcast licensees.
The Communications Act, and the FCC's implementing regulations, provide
that when subsidiaries of a holding company hold certain types of FCC licenses,
foreign nationals or their representatives may not own in excess of 25% of the
total votes or equity of record of the holding company, considered on a
fully-diluted basis, except after an FCC public interest determination. Although
the FCC's International Bureau has ruled that these limitations do not apply to
providers of DBS services, certain parties have challenged that ruling. The FCC
has not acted on that challenge. These foreign ownership limitations would apply
to our fixed satellite service authorizations if we call ourselves a common
carrier, or if the FCC decides to treat us as such a carrier. The FCC has noted
that we propose to operate one of our proposed satellite systems on both a
common and non-common carrier basis.
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A recent survey of our equity owners disclosed that our foreign ownership
was less than 5%, which is well below these limitations, if they applied.
However, the 110 acquisition contemplates the issuance of common stock to an
Australian corporation that may exceed the alien ownership limitations if they
applied. We filed a petition for a declaratory ruling that it is in the public
interest to waive any applicable limitations to allow this issuance. Under
currently effective precedent, that type of waiver is only required if we
propose to conduct common carrier or broadcast operations. After coordination
with the FCC staff and in the interest of expediting consideration of our
application before the full FCC, we withdrew the petition. We may need to
re-file that petition for consideration by the FCC's International Bureau under
delegated authority to be able to consummate the 110 acquisition. We do not know
how the FCC will rule with respect to this petition, if re-filed. The FCC could
grant our waiver, deny the waiver, or impose adverse conditions on the waiver.
If we do not comply with applicable Communications Act requirements and FCC
rules, regulations, policies, and orders, the FCC could revoke, condition, or
decline to review or decline to extend an authorization.
THE TELECOMMUNICATIONS ACT OF 1996. The 1996 Act clarifies that the FCC has
exclusive jurisdiction over direct-to-home satellite services. It further
clarifies that criminal penalties may be imposed for piracy of direct-to-home
satellite services. The 1996 Act also offers DBS operators relief from private
and local government-imposed restrictions on the placement of receiving
antennas. In some instances, DBS operators have been unable to serve areas due
to laws, zoning ordinances, homeowner association rules, or restrictive property
covenants banning the installation of antennas on or near homes. The FCC
recently announced rules designed to implement Congress' intent. The FCC's rules
prohibit most organizations from imposing restrictions on the installation of
antennas, including DBS satellite dishes smaller than one meter, on or near
homes, unless the restriction is necessary for safety or preservation of a
recognized historic district. Local governments and associations can apply to
the FCC for a waiver of this rule based on local concerns of a highly
specialized or unusual nature. In November 1998, the FCC extended these rules to
allow renters to install antennas within their leaseholds (i.e., homes, gardens,
patios, terraces and balconies). The FCC declined to extend the rules to permit
the installation of antennas on common property or on property to which a viewer
was not permitted access, such as the locked roof of an apartment building.
Several groups have filed appeals against the November order. The 1996 Act also
pre-empted local governments from imposing taxes or fees on direct-to-home
satellite services, including DBS. Finally, the 1996 Act required that
multi-channel video programming distributors, including DBS operators, fully
scramble or block channels providing indecent or sexually explicit adult
programming. If a multi-channel video programming distributor cannot fully
scramble or block such programming, it must restrict transmission to those hours
of the day when minors are unlikely to view the programming.
THE CABLE ACT. In addition to regulating pricing practices and competition
within the franchise cable television industry, the Cable Act was intended to
establish and support existing and new multi-channel video service providers,
such as wireless cable and DBS. We have benefited from the programming access
provisions of the Cable Act and implementing rules, in that we have been able to
gain access to previously unavailable programming services and, in some
circumstances, have obtained certain programming services at reduced cost. Our
business and future results of operations could suffer if the Cable Act or any
of the related rules are amended, or interpreted differently in the future. For
example, if cable companies, or any affiliated entities, could discriminate
against competitors like us with regard to programming access, or the terms on
which such programming was available, our ability to acquire programming on a
cost-effective basis would be impaired. Certain of the restrictions on
cable-affiliated programmers will expire in 2002 unless the FCC extends such
restrictions.
On May 19, 1998, we filed a complaint against Comcast Corporation, a major
cable provider, seeking access to the sports programming controlled by Comcast
in the Philadelphia area. On January 22,
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1999, the FCC denied this complaint, partly on the basis that Comcast's
programming is delivered terrestrially and therefore is not subject to the
program access prohibitions. We cannot be certain whether or not other cable
operators that control production or distribution of their own programming would
switch to terrestrial transmission of their programming and seek to rely on the
FCC's denial of our complaint against Comcast in order to deny us access to
their programming. We also cannot be certain whether or not these companies
would seek to acquire sports franchises and exclusively distribute the
corresponding programming, which could possibly limit our access to popular
sports programming.
On January 14, 1999, we filed a program access complaint with the FCC
against Speedvision Network, L.L.C. and Outdoor Life Network, L.L.C. seeking
access to the programming controlled by these two networks. Our program access
complaint alleges that the conduct of Speedvision and Outdoor Life Network in
cutting off our access to programming after five days of carriage constitutes an
unreasonable refusal to deal and a prohibited unfair practice under the
Communications Act and the FCC's rules. Speedvision and Outdoor Life Network
have answered and moved to dismiss that complaint, and we cannot be sure how the
FCC will act on our complaint. Speedvision has cut off the service allegedly
based on its view that we breached a November 1998 contract between the parties
and has sued us in federal district court in Connecticut requesting several
remedies. We cannot be sure how the court will rule on Speedvision's and Outdoor
Life Network's complaint.
Pursuant to the Cable Act, the FCC recently imposed public interest
requirements upon DBS licensees that include the obligation to set aside four
percent of the licensee's channel capacity exclusively for non-commercial
programming of an educational or informational nature provided by national
educational programming suppliers. Among other constraints, the FCC defined
relatively narrowly the type of suppliers for which this capacity must be
reserved. They also required that the capacity be made available at
substantially below cost rates. The FCC also applied to DBS service providers
the requirement of providing reasonable access to air-time at favored low rates,
and equal opportunity, for certain qualified candidates for public office.
Although DBS operators are not currently subject to the "must carry"
requirements of the Cable Act, the cable industry and broadcast interests have
argued that DBS operators should be subject to these requirements. The "must
carry" rules generally require cable operators to carry all the local broadcast
stations in areas they serve, not just the four major networks. The broadcasters
also argue that satellite companies should not be allowed to provide
local-into-local network service unless they also become subject to these
requirements. If the "must carry" requirements of the Cable Act are revised to
include DBS operators, or if Congress enacts new legislation of a similar
nature, our plans to provide local programming will be adversely affected.
CERTAIN OTHER RULEMAKINGS. The FCC recently proposed to allocate additional
"expansion" spectrum for DBS operators starting in 2007. DIRECTV has filed an
application for a satellite system using those expansion frequencies.
Foreign satellite systems also are potential providers of DBS service
within the United States. In May 1996, in its DISCO II proceeding, the FCC
proposed permitting non-U.S. satellite systems to serve the United States if the
home country of the foreign-licensed satellite offers open "effective
competitive opportunities" in the same satellite service to U.S.-licensed
satellites. In the February 1997 World Trade Organization Agreement, the United
States offer contained an exemption from market opening commitments for, among
other things, DBS and direct-to-home satellite services. In November 1997, the
FCC released new rules that maintained the effective competitive opportunities
test with respect to foreign-licensed satellites seeking to provide DBS and
direct-to-home satellite services in the United States. The FCC also established
a strong presumption in favor of authorizing foreign-licensed satellites to
provide services other than DBS and direct-to-home satellite in the United
States.
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The FCC has proposed allowing non-geostationary orbit fixed satellite
services to operate on a co-primary basis in the same frequency as DBS and
Ku-band FSS service. If the proposal is adopted, these satellite operations
could provide global high-speed data services. This would, among other things,
create additional competition for satellite and other services. The FCC has also
requested comment on a request that would allow a terrestrial service proposed
by Northpoint Communications, Inc. to retransmit local television signals and
provide data services to DBS subscribers. Both of these proposed operations, if
authorized and implemented, may cause interference in the DBS spectrum.
LOCAL NETWORK SIGNALS. We believe that our ability to deliver local
programming via satellite into the markets from which the programming originates
might help us attract subscribers who would not otherwise be willing to purchase
satellite systems. Although we have commenced providing local network service to
eligible subscribers in various metropolitan centers, subject to certain
conditions, our ability to provide such a service is limited as detailed below.
SATELLITE HOME VIEWER ACT AND RETRANSMISSION CONSENT. In order to
retransmit network station programming, satellite companies, including us, must
have a copyright license and must obtain the retransmission consent of the
station concerned, subject to certain exceptions. Through our agreement with
News Corporation, we will receive the right to retransmit programming from local
FOX Network-owned and operated stations. However, we have not yet consummated
and we cannot provide any assurance that we will be able to consummate the
transaction. Likewise, we may not be able to obtain the retransmission consents
from any other network station.
The Satellite Home Viewer Act establishes a "statutory" or compulsory
copyright license that generally allows a DBS operator, for a
statutorily-established fee, to retransmit local network signals to subscribers
for private home viewing so long as that retransmission is limited to those
persons in "unserved households." An "unserved household," with respect to a
particular television network, is defined as one that cannot receive a specified
quality over-the-air network signal of a primary network station affiliated with
that network with a conventional outdoor rooftop antenna. That household must
not, during the 90 days prior to subscribing to the DBS service, have subscribed
to a cable service that provides the signal of an affiliate of that network.
While we believe the Satellite Home Viewer Act could be interpreted in a way
that would allow us to retransmit local programming to certain local markets via
satellite, we also believe that the compulsory copyright license under the
Satellite Home Viewer Act may not be sufficient to permit us to implement our
strategy to retransmit such programming in the most efficient and comprehensive
manner.
In the process of setting royalty rates for broadcast signal
retransmissions, the Librarian of Congress published a final ruling, on review
from a Copyright Arbitration Royalty Panel's recommendation, in October 1997.
With respect to "local-into-local" retransmissions, the Librarian affirmed the
zero rate for satellite retransmission of a superstation signal within the
station's local market -- a recommendation that we had supported. The Librarian
modified the panel's recommendation by also establishing a zero rate for
secondary transmissions of a network station's signal to "unserved households"
within the station's local market. The Librarian also reviewed the panel's
recommendation on the meaning of "unserved households." The panel had determined
that the statutory license does not cover such retransmissions and the panel did
not have jurisdiction to recommend a rate for them. The Librarian decided that
the law is silent on the issue. Accordingly, he could not definitively say that
the panel's decision is arbitrary or contrary to law. At the same time, the
Librarian determined that the Copyright Office retains the authority to rule on
the permissibility of secondary transmissions of a network station's signal to
households within that station's local market.
In December 1997, we petitioned the Copyright Office to issue a rule
confirming that the statutory license provided by the Satellite Home Viewer Act
and related copyright law allow a satellite carrier to retransmit the local
network signals of the respective local network affiliates. In January 1998, the
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Copyright Office initiated a rulemaking proceeding to determine whether the
copyright law permits such "local-into-local" retransmissions. Our petition and
subsequent comments have been opposed by, among others, certain sports leagues,
representatives of the cable industry, several television networks and their
broadcast affiliates, and the Motion Picture Association of America. The staffs
of the San Francisco Regional Office and the Bureau of Economics of the Federal
Trade Commission supported our position. We do not know if these proceedings
will result in a favorable ruling for us.
In case the Copyright Office does not conduct a rulemaking proceeding or
that any such rulemaking may not provide a favorable result to us, we are
continuing to pursue the passage of legislation that would clarify and extend
current laws with respect to local network signals. We do not know whether we
will be successful in this effort. Further, if a court or administrative agency
rejected our interpretation of "unserved household" and legislation does not
pass that clarifies and extends the scope of the compulsory license, we may have
to engage in the relatively cumbersome process of obtaining copyright licenses
from all individual copyright holders instead. Without new legislation in this
area or a favorable outcome in the rulemaking, we do not know whether we would
be successful in any copyright infringement or FCC litigation with copyright
owners or broadcasters regarding the legality of certain local-into-local
network retransmissions. The same is true if we were unable to successfully
negotiate individual copyright licenses and retransmission consent agreements,
if necessary.
DISTANT SIGNALS. The national networks and local affiliate stations have
recently sued PrimeTime 24 Joint Venture, a satellite company that provides
certain network programming to satellite companies. Until July 1998, we obtained
network programming through PrimeTime 24 also. The lawsuit challenges PrimeTime
24's methods of selling network programming to consumers based upon infringement
of copyright. The United States District Court for the Southern District of
Florida has entered nationwide preliminary and permanent injunctions preventing
PrimeTime 24 from selling its programming to consumers unless the programming
was sold in accordance with certain stipulations in the injunction. The
preliminary injunction took effect on February 28, 1999, and the permanent
injunction is set to take effect on April 30, 1999. The injunctions cover
PrimeTime 24's "distributors" as well. The plaintiff in the Florida litigation
informed us that it considered us a "distributor" for purposes of that
injunction. A federal district court in North Carolina has also issued an
injunction against PrimeTime 24 prohibiting certain distant signal
retransmission to homes delineated by a contour in the Raleigh area.
During July 1998, we ceased delivering PrimeTime 24 programming. Instead,
we began to uplink and distribute network signals directly. We have also
implemented specific compliance procedures that materially restrict the market
in which we can sell and deliver those network signals. CBS and other broadcast
networks have informed us that they believe our method of providing distant
network programming violates the Satellite Home Viewer Act and hence infringes
their copyright.
In October 1998, we filed a declaratory judgment action in the United
States District Court for the District of Colorado against the four major
networks. In the future, we might attempt to certify a class including the
networks as well as any and all owned and operated stations and any independent
affiliates. We have asked the court to enter a judgment declaring that our
method of providing distant network programming does not violate the Satellite
Home Viewer Act and hence does not infringe the networks' copyrights.
In November 1998, the CBS, ABC, NBC and FOX networks and their affiliate
groups filed a complaint in the federal district court in Miami against us
alleging copyright infringement. They have also requested the issuance of a
preliminary injunction against us. The networks also filed a counter claim
containing similar allegations against us in the Colorado litigation. We could
incur significant damages and have additional material restrictions imposed
against the sale of network signals if we were to lose in this litigation. Among
other things, we could be required to terminate delivery of distant network
signals to a
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material portion of our subscriber base. Further restrictions on the sale of
network channels imposed in the future could result in decreases in subscriber
activations and subscription television services revenue and an increase in
subscriber turnover.
The Satellite Home Viewer Act permits satellite retransmission of distant
network signals only to "unserved households." The determination of whether a
household qualifies as "unserved" for the purpose of being eligible to receive a
distant network signal depends, in part, on whether that household can receive a
signal of "Grade B intensity" as defined by the FCC. On November 17, 1998, in
response to petitions for rulemaking that we and the National Rural
Telecommunications Cooperative filed, the FCC released a notice of proposed
rulemaking concerning the term "Grade B intensity" as used in the Satellite Home
Viewer Act. The notice of proposed rulemaking requested comment and made
tentative proposals, on among other things:
- - the extent of the FCC's authority in connection with the definition,
prediction, and measurement of Grade B intensity;
- - changing the definition of Grade B intensity so that truly unserved
households can be better identified;
- - endorsing or developing a methodology for accurately predicting whether an
individual household is able to receive a signal of Grade B intensity; and
- - developing an easy-to-use and inexpensive method for testing the strength
of a broadcast network signal at an individual household.
The FCC also noted that it does not appear to have the statutory authority
to prevent most of PrimeTime 24's subscribers from losing their network service
under the Miami injunction. The notice of proposed rulemaking was the subject of
extensive comments by, among others, the satellite industry (including us), the
networks and broadcast affiliates, and several sports leagues.
In February 1999, the FCC released its report and order on the proceeding.
Although the FCC declined to change the values of Grade B intensity, it adopted
a method for measuring it at particular households. The FCC also endorsed a
method for predicting Grade B intensity at particular households. We cannot be
sure whether these methods are favorable to us or what weight, if any, the
courts will give to the FCC's decision. We also cannot be certain whether the
application of these methods by the courts will result in termination of distant
signal delivery to a material portion of our subscribers and decreases in future
subscriber activations. See "Legal Proceedings" for additional information
regarding specific proceedings we are involved in.
With respect to the royalty rate for retransmission of distant network and
superstation signals, the Librarian of Congress set the rate at 27 cents per
subscriber per month -- a significant increase over the previously applicable
rates. While judicial review of this ruling is pending, the new rate became
effective January 1, 1998.
EXPORT REGULATION. From time to time, we require import licenses and
general destination export licenses to receive and deliver components of
direct-to-home satellite TV systems. In addition, the delivery of satellites and
related technical information for the purpose of launch by a non-U.S. launch
services provider is subject to strict export control and prior approval
requirements. We have contemplated the possibility of satellite launches by such
non-U.S. providers for our next planned satellites, and cannot be sure that the
requisite approvals will be received.
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PATENTS AND TRADEMARKS
We use a number of trademarks for our products and services, including
"EchoStar," "DISH Network," "America's Top 40," and others. We have registered
some of these trademarks. We believe that those trademarks that we have not
registered are generally protected by common law and state unfair competition
laws. Although we believe that these trademarks are not essential to our
business, we have taken affirmative legal steps to protect those trademarks in
the past and intend to actively protect these trademarks in the future.
We have been assigned certain patents for products and product components
that we sell. We do not consider any of these to be significant to our
continuing operations. In addition, we have obtained and, although no assurances
can be given, expect to obtain licenses for certain patents necessary to the
manufacture and sale of DBS receivers and related components. We have been
notified that certain features of the EchoStar receiver system allegedly
infringe on patents held by others, and that we therefore owe royalties. We are
investigating these allegations of infringement and, if appropriate, we would
vigorously defend against any suit filed by the parties. We do not know whether
we would be able to successfully defend any suit, if brought, or if we would be
able to obtain a license for any patent that might be required.
EMPLOYEES
We had 3,815 employees at December 31, 1998, of which 3,750 worked in our
domestic operations and 65 worked in our international operations. We are not a
party to any collective bargaining agreement and generally consider relations
with our employees to be good.
PROPERTIES
The following table sets forth certain information concerning the Company's
material properties:
<TABLE>
<CAPTION>
APPROXIMATE OWNED OR
DESCRIPTION/USE LOCATION SQUARE FOOTAGE LEASED
- --------------- -------- -------------- --------
<S> <C> <C> <C>
Corporate headquarters............................. Littleton, Colorado 156,000 Owned
EchoStar Technologies Corporation office
and distribution center......................... Englewood, Colorado 155,000 Owned
Office and distribution center..................... Sacramento, California 78,500 Owned
Digital Broadcast Operations Center................ Cheyenne, Wyoming 55,000 Owned
Customer Service Center............................ Thornton, Colorado 55,000 Owned
Customer Service Center............................ McKeesport, Pennsylvania 100,000 Leased
European headquarters and warehouse................ Almelo, The Netherlands 53,800 Owned
Warehouse and distribution center.................. Denver, Colorado 132,800 Leased
</TABLE>
LEGAL PROCEEDINGS
THE NEWS CORPORATION LIMITED
During February 1997, our parent company and News Corporation announced an
agreement pursuant to which, among other things, News Corporation agreed to
acquire approximately 50% of the outstanding capital stock of our parent
company. News Corporation also agreed to make available for use by our parent
company the DBS permit for 28 frequencies at the 110(degree) WL orbital location
purchased by MCI for more than $682 million following a 1996 FCC auction. During
late April 1997, substantial disagreements arose between the parties regarding
their obligations under this agreement. Those
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substantial disagreements led the parties to litigation. In mid-1997, our parent
company filed a complaint seeking specific performance of this agreement and
damages, including lost profits. News Corporation filed an answer and
counterclaims seeking unspecified damages, denying all of the material
allegations and asserting numerous defenses. Discovery commenced in July 1997,
and the case was set for trial commencing March 1999. In connection with the
pending 110 acquisition, the litigation between our parent company and News
Corporation will be stayed and will be dismissed with prejudice upon closing or
if the transaction is terminated for reasons other than the breach by, or
failure to fill a condition within the control of, News Corporation or MCI.
In connection with the News Corporation litigation that arose in 1997, our
parent company has a contingent fee arrangement with its lawyers, which provides
for the lawyers to be paid a percentage of any net recovery obtained in its
dispute with News Corporation. Although they have not been specific, the lawyers
have asserted that they may be entitled to receive payments in excess of $80
million to $100 million under this fee arrangement in connection with the
settlement of the dispute with News Corporation. Our parent company intends to
vigorously contest the lawyers' interpretation of the fee arrangement, which it
believes significantly overstates the magnitude of its liability thereunder. If
the lawyers and our parent company are unable to resolve this fee dispute under
the fee arrangement, the fee dispute would be resolved under arbitration. It is
too early to determine the outcome of negotiations or arbitration regarding this
fee dispute. If the lawyers and our parent company are unable to resolve this
fee dispute under the fee arrangement, the fee dispute would be resolved under
arbitration. We cannot be certain about the outcome of negotiations or
arbitration regarding this fee dispute. As the holder of the assets acquired in
the transaction with News Corporation and MCI, we would pay any fee that is
payable under the fee arrangement.
WIC PREMIUM TELEVISION LTD.
On July 28, 1998, WIC Premium Television Ltd., an Alberta corporation,
filed a lawsuit in the Federal Court of Canada Trial Division, against certain
defendants, including General Instrument Corporation, HBO, Warner
Communications, Inc., John Doe, Showtime, USSB, our parent company and two of
our wholly-owned subsidiaries, Dish, Ltd. and Echosphere. The lawsuit seeks,
among other things, an interim and permanent injunction prohibiting the
defendants from activating receivers in Canada and from infringing any
copyrights held by WIC. It is too early to determine whether or when any other
lawsuits or claims will be filed. It is also too early to make an assessment of
the probable outcome of the litigation or to determine the extent of any
potential liability or damages.
On September 28, 1998, WIC filed another lawsuit in the Court of Queen's
Bench of Alberta Judicial District of Edmonton against certain defendants, which
also include our parent company, Dish and Echosphere. WIC is a company
authorized to broadcast certain copyrighted work, such as movies and concerts,
to residents of Canada. WIC alleges that the defendants engaged in, promoted, or
allowed satellite dish equipment from the United States to be sold in Canada and
to Canadian residents and that some of the defendants allowed and profited from
Canadian residents purchasing and viewing subscription television programming
that is only authorized for viewing in the United States. The lawsuit seeks,
among other things, interim and permanent injunctions prohibiting the defendants
from importing hardware into Canada and from activating receivers in Canada and
damages in excess of the equivalent of $175 million. It is too early to
determine whether or when any other lawsuits or claims will be filed. It is also
too early to make an assessment of the probable outcome of the litigation or to
determine the extent of any potential liability or damages.
BROADCAST NETWORK PROGRAMMING
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Section 119 of the Satellite Home Viewer Act authorizes us to substitute
satellite-delivered network signals to our subscribers, but only if those
subscribers qualify as "unserved households." Historically, we obtained distant
broadcast network signals for distribution to our subscribers through PrimeTime
24, Joint Venture. PrimeTime 24 also distributes network signals to certain of
our competitors in the satellite industry.
The national networks and local affiliate stations have recently
challenged, based upon infringement of copyright, PrimeTime 24's methods of
selling network programming (national and local) to consumers. The United States
District Court for the Southern District of Florida has entered a nationwide
preliminary and permanent injunction preventing PrimeTime 24 from selling its
programming to consumers unless the programming was sold in accordance with
certain stipulations in the injunction. The preliminary injunction took effect
on February 28, 1999, and the permanent injunction is set to take effect on
April 30, 1999. The injunctions cover "distributors" as well. The plaintiff in
the Florida litigation informed us that it considered us a "distributor" for
purposes of that injunction. A federal district court in North Carolina has also
issued an injunction against PrimeTime 24 prohibiting certain distant signal
retransmissions to homes delineated by a contour in the Raleigh area.
On October 19, 1998, our parent company filed a declaratory judgment action
in the United States District Court for the District of Colorado against the
four major networks. In the future, our parent company may attempt to certify a
class including the networks as well as any and all of their owned and operated
stations and any independent affiliates. Our parent company has asked the court
to enter a judgment declaring that our method of providing distant network
programming does not violate the Satellite Home Viewer Act and hence does not
infringe the networks' copyrights.
On November 5, 1998, several broadcast parties, acting on prior threats,
filed a complaint in federal district court in Miami alleging, among other
things, copyright infringement against our parent company. The plaintiffs in
that action have also requested the issuance of a preliminary injunction against
our parent company. The networks also filed a counterclaim containing similar
allegations against us in the Colorado litigation.
On February 24, 1999, CBS, NBC, FOX, and ABC filed with the court a "Motion
for Temporary Restraining Order, Preliminary Injunction, and Contempt Finding"
against DIRECTV in response to an announcement by DIRECTV that it was
discontinuing retransmission of the programming of the four networks received
from PrimeTime 24 and would instead distribute its own package of network
affiliates to its existing subscribers. On February 25, 1999, the court granted
CBS and FOX a temporary restraining order requiring DIRECTV and its agents and
those who act in active concert or participation with DIRECTV, not to deliver
CBS or FOX programming to subscribers who do not live in "unserved households."
On March 12, 1999, DIRECTV and the four major broadcast networks and their
affiliates announced that they had reached a settlement of that dispute. Under
the terms of the settlement, DIRECTV, stations and networks have agreed on a
timeframe to disconnect distant broadcast network signals from subscribers
predicted to be ineligible based on a modified version of the method used to
determine "unserved households." Subscribers will not lose receipt of their
distant network signals if they are predicted to be ineligible to receive those
signals but they obtain consent from the affected affiliate stations to receive
their signals via satellite. We are not sure what effect this development will
have on our business.
On March 24, 1999, we had a hearing in a Denver court on similar matters
with similar parties. If we lose that hearing, it is likely that the
broadcasters would move forward on their lawsuit filed in Miami and would seek
similar remedies against us, including a temporary restraining order requiring
us to stop delivering network signals to subscribers who do not live in
"unserved households." Depending upon the terms, a restraining order could
result in us having to terminate delivery of network signals to a material
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portion of our subscriber base, which could result in decreases in subscriber
activations and subscription television services revenue and an increase in
subscriber turnover.
We are subject to various other legal proceedings and claims which arise in
the ordinary course of our business. In the opinion of management, the amount of
ultimate liability with respect to those actions will not materially affect the
our financial position or results of operations.
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MANAGEMENT
DIRECTORS AND OFFICERS
Our company is a wholly owned subsidiary of ECC. The following table sets
forth information concerning certain officers and directors of ECC and our
company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Charles W. Ergen.................................... 45 Chairman, Chief Executive Officer, President and
Director of ECC and our company
O. Nolan Daines..................................... 39 Director of ECC
Raymond L. Friedlob ................................ 54 Director of ECC
James DeFranco ..................................... 45 Executive Vice President and Director of ECC and
our company
David K. Moskowitz.................................. 40 Senior Vice President, General Counsel, Secretary
and Director of ECC and our company
Michael T. Dugan.................................... 49 President, EchoStar Technologies Corporation
Steven B. Schaver................................... 44 Chief Financial Officer and Chief Operating
Officer of ECC and Chief Financial Officer of our
company
</TABLE>
CHARLES W. ERGEN. Mr. Ergen has been Chairman of the Board of Directors,
President and Chief Executive Officer of ECC since its formation and, during the
past five years, has held various executive officer and director positions with
ECC's subsidiaries. Mr. Ergen, along with his spouse and James DeFranco, was a
co-founder of ECC in 1980.
O. NOLAN DAINES. In 1993, Mr. Daines founded DiviCom, Inc. DiviCom is a
global provider of standards-based MPEG-II encoding product systems for digital
video broadcasting. DiviCom's product lines include audio/video/data encoding
and networking systems, as well as integration consulting and implementation
services. Prior to founding DiviCom, Mr. Daines served as Executive Director of
Engineering and System Architecture at Compression Labs Inc., where he led the
development of digital video products and communications systems. In March 1998,
Mr. Daines was appointed to ECC's Board of Directors.
RAYMOND L. FRIEDLOB. Mr. Friedlob has been a director of ECC and a member
of its Audit and Executive Compensation Committees since October 1995. Mr.
Friedlob is presently a member of the law firm of Friedlob Sanderson Raskin
Paulson & Tourtillott, LLC. Prior to 1995, Mr. Friedlob was a partner of Raskin
& Friedlob, where he had practiced since 1970. Mr. Friedlob specializes in
federal securities law, corporate law, leveraged acquisitions, mergers and
taxation.
JAMES DEFRANCO. Mr. DeFranco, currently the Executive Vice President of
ECC, has been a Vice President and a Director of ECC since its formation and,
during the past five years, has held various executive officer and director
positions with ECC's subsidiaries. Mr. DeFranco, along with Mr. Ergen and Mr.
Ergen's spouse, was a co-founder of ECC in 1980.
DAVID K. MOSKOWITZ. Mr. Moskowitz is the Senior Vice President, Secretary
and General Counsel of ECC. In March 1998, Mr. Moskowitz was appointed to ECC's
Board of Directors to fill the vacancy created by the resignation of Mr. R.
Scott Zimmer. During the past five years, Mr. Moskowitz
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also has held various executive officer and director positions with ECC's
subsidiaries. Mr. Moskowitz joined ECC in March 1990 and is responsible for all
legal and regulatory affairs of ECC and its subsidiaries.
MICHAEL T. DUGAN. Mr. Dugan is the President of the Consumer Products
Division of ECC. In that capacity, Mr. Dugan is responsible for all engineering
and manufacturing operations at ECC. Mr. Dugan has been with ECC since 1990.
STEVEN B. SCHAVER. Mr. Schaver was named the Chief Financial Officer of ECC
in February 1996. In November 1996, Mr. Schaver also was named Chief Operating
Officer. From November 1993 to February 1996, Mr. Schaver was the Vice President
of ECC's European and African operations. From July 1992 to November 1993, Mr.
Schaver was the Director of Sales and Marketing for ECC's largest Spanish
customer, Internacional de Telecomunicaciones, S.A. in Madrid, Spain. Prior to
July 1992 and since joining ECC in 1984, he has held various positions with
subsidiaries of ECC, including Vice President of European operations. Prior to
joining ECC Mr. Schaver was a Banking Officer with Continental Illinois National
Bank.
The Board of Directors of ECC currently has an Audit Committee and an
Executive Compensation Committee, both of which were established in October
1995. The present members of the Audit and Executive Compensation Committees are
Messrs. Daines and Friedlob. The principal functions of the Audit Committee are:
(i) to recommend to the Board of Directors the selection of independent public
accountants; (ii) review management's plan for engaging ECC's independent public
accountants during the year to perform non-audit services and consider what
effect these services will have on the independence of the accountants; (iii)
review the annual financial statements and other financial reports which require
approval by the Board of Directors; (iv) review the adequacy of ECC's system of
internal accounting controls; and (v) review the scope of the independent public
accountants' audit plans and the results of the audit. The principal function of
the Executive Compensation Committee is to award grants under and administer
ECC's Stock Incentive Plan.
EXECUTIVE COMPENSATION
Executive Officers are compensated by certain subsidiaries of ECC. The
following table sets forth the cash and non-cash compensation for the fiscal
years ended December 31, 1998, 1997 and 1996 for the Named Executive Officers.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
-----------
SECURITIES
UNDERLYING
OTHER ANNUAL OPTIONS ALL OTHER
YEAR SALARY BONUS COMPENSATION (1) (#) COMPENSATION(2)
---- ------ ----- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Charles W. Ergen................ 1998 $ 248,082 $ -- $ -- 30,000 $ 21,510
Chairman, President and Chief 1997 190,000 -- -- 30,000 13,044
Executive Officer 1996 190,000 -- -- 17,300 140,680
James DeFranco.................. 1998 $ 178,860 $ -- $ -- 30,000 $ 15,995
Executive Vice President and 1997 160,000 -- -- 30,000 13,094
Director 1996 160,000 -- -- -- 48,990
Michael T. Dugan................ 1998 $ 209,231 $ -- $ -- 15,000 $ 14,235
President, EchoStar Technologies 1997 160,000 -- -- 138,820 13,094
Corporation 1996 149,615 -- -- 18,735 12,882
David K. Moskowitz.............. 1998 $ 187,311 $ 500,000 $ -- 30,000 $ 14,235
Senior Vice President, Secretary, 1997 157,692 -- -- 30,000 12,918
General Counsel and Director 1996 142,692 10,000 -- 7,495 12,994
Steven B. Schaver............... 1998 $ 183,081 $ -- $ 15,074 39,090 $ 13,765
Chief Operating Officer and Chief 1997 158,462 -- 15,416 59,410 11,984
Financial Officer 1996 142,498 11,787 14,340 -- 12,516
</TABLE>
(1) With respect to Mr. Schaver, "Other Annual Compensation" includes housing
and car allowances related to his overseas assignments. Although each Named
Executive Officer enjoys certain other perquisites, such perquisites do not
exceed the lesser of $50,000 or 10% of such Officer's salary and bonus.
(2) "All Other Compensation" consists of amounts contributed to the
Corporation's 401(k) Plan on behalf of the Named Executive Officers. With
respect to Mr. Ergen and Mr. DeFranco for 1996, "All Other Compensation"
also includes payments made in connection with a tax indemnification
agreement between ECC and such individuals.
The following table provides information concerning grants of options to
purchase Class A Shares of ECC made in 1998 to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS GRANTED EMPLOYEES IN EXERCISE PRICE GRANT DATE
NAME (#) 1998 PER SHARE ($/SH) EXPIRATION DATE PRESENT VALUE (3)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Charles W. Ergen............ 30,000(1) 4.33% $18.29 April 15, 2006 $318,198
James DeFranco.............. 30,000(1) 4.33% $17.00 April 15, 2006 325,251
Michael T. Dugan............ 15,000(1) 2.17% $17.00 April 15, 2006 162,625
David K. Moskowitz.......... 30,000(1) 4.33% $17.00 April 15, 2006 325,251
Steven B. Schaver........... 30,000(1) 4.33% $17.00 April 15, 2006 325,251
Steven B. Schaver........... 9,090(2) 1.31% $22.00 March 31, 2008 131,268
</TABLE>
------------------
(1) In February 1998, ECC adopted the 1998 Executive Bonus Plan which provided,
among other things, the Named Executive Officers with options to purchase
up to 30,000 Class A Shares each, depending upon ECC's achievement of
certain financial and other goals. ECC did not meet any of the goals during
1998. Accordingly, all stock options granted pursuant to the 1998 Executive
Bonus Plan were cancelled. During February 1999, each of the Named
Executive Officers has been granted awards under the 1999 Executive Bonus
Plan, which was recently approved by the Board of Directors. The 1999
Executive Bonus Plan provides for corporate performance-based bonuses,
including cash and stock options, all of which are conditioned upon the
achievement
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<PAGE>
of certain corporate, financial and other goals. The 1999 Executive Bonus
Plan consists of three components for each executive covered by the plan:
(i) a $75,000 cash bonus; (ii) options to purchase up to 15,000 Class A
shares at $48.00 per share; and (iii) a long-term incentive grant of
options to purchase up to 50,000 Class A shares at $48.00 per share. Each
of the above components is subject to cancellation to the extent ECC does
not achieve certain pre-defined corporate, financial and other goals.
(2) In March 1998, ECC granted options to Mr. Schaver and other key employees
to purchase Class A Shares. These options will vest 20% one year following
the date of the grant and continue to vest 20% each year thereafter through
2003. These options expire five years from the date on which each portion
of the option first becomes exercisable, subject to early termination in
certain circumstances.
(3) Option values reflect Black-Scholes model output for options. The
Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, because option valuation models require
the input of highly subjective assumptions (including the expected stock
price characteristics) significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its stock- based compensation awards. The assumptions used in
the model were expected volatility of 67%, risk free rate of return of
5.64%, dividend yield of 0%, and time to exercise of six years.
The following table provides information as of December 31, 1998 concerning
unexercised options to purchase Class A Shares:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
NUMBER OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES VALUE OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON REALIZED DECEMBER 31, 1998 (#) DECEMBER 31, 1998 ($)(1)
--------------------- ------------------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles W. Ergen - $ - 64,489 80,814 $2,344,164 $2,548,098
James DeFranco - - 47,340 67,279 1,748,148 2,176,592
Michael T. Dugan 17,000 496,163 64,361 137,180 2,074,513 4,361,525
David K. Moskowitz - - 68,679 80,432 2,483,365 2,605,698
Steven B. Schaver - - 34,395 98,058 1,170,798 3,064,854
</TABLE>
- -------------------
(1) The dollar value of each exercisable and unexercisable option was
calculated by multiplying the number of Class A Shares underlying the
option by the difference between the exercise price of the option and the
closing price (as quoted in the Nasdaq National Market) of a Class A Share
on December 31, 1998.
EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
Prior to October 1995, ECC did not have an Executive Compensation Committee, and
its Board of Directors determined all matters concerning executive compensation.
During 1998, the Executive Compensation Committee consisted of Messrs. Daines
and Friedlob. Mr. Friedlob is a partner in the law firm of Friedlob, Sanderson,
Raskin, Paulson & Tourtillot, LLC, which billed ECC approximately $210,000 in
fees related to securities offerings in 1997.
DIRECTOR COMPENSATION. Directors of ECC who are not also Executive Officers
of ECC receive $500 for each meeting of the Board of Directors attended and are
reimbursed for reasonable travel expenses related to attendance at Board
meetings. Directors of ECC who are employees are not compensated for their
services as Directors. Directors of ECC are elected annually by the shareholders
of ECC. Directors who are not also employees of ECC are granted options under
the 1995 Non-employee Director Stock Option Plan (the "Director Plan") to
acquire 1,000 Class A Shares of ECC upon election to the Board. Mr. Friedlob was
granted an option to acquire 1,000 Class A Shares of ECC on December 22, 1995,
pursuant to the Director Plan. These options were 100% vested upon issuance and
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<PAGE>
had an exercise price of $20.25 per share and a term of five years. These
options were repriced to $17.00 per share during July 1997. Additionally, in
February 1997, Mr. Friedlob was granted an option to acquire 5,000 shares of
Class A Common Stock. These options were 100% vested upon issuance and have an
exercise price of $17.00 and a term of five years. In March 1998, upon
appointment to ECC's Board of Directors, Mr. Daines was granted an option to
acquire 1,000 shares of ECC's Class A common stock. These options were 100%
vested upon issuance, have an exercise price of $22.00, and a term of five
years.
STOCK INCENTIVE PLAN. ECC adopted the 1995 Incentive Plan to provide
incentives to attract and retain Executive Officers and other key employees.
ECC's Executive Compensation Committee administers the Incentive Plan. Key
employees are eligible to receive awards under the Incentive Plan at the
Committee's discretion.
Awards available under the Incentive Plan include (i) common stock purchase
options; (ii) stock appreciation rights; (iii) restricted stock and restricted
stock units; (iv) performance awards; (v) dividend equivalents; and (vi) other
stock-based awards. ECC has reserved up to 10 million Class A shares for
granting awards under the Incentive Plan. Under the terms of the Incentive Plan,
the Executive Compensation Committee retains discretion, subject to plan limits,
to modify the terms of outstanding awards and to reprice awards.
Pursuant to the Incentive Plan, ECC has granted options to its Executive
Officers and other key employees for the purchase of a total of 2,780,834 Class
A Shares. Options to purchase 1,447,015 Class A Shares were outstanding as of
December 31, 1998. These options generally vest at the rate of 20% per year,
commencing one year from the date of grant and 20% thereafter on each
anniversary of the date of grant. The exercise prices of these options, which
have always been equal to or greater than the fair market value at the date of
grant, have ranged from $9.33 to $29.36 per Class A Share. Certain of these
stock options were repriced as described below.
Effective July 1, 1997, the Executive Compensation Committee voted to
reprice all outstanding options with an exercise price greater than $17.00 per
Class A Share to $17.00 per Class A Share. The price to which the options were
repriced exceeded the fair market value of a Class A Share as of the date of
repricing. The market value of Class A Shares on the date of repricing was
$15.25 per Class A Share. The Executive Compensation Committee and the Board of
Directors indicated that they would not typically consider reducing the exercise
price of previously granted options. However, the Executive Compensation
Committee and the Board of Directors recognized that certain events beyond the
reasonable control of the employees of ECC had significantly reduced the
incentive those options were intended to create. It was the expectation of the
Executive Compensation Committee and the Board of Directors that by reducing the
exercise price of these options to $17.00, the intended incentive would be
restored in part.
LAUNCH BONUS PLAN. Effective May 8, 1998, in connection with the launch of
EchoStar IV, ECC granted a performance award of ten shares of Class A common
stock to all full-time employees with more than 90 days of service. The total
number of shares granted relative to the performance award approximated 16,600
shares.
401(K) PLAN. In 1983, ECC adopted a defined-contribution tax-qualified
401(k) Plan. ECC's employees become eligible for participation in the 401(k)
Plan upon completing six months of service with ECC and reaching age 21.
Participants in the 401(k) Plan may contribute between 1% and 15% of their
compensation in each contribution period. ECC may make a 50% matching
contribution up to a maximum of $1,000 per participant per calendar year. ECC
may also make an annual discretionary profit sharing or employer stock
contribution to the 401(k) Plan with the approval of the Board of Directors.
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Participants in the 401(k) Plan are immediately vested in their voluntary
contributions, plus actual earnings thereon. The balance of the vesting in
401(k) Plan participants' accounts is based on years of service. A participant
becomes 10% vested after one year of service, 20% vested after two years of
service, 30% vested after three years of service, 40% vested after four years of
service, 60% vested after five years of service, 80% vested after six years of
service, and 100% vested after seven years of service.
In March 1998, ECC contributed 80,000 shares of its Class A common stock to
the 401(k) Plan as a discretionary employer stock contribution. These shares,
which were allocated to individual participant 401(k) Plan accounts in
proportion to their 1997 eligible compensation, are subject to the seven-year
vesting schedule previously described. Shares of Class A common stock allocated
to the 401(k) Plan accounts of the Named Executive Officers pursuant to the 1997
discretionary employer stock contribution were as follows: (i) Charles W. Ergen,
539 shares; (ii) Michael T. Dugan, 539 shares (iii) James DeFranco, 539 shares;
(iv) Steven B. Schaver, 534 shares; (v) David K. Moskowitz, 531 shares and (vi)
all Officers and Directors as a group, 4,247 shares.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1997, the law firm of Friedlob, Sanderson, Raskin, Paulson &
Tourtillott, LLC billed ECC approximately $210,000 in fees related to certain of
the Company's 1997 securities offerings. Mr. Friedlob, a member of ECC's Board
of Directors, is a partner of that law firm.
O. Nolan Daines, who was recently appointed to ECC's Board of Directors,
also is the founder of DiviCom. During 1998, ECC purchased approximately $15
million of equipment for its Digital Broadcast Operations Center and for certain
of its other project integration services for international direct-to-home
satellite TV ventures from DiviCom.
The Company distributed approximately $269.7 million of the net proceeds of
the offering of old notes to ECC to repurchase the Senior Preferred Exchange
Notes pursuant to the tender offers. In addition, ECC contributed cash or cash
equivalents of $200 million to the Company as common equity. See "Use of
Proceeds."
In addition, our company repaid a $12 million demand note payable to ECC in
October 1997. Also, during 1995 and 1996, ECC advanced our company $46 million
in the form of notes payable to enable our company to make required payments
under its EchoStar III construction contract. The notes payable bear interest at
11.25%, which has been added to principal. We used approximately $60.2 million
of the net proceeds of the old notes to repay such notes payable together with
accrued interest.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, to the best knowledge of EchoStar, the
beneficial ownership of EchoStar's voting securities as of February 28, 1999 by
(i) each person known by EchoStar to be the beneficial owner of more than five
percent of any class of EchoStar's voting shares; (ii) each Director of
EchoStar; (iii) the five highest compensated persons acting as an Executive
Officer of EchoStar (the "Named Executive Officers"); and (iv) all Directors and
Executive Officers as a group. Unless otherwise indicated, each person listed in
the following table (alone or with family members) has sole voting and
dispositive power over the shares listed opposite such person's name.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
NUMBER OF PERCENTAGE OF NUMBER OF PERCENTAGE OF
NAME(1) SHARES CLASS SHARES (2) CLASS (2)
- ------------------------------------------------------ --------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
CLASS A COMMON STOCK (3):
Charles W. Ergen (4), (5), (19), (20), (21).... 30,050,398 61.9% 30,050,398 42.0%
The News Corporation Limited (6)............... - - 18,357,884 25.7%
MCI WorldCom, Inc. (6)......................... - - 4,560,823 6.4%
FMR Corp. (7).................................. 2,172,864 4.5% 2,172,864 3.0%
Wellington Management Company, LLP (8)......... 1,657,481 3.4% 1,657,481 2.3%
AMVESCAP, PLC (9).............................. 1,276,050 2.6% 1,276,050 1.8%
Montgomery Asset Management, LLC (10).......... 1,202,100 2.5% 1,202,100 1.7%
James DeFranco (11), (19), (20)................ 1,156,345 2.4% 1,156,345 1.6%
Equitable Companies Inc. (12).................. 836,861 1.7% 836,861 1.2%
David K. Moskowitz (13), (19), (20)............ 84,140 * 84,140 *
Michael T. Dugan (14), (19), (20).............. 73,979 * 73,979 *
Steven B. Schaver (15), (19), (20)............. 48,503 * 48,503 *
O. Nolan Daines (16), (20)..................... 10,000 * 10,000 *
Raymond L. Friedlob (17), (20)................. 11,000 * 11,000 *
All Directors and Executive Officers as a Group
(12 persons) (18), (19), (20)................ 31,463,534 64.8% 31,463,534 44.0%
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SHARES OF CLASS
--------------- --------------
<S> <C> <C>
CLASS B COMMON STOCK:
Charles W. Ergen................................................. 29,804,401 100.0%
All Directors and Executive Officers as a Group (12 persons)..... 29,804,401 100.0%
</TABLE>
- -------------------
* Less than 1%.
(1) Except as otherwise noted, the address of each such person is 5701 Santa Fe
Drive, Littleton, Colorado 80120.
(2) Gives effect to the 110 Acquisition, assuming it had been consummated on
March 15, 1999 (see Note (6)). Also includes Class A Shares issuable upon
conversion of Mr. Ergen's Class B Shares.
(3) The following table sets forth, to the best knowledge of EchoStar, the
actual ownership of Class A Shares (including options exercisable within 60
days) as of February 28, 1999 by (i) each person known by EchoStar to be
the beneficial owner of more than five percent of any class of EchoStar's
voting shares; (ii) each Director or nominee of EchoStar; (iii) each Named
Executive Officer; and (iv) all Directors and Executive Officers as a
group:
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NAME SHARES CLASS
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
CLASS A COMMON STOCK:
FMR Corp................................................ 2,172,864 13.2%
Wellington Management Company, LLP...................... 1,657,481 10.1%
AMVESCAP, PLC........................................... 1,276,050 7.7%
Montgomery Asset Management, LLC........................ 1,202,100 7.3%
James DeFranco.......................................... 1,156,345 7.0%
Equitable Companies Inc................................. 836,861 5.1%
Charles W. Ergen........................................ 245,996 1.5%
David K. Moskowitz...................................... 84,140 *
Michael T. Dugan........................................ 73,979 *
Steven B. Schaver....................................... 48,503 *
O. Nolan Daines......................................... 10,000 *
Raymond L. Friedlob..................................... 11,000 *
All Directors and Executive Officers as a Group 1,659,133 10.1%
(11 persons)............................................
</TABLE>
(4) Includes (i) 1,915 Class A Shares held in EchoStar's 401(k) Employee
Savings Plan (the "401(k) Plan"); (ii) the right to acquire 70,489 Class A
Shares within 60 days upon the exercise of employee stock options; and
(iii) 29,804,401 Class A Shares issuable upon conversion of Mr. Ergen's
Class B Shares.
(5) The percentage of total voting power held by Mr. Ergen is 93.4%, after
giving effect to the exercise of Mr. Ergen's options exercisable within 60
days and would be approximately 87.2% after also giving effect to the 110
Acquisition.
(6) The exact number of Class A Shares issuable to The News Corporation Limited
("News Corporation") and MCI Telecommunications Company ("MCI"), a
subsidiary of MCI WORLDCOM, Inc., in connection with the 110 Acquisition
will not be determinable until consummation of that transaction. The number
of Class A Shares that will be issued is subject to adjustment if the 20
trading day average closing price of EchoStar's Class A Shares is less than
$15.00 or greater than $39.00. Assuming the 110 Acquisition had been
consummated on March 15, 1999, the 20 trading day average closing price of
the Class A Shares would have been $51.05. The following table illustrates,
at various prices, the number of Class A Shares issuable to News
Corporation and MCI.
<TABLE>
<CAPTION>
NEWS CORPORATION MCI
------------------------ --------------------------
AVERAGE SHARE PERCENTAGE PERCENTAGE
PRICE SHARES OF CLASS (2) SHARES OF CLASS (2)
- ------------ ---------- ----------- --------- ------------
<S> <C> <C> <C> <C>
$10.00 36,045,000 38.5% 8,955,006 9.6%
$15.00 24,030,000 30.6% 5,970,000 7.6%
$39.00 24,030,000 30.6% 5,970,000 7.6%
$40.00 23,429,250 30.1% 5,820,750 7.5%
$50.00 18,743,400 26.0% 4,656,600 6.5%
$60.00 15,619,500 22.9% 3,880,500 5.7%
$70.00 13,388,143 20.5% 3,326,143 5.1%
$80.00 11,714,625 18.5% 2,910,375 4.6%
$90.00 10,413,000 16.9% 2,587,000 4.2%
$100.00 9,371,700 15.6% 2,328,300 3.9%
$110.00 8,519,727 14.4% 2,116,636 3.6%
</TABLE>
(7) The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts
02109.
(8) The address of Wellington Management Company, LLP is 75 State Street,
Boston, Massachusetts 02109.
(9) The address of AMVESCAP, PLC is 1315 Peachtree Street, N.W., Atlanta,
Georgia 30309.
(10) The address of Montgomery Asset Management, LLC is 600 Montgomery Street,
San Francisco, California 94111.
(11) Includes: (i) 1,915 Class A Shares held in the 401(k) Plan; (ii) the right
to acquire 53,340 Class A Shares within 60 days upon the exercise of
employee stock options; (iii) 751 Class A Shares held as custodian for his
minor children; and (iv) 375,000 Class A Shares controlled by Mr. DeFranco
as general partner of a partnership.
(12) The address of Equitable Companies Inc. is 1290 Avenue of the Americas, New
York, New York 10104.
(13) Includes (i) 1,813 Class A Shares held in the 401(k) Plan; (ii) the right
to acquire 74,679 Class A Shares within 60 days upon the exercise of
employee stock options; (iii) 166 Class A Shares held as custodian for his
minor children; (iv) 3,000 Class A Shares owned by Mr. Moskowitz's spouse;
and (v) 1,023 Class A Shares held as trustee for Mr. Ergen's children.
(14) Includes: (i) 1,853 Class A Shares held in the 401(k) Plan and (ii) the
right to acquire 72,125 Class A Shares within 60 days upon the exercise of
employee stock options.
(15) Includes: (i) 1,684 Class A Shares held in the 401(k) Plan and (ii) the
right to acquire 46,780 Class A Shares within 60 days upon the exercise of
employee stock options.
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<PAGE>
(16) Includes the right to acquire 6,000 Class A Shares within 60 days upon the
exercise of employee stock options.
(17) Includes the right to acquire 11,000 Class A Shares within 60 days upon the
exercise of employee stock options.
(18) Includes (i) 14,486 Class A Shares held in the 401(k) Plan; (ii) the right
to acquire 361,113 Class A Shares within 60 days upon the exercise of
employee stock options; (iii) 375,000 Class A Shares held in a partnership;
(iv) 29,804,401 Class A Shares issuable upon conversion of Class B Shares;
(v) 101,023 Class A Shares held in the name of, or in trust for, minor
children and other family members; and (vi) 3,947 Class A Shares owned by
or jointly with family members.
(19) Includes 162,175 Class A Shares over which Mr. Ergen has voting power as
trustee for the 401(k) Plan. These shares also are beneficially owned
through investment power by each individual 401(k) Plan participant. The
Class A Shares individually owned by each of the Named Executives through
their participation in the 401(k) Plan are included in each respective
Named Executive's information above.
(20) Beneficial ownership percentage was calculated assuming exercise or
conversion of all Class B Shares, warrants and employee stock options
exercisable within 60 days (collectively, the "Derivative Securities") into
Class A Shares by all holders of such Derivative Securities. Assuming
exercise or conversion of Derivative Securities by such person, and only by
such person, the beneficial ownership of Class A Shares would be as
follows: Mr. Ergen, 66.2%; Mr. DeFranco, 7.3%; less than one percent for
Mr. Moskowitz, Mr. Dugan, Mr. Schaver, Mr. Daines and Mr. Friedlob; and all
Officers and Directors as a group, 67.0%.
(21) In connection with the 110 acquisition, Mr. Ergen entered into a voting
agreement with News Corporation and MCI pursuant to which News Corporation
and MCI have agreed to vote their shares of EchoStar stock in the manner
recommended by the Board of Directors of EchoStar for a period of five
years following consummation of the 110 acquisition. Mr. Ergen disclaims
beneficial ownership of the shares of Class A Shares to be issued to News
Corporation and MCI. See "Proposal No. 2 -- To Approve the Issuance of
Class A Shares Pursuant to the Purchase Agreement -- Information About the
Purchase Agreement -- Voting Agreement."
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<PAGE>
DESCRIPTION OF THE NOTES
The seven year notes and the ten year notes were each issued pursuant to an
indenture by and among us, the guarantors and U.S. Bank Trust National
Association, as trustee. The terms of the exchange notes are substantially
identical to the terms of the old notes. However, the exchange notes are not
subject to transfer restrictions or registration rights unless held by certain
broker-dealers, our affiliates or certain other persons.
The following summary of some of the provisions of each indenture and the
registration rights agreements relating to each series of notes does not purport
to be complete and is qualified in its entirety by reference to the applicable
indenture and the registration rights agreements.
You can find the definitions of some of the capitalized terms used in this
section under the subheading "--Certain Definitions." For purposes of this
section, references to "us," "our company" or "we" mean only EchoStar DBS
Corporation and not our subsidiaries, and references to "ECC" shall mean ECC
together with each Wholly Owned Subsidiary of ECC that beneficially owns 100% of
the Equity Interests of our company, but only so long as ECC beneficially owns
100% of the Equity Interests of such subsidiary.
The terms of the notes include those stated in the applicable indenture and
those made part of each indenture by reference to the Trust Indenture Act of
1939, as amended. The notes are subject to all such terms, and holders of notes
should refer to the applicable indenture and the Trust Indenture Act for a
statement thereof. A copy of each indenture may be obtained from us or the
initial purchasers.
The following description is a summary of the material provisions of
each indenture. It does not restate each indenture in its entirety. We urge
you to read the applicable indenture because it, and not this description,
defines your rights as a holder of the notes.
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES
In the following summary, "EchoStar" refers solely to EchoStar
Communications Corporation and does not include any direct or indirect
subsidiaries of EchoStar. Unless the context otherwise requires, all references
herein to the notes shall include the old notes and the exchange notes.
THE NOTES
The notes are:
- - general unsecured obligations of our company;
- - ranked equally in right of payment to each other;
- - ranked equally in right of payment with all existing and future senior debt
of our company;
- - ranked senior in right of payment to all other existing and future
subordinated debt of our company;
- - effectively junior to (i) all liabilities (including trade payables) of our
company's Subsidiaries (if any) that are Unrestricted Subsidiaries (and
thus not guarantors) or that are otherwise not guarantors and of ETC or any
Subsidiary of our company which constitutes a Non-Core Asset in the event
ETC or such Subsidiary is released from its guarantee pursuant to the
covenant entitled "Certain Covenants--Dispositions of ETC and Non-Core
Assets," (ii) all liabilities (including trade payables) of any Subsidiary
Guarantor if such guarantor's guarantee is subordinated or avoided by a
court of competent jurisdiction (see "Risk Factors--Under Fraudulent
Conveyance
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<PAGE>
Statutes, A Court May Void Or Subordinate Our Obligations Under The Notes
Or Our Subsidiary Guarantors' Obligations Under Their Guarantees") and
(iii) all secured obligations, to the extent of the collateral securing
such obligations, including any borrowings under any of our future secured
credit facilities; and
- - unconditionally guaranteed by the guarantors.
The notes are issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Any ten year notes that
remain outstanding after the completion of the ten year note exchange offer,
together with the ten year exchange notes issued in connection with the ten year
note exchange offer, will be treated as a single class of securities for all
purposes under the ten year note indenture, including, without limitation,
waivers, amendments, redemptions, Change of Control Offers and Excess Proceeds
Offers. Any seven year notes that remain outstanding after completion of the
seven year note exchange offer, together with the seven year exchange notes
issued in connection with the seven year note exchange offer, will be treated as
a single class of securities for all purposes under the seven year note
indenture, including without limitation, waivers, amendments, redemptions,
Change of Control Offers and Excess Proceeds Offers.
THE GUARANTEES
The notes are guaranteed by the guarantors, which currently include DBSC
and substantially all of our direct and indirect Wholly Owned Restricted
Subsidiaries. The guarantees of the notes are:
- general unsecured obligations of each guarantor;
- ranked equally in right of payment to all other guarantees;
- ranked equally in right of payment with any existing and future senior
debt of the guarantor;
- effectively junior to secured obligations, to the extent of the
collateral securing such obligations, including any secured guarantees
of our obligations under any of our future credit facilities; and
- ranked senior in right of payment to all other existing and future
subordinated debt of such guarantor.
Assuming we had completed the offering and applied the proceeds as
intended, as of September 30, 1998, on a pro forma basis after giving effect to
the tender offers (assuming that all of the 1994 notes, the 1996 notes, the 1997
notes were tendered in the tender offers) and to the reorganization, there would
have been
- no outstanding debt ranking ahead of the notes or the guarantees, as
the case may be,
- $70.6 million of outstanding debt ranking equally with the notes and
the guarantees, as the case may be, $45.4 million of which is secured
and
- no outstanding debt ranking behind the notes or the guarantees, as the
case may be.
The indentures permit us and the guarantors to incur additional Indebtedness,
including secured and unsecured Indebtedness that ranks PARI PASSU with the
notes. Any secured Indebtedness will, as to the collateral securing such
Indebtedness, be effectively senior to the notes to the extent of such
collateral.
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<PAGE>
As of the date of the indentures, all of our Subsidiaries are "Restricted
Subsidiaries" other than E-Sat, Inc., EchoStar Real Estate Corporation, EchoStar
International (Mauritius) Ltd., EchoStar Manufacturing and Distribution Private
Ltd. and Satrec Mauritius Ltd., which are "Unrestricted Subsidiaries." Under
certain circumstances, we are permitted to designate certain of our Subsidiaries
as additional "Unrestricted Subsidiaries." Unrestricted Subsidiaries are not
subject to many of the restrictive covenants in the indenture. Unrestricted
Subsidiaries will not guarantee the notes.
ECC and its Subsidiaries (other than we and substantially all of our
Subsidiaries) will not guarantee or otherwise be obligated in respect of the
notes.
GENERAL
The notes rank PARI PASSU in right of payment to each other, and with all
of our senior indebtedness, except to the extent of any collateral securing such
senior indebtedness, which is effectively senior to the notes to the extent of
such collateral. Each guarantee ranks PARI PASSU in right of payment with the
other guarantees, and with all senior indebtedness of the guarantor issuing such
guarantee, except to the extent of any collateral securing such senior
indebtedness, which is effectively senior to the guarantees to the extent of
such collateral. Although the notes are titled "Senior," neither we nor any
guarantor has issued, and neither has any plans to issue, any indebtedness to
which the notes or the guarantees, as the case may be, would be senior. On a pro
forma basis, after giving effect to the offering of the notes and to the
application of the net proceeds therefrom as intended (assuming that all of the
1994 notes, the 1996 notes, the 1997 notes and the Senior Preferred Exchange
Notes were tendered in the tender offers), and to the reorganization, our
aggregate consolidated Indebtedness as of December 31, 1998, for purposes of
the indentures, would have been approximately $2.05 billion.
PRINCIPAL, MATURITY AND INTEREST
The ten year notes were issued in an aggregate principal amount of $1.625
billion. The ten year notes will mature on February 1, 2009. The seven year
notes were issued in an aggregate principal amount of $375.0 million. The seven
year notes will mature on February 1, 2006.
Interest on the notes accrues at the rate per annum set forth on the cover
page of this prospectus and will be payable semiannually in cash on each
February 1 and August 1, commencing August 1, 1999 to holders of record on the
immediately preceding January 15 and July 15, respectively. Interest on the
notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the date of issuance. Interest on the notes
will be computed on the basis of a 360-day year of twelve 30-day months.
The notes will be payable both as to principal and interest at the office
or agency of our company maintained for such purpose or, at our option, payment
of interest may be made by check mailed to the holders of the notes at their
respective addresses set forth in the register of holders of notes. Until
otherwise designated by us, our office or agency will be the office of the
trustee maintained for such purpose.
GUARANTEES
Each guarantor jointly and severally guarantees our obligations under the
ten year notes and the seven year notes, respectively. The obligations of each
guarantor under its guarantee is limited as necessary to prevent such guarantee
from constituting a fraudulent conveyance or fraudulent transfer under
applicable law. See "Risk Factors--Under Fraudulent Conveyance Statutes, A Court
May Void Or Subordinate Our Obligations Under The Notes Or Our Subsidiary
Guarantors' Obligations Under Their
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<PAGE>
Guarantees." Each guarantor that makes a payment or distribution under a
guarantee shall be entitled to a pro rata contribution from each other guarantor
based on the net assets of each other guarantor.
Each guarantor may consolidate with or merge into or sell its assets to us
or another guarantor that is our Restricted Subsidiary, or with or to other
persons upon the terms and conditions set forth in the indentures. A guarantor
may not sell or otherwise dispose of all or substantially all of its assets, or
consolidate with or merge with or into another person (whether or not such
guarantor is the surviving person) unless certain conditions are met. See
"--Certain Covenants--Merger, Consolidation, or Sale of Assets."
The guarantee of a guarantor will be deemed automatically discharged and
released in accordance with the terms of the indenture:
(1) in connection with any direct or indirect sale, conveyance or other
disposition of all of the capital stock or all or substantially all of the
assets of that guarantor (including by way of merger or consolidation), if such
sale or disposition is made in compliance with the applicable provisions of the
indenture (See "--Certain Covenants--Asset Sales");
(2) if a guarantor is dissolved or liquidated in accordance with the
provisions of the indenture;
(3) if we designate any such guarantor as an Unrestricted Subsidiary in
compliance with the terms of the indentures; or
(4) without limiting the generality of the foregoing, in the case of ETC or
any guarantor which constitutes a Non-Core Asset, upon the sale or other
disposition of any Equity Interest of ETC or such guarantor which constitutes a
Non-Core Asset, respectively. See "--Certain Covenants--Dispositions of ETC and
Non-Core Assets."
OPTIONAL REDEMPTION
THE TEN YEAR NOTES
Except as provided in the next paragraph, the ten year notes are not
redeemable at our option prior to February 1, 2004. Thereafter, the ten year
notes are subject to redemption at our option, in whole or in part, upon not
less than 30 nor more than 60 days' notice, at the redemption prices (expressed
as percentages of principal amount) set forth below, together with accrued and
unpaid interest thereon to the applicable redemption date, if redeemed during
the 12-month period beginning on February 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2004................ 104.688%
2005................ 103.516
2006................ 102.344
2007................ 101.172
2008................ 100.000
</TABLE>
Notwithstanding the foregoing, at any time prior to February 1, 2002, we
may redeem up to 35% of the aggregate principal amount of the ten year notes
outstanding at a redemption price equal to 109.375% of the principal amount
thereof on the repurchase date, together with accrued and unpaid interest to
such repurchase date, with the net cash proceeds of one or more public or
private sales
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<PAGE>
(including sales to ECC, regardless of whether ECC obtained such funds from an
offering of Equity Interests or Indebtedness of ECC or otherwise) of our Equity
Interests (other than Disqualified Stock) (other than proceeds from a sale to
any of our Subsidiaries or any employee benefit plan in which we or any of our
Subsidiaries participates); PROVIDED that:
- at least 65% in aggregate principal amount of the ten year notes
originally issued remain outstanding immediately after the occurrence
of such redemption;
- such redemption occurs within 120 days of the date of the closing of
any such sale; and
- the sale of such Equity Interests is made in compliance with the terms
of the indenture.
THE SEVEN YEAR NOTES
Except as provided in the next paragraph, the seven year notes are not
redeemable at our option prior to February 1, 2003. Thereafter, the seven year
notes are subject to redemption at our option, in whole or in part, upon not
less than 30 nor more than 60 days' notice, at the redemption prices (expressed
as percentages of principal amount) set forth below, together with accrued and
unpaid interest thereon to the applicable redemption date, if redeemed during
the 12-month period beginning on February 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2003................ 104.625%
2004................ 102.313
2005................ 100.000
</TABLE>
Notwithstanding the foregoing, at any time prior to February 1, 2002, we
may redeem up to 35% of the aggregate principal amount of the seven year notes
outstanding at a redemption price equal to 109.250% of the principal amount
thereof on the repurchase date, together with accrued and unpaid interest to
such repurchase date, with the net cash proceeds of one or more public or
private sales (including sales to ECC, regardless of whether ECC obtained such
funds from an offering of Equity Interests or Indebtedness of ECC or otherwise)
of our Equity Interests (other than Disqualified Stock) (other than proceeds
from a sale to any of our Subsidiaries or any employee benefit plan in which we
or any of our Subsidiaries participates); PROVIDED that:
- at least 65% in aggregate principal amount of the seven year notes
originally issued remain outstanding immediately after the occurrence
of such redemption;
- such redemption occurs within 120 days of the date of the closing of
any such sale; and
- the sale of such Equity Interests is made in compliance with the terms
of the indenture.
SELECTION AND NOTICE
If less than all of a series of notes are to be redeemed at any time,
selection of notes of the applicable series for redemption will be made by the
trustee in compliance with the requirements of the principal national securities
exchange, if any, on which such notes are listed or, if such notes are not so
listed, on a pro rata basis, by lot or by such other method as the trustee deems
fair and appropriate, PROVIDED that no notes with a principal amount of $1,000
or less shall be redeemed in part. Notice of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each holder of notes to be redeemed at its registered address. If any note is to
be redeemed in part
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<PAGE>
only, the notice of redemption that relates to such note shall state the portion
of the principal amount thereof to be redeemed. A new note of the same series in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon cancellation of the original note. On and after
the redemption date, if we do not default in the payment of the redemption
price, interest will cease to accrue on notes or portions thereof called for
redemption.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, we will be required to make an
offer (a "Change of Control Offer") to each holder of notes to repurchase all or
any part (equal to $1,000 or an integral multiple thereof) of such holder's
notes at a purchase price equal to 101% of the aggregate principal amount
thereof, together with accrued and unpaid interest thereon to the date of
repurchase (in either case, the "Change of Control Payment"). Within 15 days
following any Change of Control, we shall mail a notice to each holder stating:
1. that the Change of Control Offer is being made pursuant to the
covenant entitled "Change of Control";
2. the purchase price and the purchase date, which shall be no earlier
than 30 days nor later than 40 days after the date such notice is
mailed (the "Change of Control Payment Date");
3. that any notes not tendered will continue to accrue interest in
accordance with the terms of the indenture;
4. that, unless we default in the payment of the Change of Control
Payment, all notes accepted for payment pursuant to the Change of
Control Offer shall cease to accrue interest after the Change of
Control Payment Date;
5. that holders will be entitled to withdraw their election if the paying
agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of notes delivered for purchase, and a
statement that such holder is withdrawing his election to have such
notes purchased;
6. that holders whose notes are being purchased only in part will be
issued new notes equal in principal amount to the unpurchased portion
of the notes surrendered, which unpurchased portion must be equal to
$1,000 in principal amount or an integral multiple thereof; and
7. any other information material to such holder's decision to tender
notes.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of the notes in
connection with a Change of Control. Due to our highly leveraged structure and
the terms of other indebtedness to which we and our Subsidiaries are or may in
the future be subject, we may not be able to repurchase all of the notes
tendered for purchase upon the occurrence of a Change of Control. If we fail to
repurchase all of the notes tendered for purchase upon the occurrence of a
Change of Control, such failure will constitute an Event of Default. In
addition, the terms of other indebtedness to which we may be subject may
prohibit us from purchasing the notes or offering to purchase the notes, and a
Change of Control Offer or a Change of Control Payment could trigger a default
or event of default under the terms of such indebtedness. In the event that we
were unable to obtain the consent of the holders of any such other indebtedness
to make a Change of Control Offer or
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<PAGE>
make the Change of Control Payment or to repay such indebtedness, a Default or
Event of Default may occur. See "--Events of Default and Remedies."
Except as described above with respect to a Change of Control, the
indentures do not contain provisions that permit the holders of the notes to
require that we repurchase or redeem the notes in the event of a takeover,
recapitalization or similar transaction.
CERTAIN COVENANTS
RESTRICTED PAYMENTS. The indentures provide that neither we nor any of our
Restricted Subsidiaries may, directly or indirectly:
(a) declare or pay any dividend or make any distribution on account of any
Equity Interests of our company other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of our company;
(b) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of ECC, our company or any of their respective Subsidiaries or
Affiliates, other than any such Equity Interests owned by our company or any
Wholly Owned Restricted Subsidiary;
(c) purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is expressly subordinated in right of payment to the notes or
the guarantees, except in accordance with the scheduled mandatory redemption,
sinking fund or repayment provisions set forth in the original documentation
governing such Indebtedness;
(d) declare or pay any dividend or make any distribution on account of any
Equity Interests of any Restricted Subsidiary, other than
(x) to our company or any Wholly Owned Restricted Subsidiary or
(y) to all holders of any class or series of Equity Interests of such
Restricted Subsidiary on a PRO RATA basis; PROVIDED that in the case of
this clause (y), such dividends or distributions may not be in the form of
Indebtedness or Disqualified Stock; or
(e) make any Restricted Investment (all such prohibited payments and other
actions set forth in clauses (a) through (e) being collectively referred to as
"Restricted Payments"),
unless, at the time of such Restricted Payment:
(i) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(ii) after giving effect to such Restricted Payment and the incurrence
of any Indebtedness the net proceeds of which are used to finance such
Restricted Payment, the Indebtedness to Cash Flow Ratio of our company would not
have exceeded 8.0 to 1; and
(iii) such Restricted Payment, together with the aggregate of all
other Restricted Payments after the date of the indenture, is less than the sum
of
(A) the difference of
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(x) cumulative Consolidated Cash Flow of our company
determined at the time of such Restricted Payment (or, in case such
Consolidated Cash Flow shall be a deficit, minus 100% of such deficit)
minus
(y) 120% of Consolidated Interest Expense of our company, each
as determined for the period (taken as one accounting period) from
April 1, 1999 to the end of our company's most recently ended fiscal
quarter for which internal financial statements are available at the
time of such Restricted Payment; plus
(B) an amount equal to 100% of the aggregate net cash proceeds
and, in the case of proceeds consisting of assets used in or constituting a
business permitted under the covenant described under " --Activities of our
Company," 100% of the fair market value of the aggregate net proceeds other
than cash received by our company either from capital contributions from
ECC, or from the issue or sale (including an issue or sale to ECC) of
Equity Interests (other than Disqualified Stock) of our company (other than
Equity Interests sold to any Subsidiary of our company), since the date of
the Indenture, but, in the case of any net cash proceeds, only to the
extent such net cash proceeds are not used to redeem notes pursuant to the
provision described in the second paragraph under "--Optional Redemption";
PROVIDEd that the proceeds calculated for purposes of this clause (B) shall
exclude cash and non-cash property and assets received by our company
pursuant to the covenants described under "--The 110 Acquisition" and
"--The ECC Equity Contribution;" plus
(C) in the event that any Unrestricted Subsidiary is designated
by our company as a Restricted Subsidiary, an amount equal to the fair
market value of the net Investment of our company or a Restricted
Subsidiary in such Subsidiary at the time of such designation PROVIDED,
HOWEVER, that the foregoing sum shall not exceed the amount of the
Investments made by our company or any Restricted Subsidiary in any such
Unrestricted Subsidiary since the date of the indenture, plus
(D) 100% of any cash dividends and other cash distributions
received by our company and its Wholly Owned Restricted Subsidiaries from
an Unrestricted Subsidiary to the extent not included in Cumulative
Consolidated Cash Flow plus
(E) to the extent not included in clauses (A) through (D) above,
an amount equal to the net reduction in Investments of our company and our
Restricted Subsidiaries since the Issue Date resulting from payments in
cash of interest on Indebtedness, dividends, or repayment of loans or
advances, or other transfers of property, in each case, to our company or
to a Wholly Owned Restricted Subsidiary or from the net cash proceeds from
the sale, conveyance or other disposition of any such Investment; PROVIDED,
HOWEVER, that the foregoing sum shall not exceed, with respect to any
person in whom such Investment was made, the amount of Investments
previously made by our company or any Restricted Subsidiary in such person
which were included in computations made pursuant to this clause (iii).
The foregoing provisions will not prohibit the following (provided that
with respect to clauses (2), (3), (5), (6), (7), (8), (9), (12), (13) and (14)
below, no Default or Event of Default shall have occurred and be continuing
therein):
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would have
complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement or other acquisition of any
Equity Interests of our company in exchange for, or out of the net proceeds of
the substantially concurrent capital contribution from ECC or from the
substantially concurrent issue or sale (including to ECC) of Equity Interests
(other than Disqualified Stock) of our company (other
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than Equity Interests issued or sold to any Subsidiary of our company);
(3) Investments in an aggregate amount not to exceed $75 million plus,
to the extent not included in Consolidated Cash Flow, an amount equal to the net
reduction in such Investments resulting from payments in cash of interest on
Indebtedness, dividends or repayment of loans or advances, or other transfers of
property, in each case, to our company or to a Wholly Owned Restricted
Subsidiary or from the net cash proceeds from the sale, conveyance or other
disposition of any such Investment; PROVIDED, HOWEVER, that the foregoing sum
shall not exceed, with respect to any person in whom such Investment was made,
the amount of Investments previously made by our company or any Restricted
Subsidiary in such person pursuant to this clause (3);
(4) Investments to fund the financing activity of DNCC in the ordinary
course of its business in an amount not to exceed, as of the date of
determination, the sum of
(A) $35 million plus
(B) 40% of the aggregate cost to DNCC for each Satellite Receiver
purchased by DNCC and leased by DNCC to a retail consumer in excess of
100,000 units;
(5) cash dividends or distributions to ECC to the extent required for
the purchase of employee stock options to purchase Capital Stock of ECC, or
Capital Stock of ECC issued pursuant to the exercise of employee stock options
to purchase Capital Stock of ECC, in an aggregate amount not to exceed $2
million in any calendar year and in an aggregate amount not to exceed $10
million since the date of the indenture;
(6) a Permitted Refinancing (as defined below in "--Incurrence of
Indebtedness");
(7) Investments in an amount equal to 100% of the aggregate net
proceeds (whether or not in cash) received by our company from capital
contributions from ECC or from the issue and sale (including a sale to ECC) of
Equity Interests (other than Disqualified Stock) of our company (other than
Equity Interests issued or sold to a Subsidiary of our company), on or after the
date of the indenture; PROVIDED that such proceeds shall include only $300
million in the case of assets contributed pursuant to the covenant described
under "--The 110 Acquisition" and shall include all of the cash contributed
pursuant to the covenant described under "--The ECC Equity Contribution;" plus,
to the extent not included in Consolidated Cash Flow, an amount equal to the net
reduction in such Investments resulting from payments in cash of interest on
Indebtedness, dividends, or repayment of loans or advances, or other transfers
of property, in each case, to our company or to a Wholly Owned Restricted
Subsidiary or from the net cash proceeds from the sale, conveyance, or other
disposition of any such Investment; PROVIDED, HOWEVER, that the foregoing sum
shall not exceed, with respect to any person in whom such Investment was made,
the amount of Investments previously made by our company or any Restricted
Subsidiary in such person pursuant to this clause (7) in each case, PROVIDED
that such Investments are in businesses of the type described under
"--Activities of our Company;"
(8) Investments in any Restricted Subsidiary which is a guarantor but
which is not a Wholly Owned Restricted Subsidiary;
(9) Investments in NagraStar in an aggregate amount not to exceed $25
million and in SkyVista in an aggregate amount not to exceed $10 million;
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(10) cash dividends or other cash distributions to ECC in an amount
sufficient to enable ECC to
(A) repurchase its 12 1/8% Senior Exchange Notes,
(B) pay interest on any of its 12 1/8% Senior Exchange Notes
which remain outstanding following consummation of the tender offers and
(C) either
(x) redeem such 12 1/8% Senior Exchange Notes that remain
outstanding at the prices set forth in the indenture governing such
notes; or
(y) repurchase or defease such notes at any time prior to such
redemption; PROVIDED in each case, that ECC has irrevocably agreed,
for the benefit of the holders of the notes issued under this
indenture, to apply such cash pursuant to the clause above under which
such dividend or other distribution was made;
(11) cash dividends or distributions to ECC to the extent required for
the purchase of odd-lots of Equity Interests of ECC, in an amount not to exceed
$5 million in the aggregate;
(12) the making of any Restricted Payment (including the receipt of
any Investment) permitted under or resulting from any transaction permitted
under the covenant described under "--Dispositions of ETC and Non-Core Assets";
PROVIDED that all conditions to any such Restricted Payment set forth in such
covenant are satisfied; or
(13) Investments made as a result of the receipt of non-cash proceeds
from Asset Sales made in compliance with the covenant described under "--Asset
Sales."
Restricted Payments made pursuant to clauses (1), (2), (4), (7) (but only
to the extent that net proceeds received by our company as set forth in such
clause (7) were included in the computations made in clause (iii)(B) of the
first paragraph of this covenant), (11) and (13) (but only to the extent such
Investments pursuant to clause (13) (a) were made as a result of the receipt of
non-cash proceeds from Asset Sales as set forth in the provision described in
clause (y) of the last paragraph under "--Asset Sales" and (b) are not
designated as Investments made pursuant to an applicable provision of the
immediately preceding paragraph of this covenant (other than clause (13)
thereof)) shall be included as Restricted Payments in any computation made
pursuant to clause (iii) of the first paragraph of this covenant. Restricted
Payments made pursuant to clauses (3), (5), (6), (7) (but only to the extent
that net proceeds received by our company as set forth in such clause (7) were
not included in the computations made in clause (iii)(B) of the first paragraph
of this covenant), (8), (9), (10), (12) and (13) (but only to the extent such
Investments pursuant to clause (13) (a) were not made as a result of the receipt
of non-cash proceeds from Asset Sales as set forth in the provision described in
clause (y) of the last paragraph of "--Asset Sales" or (b) if made pursuant to
such clause (y), were designated as Investments made pursuant to an applicable
provision of the immediately preceding paragraph of this covenant (other than
clause (13) thereof)) shall not be included as Restricted Payments in any
computation made pursuant to clause (iii) of the first paragraph of this
covenant.
If our company or any Restricted Subsidiary makes an Investment which was
included in computations made pursuant to this covenant and the person in which
such Investment was made subsequently becomes a Restricted Subsidiary that is a
guarantor, to the extent such Investment resulted
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in a reduction in the amounts calculated under clause (iii) of the first
paragraph of or under any other provision of this covenant, then such amount
shall be increased by the amount of such reduction.
Not later than five business days after January 1 and July 1 of each year
and ten days following a request from the trustee, we shall deliver to the
trustee an officers' certificate stating that each Restricted Payment made in
the six months preceding such January 1, July 1 or date of request, as the case
may be, is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, which calculations
shall be based upon our company's latest available financial statements.
INCURRENCE OF INDEBTEDNESS. The indentures provide that our company shall
not, and shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, issue, assume, guarantee or otherwise become directly
or indirectly liable with respect to (collectively, "incur") any Indebtedness
(including Acquired Debt); PROVIDED, HOWEVER, that, notwithstanding the
foregoing our company and any guarantor under the indenture may incur
Indebtedness (including Acquired Debt), if, after giving effect to the
incurrence of such Indebtedness and the application of the net proceeds thereof
on a pro forma basis, the Indebtedness to Cash Flow Ratio of our company would
not have exceeded 8.0 to 1.
The foregoing limitation will not apply to any of the following incurrences
of Indebtedness:
(1) Indebtedness represented by the notes, the guarantees and the
indenture;
(2) the incurrence by our company or any guarantor of Acquired
Subscriber Debt not to exceed $1,250 per Acquired Subscriber;
(3) the incurrence by our company or any guarantor of Deferred
Payments and letters of credit with respect thereto;
(4) Indebtedness of our company or any guarantor that ranks PARI PASSU
with or is subordinated to the notes and the guarantees in an aggregate
principal amount not to exceed $700 million at any one time outstanding, which
Indebtedness may be secured to the extent permitted under the covenant described
under "--Liens"; PROVIDEd that up to $75 million at any one time outstanding of
such Indebtedness may be incurred by Restricted Subsidiaries that are not
guarantors; PROVIDED further that any Indebtedness incurred pursuant to this
clause (4) that is incurred pursuant to a Credit Agreement shall be incurred
pursuant to a Credit Agreement under which our company is the sole primary
obligor (and under which the guarantors (and no other Restricted Subsidiary) may
guarantee the primary obligations of our company);
(5) Indebtedness between and among our company and each of the
guarantors under the indenture;
(6) Acquired Debt of a person incurred prior to the date upon which
such person was acquired by our company or any guarantor under the indenture
(excluding Indebtedness incurred by such entity other than in the ordinary
course of its business in connection with, or in contemplation of, such entity
being so acquired) in an amount not to exceed
(A) $30 million in the aggregate for all such persons other than
those described in the immediately following clause (B); and
(B) $5 million acquired in connection with the acquisition of
Media4;
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(7) Existing Indebtedness;
(8) the incurrence of Purchase Money Indebtedness by our company or
any guarantor under the indenture in an amount not to exceed the cost of
construction, acquisition or improvement of assets used in any business
permitted under the covenant "--Activities of our Company," being constructed,
acquired or improved as well as any launch costs and insurance premiums related
to such assets;
(9) Hedging Obligations of our company or any of its Restricted
Subsidiaries covering Indebtedness of our company or such Restricted Subsidiary
to the extent the notional principal amount of such Hedging Obligation does not
exceed the principal amount of the Indebtedness to which such Hedging Obligation
relates; PROVIDED, HOWEVER, that such Hedging Obligations are entered into to
protect our company and its Restricted Subsidiaries from fluctuation in interest
rates on Indebtedness incurred in accordance with the indenture;
(10) Indebtedness of our company or any Restricted Subsidiary in
respect of performance bonds or letters of credit of our company or any
Restricted Subsidiary or surety bonds provided by our company or any Restricted
Subsidiary incurred in the ordinary course of business and on ordinary business
terms in connection with the businesses permitted under the covenant
"--Activities of our Company";
(11) Indebtedness of our company or any guarantor under the indenture
the proceeds of which are used solely to finance the construction and
development of a call center owned by our company or a guarantor under the
indenture in McKeesport, Pennsylvania or any refinancing thereof; PROVIDED that
the aggregate of all Indebtedness incurred pursuant to this clause (xi) shall in
no event exceed $10 million at any one time outstanding;
(12) the incurrence by our company or any guarantor under the
indenture of Indebtedness issued in exchange for, or the proceeds of which are
used to extend, refinance, renew, replace, substitute or refund in whole or in
part Indebtedness referred to in the first paragraph of this covenant or in
clauses (1), (2), (3), (6), (7) above ("Refinancing Indebtedness"); PROVIDED,
HOWEVER, that:
(A) the principal amount of such Refinancing Indebtedness shall
not exceed the principal amount and accrued interest of the Indebtedness so
extended, refinanced, renewed, replaced, substituted or refunded and any
premiums payable and reasonable fees, expenses, commissions and costs in
connection therewith;
(B) the Refinancing Indebtedness shall have a final maturity
later than, and a Weighted Average Life to Maturity equal to or greater
than, the final maturity and Weighted Average Life to Maturity,
respectively, of the Indebtedness being extended, refinanced, renewed,
replaced or refunded; and
(C) the Refinancing Indebtedness shall be subordinated in right
of payment to the notes and the guarantees, if at all, on terms at least as
favorable to the holders of notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced or
refunded (a "Permitted Refinancing");
(13) the guarantee by our company or any guarantor under the indenture
of Indebtedness of our company or a Restricted Subsidiary that was permitted to
be incurred by another provision of this covenant; or
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(14) Indebtedness under Capital Lease Obligations of our company or
any guarantor under the indenture with respect to no more than two direct
broadcast satellites at any time.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories described in clauses (1) through (14) above or is permitted to be
incurred pursuant to the first paragraph of this covenant and also meets the
criteria of one or more of the categories described in clauses (1) through (14)
above, our company shall, in its sole discretion, classify such item of
Indebtedness in any manner that complies with this covenant and may from time to
time reclassify such item of Indebtedness in any manner in which such item could
be incurred at the time of such reclassification. Accrual of interest and the
accretion of accreted value will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant.
ASSET SALES. If our company or any Restricted Subsidiary, in a single
transaction or a series of related transactions:
(a) sells, leases (in a manner that has the effect of a disposition),
conveys or otherwise disposes of any of its assets (including by way of a
sale-and-leaseback transaction), other than:
(1) sales or other dispositions of inventory in the ordinary course of
business;
(2) sales or other dispositions to our company or a Wholly Owned
Restricted Subsidiary of our company by our company or any Restricted
Subsidiary;
(3) sales or other dispositions of accounts receivable to DNCC for
cash in an amount at least equal to the fair market value of such accounts
receivable;
(4) sales or other dispositions of rights to construct or launch
satellites; and
(5) sales or other dispositions permitted under "--Disposition of ETC
and Non-Core Assets" (PROVIDED that the sale, lease, conveyance or other
disposition of all or substantially all of the assets of our company shall be
governed by the provisions of the indenture described below under the caption
"--Merger, Consolidation, or Sale of Assets");
(b) issues or sells Equity Interests of any Restricted Subsidiary (other
than any issue or sale of Equity Interests of ETC or a Subsidiary which
constitutes a Non-Core Asset permitted under "--Disposition of ETC and Non-Core
Assets"),
in either case, which assets or Equity Interests:
(1) have a fair market value in excess of $35 million (as determined
in good faith by the Board of Directors of our company evidenced by a resolution
of the Board of Directors of our company and set forth in an officers'
certificate delivered to the trustee); or
(2) are sold or otherwise disposed of for net proceeds in excess of
$35 million (each of the foregoing, an "Asset Sale"), then:
(A) our company or such Restricted Subsidiary, as the case may
be, must receive consideration at the time of such Asset Sale at least
equal to the fair market value (as determined in good faith by the Board of
Directors of our company evidenced by a resolution of the Board of
Directors of our company and set forth in an officers' certificate
delivered to the trustee not later than the fifth business day following
January 1 and July 1 of each year and ten days following a request from the
trustee which
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certificate shall cover each Asset Sale made in the six months preceding
January 1, July 1 or date of request, as the case may be) of the assets
sold or otherwise disposed of; and
(B) at least 75% of the consideration therefor received by our
company or such Restricted Subsidiary, as the case may be, must be in the
form of
(x) cash, Cash Equivalents or Marketable Securities,
(y) any asset which is promptly (and in no event later than 90
days after the date of transfer to our company or a Restricted
Subsidiary) converted into cash; PROVIDED that to the extent that such
conversion is at a price that is less than the fair market value (as
determined above) of such asset at the time of the Asset Sale in which
such asset was acquired, our company shall be deemed to have made a
Restricted Payment in the amount by which such fair market value
exceeds the cash received upon conversion; or
(z) properties and capital assets (excluding Equity Interests)
to be used by our company or any of its Restricted Subsidiaries in a
business permitted under the covenant described under "--Activities of
our Company";
PROVIDED, HOWEVER, that up to $20 million of assets in addition to assets
specified in clauses (x), (y) or (z) above at any one time may be considered to
be cash for purposes of this clause (B), PROVIDED that the provisions of the
next paragraph are complied with as such non-cash assets are converted to cash.
The amount of any liabilities of our company or any Restricted Subsidiary that
are assumed by or on behalf of the transferee in connection with an Asset Sale
(and from which our company or such Restricted Subsidiary are unconditionally
released) shall be deemed to be cash for the purpose of this clause (B).
The indentures also provide that the Net Proceeds from such Asset Sale
shall be used only:
(1) to acquire assets used in, or stock or other ownership interests in a
person that upon the consummation of such Asset Sale becomes a Restricted
Subsidiary and will be engaged primarily in, the business of our company as
described under "--Activities of our Company," to repurchase notes or if our
company sells any of its satellites after launch such that our company or its
Restricted Subsidiaries own less than three in-orbit satellites, only to
purchase a replacement satellite; or
(2) as set forth in the next sentence. Any Net Proceeds from any Asset Sale
that are not applied or invested as provided in the preceding sentence within
365 days after such Asset Sale shall constitute "Excess Proceeds" and shall be
applied to an offer to purchase notes and other senior Indebtedness of our
company if and when required under "--Excess Proceeds Offer."
Clause (B) of the second preceding paragraph shall not apply to all or such
portion of the consideration
(1) as is designated by our company in an Asset Sale as being subject to
this paragraph; and
(2) with respect to which the aggregate fair market value at the time of
receipt of all consideration received by our company or any Restricted
Subsidiary in all such Asset Sales so designated does not exceed the amount
contributed to our company under the covenant described under "--ECC Equity
Contribution" plus, to the extent any such consideration did not satisfy clauses
(B)(x) or B(z) above, upon the exchange or repayment of such consideration for
or with assets which satisfy such clauses, an amount equal to the fair market
value of such consideration (evidenced by a resolution of the
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Board of Directors of our company and set forth in an officers' certificate
delivered to the trustee as set forth in clause (A) above).
In addition, clause (B) above shall not apply to any Asset Sale
(x) where assets not related to the direct broadcast satellite
business are contributed to a joint venture between our company or one of its
Restricted Subsidiaries and a third party that is not an Affiliate of ECC or any
of its Subsidiaries; PROVIDED that following the sale, lease, conveyance or
other disposition our company or one of its Wholly Owned Restricted Subsidiaries
owns at least 50% of the voting and equity interest in such joint venture,
(y) to the extent the consideration therefor received by our
company or a Restricted Subsidiary would constitute Indebtedness or Equity
Interests of a person that is not an Affiliate of ECC, our company or one of
their respective Subsidiaries; PROVIDED that the acquisition of such
Indebtedness or Equity Interests is permitted under the provisions of the
covenant described under "--Restricted Payments" and
(z) where assets sold are satellites, uplink centers or call
centers, PROVIDED that, in the case of clause (z) our company and its Restricted
Subsidiaries continue to own at least three satellites, one uplink center and
one call center.
LIENS. The indentures provide that our company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly, create, incur,
assume or suffer to exist any Lien on any asset now owned or hereafter acquired,
or on any income or profits therefrom or assign or convey any right to receive
income therefrom, except Permitted Liens.
MAINTENANCE OF INSURANCE. The indentures provide that at all times, our
company or a Wholly Owned Restricted Subsidiary which is a guarantor under the
indenture will maintain and be the named beneficiary under Satellite Insurance
with respect to at least one-half of the satellites owned or leased by our
company or its Subsidiaries (insured in an amount at least equal to the
depreciated cost of such satellites).
In the event that our company or its Restricted Subsidiaries receive
proceeds from any Satellite Insurance covering any satellite owned by our
company or any of its Restricted Subsidiaries, or in the event that our company
or any of its Subsidiaries receives proceeds from any insurance maintained by
any satellite manufacturer or any launch provider covering any of such
satellites, all such proceeds (including any cash, Cash Equivalents or
Marketable Securities deemed to be proceeds of Satellite Insurance pursuant to
the respective definition thereof) shall be used only:
(1) to purchase a replacement satellite if at such time our
company or a Restricted Subsidiary then owns less than three satellites,
PROVIDED that if such replacement satellite is of lesser value compared to the
insured satellite, any insurance proceeds remaining after purchase of such
replacement satellite must be applied to the construction, launch and insurance
of a satellite of equal or greater value as compared to the insured satellite
(or in accordance with clause (3) below);
(2) for purposes permitted under the covenant entitled
"--Activities of our Company" if at such time our company or a Restricted
Subsidiary owns three or more satellites (or in accordance with clause (3)
below); or
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(3) to the extent that such proceeds are not applied or
contractually committed to be applied as described in (1) or (2) above within
365 days of the receipt of such proceeds as "Excess Proceeds" to be applied to
an offer to purchase notes as set forth under "--Excess Proceeds Offer."
ACTIVITIES OF OUR COMPANY. The indentures provide that neither our
company nor any of its Restricted Subsidiaries may engage in any business other
than developing, owning, engaging in and dealing with all or any part of the
business of domestic and international media, entertainment, electronics or
communications, and reasonably related extensions thereof, including but not
limited to the purchase, ownership, operation, leasing and selling of, and
generally dealing in or with, one or more communications satellites and the
transponders thereon, and communications uplink centers, the acquisition,
transmission, broadcast, production and other provision of programming relating
thereto and the manufacturing, distribution and financing of equipment
(including consumer electronic equipment) relating thereto.
DISPOSITIONS OF ETC AND NON-CORE ASSETS. Notwithstanding the provisions
of the covenants described under "--Restricted Payments" and "--Asset Sales," in
the event that the 110 Acquisition has been consummated, the requirements set
forth under "--The 110 Acquisition" have been satisfied and the Indebtedness to
Cash Flow Ratio of our company would not have exceeded 6.0 to 1 on a pro forma
basis after giving effect to the sale of all of our company's Equity Interests
in or assets of ETC, then
(1) the payment of any dividend or distribution consisting of
Equity Interests or assets of ETC or the proceeds of a sale, conveyance or other
disposition of such Equity Interests or assets or the sale, conveyance or other
disposition of Equity Interests or assets of ETC or the proceeds of a sale,
conveyance or other disposition of such Equity Interests or assets shall not
constitute a Restricted Payment and
(2) the sale, conveyance or other disposition of the Equity
Interests or assets of ETC or the proceeds of a sale, conveyance or other
disposition of such Equity Interests or assets shall not constitute an Asset
Sale and
(3) upon delivery of an officers' certificate to the trustee
evidencing satisfaction of the conditions to such release and a written request
to the trustee requesting such a release, ETC shall be discharged and released
from its guarantee under the indenture and, PROVIDED that our company designates
ETC as an Unrestricted Subsidiary, from all covenants and restrictions contained
in the indenture; PROVIDED that no such payment, dividend, distribution, sale,
conveyance or other disposition of any kind (collectively, a "Payout") described
in clauses (1) and (2) above shall be permitted if at the time of such Payout
(1) after giving pro forma effect to such Payout, our company would not have
been permitted under the covenant described under "--Restricted Payments" to
make a Restricted Payment in an amount equal to the total (the "ETC Amount Due")
of (x) the amount of all Investments (other than the contribution of
(i) title to the headquarters building of ETC in
Inverness, Colorado and the tangible assets therein to the extent used by ETC as
of the date of the indenture and
(ii) patents, trademarks and copyrights applied for or
granted as of the date of the indenture to the extent used by ETC or result from
the business of ETC, in each case, to ETC) made in ETC by our company or its
Restricted Subsidiaries since the date of the indenture (which, in the case of
Investments in exchange for assets, shall be valued at the fair market value of
each such asset at the time each such Investment was made) minus
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(y) the amount of the after-tax value of all cash
returns on such Investments paid to our company or its Wholly Owned Restricted
Subsidiaries (or, in the case of a non-Wholly Owned Restricted Subsidiary, the
pro rata portion thereof attributable to our company) minus
(z) $25 million and
(2) any contract, agreement or understanding between ETC and our company or any
Restricted Subsidiary of our company and any loan or advance to or guarantee
with, or for the benefit of, ETC issued or made by our company or one of its
Restricted Subsidiaries, is on terms that are less favorable to our company or
its Restricted Subsidiaries than those that would have been obtained in a
comparable transaction by our company or such Restricted Subsidiaries with an
unrelated person, all as evidenced by a resolution of the Board of Directors of
our company set forth in an officers' certificate delivered to the trustee
certifying that each such contract, agreement, understanding, loan, advance and
guarantee has been approved by a majority of the members of such Board.
In the event that at the time of such Payout, the condition set forth
in clause (1) of the proviso of the preceding sentence cannot be satisfied, ETC
may seek to have a person other than our company or one of its Restricted
Subsidiaries pay in cash an amount to our company or its Restricted Subsidiaries
such that after taxes, such amount is greater than or equal to the ETC Amount
Due or the portion of the ETC Amount Due which would not have been permitted to
be made as a Restricted Payment by our company; PROVIDED that such payment shall
be treated for purposes of this covenant as a cash return on the Investments
made in ETC and provided further that for all purposes under the indenture, such
payment shall not be included in any calculation under clauses (iii)(A) through
(iii)(E) of the first paragraph of the covenant described under "--Restricted
Payments." To the extent that the ETC Amount Due or any portion thereof would
have been permitted to be made as a Restricted Payment by our company and was
not paid by another person as permitted by the preceding sentence, our company
shall be deemed to have made a Restricted Payment in the amount of such ETC
Amount Due or portion thereof, as the case may be. It shall be a condition to
any Payout pursuant to the first paragraph of this covenant that, commencing
with the quarter commencing July 1, 1999, our company shall have caused ETC to
maintain, in accordance with GAAP, consolidated financial statements for ETC and
its Subsidiaries on a "stand-alone" basis.
Notwithstanding the provisions of the covenants described under "
- --Restricted Payments" and "--Asset Sales,"
(1) the payment of any dividend or distribution consisting of
Equity Interests or assets of any Non-Core Asset or the proceeds of a sale,
conveyance or other disposition of such Equity Interests or assets or the sale,
conveyance or other disposition of Equity Interests in or assets of any Non-Core
Asset or the proceeds of a sale, conveyance or other disposition of such Equity
Interests or assets shall not constitute a Restricted Payment; and
(2) the sale, conveyance or other disposition of the Equity
Interests or assets of any Non-Core Asset or the proceeds of a sale, conveyance
or other disposition of such Equity Interests or assets shall not constitute an
Asset Sale; and
(3) upon delivery of an officers' certificate to the trustee
evidencing satisfaction of the conditions to such release and a written request
to the trustee requesting such a release, any such Non-Core Asset that is a
guarantor under the indenture shall be discharged and released from its
guarantee under the indenture and, provided that our company designates such
Non-Core Asset as an Unrestricted Subsidiary, from all covenants and
restrictions contained in the indenture; PROVIDED that no Payout of any Non-Core
Asset shall be permitted such as described in clauses (1) and (2) above if at
the time of such
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Payout (1) after giving pro forma effect to such Payout, our company would not
have been permitted under the covenant described under "--Restricted Payments"
to make a Restricted Payment in an amount equal to the total (the "Non-Core
Asset Amount Due") of
(x) the amount of all Investments made in such Non-Core Asset
by our company or its Restricted Subsidiaries since the date of the indenture
(which, in the case of Investments in exchange for assets, shall be valued at
the fair market value of each such asset at the time each such Investment was
made) minus
(y) the amount of the after-tax value of all cash returns on
such Investments paid to our company or its Wholly Owned Restricted Subsidiaries
(or, in the case of a non-Wholly Owned Restricted Subsidiary, the pro rata
portion thereof attributable to our company) minus
(z) $25 million in the aggregate for all such Payouts and $5
million for any single such Payout
and (2) any contract, agreement or understanding between or relating to a
Non-Core Asset and our company or a Restricted Subsidiary of our company and any
loan or advance to or guarantee with, or for the benefit of, a Restricted
Subsidiary which is a Non-Core Asset issued or made by our company or one of its
Restricted Subsidiaries, is on terms that are less favorable to our company or
its Restricted Subsidiaries than those that would have been obtained in a
comparable transaction by our company or such Restricted Subsidiaries with an
unrelated person, all as evidenced by a resolution of the Board of Directors of
our company set forth in an officers' certificate delivered to the trustee
certifying that each such contract, agreement, understanding, loan, advance and
guarantee has been approved by a majority of such Board.
In the event that at the time of such Payout, the condition set forth
in clause (1) of the proviso of the preceding sentence cannot be satisfied, such
Restricted Subsidiary which is a Non-Core Asset may seek to have a person other
than our company or one of its Restricted Subsidiaries pay in cash an amount to
our company such that after taxes, such amount, is greater than or equal to the
Amount Due or the portion of the Non-Core Asset Amount Due which would not have
been permitted to be made as a Restricted Payment by our company; PROVIDED that
such payment shall be treated for purposes of this covenant as a cash return on
the Investments made in a Non-Core Asset and provided further that for all
purposes under the indenture, such payment shall not be included in any
calculation under clauses (iii)(A) through (iii)(E) of the first paragraph of
the covenant described under " --Restricted Payments." To the extent that the
Non-Core Asset Amount Due or any portion thereof would have been permitted to be
made as a Restricted Payment by our company and was not paid by another person
as permitted by the preceding sentence, our company shall be deemed to have made
a Restricted Payment in the amount of such Non-Core Asset Amount Due or portion
thereof, as the case may be.
Promptly after any Payout pursuant to the terms of this covenant, our
company shall deliver an officers' certificate to the trustee setting forth the
Investments made by our company or its Restricted Subsidiaries in ETC or a
Non-Core Asset, as the case may be, and certifying that the requirements of this
covenant have been satisfied in connection with the making of such Payout.
ECC EQUITY CONTRIBUTION. Concurrently with or within five business days
of the consummation of the offering of the old notes, ECC shall make a capital
contribution to the common equity of our company in the form of cash, Cash
Equivalents or Marketable Securities in an aggregate amount no less than $200
million.
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THE 110 ACQUISITION. The indentures provide that upon consummation of
the 110 Acquisition, all property and assets acquired in such transaction or the
right to receive such property and assets will be contributed as capital
contributions to our company or one or more of the guarantors under the
indenture that is a Wholly Owned Restricted Subsidiary.
ADDITIONAL SUBSIDIARY GUARANTEES. The indentures provide that if our
company or any guarantor under the indenture transfers or causes to be
transferred, in one or a series of related transactions, property or assets
(including, without limitation, businesses, divisions, real property, assets or
equipment) having a fair market value (as determined in good faith by the Board
of Directors of our company evidenced by a resolution of the Board of Directors
of our company and set forth in an officers' certificate delivered to the
trustee no later than five business days following January 1 and July 1 of each
year or ten days following a request from the trustee, which certificate shall
cover the six months preceding January 1, July 1 or date of request, as the case
may be) exceeding the sum of $20 million in the aggregate for all such transfers
after the date of the indentures minus the fair market value of Restricted
Subsidiaries acquired or created after the date of the indentures that are not
guarantors under the indenture (fair market value being determined as of the
time of such acquisition) to Restricted Subsidiaries that are not guarantors of
the notes, our company, shall, or shall cause each of such Subsidiaries to which
any amount exceeding such $20 million (less such fair market value) is
transferred to:
(1) execute and deliver to the trustee a supplemental indenture in
form and substance reasonably satisfactory to the trustee pursuant to which such
Subsidiary shall unconditionally guarantee all of our company's obligations
under the notes on the terms set forth in the indenture; and
(2) deliver to the trustee an opinion of counsel reasonably
satisfactory to the trustee that such supplemental indenture and guarantee have
been duly authorized, executed and delivered by and are valid and binding
obligations of such Subsidiary or such owner, as the case may be; PROVIDED,
HOWEVER, that the foregoing provisions shall not apply to transfers of property
or assets (other than cash) by our company or any guarantor under the indenture
in exchange for cash, Cash Equivalents or Marketable Securities in an amount
equal to the fair market value (as determined in good faith by the Board of
Directors of our company evidenced by a resolution of the Board of Directors of
our company and set forth in an officers' certificate delivered to the trustee
no later than five business days following January 1 and July 1 of each year or
ten days following a request from the trustee, which certificate shall cover the
six months preceding January 1, July 1 or date of request, as the case may be)
of such property or assets.
In addition, if
(1) our company or any of its Restricted Subsidiaries acquires or
creates another Restricted Subsidiary or
(2) an Unrestricted Subsidiary of our company is redesignated as a
Restricted Subsidiary or otherwise ceases to be an Unrestricted Subsidiary,
such Subsidiary shall execute a supplemental indenture and deliver an opinion,
each as required in the preceding sentence; PROVIDED that no supplemental
indenture or opinion shall be required if the fair market value (as determined
in good faith by the Board of Directors of our company and set forth in an
officers' certificate delivered to the trustee no later than five business days
following January 1 and July 1 of each year or ten days following a request from
the trustee, which certificate shall cover the six months preceding such January
1, July 1 or date of request, as the case may be) of all such Restricted
Subsidiaries created, acquired or designated since the date of the indenture
(fair market value being determined as of the time of creation, acquisition or
designation) does not exceed the sum of $20 million in the aggregate minus the
fair market value of the assets transferred to any Subsidiaries of our company
which do not
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execute supplemental indentures pursuant to the preceding sentences; PROVIDED
FURTHER that to the extent a Restricted Subsidiary is subject to the terms of
any instrument governing Acquired Debt, as in effect at the time of acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition) which instrument or restriction prohibits
such Restricted Subsidiary from issuing a guarantee of the notes, such
Restricted Subsidiary shall not be required to execute such a supplemental
indenture until it is permitted to issue such guarantee pursuant to the terms of
such Acquired Debt.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. Each
indenture provides that our company shall not, and shall not permit any
Restricted Subsidiary of our company to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to:
(a) pay dividends or make any other distribution to our company or
any of its Restricted Subsidiaries on its Capital Stock or with respect to any
other interest or participation in, or measured by, its profits, or pay any
Indebtedness owed to our company or any of its Restricted Subsidiaries;
(b) make loans or advances to our company or any of its Restricted
Subsidiaries; or
(c) transfer any of its properties or assets to our company or any
of its Restricted Subsidiaries;
except for such encumbrances or restrictions existing under or by
reasons of:
(i) Existing Indebtedness and existing agreements as in
effect on the date of the indenture;
(ii) applicable law or regulation;
(iii) any instrument governing Acquired Debt as in effect at
the time of acquisition (except to the extent such Indebtedness was incurred in
connection with, or in contemplation of, such acquisition), which encumbrance or
restriction is not applicable to any person, or the properties or assets of any
person, other than the person, or the property or assets of the person, so
acquired, provided that the Consolidated Cash Flow of such person shall not be
taken into account in determining whether such acquisition was permitted by the
terms of the indenture; except to the extent that dividends or other
distributions are permitted notwithstanding such encumbrance or restriction and
could have been distributed;
(iv) by reason of customary non-assignment provisions in
leases entered into in the ordinary course of business and consistent with past
practices;
(v) Refinancing Indebtedness (as defined in "--Incurrence of
Indebtedness"), PROVIDEd that the restrictions contained in the agreements
governing such Refinancing Indebtedness are no more restrictive than those
contained in the agreements governing the Indebtedness being refinanced;
(vi) the indenture and the notes;
(vii) Permitted Liens; or
(viii) any agreement for the sale of any Subsidiary or its
assets that restricts distributions by that Subsidiary pending its sale;
provided that during the entire period in which such encumbrance or
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restriction is effective, such sale (together with any other sales pending)
would be permitted under the terms of the indenture.
ACCOUNTS RECEIVABLE SUBSIDIARY. Each indenture provides that our
company:
(a) may, and may permit any of its Subsidiaries to, notwithstanding the
provisions of the covenant entitled "Restricted Payments," make Investments in
an Accounts Receivable Subsidiary:
(i) the proceeds of which are applied within five Business Days
of the making thereof solely to finance:
(A) the purchase of accounts receivable of our company and
its Subsidiaries or
(B) payments required in connection with the termination
of all then existing arrangements relating to the sale of accounts receivable or
participation interests therein by an Accounts Receivable Subsidiary (provided
that the Accounts Receivable Subsidiary shall receive cash, Cash Equivalents and
accounts receivable having an aggregate fair market value not less than the
amount of such payments in exchange therefor) and
(ii) in the form of Accounts Receivable Subsidiary Notes to
the extent permitted by clause (b) below;
(b) shall not, and shall not permit any of its Subsidiaries to, sell
accounts receivable to an Accounts Receivable Subsidiary except for
consideration in an amount not less than that which would be obtained in an
arm's length transaction and solely in the form of cash or Cash Equivalents;
provided that an Accounts Receivable Subsidiary may pay the purchase price for
any such accounts receivable in the form of Accounts Receivable Subsidiary Notes
so long as, after giving effect to the issuance of any such Accounts Receivable
Subsidiary Notes, the aggregate principal amount of all Accounts Receivable
Subsidiary Notes outstanding shall not exceed 20% of the aggregate purchase
price paid for all outstanding accounts receivable purchased by an Accounts
Receivable Subsidiary since the date of the indenture (and not written off or
required to be written off in accordance with the normal business practice of an
Accounts Receivable Subsidiary);
(c) shall not permit an Accounts Receivable Subsidiary to sell any
accounts receivable purchased from our company or its Subsidiaries or
participation interests therein to any other person except on an arm's length
basis and solely for consideration in the form of cash or Cash Equivalents or
certificates representing undivided interests of a Receivables Trust; provided
an Accounts Receivable Subsidiary may not sell such certificates to any other
person except on an arm's length basis and solely for consideration in the form
of cash or Cash Equivalents;
(d) shall not, and shall not permit any of its Subsidiaries to, enter
into any guarantee, subject any of their respective properties or assets (other
than the accounts receivable sold by them to an Accounts Receivable Subsidiary)
to the satisfaction of any liability or obligation or otherwise incur any
liability or obligation (contingent or otherwise), in each case, on behalf of an
Accounts Receivable Subsidiary or in connection with any sale of accounts
receivable or participation interests therein by or to an Accounts Receivable
Subsidiary, other than obligations relating to breaches of representations,
warranties, covenants and other agreements of our company or any of its
Subsidiaries with respect to the accounts receivable sold by our company or any
of its Subsidiaries to an Accounts Receivable Subsidiary or with respect to the
servicing thereof; PROVIDED that neither our company nor any of its Subsidiaries
shall at any time guarantee or be otherwise liable for the collectibility of
accounts receivable sold by them;
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(e) shall not permit an Accounts Receivable Subsidiary to engage in any
business or transaction other than the purchase and sale of accounts receivable
or participation interests therein of our company and its Subsidiaries and
activities incidental thereto;
(f) shall not permit an Accounts Receivable Subsidiary to incur any
Indebtedness other than the Accounts Receivable Subsidiary Notes, Indebtedness
owed to our company and Non-Recourse Indebtedness; PROVIDED that the aggregate
principal amount of all such Indebtedness of an Accounts Receivable Subsidiary
shall not exceed the book value of its total assets as determined in accordance
with GAAP;
(g) shall cause any Accounts Receivable Subsidiary to remit to our
company or a Restricted Subsidiary of our company on a monthly basis as a
distribution all available cash and Cash Equivalents not held in a collection
account pledged to acquirors of accounts receivable or participation interests
therein, to the extent not applied to
(i) pay interest or principal on the Accounts Receivable
Subsidiary Notes or any Indebtedness of such Accounts Receivable Subsidiary owed
to our company,
(ii) pay or maintain reserves for reasonable operating expenses
of such Accounts Receivable Subsidiary or to satisfy reasonable minimum
operating capital requirements or
(iii) to finance the purchase of additional accounts receivable
of our company and its Subsidiaries; and
(h) shall not, and shall not permit any of its Subsidiaries to, sell
accounts receivable to, or enter into any other transaction with or for the
benefit of, an Accounts Receivable Subsidiary
(i) if such Accounts Receivable Subsidiary pursuant to or within
the meaning of any Bankruptcy Law
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it
in an involuntary case,
(C) consents to the appointment of a Custodian of it or for
all or substantially all of its property,
(D) makes a general assignment for the benefit of its
creditors, or (E) generally is not paying its debts as they become due; or
(ii) if a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that
(A) is for relief against such Accounts Receivable Subsidiary
in an involuntary case,
(B) appoints a Custodian of such Accounts Receivable
Subsidiary or for all or substantially all of the property of such Accounts
Receivable Subsidiary, or
(C) orders the liquidation of such Accounts Receivable
Subsidiary, and, with respect to clause (ii) hereof, the order or decree remains
unstayed and in effect for 60 consecutive days.
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MERGER, CONSOLIDATION, OR SALE OF ASSETS. Each indenture provides that
our company may not consolidate or merge with or into (whether or not our
company is the surviving entity), or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets in one
or more related transactions to, another person unless:
(a) our company is the surviving person or the person formed by or
surviving any such consolidation or merger (if other than our company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia;
(b) the person formed by or surviving any such consolidation or merger
(if other than our company) or the person to which such sale, assignment,
transfer, lease, conveyance or other disposition will have been made assumes all
the obligations of our company, pursuant to a supplemental indenture in form
reasonably satisfactory to the trustee, under the notes and the indenture;
(c) immediately after such transaction, no Default or Event of Default
exists; and
(d) our company or the person formed by or surviving any such
consolidation or merger (if other than our company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition will have been made
(i) will have Consolidated Net Worth immediately after the
transaction (but prior to any purchase accounting adjustments or accrual of
deferred tax liabilities resulting from the transaction) not less than the
Consolidated Net Worth of our company immediately preceding the transaction; and
(ii) would, at the time of such transaction after giving pro
forma effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Indebtedness to Cash Flow Ratio test set
forth in the covenant described under "--Incurrence of Indebtedness."
Notwithstanding the foregoing, our company may merge with another
person if:
(a) our company is the surviving person;
(b) the consideration issued or paid by our company in such merger
consists solely of Equity Interests (other than Disqualified Stock) of our
company or Equity Interests of ECC; and
(c) immediately after giving effect to such merger, our company's
Indebtedness to Cash Flow Ratio does not exceed our company's Indebtedness to
Cash Flow Ratio immediately prior to such merger.
Each guarantor under the indenture (other than any guarantor whose
guarantee is to be released in accordance with the terms of the guarantee and
the indenture and other than ETC and any Non-Core Asset in connection with any
transaction permitted under "--Dispositions of ETC and Non-Core Assets") will
not, and our company will not cause or permit any guarantor under the indenture
to, consolidate or merge with or into (whether or not such guarantor is the
surviving entity), or sell, assign, transfer, lease, convey, or otherwise
dispose of all or substantially all of its properties or assets in one or more
related transactions to, any person other than our company or a Guarantor under
the indenture unless:
(a) the guarantor under the indenture is the surviving person or the
person formed by or surviving any such consolidation or merger (if other than
the guarantor) or the person to which such sale,
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assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia;
(b) the person formed by or surviving any such consolidation or merger
(if other than the guarantor under the indenture) or the person to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made assumes all the obligations of the guarantor under the indenture,
pursuant to a supplemental indenture in form reasonably satisfactory to the
trustee, under the notes and the indenture;
(c) immediately after such transaction, no Default or Event of Default
exists; and
(d) our company will have Consolidated Net Worth immediately after the
transaction (after any purchase accounting adjustments or accrual of deferred
tax liabilities resulting from the transaction) not less than the Consolidated
Net Worth of our company immediately preceding the transaction.
TRANSACTIONS WITH AFFILIATES. Each indenture provides that our company
shall not and shall not permit any Restricted Subsidiary to, sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or purchase
any property or assets from, or enter into any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (including any Unrestricted Subsidiary) (each of the foregoing, an
"Affiliate Transaction"), unless:
(a) such Affiliate Transaction is on terms that are no less favorable
to our company or its Restricted Subsidiaries than those that would have been
obtained in a comparable transaction by our company or such Subsidiaries with an
unrelated person; and
(b) if such Affiliate Transaction involves aggregate payments in excess
of $15 million such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors of our company, and our company
delivers to the trustee no later than five business days following January 1 or
July 1 of each year or ten days following a request from the trustee a
resolution of the Board of Directors of our company set forth in an officers'
certificate certifying that such Affiliate Transaction has been so approved and
complies with clause (a) above;
PROVIDED, HOWEVER, that
(i) the payment of compensation to directors and management of
ECC and its Subsidiaries;
(ii) transactions between or among our company and its Wholly
Owned Subsidiaries (other than Unrestricted Subsidiaries of our company);
(iii) any dividend, distribution, sale, conveyance or other
disposition of any assets of, or Equity Interests in, any Non-Core Assets or ETC
or the proceeds of a sale, conveyance or other disposition thereof, in
accordance with the provisions of the indenture;
(iv) transactions permitted by the provisions of the indenture
described above under clauses (1), (2), (5), (6), (8), (9), (10), (11) and (12)
of the second paragraph of the covenant described under "--Restricted Payments";
(v) so long as it complies with clause (a) above, the provision
of backhaul, uplink, transmission, billing, customer service, programming
acquisition and other ordinary course services by
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our company or any of its Restricted Subsidiaries to Satellite Communications
Operating Corporation and to Transponder Encryption Services Corporation on a
basis consistent with past practice; and
(vi) any transactions between our company or any Restricted
Subsidiary of our company and any Affiliate of our company the Equity Interests
of which Affiliate are owned solely by our company or one of its Restricted
Subsidiaries, on the one hand, and by persons who are not Affiliates of our
company or Restricted Subsidiaries of our company, on the other hand, shall, in
each case, not be deemed Affiliate Transactions.
REPORTS. Whether or not required by the rules and regulations of the
SEC, so long as any notes are outstanding, our company will file with the SEC
and furnish to the holders of notes all quarterly and annual financial
information that would be required to be contained in a filing with the SEC on
Forms 10-Q and 10-K if our company were required to file such forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by our company's certified public accountants.
PAYMENTS FOR CONSENT. Our company shall not, and shall not permit any
of its Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any holder of a
note for or as an inducement to any consent, waiver or amendment of any of the
terms or provisions of the indenture or the notes unless such consideration is
offered to be paid or agreed to be paid to all holders of the notes that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
EXCESS PROCEEDS OFFER. When the cumulative amount of Excess Proceeds
that have not been applied in accordance with the covenants entitled "Asset
Sales" and "Maintenance of Insurance" or this paragraph exceeds $17.5 million,
our company will be obligated to make an offer to all holders of the notes (an
"Excess Proceeds Offer") to purchase the maximum principal amount of notes that
may be purchased out of such Excess Proceeds at an offer price in cash in an
amount equal to 101% of the principal amount thereof, together with accrued and
unpaid interest to the date fixed for the closing of such offer in accordance
with the procedures set forth in the indenture. To the extent our company or a
Restricted Subsidiary is required under the terms of Indebtedness of our company
or such Restricted Subsidiary which is PARI PASSU with, or (in the case of any
secured Indebtedness) senior with respect to such collateral to, the notes with
any proceeds which constitute Excess Proceeds under the indentures, our company
shall make a pro rata offer to the holders of all other pari passu Indebtedness
(including the notes) with such proceeds. If the aggregate principal amount of
notes and other pari passu indebtedness surrendered by holders thereof exceeds
the amount of such Excess Proceeds, the trustee shall select the notes and other
pari passu Indebtedness to be purchased on a pro rata basis. To the extent that
the principal amount of notes tendered pursuant to an Excess Proceeds Offer is
less than the amount of such Excess Proceeds, our company may use any remaining
Excess Proceeds for general corporate purposes. Upon completion of an Excess
Proceeds Offer, the amount of Excess Proceeds shall be reset at zero.
EVENTS OF DEFAULT AND REMEDIES
Each indenture provides that each of the following constitutes an Event
of Default:
(a) default for 30 days in the payment when due of interest on
the notes issued thereunder;
(b) default in payment when due of principal of the notes
issued thereunder at maturity, upon repurchase, redemption or
otherwise;
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(c) failure to comply with the provisions described under
"--Offer to Purchase upon Change of Control," "--Certain
Covenants--Maintenance of Insurance," "--Certain
Covenants--Transactions with
Affiliates," or "--Certain Covenants--Asset Sales";
(d) default under the provisions described under "--Certain
Covenants--Restricted Payments" or "--Certain Covenants--Incurrence of
Indebtedness" which default remains uncured for 30 days, or the breach
of any representation or warranty, or the making of any untrue
statement, in any certificate delivered by our company pursuant to the
indenture;
(e) failure by our company for 60 days after notice from the
trustee or the holders of at least 25% in principal amount then
outstanding of any issue of notes to comply with any of its other
agreements in the indenture or the notes of such issue;
(f) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by our company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by our
company or any of its Restricted Subsidiaries), which default is caused
by a failure to pay when due principal or interest on such Indebtedness
within the grace period provided in such Indebtedness (a "Payment
Default"), and the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness under which
there has been a Payment Default, aggregates $20 million or more;
(g) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by our company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by our
company or any of its Restricted Subsidiaries), which default results
in the acceleration of such Indebtedness prior to its express maturity
and the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has
been a Payment Default or the maturity of which has been so
accelerated, aggregates $20 million or more; provided that any
acceleration (other than an acceleration which is the result of a
Payment Default under clause (f) above) of Indebtedness under the
Outstanding Deferred Payments in aggregate principal amount not to
exceed $50 million shall be deemed not to constitute an acceleration
pursuant to this clause (g);
(h) failure by our company or any of its Restricted
Subsidiaries to pay final judgments (other than any judgment as to
which a reputable insurance company has accepted full liability)
aggregating in excess of $20 million, which judgments are not stayed
within 60 days after their entry;
(i) certain events of bankruptcy or insolvency with respect to
ECC, our company or certain of our company's Subsidiaries (including
the filing of a voluntary case, the consent to an order of relief in an
involuntary case, the consent to the appointment of a custodian, a
general assignment for the benefit of creditors or an order of a court
for relief in an involuntary case, appointing a custodian or ordering
liquidation, which order remains unstayed for 60 days); and
(j) any guarantee under the indenture of the notes shall be
held in a judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect, or any guarantors,
or any person acting on behalf of any guarantor, shall deny or
disaffirm its obligations under its guarantee of any notes.
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If any Event of Default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount then outstanding of any series of
notes may declare all the notes of such series to be due and payable immediately
(plus, in the case of an Event of Default that is the result of an action by our
company or any of its Subsidiaries intended to avoid restrictions on or premiums
related to redemptions of the notes contained in the indenture or the notes, an
amount of premium that would have been applicable pursuant to the notes or as
set forth in the indenture). Notwithstanding the foregoing, in the case of an
Event of Default arising from the events of bankruptcy or insolvency with
respect to our company or any of its Subsidiaries described in (i) above, all
outstanding notes will become due and payable without further action or notice.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, holders of a majority
in principal amount of the then outstanding notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from holders of the
notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in such holders' interest.
The holders of a majority in aggregate principal amount then
outstanding of each series of notes, by notice to the trustee, may on behalf of
the holders of all of the notes of such series waive any existing Default or
Event of Default and its consequences under its respective indentures, except a
continuing Default or Event of Default in the payment of interest or premium on,
or principal of, such series of notes.
We are required to deliver to the trustee annually a statement
regarding compliance with the indentures, and we are required upon becoming
aware of any Default or Event of Default to deliver to the trustee a statement
specifying such Default or Event of Default.
All powers of the trustee under the indentures will be subject to
applicable provisions of the Communications Act, including without limitation,
the requirements of prior approval for DE FACTO or DE JURE transfer of control
or assignment of Title III licenses.
NO PERSONAL LIABILITY OF DIRECTORS, OWNERS, EMPLOYEES, INCORPORATOR AND
STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of our
company or any of its Affiliates, as such, shall have any liability for any
obligations of our company or any of its Affiliates under the notes or the
indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each holder of notes by accepting a note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
SEC that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Each indenture provides that with respect to the notes issued
thereunder, our company may, at its option and at any time, elect to have all
obligations discharged with respect to the outstanding notes of such issue
("Legal Defeasance"). Such Legal Defeasance means that we will be deemed to have
paid and discharged the entire indebtedness represented by the outstanding notes
of such issue, except for:
(a) the rights of holders of outstanding notes of such issue to
receive payments in respect of the principal of, premium, if any, and interest
on the notes of such issue when such payments are due, or on the redemption
date, as the case may be;
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(b) our company's obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed, lost or
stolen notes of such issue and the maintenance of an office or agency for
payment and money for security payments held in trust;
(c) the rights, powers, trust, duties and immunities of the
trustee, and our obligations in connection therewith; and
(d) In addition, the indenture provides that with respect to each
issue of notes, we may, at our option and at any time, elect to have all
obligations released with respect to certain covenants that are described in the
indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the notes of such issue. In the event Covenant Defeasance occurs, certain
events (not including non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under "--Events of Default and Remedies" will no
longer constitute an Event of Default with respect to the notes of such issue.
In order to exercise either Legal Defeasance or Covenant Defeasance:
each indenture provides that with respect to the notes issued thereunder,
(i) We must irrevocably deposit with the trustee, in trust,
for the benefit of the holders of the notes of such issue, cash in U.S. dollars,
non-callable U.S. government obligations, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants selected by the trustee, to pay the principal of,
premium, if any, and interest on the outstanding notes of such issue on the
stated maturity or on the applicable optional redemption date, as the case may
be;
(ii) in the case of Legal Defeasance, we shall have delivered
to the trustee an opinion of counsel in the United States reasonably acceptable
to the trustee confirming that
(A) we have received from, or there has been published by,
the Internal Revenue Service a
ruling or
(B) since the date of the indenture, there has been a
change in the applicable federal income tax law, in each case to the effect
that, and based thereon such opinion of counsel shall confirm that, the
holders of the notes of such issue will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance, and
will be subject to federal income tax in the same amount, in the same manner
and at the same times as would have been the case if such Legal Defeasance
had not occurred;
(iii) in the case of Covenant Defeasance, we shall have
delivered to the trustee an opinion of counsel reasonably acceptable to such
trustee confirming that the holders of the notes of such issue will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period ending
on the 91st day after the date of deposit;
(v) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under, the indenture
or any other material agreement or instrument to which we or any of our
Subsidiaries is a party or by which we or any of our Subsidiaries is bound;
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(vi) we shall have delivered to the trustee an officers'
certificate stating that the deposit was not made by us with the intent of
preferring the holders of the notes of such series over any of our other
creditors or with the intent of defeating, hindering, delaying or defrauding any
of our other creditors or others; and
(vii) we shall have delivered to the trustee an officers'
certificate stating that all conditions precedent provided for or relating to
the Legal Defeasance or the Covenant Defeasance relating to such series of notes
have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next paragraph, each indenture and the notes
issued thereunder may be amended or supplemented with the consent of the holders
of at least a majority in principal amount of the notes of such series then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for notes of such series), and any existing default or compliance
with any provision of the indenture or the notes of such series may be waived
with the consent of the holders of a majority in principal amount of the then
outstanding notes of such series (including consents obtained in connection with
a tender offer or exchange offer for notes of such series).
Without the consent of each holder affected, however, an amendment or
waiver may not (with respect to any note held by a non-consenting holder):
(a) reduce the aggregate principal amount of notes whose
holders must consent to an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of
any note or alter the provisions with respect to the redemption of the
notes;
(c) reduce the rate of or change the time for payment of
interest on any notes;
(d) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the notes (except a
rescission of acceleration of the notes of a series by the holders of
at least a majority in aggregate principal amount of the notes of such
series and a waiver of the payment default that resulted from such
acceleration);
(e) make any note payable in money other than that stated in
the notes;
(f) make any change in the provisions of the indenture
relating to waivers of past Defaults or the rights of holders of notes
to receive payments of principal of or interest on the notes;
(g) waive a redemption payment with respect to any note; or
(h) make any change in the foregoing amendment and waiver
provisions.
In addition, without the consent of at least 66 2/3% of the notes of a
series then outstanding, an amendment or a waiver may not make any change to the
covenants in the indenture entitled "Asset Sales," "Offer to Purchase Upon a
Change of Control" and "Excess Proceeds Offer" (including, in each case, the
related definitions) as such covenants apply to such series of notes.
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Notwithstanding the foregoing, without the consent of any holder of
notes, we, the guarantors under the indenture and the trustee may amend or
supplement each indenture, the notes or the guarantees to cure any ambiguity,
defect or inconsistency, to provide for uncertificated notes or guarantees in
addition to or in place of certificated notes or the guarantees, to provide for
the assumption of our company's or a guarantor's obligations to holders of the
notes in the case of a merger or consolidation, to make any change that would
provide any additional rights or benefits to the holders of the notes or the
guarantees or that does not adversely affect the legal rights under the
indenture of any such holder, or to comply with requirements of the SEC in order
to effect or maintain the qualification of the indenture under the Trust
Indenture Act.
CONCERNING THE TRUSTEE
Each indenture contains certain limitations on the rights of the
trustee, if the trustee becomes a creditor of our company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The trustee will be permitted to
engage in other transactions with us; however, if the trustee acquires any
conflicting interest, it must eliminate such conflict within 90 days, apply to
the SEC for permission to continue as trustee or resign.
With respect to such series of notes, the holders of a majority in
principal amount of the then outstanding notes of such series will have the
right to direct the time, method and place of conducting any proceeding for
exercising any remedy available to the trustee, subject to certain exceptions.
Each indenture provides that in case an Event of Default shall occur (which
shall not be cured), the trustee will be required, in the exercise of its power,
to use the degree of care of a prudent person in the conduct of his or her own
affairs. The trustee will not be relieved from liabilities for its own negligent
action, its own negligent failure to act or its own willful misconduct, except
that:
(i) this sentence shall not limit the preceding sentence of this
paragraph;
(ii) the trustee shall not be liable for any error of judgment
made in good faith, unless it is proved that the trustee was negligent in
ascertaining the pertinent facts; and
(iii) the trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a direction received
by it pursuant to the first sentence of this paragraph. Subject to such
provisions, the trustee will be under no obligation to exercise any of its
rights or powers under the indenture at the request of any holder of notes,
unless such holder shall have offered to the trustee security and indemnity
satisfactory to it against any loss, liability or expense.
BOOK-ENTRY, DELIVERY AND FORM
The exchange notes of each series will be represented by one or more
registered global notes without interest coupons. Upon issuance, the global
exchange notes will be deposited with the trustee, as custodian for The
Depository Trust Company, in New York, New York, and registered in the name of
DTC or its nominee for credit to the accounts of DTC's direct and indirect
participants.
The global exchange notes may be transferred, in whole and not in part,
only to another nominee of DTC or to a successor of DTC or its nominee in
certain limited circumstances. Beneficial interests in the global exchange notes
may be exchanged for notes in certificated form in certain limited
circumstances. See "--Transfer of Interests in Global Notes for certificated
notes." Such certificated notes may, unless the global exchange note has
previously been exchanged for certificated notes, be exchanged for an interest
in the global exchange note representing the principal amount of exchange notes
being transferred. In addition, transfer of beneficial interests in any global
exchange notes will be subject
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to the applicable rules and procedures of DTC and its direct or indirect
participants, which may change from time to time.
DEPOSITARY PROCEDURES. DTC has advised us that DTC is a limited-purpose
trust company created to hold securities for its participating organizations,
known as "direct participants", and to facilitate the clearance and settlement
of transactions in those securities between direct participants through
electronic book-entry changes in accounts of participants. The direct
participants include securities brokers and dealers, including the initial
purchasers of the old notes, banks, trust companies, clearing corporations and
certain other organizations, including Euroclear and CEDEL. Access to DTC's
system is also available to other entities that clear through or maintain a
direct or indirect, custodial relationship with a direct participant, known as
"indirect participants."
DTC has also advised us that, pursuant to DTC procedures, upon deposit
of the global exchange notes, DTC will credit the accounts of direct
participants with portions of the principal amount of global exchange notes that
have been allocated to them by the initial purchasers, and DTC will maintain
records of the ownership interests of such direct participants in the global
exchange notes and the transfer of ownership interests by and between direct
participants. DTC will not maintain records of the ownership interests of, or
the transfer of ownership interests by and between, indirect participants or
other owners of beneficial interests in the global exchange notes. Direct
participants and indirect participants must maintain their own records of the
ownership interests of, and the transfer of ownership interests by and between,
indirect participants and other owners of beneficial interests in the global
exchange notes. We expect that payments by direct participants to owners of
beneficial interests in such global exchange notes held through such direct
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the name of nominees for such customers. Such payments will be the
responsibility of such direct participants.
Investors in the global exchange notes may hold their interests therein
directly through DTC if they are direct participants in DTC or indirectly
through organizations, including Euroclear and CEDEL, which are direct
participants in DTC. Euroclear and CEDEL will hold interests in the global
exchange notes on behalf of their participants through customers' securities
accounts in their respective names on the books of their respective
depositaries, which are Morgan Guaranty Trust Company of New York, Brussels
office, as operator or Euroclear and Citibank, N.A., as depositary of CEDEL. The
depositaries, in turn, will hold such interests in the global exchange notes in
customers' securities accounts in the depositaries' names on the books of DTC.
All ownership interests in any global exchange notes, including those of
customers' securities accounts held through Euroclear or CEDEL, may be subject
to the procedures and requirements of DTC. Those interests held through
Euroclear and CEDEL may also be subject to the procedures and requirements of
such systems.
The laws of some states require that certain persons take physical
delivery in definitive, certificated form, of securities that they own. This may
limit or curtail the ability to transfer beneficial interests in a global
exchange note to such persons. Because DTC can act only on behalf of direct
participants, which in turn act on behalf of indirect participants and others,
the ability of a person having a beneficial interest in a global exchange note
to pledge such interest to persons or entities that are not direct participants
in DTC, or to otherwise take actions in respect of such interests, may be
affected by the lack of physical certificates evidencing such interests. For
certain other restrictions on the transferability of the notes see "--Transfers
of Interests in Global Notes for Certificated Notes."
Except as described in "--Transfers of Interests in Global Notes for
Certificated Notes," owners of beneficial interests in the global exchange notes
will not have notes registered in their names, will not receive physical
delivery of notes in certificated form and will not be considered the registered
owners or holders thereof under the indentures for any purpose.
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Under the terms of each indenture, we, the guarantors under the
indenture and the trustee will treat the persons in whose names the notes are
registered (including notes represented by global exchange notes) as the owners
thereof for the purpose of receiving payments and for any and all other purposes
whatsoever. Payments in respect of the principal, premium, liquidated damages,
if any, and interest on global exchange notes registered in the name of DTC or
its nominee will be payable by the trustee to DTC or its nominee as the
registered holder under each indenture. Consequently, neither we, the trustee
nor any agent of ours or the trustee has or will have any responsibility or
liability for any aspect of DTC's records or any direct participant's or
indirect participant's records relating to or payments made on account of
beneficial ownership interests in the global exchange notes or for maintaining,
supervising or reviewing any of DTC's records or any direct participant's or
indirect participant's records relating to the beneficial ownership interests in
any global exchange note or any other matter relating to the actions and
practices of DTC or any of its direct participants or indirect participants.
DTC has advised us that its current payment practice for payments of
principal, interest and the like with respect to securities such as the notes is
to credit the accounts of the relevant direct participants with such payment on
the payment date in amounts proportionate to such direct participant's
respective ownership interests in the global exchange notes as shown on DTC's
records. Payments by direct participants and indirect participants to the
beneficial owners of the notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC, the
trustee, us or the guarantors under the indenture. Neither we, the guarantors
under the indenture nor the trustee will be liable for any delay by DTC or its
direct participants or indirect participants in identifying the beneficial
owners of the notes, and we and the trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee as the registered
owner of the notes for all purposes.
The global exchange notes will trade in DTC's Same-Day Funds Settlement
System and, therefore, transfers between direct participants in DTC will be
effected in accordance with DTC's procedures, and will be settled in immediately
available funds. Transfers between indirect participants, other than indirect
participants who hold an interest in the notes through Euroclear or CEDEL, who
hold an interest through a direct participant will be effected in accordance
with the procedures of such direct participant but generally will settle in
immediately available funds. Transfers between and among indirect participants
who hold interests in the notes through Euroclear and CEDEL will be effected in
the ordinary way in accordance with their respective rules and operating
procedures.
Subject to compliance with the transfer restrictions applicable to the
notes described herein, cross-market transfers between direct participants in
DTC, on the one hand, and indirect participants who hold interests in the
exchange notes through Euroclear or CEDEL, on the other hand, will be effected
by Euroclear's or CEDEL's respective nominee through DTC in accordance with
DTC's rules on behalf of Euroclear or CEDEL; HOWEVER, delivery of instructions
relating to crossmarket transactions must be made directly to Euroclear or
CEDEL, as the case may be, by the counterparty in accordance with the rules and
procedures of Euroclear or CEDEL and within their established deadlines, which
is Brussels time for Euroclear and UK time for CEDEL. Indirect participants who
hold interest in the exchange notes through Euroclear and CEDEL may not deliver
instructions directly to Euroclear's or CEDEL's nominee. Euroclear or CEDEL
will, if the transaction meets its settlement requirements, deliver instructions
to its respective nominee to deliver or receive interests on Euroclear's or
CEDEL's behalf in the relevant global exchange note in DTC, and make or receive
payment in accordance with normal procedures for same-day fund settlement
applicable to DTC.
Because of time zone differences, the securities accounts of an
indirect participant who holds an interest in the exchange notes through
Euroclear or CEDEL purchasing an interest in a global exchange note from a
direct participant in DTC will be credited, and any such crediting will be
reported to Euroclear or CEDEL during the European business day immediately
following the settlement date of
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DTC in New York. Although recorded in DTC's accounting records as of DTC's
settlement date in New York, Euroclear and CEDEL customers will not have access
to the cash amount credited to their accounts as a result of a sale of an
interest in a global exchange note to a DTC participant until the European
business day for Euroclear or CEDEL immediately following DTC's settlement date.
DTC has advised us that it will take any action permitted to be taken
by a holder of notes only at the direction of one or more direct participants to
whose account interests in the global exchange notes are credited and only in
respect of such portion of the aggregate principal amount of the notes of a
series as to which such direct participant or direct participants has or have
given direction.
Although DTC, Euroclear and CEDEL have agreed to the foregoing
procedures to facilitate transfers of interests in the global exchange notes
among direct participants, including Euroclear and CEDEL, they are under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither we, the guarantors under
the indenture, the initial purchasers of the old notes nor the trustee shall
have any responsibility for the performance by DTC, Euroclear or CEDEL or
their respective direct and indirect participants of their respective
obligations under the rules and procedures governing any of their operations.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that we believe are
reliable, but we take no responsibility for the accuracy thereof.
TRANSFER OF INTERESTS IN GLOBAL EXCHANGE NOTES FOR CERTIFICATED NOTES
An entire global exchange note may be exchanged for definitive notes of
a series in registered, certificated form without interest coupons if DTC
notifies us that it is unwilling or unable to continue as depositary for the
global exchange notes and we thereupon fail to appoint a successor depositary
within 90 days or if DTC has ceased to be a clearing agency registered under the
Exchange Act. Alternatively, our company, at its option, may notify the trustee
in writing that it elects to cause the issuance of certificated notes or
certificated notes will be issued if there shall have occurred and be continuing
to occur a Default or an Event of Default with respect to the notes of such
series. In any such case, we will notify the trustee in writing that, upon
surrender by the direct and indirect participants of their interest in such
global note, certificated notes will be issued to each person that such direct
and indirect participants and DTC identify as being the beneficial owner of the
related notes.
Beneficial interests in global notes held by any direct or indirect
participant may be exchanged for certificated notes upon request to DTC, on
behalf of such direct participant (for itself or on behalf of an indirect
participant), to the trustee in accordance with customary DTC procedures.
Certificated notes delivered in exchange for any beneficial interest in any
global note will be registered in the names, and issued in any approved
denominations, requested by DTC on behalf of such direct or indirect
participants, in accordance with DTC's customary procedures.
Neither we, the guarantors under the indenture nor the trustee will be
liable for any delay by the holder of the global notes or DTC in identifying the
beneficial owners of notes, and we and the trustee may conclusively rely on, and
will be protected in relying on, instructions from the holder of the global note
or DTC for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
Each indenture requires that payments in respect of the notes
represented by the global exchange notes, including principal, premium, if any,
interest and liquidated damages, if any, be made by wire
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transfer of immediately available same day funds to the accounts specified by
the holder of interests in such global exchange notes. With respect to
certificated notes, we will make all payments of principal, premium, if any,
interest and liquidated damages, if any, by wire transfer of immediately
available same day funds to the accounts specified by the holders thereof or, if
no such account is specified, by mailing a check to each such holder's
registered address. We expect that secondary trading in the certificated notes
will also be settled in immediately available funds.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the applicable
indenture without charge by writing to us at, 5701 South Sante Fe Drive,
Littleton, Colorado 80120, attention David K. Moskowitz, facsimile (303)
723-1699.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
WE AND THE GUARANTORS UNDER THE INDENTURE ARE MAKING THE EXCHANGE OFFER
TO COMPLY WITH OUR OBLIGATIONS UNDER THE REGISTRATION RIGHTS AGREEMENTS TO
REGISTER THE EXCHANGE OF EXCHANGE NOTES FOR THE OLD NOTES. IN THE REGISTRATION
RIGHTS AGREEMENTS, WE AND SUCH GUARANTORS ALSO AGREED UNDER CERTAIN
CIRCUMSTANCES TO FILE A SHELF REGISTRATION STATEMENT TO REGISTER THE RESALE OF
CERTAIN OLD NOTES AND EXCHANGE NOTES.
We, the guarantors under the indenture and the initial purchasers of
the old notes entered into the registration rights agreements on January 25,
1999. In the registration rights agreement relating to each series of notes, we
and the guarantors agreed to file the exchange offer registration statement
relating to such issue with the SEC within 90 days of the closing date of the
initial sale of the notes to the initial purchasers, and use our respective best
efforts to have it then declared effective at the earliest possible time. We and
the guarantors also agreed to use our best efforts to cause that exchange offer
registration statement to be effective continuously, to keep each exchange offer
open for a period of not less than 20 business days and cause each exchange
offer to be consummated no later than the 210th day after that closing date.
Pursuant to the exchange offer, certain holders of notes which constitute
"transfer restricted securities" will be allowed to exchange their transfer
restricted securities for registered exchange notes.
Each registration rights agreement provides that the following events
will constitute a "registration default":
- if we or the guarantors under the indenture fail to file an
exchange offer registration statement with the SEC on or prior
to the 90th day after the closing date of the initial sale of
the notes to the initial purchasers,
- if the exchange offer registration statement is not declared
effective by the SEC on or prior to the 180th day after that
closing date,
- if the exchange offer is not consummated on or before the
210th day after that closing date,
- if obligated to file the shelf registration statement and we
and the guarantors under the indenture fail to file the shelf
registration statement with the SEC on or prior to the 90th
day after that closing date or the 30th day after such filing
obligation arises,
- if obligated to file a shelf registration statement and the
shelf registration statement is not declared effective on or
prior to the 90th day after the obligation to file a shelf
registration statement arises, or
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- if the exchange offer registration statement or the shelf
registration statement, as the case may be, is declared
effective but thereafter ceases to be effective or useable in
connection with resales of the transfer restricted securities,
for such time of non-effectiveness or non-usability.
If there is a registration default, then we and the guarantors under
the indenture agree to pay to each holder of transfer restricted securities
affected thereby liquidated damages in an amount equal to $0.05 per week per
$1,000 in principal amount of transfer restricted securities held by such holder
for each week or portion thereof that the registration default continues for the
first 90-day period immediately following the occurrence of that registration
default. The amount of the liquidated damages shall increase by an additional
$0.05 per week per $1,000 in principal amount of transfer restricted securities
with respect to each subsequent 90-day period until all registration defaults
have been cured or until the transfer restricted securities become freely
tradable without registration under the Securities Act, up to a maximum amount
of liquidated damages of $0.30 per week per $1,000 in principal amount of
transfer restricted securities. We and the guarantors under the indenture shall
not be required to pay liquidated damages for more than one of these
registration defaults at any given time. Following the cure of all of these
registration defaults, the accrual of liquidated damages will cease.
All accrued liquidated damages are to be paid by us or the guarantors
under the indenture to holders entitled thereto by wire transfer to the accounts
specified by them or by mailing checks to their registered address if no such
accounts have been specified.
Holders of notes are required to make certain representations to us, as
described in the registration rights agreements, in order to participate in the
exchange offer and are required to deliver information to be used in connection
with the shelf registration statement and to provide comments on the shelf
registration statement within the time periods set forth in the registration
rights agreements in order to have their notes included in the shelf
registration statement and benefit from the provisions regarding liquidated
damages set forth above.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in each indenture.
Reference is made to the applicable indenture for a full disclosure of all such
terms, as well as any other capitalized terms used herein for which no
definition is provided.
"ACCOUNTS RECEIVABLE SUBSIDIARY" means one Unrestricted Subsidiary of
our company specifically designated as an Accounts Receivable Subsidiary for the
purpose of financing the accounts receivable of our company, and provided that
any such designation shall not be deemed to prohibit our company from financing
accounts receivable through any other entity, including, without limitation, any
other Unrestricted Subsidiary.
"ACCOUNTS RECEIVABLE SUBSIDIARY NOTES" means the notes to be issued by
the Accounts Receivable Subsidiary for the purchase of accounts receivable.
"ACQUIRED DEBT" means, with respect to any specified person,
Indebtedness of any other person existing at the time such other person merges
with or into or becomes a Subsidiary of such specified person, or Indebtedness
incurred by such person in connection with the acquisition of assets, including
Indebtedness incurred in connection with, or in contemplation of, such other
person merging with or into or becoming a Subsidiary of such specified person or
the acquisition of such assets, as the case may be.
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"ACQUIRED SUBSCRIBER" means a subscriber to a pay television service
provided by a pay television provider that is not an Affiliate of our company at
the time our company or one of its Restricted Subsidiaries purchases the right
to provide pay television service to such subscriber from such pay television
provider, whether directly or through the acquisition of the entity providing
pay television service to such subscriber.
"ACQUIRED SUBSCRIBER DEBT" means (i) Indebtedness the proceeds of which
are used to pay the purchase price for Acquired Subscribers or to acquire the
entity which has the right to provide pay television service to such Acquired
Subscribers or to acquire from such entity or an Affiliate of such entity assets
used or to be used in connection with such pay television business; PROVIDED
that such Indebtedness is incurred within three years after the date of the
acquisition of such Acquired Subscriber and (ii) Acquired Debt of any such
entity being acquired; PROVIDED that in no event shall the amount of such
Indebtedness and Acquired Debt for any Acquired Subscriber exceed the sum of the
actual purchase price (inclusive of such Acquired Debt) for such Acquired
Subscriber, such entity and such assets plus the cost of converting such
Acquired Subscriber to usage of a delivery format for pay television service
made available by our company or any of its Restricted Subsidiaries.
"AFFILIATE" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED, HOWEVER,
that beneficial ownership of 10% or more of the voting securities of a person
shall be deemed to be control; PROVIDED FURTHER that no individual, other than a
director of ECC or our company or an officer of ECC or our company with a policy
making function, shall be deemed an Affiliate of our company or any of its
Subsidiaries solely by reason of such individual's employment, position or
responsibilities by or with respect to ECC, our company or any of their
respective Subsidiaries.
"CAPITAL LEASE OBLIGATION" means, as to any person, the obligations of
such person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at the time any determination thereof is to be
made shall be the amount of the liability in respect of a capital lease that
would at such time be so required to be capitalized on a balance sheet in
accordance with GAAP.
"CAPITAL STOCK" means any and all shares, interests, participations,
rights or other equivalents, however designated, of corporate stock or
partnership or membership interests, whether common or preferred.
"CASH EQUIVALENTS" means: (a) United States dollars; (b) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof having maturities of not
more than six months from the date of acquisition; (c) certificates of deposit
and eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank deposits, in each case with any domestic commercial bank
having capital and surplus in excess of $500 million; (d) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clauses (b) and (c) entered into with any financial institution
meeting the qualifications specified in clause (c) above; (e) commercial paper
rated P-1, A-1 or the equivalent thereof by Moody's or S&P, respectively, and in
each case maturing within six months after the date of acquisition and (f) money
market funds offered by any domestic commercial or investment bank having
capital and surplus in
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excess of $500 million at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (a) through (e) of this
definition.
"CHANGE OF CONTROL" means: (a) any transaction or series of
transactions (including, without limitation, a tender offer, merger or
consolidation) the result of which is that the Principal and his Related Parties
or an entity controlled by the Principal and his Related Parties (and not
controlled by any person other than the Principal or his Related Parties) (i)
sell, transfer or otherwise dispose of more than 50% of the total Equity
Interests in ECC beneficially owned (as defined in Rule 13(d)(3) under the
Exchange Act but without including any Equity Interests which may be deemed to
be owned solely by reason of the existence of any voting arrangements), by such
persons on the date of the indenture (as adjusted for stock splits and dividends
and other distributions payable in Equity Interests), after giving effect to the
repurchase of the Series A Preferred Stock on or about the date of the
indenture, or (ii) do not have the voting power to elect at least a majority of
the Board of Directors of ECC; (b) the first day on which a majority of the
members of the Board of Directors of ECC are not Continuing Directors; or (c)
any time that ECC shall cease to beneficially own 100% of the Equity Interests
of our company.
"CONSOLIDATED CASH FLOW" means, with respect to any person for any
period, the Consolidated Net Income of such person for such period, plus, to the
extent deducted in computing Consolidated Net Income: (a) provision for taxes
based on income or profits; (b) Consolidated Interest Expense; (c) depreciation
and amortization (including amortization of goodwill and other intangibles) of
such person for such period; and (d) any extraordinary loss and any net loss
realized in connection with any Asset Sale, in each case, on a consolidated
basis determined in accordance with GAAP, provided that Consolidated Cash Flow
shall not include interest income derived from the net proceeds of the offering.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any person for
any period, consolidated interest expense of such person for such period,
whether paid or accrued, including amortization of original issue discount and
deferred financing costs, non-cash interest payments and the interest component
of Capital Lease Obligations, on a consolidated basis determined in accordance
with GAAP; PROVIDED HOWEVER that with respect to the calculation of the
consolidated interest expense of our company, the interest expense of
Unrestricted Subsidiaries shall be excluded.
"CONSOLIDATED NET INCOME" means, with respect to any person for any
period, the aggregate of the Net Income of such person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED, HOWEVER, that: (a) the Net Income of any person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent person, in the case of a gain, or to the extent of any
contributions or other payments by the referent person, in the case of a loss;
(b) the Net Income of any person that is a Subsidiary that is not a Wholly Owned
Subsidiary (or, with respect to the calculation of the Consolidated Net Income
of our company, a Wholly Owned Restricted Subsidiary) shall be included only to
the extent of the amount of dividends or distributions paid in cash to the
referent person; (c) the Net Income of any person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded; (d) the Net Income of any Subsidiary of such person shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions is not at the time permitted by operation of the terms of its
charter or bylaws or any other agreement, instrument, judgment, decree, order,
statute, rule or government regulation to which it is subject; and (e) the
cumulative effect of a change in accounting principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any person, the sum of:
(a) the stockholders' equity of such person; plus (b) the amount reported on
such person's most recent balance sheet with respect to any series of preferred
stock (other than Disqualified Stock) that by its terms is not entitled to the
payment of dividends unless such dividends may be declared and paid only out of
net earnings in
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respect of the year of such declaration and payment, but only to the extent of
any cash received by such person upon issuance of such preferred stock, less:
(i) all write-ups (other than write-ups resulting from foreign currency
translations and write-ups of tangible assets of a going concern business made
within 12 months after the acquisition of such business) subsequent to the date
of the indenture in the book value of any asset owned by such person or a
consolidated Subsidiary of such person; and (ii) all unamortized debt discount
and expense and unamortized deferred charges, all of the foregoing determined in
accordance with GAAP.
"CONTINUING DIRECTOR" means, as of any date of determination, any
member of the Board of Directors of ECC who: (a) was a member of such Board of
Directors on the date of the indenture; or (b) was nominated for election or
elected to such Board of Directors with the affirmative vote of a majority of
the Continuing Directors who were members of such Board at the time of such
nomination or election or was nominated for election or elected by the Principal
and his Related Parties.
"CREDIT AGREEMENT" means any one or more credit agreements (which may
include or consist of revolving credits) between our company and one or more
banks or other financial institutions providing financing for the business of
our company and our company's Restricted Subsidiaries, provided that the lenders
party to the Credit Agreement may not be Affiliates of ECC, our company or their
respective Subsidiaries and provided further that the guarantors under the
indenture may be guarantors under such agreements.
"DBSC" means Direct Broadcasting Satellite Corporation, a Colorado
corporation.
"DEFAULT" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"DEFERRED PAYMENTS" means Indebtedness to satellite construction or
launch contractors incurred after the date of the Indenture in connection with
the construction or launch of one or more satellites of our company or its
Restricted Subsidiaries used by it in the businesses described in the covenant
"--Certain Covenants--Activities of our Company" in an amount not to exceed at
any one time outstanding in the aggregate $135 million.
"DNCC" means Dish Network Credit Corporation, a Colorado corporation.
"DISQUALIFIED STOCK" means any Capital Stock which, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to date on
which the notes mature; PROVIDED, HOWEVER, that any such Capital Stock may
require our company of such Capital Stock to make an offer to purchase such
Capital Stock upon the occurrence of certain events if the terms of such Capital
Stock provide that such an offer may not be satisfied and the purchase of such
Capital Stock may not be consummated until the 91st day after the notes have
been paid in full.
"ELIGIBLE INSTITUTION" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent in
foreign currency, whose debt is rated Investment Grade at the time as of which
any investment or rollover therein is made.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"ETC" means EchoStar Technologies Corporation, a Texas corporation.
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"EXISTING INDEBTEDNESS" means the notes and any other Indebtedness of
our company and its Subsidiaries in existence on the date of the indentures
until such amounts are repaid.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession of the U.S., which are applicable as of the date of
determination; PROVIDED that, except as otherwise specifically provided, all
calculations made for purposes of determining compliance with the terms of the
provisions of the indenture shall utilize GAAP as in effect on the date of the
indentures.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"HEDGING OBLIGATIONS" means, with respect to any person, the
obligations of such person pursuant to any arrangement with any other person,
whereby, directly or indirectly, such person is entitled to receive from time to
time periodic payments calculated by applying either floating or a fixed rate of
interest on a stated notional amount in exchange for periodic payments made by
such other person calculated by applying a fixed or a floating rate of interest
on the same notional amount and shall include, without limitation, interest rate
swaps, caps, floors, collars and similar agreements designed to protect such
person against fluctuations in interest rates.
"INDEBTEDNESS" means, with respect to any person, any indebtedness of
such person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or representing the
balance deferred and unpaid of the purchase price of any property (including
pursuant to capital leases) or representing any Hedging Obligations, except any
such balance that constitutes an accrued expense or trade payable, if and to the
extent any of the foregoing (other than Hedging Obligations) would appear as a
liability upon a balance sheet of such person prepared in accordance with GAAP,
and also includes, to the extent not otherwise included, the amount of all
obligations of such person with respect to the redemption, repayment or other
repurchase of any Disqualified Stock or, with respect to any Subsidiary of such
person, the liquidation preference with respect to, any Preferred Equity
Interests (but excluding, in each case, any accrued dividends) as well as the
guarantee of items that would be included within this definition.
"INDEBTEDNESS TO CASH FLOW RATIO" means, with respect to any person,
the ratio of: (a) the Indebtedness of such person and its Subsidiaries (or, if
such person is our company, of our company and its Restricted Subsidiaries) as
of the end of the most recently ended fiscal quarter, plus the amount of any
Indebtedness incurred subsequent to the end of such fiscal quarter; to (b) such
person's Consolidated Cash Flow for the most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date on which such event for which such calculation is being made
shall occur (the "Measurement Period"), PROVIDED, HOWEVER; that: (i) in making
such computation, Indebtedness shall include the total amount of funds
outstanding and available under any revolving credit facilities; and (ii) in the
event that such person or any of its Subsidiaries (or, if such person is our
company, any of its Restricted Subsidiaries) consummates a material acquisition
or an Asset Sale or other
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disposition of assets subsequent to the commencement of the Measurement Period
but prior to the event for which the calculation of the Indebtedness to Cash
Flow Ratio is made, then the Indebtedness to Cash Flow Ratio shall be calculated
giving pro forma effect to such material acquisition or Asset Sale or other
disposition of assets, as if the same had occurred at the beginning of the
applicable period.
"INVESTMENT GRADE" means with respect to a security, that such security
is rated, by at least two nationally recognized statistical rating
organizations, in one of each such organization's four highest generic rating
categories.
"INVESTMENTS" means, with respect to any person, all investments by
such person in other persons (including Affiliates) in the forms of loans
(including guarantees), advances or capital contributions (excluding commission,
travel and similar advances to officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities and all other items that are
or would be classified as investments on a balance sheet prepared in accordance
with GAAP.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent status) of any jurisdiction).
"MARKETABLE SECURITIES" means: (a) Government Securities; (b) any
certificate of deposit maturing not more than 365 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution; (c)
commercial paper maturing not more than 365 days after the date of acquisition
issued by a corporation (other than an Affiliate of our company) with an
Investment Grade rating, at the time as of which any investment therein is made,
issued or offered by an Eligible Institution; (d) any bankers acceptances or
money market deposit accounts issued or offered by an Eligible Institution; and
(e) any fund investing exclusively in investments of the types described in
clauses (a) through (d) above.
"MAXIMUM SECURED AMOUNT" means at any time (i) in the event our company
at such time has a rating or has received in writing an indicative rating on all
outstanding notes of both "Ba3" from Moody's and "BB-" from S&P, an amount equal
to the greater of (x) the product of 1.25 times the Trailing Cash Flow Amount
and (y) $500 million and (ii) in the event our company does not have both of
such ratings or indicative ratings at such time, $500 million.
"MEDIA 4" means Media4, Inc., a Georgia corporation.
"MOODY'S" means Moody's Investors Service, Inc.
"NAGRASTAR" means NagraStar LLC, a Colorado limited liability
corporation.
"NET INCOME" means, with respect to any person, the net income (loss)
of such person, determined in accordance with GAAP, excluding, however, any gain
(but not loss), together with any related provision for taxes on such gain (but
not loss), realized in connection with any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions), and
excluding any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss) and excluding any
unusual gain (but not loss) relating to recovery of insurance proceeds on
satellites, together with any related provision for taxes on such extraordinary
gain (but not loss).
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"NET PROCEEDS" means the aggregate cash proceeds received by our
company or any of its Restricted Subsidiaries, as the case may be, in respect of
any Asset Sale, net of the direct costs relating to such Asset Sale (including,
without limitation, legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result thereof, taxes
paid or payable as a result thereof (after taking into account any available tax
credits or deductions and any tax sharing arrangements), amounts required to be
applied to the repayment of Indebtedness secured by a Lien on the asset or
assets that are the subject of such Asset Sale and any reserve for adjustment in
respect of the sale price of such asset or assets. Net Proceeds shall exclude
any non-cash proceeds received from any Asset Sale, but shall include such
proceeds when and as converted by our company or any Restricted Subsidiary to
cash.
"NON-CORE ASSETS" means: (1) all intangible authorizations, rights,
interests and other intangible assets related to all "western" DBS orbital
locations other than the 148 degree orbital slot (as the term "western" is used
by the FCC) held by our company and/or any of its Subsidiaries at any time,
including without limitation the authorizations for 22 DBS frequencies at 175
degrees WL and ESC's permit for 11 unspecified western assignments; (2) all
intangible authorizations, rights, interests and other intangible assets related
to the FSS in the Ku-band, Ka-band and C-band held by our company and/or any of
its Subsidiaries at any time, including without limitation the license of ESC
for a two satellite Ku-band system at 83 degrees and 121 degrees WL, the license
of ESC for a two satellite Ka-band system at 83 degrees WL and 121 degrees WL,
and the application of ESC to add C-band capabilities to a Ku-band satellite
authorized at 83 degrees WL; (3) all intangible authorizations, rights,
interests and other intangible assets related to the Mobile-Satellite Service
held by our company and/or any of its Subsidiaries at any time, including
without limitation the license of E-SAT, Inc. for a low-earth orbit MSS system,
(4) all intangible authorizations, rights, interests and other intangible assets
related to local multi-point distribution service and (5) any Subsidiary of our
company the assets of which consist solely of (i) any combination of the
foregoing and (ii) other assets to the extent permitted under the provision
described under the second paragraph of "--Certain Covenants--Dispositions of
ETC and Non-Core Assets."
"NON-RECOURSE INDEBTEDNESS" of any person means Indebtedness of such
person that: (i) is not guaranteed by any other person (except a Wholly Owned
Subsidiary of the referent person); (ii) is not recourse to and does not
obligate any other person (except a Wholly Owned Subsidiary of the referent
person) in any way; (iii) does not subject any property or assets of any other
person (except a Wholly Owned Subsidiary of the referent person), directly or
indirectly, contingently or otherwise, to the satisfaction thereof, and (iv) is
not required by GAAP to be reflected on the financial statements of any other
person (other than a Subsidiary of the referent person) prepared in accordance
with GAAP.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"PERMITTED INVESTMENTS" means: (a) Investments in our company or in a
Wholly Owned Restricted Subsidiary of our company that is a guarantor under the
indenture, (b) Investments in Cash Equivalents and Marketable Securities; and
(c) Investments by our company or any Subsidiary of our company in a person if,
as a result of such Investment: (i) such person becomes a Wholly Owned
Restricted Subsidiary of our company and becomes a guarantor under the
indenture, or (ii) such person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, our company or a Wholly Owned Restricted Subsidiary of our
company that is a guarantor; PROVIDED that if at any time a Restricted
Subsidiary of our company shall cease to be a Subsidiary of our company, our
company shall be deemed to have made a Restricted Investment in the amount of
its remaining investment, if any, in such former Subsidiary.
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"PERMITTED LIENS" means: (a) Liens securing the notes and Liens
securing any guarantee under the indenture; (b) Liens securing the Deferred
Payments; (c) Liens securing any Indebtedness permitted under the covenant
described under "--Certain Covenants--Incurrence of Indebtedness"; PROVIDed that
such Liens under this clause (c) shall not secure Indebtedness in an amount
exceeding the Maximum Secured Amount at the time that such Lien is incurred; (d)
Liens securing Purchase Money Indebtedness, PROVIDED that such Indebtedness was
permitted to be incurred by the terms of the indenture and such Liens do not
extend to any assets of our company or its Restricted Subsidiaries other than
the assets so acquired; (e) Liens securing Indebtedness the proceeds of which
are used to develop, construct, launch or insure any satellites other than
EchoStar I, EchoStar II, EchoStar III, EchoStar IV or any permitted replacements
of any such satellites, PROVIDED that such Indebtedness was permitted to be
incurred by the terms of the indenture and such Liens do not extend to any
assets of our company or its Restricted Subsidiaries other than such satellites
being developed, constructed, launched or insured, and to the related licenses,
permits and construction, launch and TT&C contracts; (f) Liens on orbital slots,
licenses and other assets and rights of our company, PROVIDED that such orbital
slots, licenses and other assets and rights relate solely to the satellites
referred to in clause (e) of this definition; (g) Liens on property of a person
existing at the time such person is merged into or consolidated with our company
or any Restricted Subsidiary of our company, PROVIDED, that such Liens were not
incurred in connection with, or in contemplation of, such merger or
consolidation, other than in the ordinary course of business; (h) Liens on
property of an Unrestricted Subsidiary at the time that it is designated as a
Restricted Subsidiary pursuant to the definition of "Unrestricted Subsidiary,"
PROVIDED that such Liens were not incurred in connection with, or contemplation
of, such designation; (i) Liens on property existing at the time of acquisition
thereof by our company or any Restricted Subsidiary of our company; PROVIDED
that such Liens were not incurred in connection with, or in contemplation of,
such acquisition and do not extend to any assets of our company or any of its
Restricted Subsidiaries other than the property so acquired; (j) Liens to secure
the performance of statutory obligations, surety or appeal bonds or performance
bonds, or landlords', carriers', warehousemen's, mechanics', suppliers',
materialmen's or other like Liens, in any case incurred in the ordinary course
of business and with respect to amounts not yet delinquent or being contested in
good faith by appropriate process of law, if a reserve or other appropriate
provision, if any, as is required by GAAP shall have been made therefore; (k)
Liens existing on the date of the indentures; (l) Liens for taxes, assessments
or governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded; PROVIDED that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor; (m)
Liens incurred in the ordinary course of business of our company or any
Restricted Subsidiary of our company (including, without limitation, Liens
securing Purchase Money Indebtedness) with respect to obligations that do not
exceed $10 million in principal amount in the aggregate at any one time
outstanding; (n) Liens securing Indebtedness in an amount not to exceed $10
million incurred pursuant to clause (xi) of the second paragraph of the covenant
described under "Incurrence of Indebtedness;" (o) Liens on any asset of our
company or a guarantor under the indenture securing Indebtedness in an amount
not to exceed $10 million; (p) Liens securing Indebtedness permitted under
clause (12) of the second paragraph of the provision described under "--Certain
Covenants--Incurrence of Indebtedness"; provided that such Liens shall not
extend to assets other than the assets that secure such Indebtedness being
refinanced; (q) any interest or title of a lessor under any Capital Lease
Obligation; PROVIDED that such Capital Lease Obligation is permitted under the
other provisions of the indenture; (r) Liens not provided for in clauses (a)
through (q) above, securing Indebtedness incurred in compliance with the terms
of the indentures provided that the notes are secured by the assets subject to
such Liens on an equal and ratable basis or on a basis prior to such Liens;
PROVIDED that to the extent that such Lien secured Indebtedness that is
subordinated to the notes, such Lien shall be subordinated to and be later in
priority than the notes on the same basis and (s) extensions, renewals or
refundings of any Liens referred to in clauses (a) through (q) above, PROVIDED
that (i) any such extension, renewal or refunding does not extend to any assets
or secure any Indebtedness not securing or secured by the Liens being extended,
renewed or refinanced and (ii) any extension, renewal or refunding of a Lien
originally
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incurred pursuant to clause (c) above shall not secure Indebtedness in an amount
greater than the Maximum Secured Amount at the time of such extension, renewal
or refunding.
"PREFERRED EQUITY INTEREST," in any person, means an Equity Interest of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such person, over Equity
Interests of any other class in such person.
"PRINCIPAL" means Charles W. Ergen.
"PURCHASE MONEY INDEBTEDNESS" means (i) indebtedness of our company or
any guarantor under the indenture (including indebtedness that otherwise
satisfies this clause (i) which was incurred prior to the date the obligor
thereunder became a guarantor under the indenture) incurred (within 365 days of
such purchase) to finance the purchase of any assets (including the purchase of
Equity Interests of persons that are not Affiliates of our company) of our
company or any Guarantor under the indenture: (a) to the extent the amount of
Indebtedness thereunder does not exceed 100% of the purchase cost of such
assets; and (b) to the extent that no more than $20 million of such Indebtedness
at any one time outstanding is recourse to our company or any of its Restricted
Subsidiaries or any of their respective assets, other than the assets so
purchased; or (ii) indebtedness of our company or any guarantor under the
indenture which refinances indebtedness referred to in clause (i) of this
definition, PROVIDED that such refinancing satisfies subclauses (a) and (b) of
such clause (i).
"RECEIVABLES TRUST" means a trust organized solely for the purpose of
securitizing the accounts receivable held by the Accounts Receivable Subsidiary
that (a) shall not engage in any business other than (i) the purchase of
accounts receivable or participation interests therein from the Accounts
Receivable Subsidiary and the servicing thereof, (ii) the issuance of and
distribution of payments with respect to the securities permitted to be issued
under clause (b) below and (iii) other activities incidental to the foregoing,
(b) shall not at any time incur Indebtedness or issue any securities, except (i)
certificates representing undivided interests in the trust issued to the
Accounts Receivable Subsidiary and (ii) debt securities issued in an arm's
length transaction for consideration solely in the form of cash and Cash
Equivalents, all of which (net of any issuance fees and expenses) shall promptly
be paid to the Accounts Receivable Subsidiary, and (c) shall distribute to the
Accounts Receivable Subsidiary as a distribution on the Accounts Receivable
Subsidiary's beneficial interest in the trust no less frequently than once every
six months all available cash and Cash Equivalents held by it, to the extent not
required for reasonable operating expenses or reserves therefor or to service
any securities issued pursuant to clause (b) above that are not held by the
Accounts Receivable Subsidiary.
"RECEIVER SUBSIDY" means a subsidy, rebate or other similar payment by
EchoStar or any of its Subsidiaries, in the ordinary course of business, to
subscribers, vendors or distributors, relating to an EchoStar receiver system,
not to exceed the retail price of such EchoStar receiver system, together with
the retail price of installation of such EchoStar receiver system.
"RELATED PARTY" means, with respect to the Principal, (a) the spouse
and each immediate family member of the Principal and (b) each trust,
corporation, partnership or other entity of which the Principal beneficially
holds an 80% or more controlling interest.
"RESTRICTED INVESTMENT" means an Investment other than Permitted
Investments.
"RESTRICTED SUBSIDIARY" means any corporation, association or other
business entity of which more than 50% of the total voting power of shares of
Capital Stock entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the
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<PAGE>
time owned or controlled, directly or indirectly, by our company or one or more
Subsidiaries of our company or a combination thereof, other than Unrestricted
Subsidiaries.
"S&P" means Standard & Poor's Rating Services.
"SATELLITE INSURANCE" means insurance providing coverage for a
satellite in an amount which is, together with cash, Cash Equivalents and
Marketable Securities segregated and reserved on the balance sheet of our
company, for the duration of the insured period or until applied in accordance
with the covenant entitled "Maintenance of Insurance." For purposes of the
indenture, the proceeds of any Satellite Insurance shall be deemed to include
the amount of cash, Cash Equivalents and Marketable Securities segregated and
reserved by our company for purposes of the preceding sentence.
"SATELLITE RECEIVER" means any satellite receiver capable of receiving
programming from the EchoStar Dish Network.sm
"SERIES A CUMULATIVE PREFERRED STOCK" means the Series A Cumulative
Preferred Stock of ECC outstanding on the date of the indentures.
"SKYVISTA" means SkyVista Corporation, a Colorado corporation.
"SUBSIDIARY" means, with respect to any person, any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
person or one or more of the other Subsidiaries of such person or a combination
thereof. Notwithstanding the foregoing, for purposes of the indentures, until
the consummation of the Reorganization, DBSC shall be deemed to be a Subsidiary
of our company.
"TRAILING CASH FLOW AMOUNT" means the Consolidated Cash Flow of our
company during the most recent four fiscal quarters of our company for which
financial statements are available.
"UNRESTRICTED SUBSIDIARY" means; (A) E-Sat, Inc., EchoStar Real Estate
Corporation, EchoStar International (Mauritius) Ltd., EchoStar Manufacturing and
Distribution Pvt. Ltd. and Satrec Mauritius Ltd.; and (B) any Subsidiary of our
company designated as an Unrestricted Subsidiary in a resolution of the Board of
Directors of our company (a) no portion of the Indebtedness or any other
obligation (contingent or otherwise) of which, immediately after such
designation: (i) is guaranteed by our company or any other Subsidiary of our
company (other than another Unrestricted Subsidiary); (ii) is recourse to or
obligates our company or any other Subsidiary of our company (other than another
Unrestricted Subsidiary) in any way; or (iii) subjects any property or asset of
our company or any other Subsidiary of our company (other than another
Unrestricted Subsidiary), directly or indirectly, contingently or otherwise, to
satisfaction thereof; (b) with which neither our company nor any other
Subsidiary of our company (other than another Unrestricted Subsidiary) has any
contract, agreement, arrangement, understanding or is subject to an obligation
of any kind, written or oral, other than on terms no less favorable to our
company or such other Subsidiary than those that might be obtained at the time
from persons who are not Affiliates of our company; and (c) with which neither
our company nor any other Subsidiary of our company (other than another
Unrestricted Subsidiary) has any obligation: (i) to subscribe for additional
shares of Capital Stock or other equity interests therein; or (ii) to maintain
or preserve such Subsidiary's financial condition or to cause such Subsidiary to
achieve certain levels of operating results; PROVIDED, HOWEVER, that none of our
company, ESC and Echosphere Corporation may be designated as Unrestricted
Subsidiaries. At any time after the date of the indentures that our company
designates an additional Subsidiary (other than ETC or a Subsidiary that
constitutes a Non-Core Asset) as
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an Unrestricted Subsidiary, our company will be deemed to have made a Restricted
Investment in an amount equal to the fair market value (as determined in good
faith by the Board of Directors of our company evidenced by a resolution of the
Board of Directors of our company and set forth in an officers' certificate
delivered to the trustee no later than five business days following January 1
and July 1 of each year and ten days following a request from the trustee, which
certificate shall cover the six months preceding such January 1, July 1 or date
of request, as the case may be) of such Subsidiary and to have incurred all
Indebtedness of such Unrestricted Subsidiary. An Unrestricted Subsidiary may be
designated as a Restricted Subsidiary of our company if, at the time of such
designation after giving pro forma effect thereto, no Default or Event of
Default shall have occurred or be continuing.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the then
outstanding principal amount of such Indebtedness into (b) the total of the
product obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means a Wholly Owned Subsidiary of
our company that is a Restricted Subsidiary.
"WHOLLY OWNED SUBSIDIARY" means, with respect to any person, any
Subsidiary all of the outstanding voting stock (other than directors' qualifying
shares) of which is owned by such person, directly or indirectly.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
In this section we discuss the material United States federal income
tax consequences of participating in the exchange offer and owning and disposing
of exchange notes.
In this section we discuss only United States federal income tax
consequences to U.S. holders that participate in the exchange offer, and that
hold old notes, and that will hold exchange notes, as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended. We
generally do not address any tax considerations relevant to holders other than
U.S. holders or to U.S. holders that may be subject to special tax rules, such
as banks, insurance companies, dealers in securities, holders of 10% or more of
our voting stock, persons who "mark to market" their securities, persons who
have a "functional currency" other than the United States dollar, or persons
that will hold notes as a position in a "straddle" for tax purposes or as part
of a "synthetic security" or a "conversion transaction" or other integrated
investment consisting of notes and one or more other investments.
The term "U.S. holder" means a beneficial owner of an old note or an
exchange note that is:
- a citizen or resident of the United States;
- a corporation, partnership or other entity created or
organized under the laws of the United States, any state
thereof or the District of Columbia;
- a trust the administration of which is subject to the primary
supervision of a United States court and with respect to which
one or more United States persons have the authority to
control all substantial decisions; or
- an estate the income of which is subject to United States
federal income tax regardless of its source.
This section is based upon the Internal Revenue Code, Treasury
regulations promulgated thereunder and rulings and judicial decisions now in
effect. Those authorities could change at any time, and any such change could be
retroactive. If that occurred, the tax consequences of participating in the
exchange offer and owning and disposing of exchange notes could differ from the
consequences described below.
THE EXCHANGE OFFER
If you exchange an old note for an exchange note in the exchange offer,
the exchange will not be a taxable transaction for United States federal income
tax purposes. Accordingly, you will not recognize any gain or loss when you
receive the exchange note, and you will be required to continue to include
interest on the exchange note in gross income as described below. Your holding
period for the exchange note will include your holding period for the old note
exchanged therefor, and your adjusted tax basis in the exchange note will be the
same as your adjusted tax basis in such old note, in each case immediately
before the exchange.
If the IRS disagreed and treated the exchange of an old note for an
exchange note in the exchange offer as a taxable transaction, the United States
federal income tax consequences to you generally would be as described below
under "Dispositions of Notes."
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INTEREST ON THE NOTES
Interest on the notes generally will be taxable to a holder as ordinary
income at the time it is received or accrued in accordance with the holder's
method of accounting for United States federal income tax purposes.
We are obligated to pay liquidated damages in the form of additional
interest in certain circumstances, as described under "Description of the
Notes--Registration Rights; Liquidated Damages" above. We believe, and intend to
take the position, that the possibility of payment of liquidated damages should
not cause the notes to be issued with original issue discount. You should
consult your own tax advisor regarding the possible payment of liquidated
damages.
MARKET DISCOUNT
If a holder purchased an old note for less than its stated redemption
price at maturity, the difference is treated as "market discount" for United
States federal income tax purposes if it exceeds a specified DE MINIMIS amount.
Under the market discount rules, when the holder disposes of the exchange note
received in exchange for such old note, the holder will have to treat any gain
as ordinary income to the extent that market discount has accrued on the old
note and the exchange note and the holder has not included the market discount
in income. In addition, if the holder incurred or continued any indebtedness to
purchase or carry the old note or exchange note, the holder may have to defer
the deduction of all or a portion of the related interest expense until the
exchange note matures or the holder disposes of the exchange note.
Market discount will accrue ratably from the date the holder acquired
the old note to the date that the exchange note matures, unless the holder
elects to accrue it under a constant-yield method. A holder may elect to include
market discount in income currently as it accrues, either ratably or under a
constant-yield method. If the holder elects to do so, the rule described above
regarding deferral of interest deductions will not apply. The election to
include market discount in income currently applies to all market discount
obligations that the holder holds or acquires on or after the first day of the
first taxable year to which the election applies. The holder may not revoke the
election without the consent of the IRS.
AMORTIZABLE BOND PREMIUM
If a holder purchased an old note for more than its stated redemption
price at maturity, the holder will be treated as having purchased the old note
at a "premium" and may elect to amortize the premium over the remaining term of
the old note and the exchange note under a constant-yield method. The amount
amortized in any year will be treated as a reduction of the holder's interest
income from the exchange note. Premium on an old note and an exchange note held
by a U.S. holder that does not make such an election will decrease the gain or
increase the loss otherwise recognized on a disposition of the exchange note.
The election to amortize premium under a constant-yield method applies to all
debt obligations that the holder holds or acquires on or after the first day of
the first taxable year to which the election applies. The holder may not revoke
the election without the consent of the IRS.
DISPOSITIONS OF NOTES
Gain or loss recognized by a holder on a disposition (including a sale,
exchange or redemption) of an exchange note will generally equal the difference
between the amount realized by the holder on the disposition (except to the
extent that such amount realized is attributable to accrued but unpaid interest
not previously included in income, which will be taxable as ordinary income) and
the holder's adjusted
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tax basis in the exchange note. A holder's adjusted tax basis in an exchange
note generally will equal the holder's cost of the old note exchanged therefor,
increased by any market discount that the holder previously included in income.
Except as described above with respect to market discount, gain or loss
recognized on a disposition of an exchange note generally will be long-term
capital gain or loss if, at the time of the disposition, the exchange note has
been held for more than one year. In general, long-term capital gains of
individuals are eligible for reduced rates of United States federal income
taxation. The deductibility of losses is subject to limitations.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, payments of interest on, and the proceeds from the sale,
redemption or other disposition of exchange notes (other than exchange notes
held by certain exempt persons, including most corporations and other persons
who, when required, demonstrate their exempt status) will be subject to
information reporting requirements. "Backup withholding" at a rate of 31% may
apply to such payments if the holder fails to furnish a correct taxpayer
identification number or otherwise fails to comply with all backup withholding
requirements.
The backup withholding tax is not an additional tax and may be credited
against a holder's regular United States federal income tax liability or
refunded by the IRS.
The payment of proceeds from the disposition of exchange notes to or
through the United States office of a broker will be subject to information
reporting and backup withholding rules unless the owner establishes an
exemption. Special rules may apply with respect to the payment of the proceeds
from the disposition of exchange notes to or through foreign offices of certain
brokers.
Treasury regulations that are generally effective for payments made
after December 31, 1999, subject to certain transition rules, modify in certain
respects the backup withholding and information reporting rules. In general,
these regulations do not significantly alter the substantive requirements of
these rules, but unify current procedures and forms and clarify reliance
standards. You should consult your own tax advisor regarding these regulations.
THE FOREGOING DISCUSSION DOES NOT PURPORT TO BE COMPLETE, IS FOR
GENERAL INFORMATION PURPOSES ONLY, AND IS NOT TAX ADVICE. ACCORDINGLY, YOU
SHOULD CONSULT YOUR OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO YOU
RESULTING FROM PARTICIPATING IN THE EXCHANGE OFFER AND OWNING AND DISPOSING OF
EXCHANGE NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
FOREIGN INCOME TAX LAWS, AND ANY ESTATE, GIFT OR OTHER TAX LAWS, AND ANY RECENT
OR PROSPECTIVE CHANGES IN APPLICABLE TAX LAWS, AS WELL AS THE TAX CONSEQUENCES
OF NOT PARTICIPATING IN THE EXCHANGE OFFER.
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UNITED STATES ERISA CONSIDERATIONS
ANY UNITED STATES EMPLOYEE BENEFIT PLAN THAT PROPOSES TO PURCHASE THE
NOTES SHOULD CONSULT WITH ITS COUNSEL WITH RESPECT TO THE POTENTIAL CONSEQUENCES
OF SUCH INVESTMENT UNDER THE FIDUCIARY RESPONSIBILITY PROVISIONS OF THE UNITED
STATES EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED AND THE
PROHIBITED TRANSACTION PROVISIONS OF ERISA AND THE CODE.
ERISA and the Internal Revenue Code impose certain requirements on
employee benefit plans and certain other retirement plans and arrangements,
including individual retirement accounts and annuities, that are subject to
ERISA or the Internal Revenue Code, all of which are referred to as "ERISA
plans," and on persons who are fiduciaries with respect to such ERISA plans. A
person who exercises discretionary authority or control with respect to the
management or assets of an ERISA plan will be considered a fiduciary of the
ERISA plan under ERISA. In accordance with ERISA's general fiduciary standards,
before investing in the notes, an ERISA plan fiduciary should determine whether
such an investment is permitted under the governing ERISA plan instruments and
is appropriate for the ERISA plan in view of its overall investment policy and
the composition and diversification of its portfolio. Other provisions of ERISA
and the Internal Revenue Code prohibit certain transactions involving the assets
of an ERISA plan and persons who have certain specified relationships to the
ERISA plan, "parties in interest" within the meaning of ERISA or "disqualified
persons" within the meaning of the Internal Revenue Code. Thus, an ERISA plan
fiduciary considering an investment in the notes should also consider whether
such an investment may constitute or give rise to a prohibited transaction under
ERISA or the Internal Revenue Code and whether an administrative exemption may
be applicable to such investment.
The acquisition of the notes by an ERISA plan could be a prohibited
transaction if either ECC, an initial purchaser or any of their respective
affiliates or, "offering participant," are parties in interest or disqualified
persons with respect to the ERISA plan. Any prohibited transaction could be
treated as exempt under ERISA and the Internal Revenue Code if the notes were
acquired pursuant to and in accordance with one or more "class exemptions"
issued by the United States Department of Labor, such as PTCE 84-14, which is an
exemption for certain transactions determined by an independent qualified
professional asset manager, PTCE 91-38, which is an exemption for certain
transactions involving bank collective investment funds, or PTCE 90-1, which is
an exemption for certain transactions involving insurance company pooled
separate accounts. Prior to acquiring the notes in this offering, an ERISA plan
or fiduciary should determine either that none of the offering participants is a
party in interest or disqualified person with respect to the ERISA plan or that
an exemption from the prohibited transaction rules is available for such
acquisition.
An ERISA plan fiduciary considering the purchase of the notes should
consult its tax and/or legal advisors regarding ECC, the availability, if any,
of exemptive relief from any potential prohibited transaction and other
fiduciary issues and their potential consequences. Each purchaser acquiring the
notes with the assets of an ERISA plan with respect to which any offering
participant is a party in interest or a disqualified person shall be deemed to
have represented that a statutory or an administrative exemption from the
prohibited transaction rules under Section 406 of ERISA and Section 4975 of the
Internal Revenue Code is applicable to such purchaser's acquisition of the
notes.
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PLAN OF DISTRIBUTION
Based on interpretations by the Staff set forth in no-action letters
issued to third parties, including "Exxon Capital Holdings Corporation,"
available May 13, 1988, "Morgan Stanley & Co. Incorporated," available June 5,
1991, "Mary Kay Cosmetics, Inc." available June 5, 1991, and "Warnaco, Inc.,"
available October 11, 1991, our company believes that exchange notes issued
pursuant to the exchange offer in exchange for the old notes may be offered for
resale, resold and otherwise transferred by holders so long as such holder is
not (i) our affiliate, (ii) a broker-dealer who acquired old notes directly from
us or our affiliate or (iii) a broker-dealer who acquired old notes as a result
of market-making or other trading activities. Offers, sales and transfers may be
made without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such exchange notes are acquired in the
ordinary course of such holders' business, and such holders are not engaged in,
and do not intend to engage in, and have no arrangement or understanding with
any person to participate in, a distribution of such exchange notes and that
participating broker-dealers receiving exchange notes in the exchange offer will
be subject to a prospectus delivery requirement with respect to resales of such
exchange notes. To date, the staff of the SEC has taken the position that
participating broker-dealers may fulfill their prospectus delivery requirements
with respect to transactions involving an exchange of securities such as the
exchange pursuant to the exchange offer (other than a resale of an unsold
allotment from the sale of the old notes to the initial purchasers) with the
prospectus contained in the registration statement relating to the exchange
offer. Pursuant to the registration rights agreements, we have agreed to permit
participating broker-dealers and other persons, if any, subject to similar
prospectus delivery requirements to use this prospectus in connection with the
resale of such exchange notes. We have agreed that, for a period of one year
after the consummation of the exchange offer, we will make this prospectus, and
any amendment or supplement to this prospectus, available to any broker-dealer
that requests such documents in the letter of transmittal for the exchange
offer. Each holder of the old notes who wishes to exchange its old notes for
exchange notes in the exchange offer will be required to make certain
representations to us as set forth in "The Exchange Offer." In addition, each
holder who is a broker-dealer and who receives exchange notes for its own
account in exchange for old notes that were acquired by it as a result of
market-making activities or other trading activities will be required to
acknowledge that it will deliver a prospectus in connection with any resale by
it of such exchange notes.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such exchange notes. Any
broker-dealer that resells exchange notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such exchange notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of exchange notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The letter of transmittal for the exchange offer states that, by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
We have agreed to pay all expenses incidental to the exchange offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act, as set forth in the
registration rights agreements.
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Following consummation of the exchange offer, we may, in our sole
discretion, commence one or more additional exchange offers to holders of old
notes who did not exchange their old notes for exchange notes in the exchange
offer, or terms that may differ from those contained in the registration
statement. This prospectus, as it may be amended or supplemented from time to
time, may be used by us in connection with any such additional exchange offers.
Such additional exchange offers will take place from time to time until all
outstanding old notes have been exchanged for exchange notes pursuant to the
terms and conditions herein.
LEGAL MATTERS
The validity of the exchange notes will be passed upon for us by
Winthrop, Stimson, Putnam & Roberts, New York, New York, as to matters of New
York law, and Friedlob Sanderson Raskin Paulson & Tourtillott, LLC, Denver,
Colorado, as to matters of Colorado law.
EXPERTS
The audited financial statements of our company included in this
prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of such firm as experts in giving such
reports.
WHERE YOU CAN FIND MORE INFORMATION
We and ECC are subject to the informational requirements of the
Exchange Act and each of ECC, our company, Dish and ESBC files reports, proxy
statements and other information with the SEC. The reports, proxy statements and
other information filed by the foregoing companies may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W. Washington D.C. 20549, and at the Commission's regional
offices located at 7 World Trade Center, New York, New York 10048, and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
be obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. ECC's Class A
common stock is traded on the Nasdaq National Market and reports and other
information concerning ECC can also be inspected at the Nasdaq National Market
Exchange, 1735 K Street, N.W., Washington, D.C. 20546. Such material may also be
accessed electronically by means of the EDGAR database at the SEC's home page on
the Internet at HTTP://WWW.SEC.GOV.
We have filed with the SEC a Registration Statement on Form S-4 (the
"Registration Statement") with respect to our 9 1/4% Senior Notes due 2006
and our 9 1/4% Senior Notes due 2009. This prospectus, which is part of the
registration statement, omits certain information included in the
registration statement. Statements made in the prospectus as to the contents
of any contract, agreement or other document are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the registration statement, we refer you to such exhibit for a
more complete description of the matter involved.
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INDEX TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants............................ F-2
Combined and Consolidated Balance Sheets at December 31, 1997
and 1998.......................................................... F-3
Combined and Consolidated Statements of Operations and Comprehensive
Loss for the years ended December 31, 1996, 1997 and 1998......... F-4
Combined and Consolidated Statements of Changes in Stockholder's
Equity for the years ended December 31, 1996, 1997 and 1998....... F-5
Combined and Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1997 and 1998............................ F-6
Notes to Combined and Consolidated Financial Statements............. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EchoStar DBS Corporation:
We have audited the accompanying combined and consolidated balance
sheets of EchoStar DBS Corporation (a Colorado corporation) and affiliates
and subsidiaries, as described in Note 1, as of December 31, 1997 and 1998,
and the related combined and consolidated statements of operations and
comprehensive loss, changes in stockholder's equity and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined and consolidated financial
position of EchoStar DBS Corporation and affiliates and subsidiaries as of
December 31, 1997 and 1998, 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, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 2, 1999.
F-2
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
COMBINED AND CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................. $ 62,059 $ 25,308
Marketable investment securities.......................................... 3,906 7,000
Trade accounts receivable, net of allowance for
uncollectible accounts of $1,347 and $2,996, respectively.............. 66,045 107,743
Inventories............................................................... 22,993 76,708
Other current assets...................................................... 28,264 24,823
----------- -----------
Total current assets......................................................... 183,267 241,582
Restricted Assets:
Insurance receivable (Note 3)............................................. - 106,000
Interest escrow........................................................... 112,284 69,129
Satellite escrow and other restricted cash and marketable investment
securities............................................................. 75,478 8,528
----------- -----------
Total restricted cash and marketable investment securities................... 187,762 183,657
Property and equipment, net.................................................. 859,284 853,818
FCC authorizations, net...................................................... 99,220 103,266
Advances to affiliates, net.................................................. 2,021 -
Deferred tax assets.......................................................... 64,409 60,638
Other noncurrent assets...................................................... 35,811 27,212
----------- -----------
Total assets............................................................ $ 1,431,774 $ 1,470,173
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable.................................................... $ 69,036 $ 90,562
Deferred revenue.......................................................... 122,215 132,857
Accrued expenses.......................................................... 97,090 176,158
Advances from affiliates, net............................................. - 54,805
Current portion of long-term debt......................................... 17,885 22,679
----------- -----------
Total current liabilities.................................................... 306,226 477,061
Long-term obligations, net of current portion:
1994 Notes................................................................ 499,863 571,674
1996 Notes................................................................ 438,512 497,955
1997 Notes................................................................ 375,000 375,000
Mortgages and other notes payable, net of current portion................. 51,846 43,450
Notes payable to ECC, including accumulated interest...................... 54,597 59,812
Long-term deferred satellite services revenue and other
long-term liabilities................................................... 19,500 33,358
----------- -----------
Total long-term obligations, net of current portion.......................... 1,439,318 1,581,249
----------- -----------
Total liabilities....................................................... 1,745,544 2,058,310
Commitments and Contingencies (Note 8)
Stockholder's Equity (Deficit):
Common Stock, $.01 par value, 3,000 shares authorized, issued and - -
outstanding...............................................................
Additional paid-in capital................................................ 125,164 145,164
Accumulated other comprehensive loss...................................... (8) -
Accumulated deficit....................................................... (438,926) (733,301)
----------- -----------
Total stockholder's equity (deficit)......................................... (313,770) (588,137)
----------- -----------
Total liabilities and stockholder's equity (deficit).................... $ 1,431,774 $1,470,173
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Combined and Consolidated Financial Statements.
F-3
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
DISH Network:
Subscription television services................. $ 49,650 $ 298,883 $ 669,310
Other............................................ 8,238 42,925 12,799
----------- ----------- -----------
Total DISH Network................................. 57,888 341,808 682,109
DTH equipment sales and integration services....... 77,390 90,263 253,841
Satellite services................................. 5,822 11,135 22,304
C-band and other................................... 56,003 32,696 27,655
----------- ----------- -----------
Total revenue......................................... 197,103 475,902 985,909
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses...................... 22,840 143,529 298,443
Customer service center and other................ 12,996 35,078 72,482
Satellite and transmission....................... 6,573 14,563 26,067
----------- ----------- -----------
Total DISH Network operating expenses.............. 42,409 193,170 396,992
Cost of sales - DTH equipment and integration
services..................................... 75,984 60,918 174,615
Cost of sales - C-band and other................... 42,345 23,909 16,496
Marketing:
Subscriber promotion subsidies................... 35,239 148,502 283,694
Advertising and other............................ 17,929 34,843 47,986
----------- ----------- -----------
Total marketing expenses........................... 53,168 183,345 331,680
General and administrative......................... 48,693 66,060 94,824
Amortization of subscriber acquisition costs....... 16,073 121,428 18,819
Depreciation and amortization...................... 27,296 51,408 83,338
----------- ----------- -----------
Total costs and expenses.............................. 305,968 700,238 1,116,764
----------- ----------- -----------
Operating loss........................................ (108,865) (224,336) (130,855)
Other Income (Expense):
Interest income.................................... 15,111 12,512 10,111
Interest expense, net of amounts capitalized....... (62,430) (110,003) (172,942)
Other.............................................. (345) (1,451) (618)
----------- ----------- -----------
Total other income (expense).......................... (47,664) (98,942) (163,449)
----------- ----------- -----------
Loss before income taxes.............................. (156,529) (323,278) (294,304)
Income tax benefit (provision), net................... 54,853 (146) (71)
----------- ----------- -----------
Net loss.............................................. $ (101,676) $ (323,424) $ (294,375)
----------- ----------- -----------
----------- ----------- -----------
Change in unrealized gain (loss) on available-for-sale
securities, net of tax ............................ (263) 4 8
----------- ----------- -----------
Comprehensive loss.................................... $ (101,939) $ (323,420) $ (294,367)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying Notes to Combined and Consolidated Financial Statements.
F-4
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
COMBINED AND CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT AND
UNREALIZED
COMMON STOCK COMMON ADDITIONAL HOLDING
---------------- PREFERRED STOCK PAID-IN GAINS
SHARES AMOUNT STOCK WARRANTS CAPITAL (LOSSES) TOTAL
-------- ------ --------- -------- --------- ---------- ---------
(Note 1)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994................. 33,544 $336 $15,991 $26,133 $62,197 $ (849) $103,808
Issuance of Common Stock................ 2 - - - 2 - 2
8% Series A Cumulative Preferred Stock
dividends (at $0.38 per share)........ - - 616 - - (616) -
Exercise of Common Stock Warrants....... 2,731 26 - (25,419) 25,393 - -
Common Stock Warrants exchanged for ECC
Warrants.............................. - - - (714) 714 - -
Launch bonuses funded by issuance of
ECC's Class A Common Stock............ - - - - 1,192 - 1,192
Unrealized holding gains on
available-for-sale securities, net.... - - - - - 251 251
Net loss................................ - - - - - (12,361) (12,361)
------- ------ -------- -------- --------- -------- --------
Balance, December 31, 1995................. 36,277 362 16,607 - 89,498 (13,575) 92,892
Issuance of Common Stock (Note 1)....... 1 - - - 2 - 2
Reorganization of entities under common
control (Note 1)...................... (36,275) (362) (16,607) - 16,969 - -
Income tax benefit of deduction for
income tax purposes on exercise of
Class A Common Stock options.......... - - - - 2,372 - 2,372
Unrealized holding losses on
available-for-sale securities, net.... - - - - - (263) (263)
Net loss................................ - - - - - (101,676) (101,676)
------- ------ -------- -------- --------- -------- --------
Balance, December 31, 1996................. 3 - - - 108,841 (115,514) (6,673)
Purchase price "pushed-down" to DBSC by
ECC (Note 1).......................... - - - - 16,323 - 16,323
Unrealized holding gains on
available-for-sale securities, net.... - - - - - 4 4
Net loss................................ - - - - - (323,424) (323,424)
------- ------ -------- -------- --------- -------- --------
Balance, December 31, 1997................. 3 - - - 125,164 (438,934) (313,770)
Contribution of satellite asset......... - - - - 20,000 - 20,000
Unrealized holding gains on
available-for-sale securities, net ... - - - - - 8 8
Net loss................................ - - - - - (294,375) (294,375)
------- ------ -------- -------- --------- -------- --------
Balance, December 31, 1998................. 3 $ - $ - $ - $145,164 $(733,301) $(588,137)
------- ------ -------- -------- --------- -------- --------
------- ------ -------- -------- --------- -------- --------
</TABLE>
See accompanying Notes to Combined and Consolidated Financial Statements.
F-5
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
----------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $ (101,676) $(323,424) $(294,375)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization.................. 27,296 51,408 83,338
Amortization of subscriber acquisition costs... 16,073 121,428 18,819
Interest on notes payable to ECC added to
principal...................................... - 5,215 5,215
Deferred income tax benefit.................... (50,515) (361) -
Amortization of debt discount and deferred
financing costs............................. 61,695 83,221 125,724
Change in reserve for excess and obsolete
inventory................................... 2,866 (1,823) 1,341
Change in long-term deferred satellite services
revenue and other long-term liabilities..... 5,949 12,056 13,858
Other, net..................................... 536 403 -
Changes in current assets and current liabilities:
Trade accounts receivable, net............... (4,368) (52,562) (41,698)
Inventories.................................. (36,864) 51,597 (55,056)
Subscriber acquisition costs................. (84,202) (72,118) -
Other current assets......................... (3,118) 13,359 (11,611)
Trade accounts payable....................... 22,165 27,808 21,526
Deferred revenue............................. 103,511 18,120 10,642
Accrued expenses............................. 17,816 58,124 68,328
---------- --------- ---------
Net cash flows from operating activities.......... (22,836) (7,549) (53,949)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities..... (138,328) (36,586) (8,970)
Sales of marketable investment securities......... 119,730 51,513 5,868
Purchases of restricted marketable investment (21,100) (1,495) -
securities......................................
Funds released from escrow and restricted cash and
marketable investment securities................ 235,402 120,215 116,468
Offering proceeds and investment earnings placed (193,972) (227,561) (6,343)
in escrow.......................................
Repayments from (advances to) affiliates, net..... (33,105) 9,976 -
Purchases of property and equipment............... (214,614) (221,750) (153,513)
Expenditures for FCC authorizations............... (55,420) - -
Other............................................. 6,445 (391) 3,150
---------- --------- ---------
Net cash flows from investing activities.......... (294,962) (306,079) (43,340)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock............ 2 - -
Proceeds from (repayment of) note payable to ECC.. 12,000 (12,000) -
Net proceeds from issuance of 1996 Notes.......... 336,916 - -
Net proceeds from issuance of 1997 Notes.......... - 362,500 -
Advances from affiliates.......................... - - 77,090
Repayments of mortgage indebtedness and notes
payable......................................... (6,631) (13,253) (16,552)
---------- --------- ---------
Net cash flows from financing activities.......... 342,287 337,247 60,538
---------- --------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... 24,489 23,619 (36,751)
Cash and cash equivalents, beginning of year...... 13,951 38,440 62,059
---------- --------- ---------
Cash and cash equivalents, end of year............ $ 38,440 $ 62,059 $ 25,308
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying Notes to Combined and Consolidated Financial Statements.
F-6
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
BASIS OF PRESENTATION
EchoStar DBS Corporation ("DBS Corp," or the "Company"), is a
wholly-owned subsidiary of EchoStar Communications Corporation ("ECC" and
together with its subsidiaries "EchoStar"), a publicly traded company on the
Nasdaq National Market. During March 1999, EchoStar received approval from
the Federal Communications Commission ("FCC") to reorganize certain of its
direct and indirect wholly-owned subsidiaries in order to streamline its
organization and operations. During the first quarter of 1999, EchoStar
intends to place ownership of all of its direct broadcast satellites and
related FCC licenses into EchoStar Satellite Corporation ("ESC"). DirectSat
Corporation and Direct Broadcasting Satellite Corporation ("DBSC"), which
currently own EchoStar II and EchoStar III, respectively, will both be merged
into ESC. EchoStar also intends to merge EchoStar Space Corporation ("Space")
into ESC. Dish, Ltd., and EchoStar Satellite Broadcasting Company ("ESBC")
will be merged into the Company. EchoStar IV and the related FCC licenses,
which are currently owned by DBS Corp, and those satellites and FCC licenses
to be acquired in the 110 Acquisition (defined herein), also will be
transferred to ESC. The accompanying financial statements retroactively
reflect the consolidated historical results of DBS Corp and its subsidiaries
combined with the historical results of Space and DBSC. Substantially all of
EchoStar's operating activities are conducted by subsidiaries of DBS Corp.
DBSC and Space's assets consist principally of certain satellite and FCC
authorization assets. There are no significant operating activities conducted
by either DBSC or Space. (See Organization and Legal Structure below).
DBS Corp was formed under Colorado law in January 1996 for the
initial purpose of participating in an FCC auction. On January 26, 1996, DBS
Corp submitted the winning bid of $52.3 million for 24 direct broadcast
satellite ("DBS") frequencies at the 148DEG. West Longitude ("WL")
orbital location. Funds necessary to complete the purchase of the DBS
frequencies and commence construction of the Company's fourth DBS satellite,
EchoStar IV, were advanced to the Company by ECC. In June 1997, DBS Corp
completed an offering (the "1997 Notes Offering") of 12 1/2% Senior Secured
Notes due 2002 (the "1997 Notes"). The 1997 Notes were retired on January 25,
1999 upon completion of the Tender Offers (as defined herein). Prior to
consummation of the 1997 Notes Offering, ECC contributed all of the
outstanding capital stock (the "Contribution") of ESBC to DBS Corp. As a
result of the Contribution, ESBC became a wholly-owned subsidiary of DBS
Corp. This transaction was accounted for as a reorganization of entities
under common control in which ESBC is treated as the predecessor of DBS Corp.
During 1994, EchoStar acquired approximately 40% of the outstanding
common stock of Direct Broadcasting Satellite Corporation ("Old DBSC"). Old
DBSC's principal assets included an FCC conditional satellite permit and
specific orbital slot assignments for a total of 22 DBS frequencies. Through
December 1996, EchoStar advanced Old DBSC a total of $46 million in the form
of notes receivable to enable Old DBSC to make required payments under its
satellite (EchoStar III) construction contract. As of December 31, 1996,
these notes receivable totaled $49 million, including accrued interest of $3
million. On January 8, 1997, EchoStar consummated the merger of Old DBSC with
a wholly-owned subsidiary of EchoStar, DBSC, as defined above. EchoStar
issued approximately 650,000 shares of its Class A common stock to acquire
the remaining 60% of Old DBSC that it did not previously own. This
transaction was accounted for as a purchase and the excess of the purchase
price over the fair value of Old DBSC's tangible assets was allocated to Old
DBSC's FCC authorizations (approximately $16 million). Upon consummation of
the merger, Old DBSC ceased to exist.
F-7
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PRINCIPAL BUSINESS
The operations of EchoStar include three interrelated business units:
- THE DISH NETWORk - a DBS subscription television service in the United
States. As of December 31, 1998, EchoStar had approximately 1.9
million DISH Network subscribers.
- ECHOSTAR TECHNOLOGIEs CORPORATIOn ("ETC") - engaged in the design,
distribution and sale of DBS set-top boxes, antennae and other digital
equipment for the DISH Network ("EchoStar receiver systems"), and the
design and distribution of similar equipment for direct-to-home
("DTH") projects of others internationally, together with the
provision of uplink center design, construction oversight and other
project integration services for international direct-to-home
ventures.
- SATELLITE SERVICEs - engaged in the delivery of video, audio and data
services to business television customers and other satellite users.
These services may include satellite uplink services, satellite
transponder space usage, billing, customer service and other services.
Since 1994, EchoStar has deployed substantial resources to develop
the "EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-allocated DBS spectrum, DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," and "EchoStar IV"), digital satellite receivers, digital
broadcast operations center, customer service facilities, and other assets
utilized in its operations. EchoStar's principal business strategy is to
continue developing its subscription television service in the United States
to provide consumers with a fully competitive alternative to cable television
service.
AGREEMENT WITH NEWS CORPORATION LIMITED AND MCI TELECOMMUNICATIONS
CORPORATION/WORLDCOM
On November 30, 1998, EchoStar announced an agreement with MCI
Telecommunications Corporation/WorldCom ("MCI"), The News Corporation Limited
("News Corporation") and its American Sky Broadcasting, LLC subsidiary (the
"110 Acquisition"). Pursuant to the 110 Acquisition, EchoStar would acquire
or receive:
- the rights to 28 frequencies at the 110DEG. WL orbital location
from which EchoStar could transmit programming to the entire
continental United States;
- two DBS satellites constructed by Space Systems/Loral, delivered
in-orbit and currently expected to be launched during 1999;
- a recently-constructed digital broadcast operations center located in
Gilbert, Arizona;
- a worldwide license agreement to manufacture and distribute set-top
boxes internationally using News Data System, Limited's
encryption/decoding technology;
- a commitment by an affiliated entity of News Corporation to purchase
from ETC a minimum of 500,000 set-top boxes; and o a three-year, no
fee agreement for the DISH Network to rebroadcast FOX Broadcasting
Company owned-and-operated local station signals to their respective
markets.
EchoStar will not incur any costs associated with the construction,
launch or insurance (including launch insurance and one year of in-orbit
insurance) of the two DBS satellites. EchoStar and MCI also agreed that MCI
will have the non-exclusive right to bundle DISH Network service with MCI's
telephony service offerings on mutually agreeable terms. In addition,
EchoStar agreed to carry the FOX News Channel on the DISH Network. EchoStar
received standard program launch support payments in exchange for carrying
the programming.
By combining the capacity of the two newly acquired satellites at
the 110DEG. WL orbital slot and EchoStar's current satellites at the
119DEG. WL orbital slot (subject to FCC approval), EchoStar expects that
the DISH Network will have the capacity to provide more than 500 channels of
programming, Internet and high-speed data services and high definition
television nationwide to a subscriber's single 18-inch satellite dish, and
would be positioned to
F-8
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
offer a one-dish solution for satellite-delivered local programming to major
markets across the United States. EchoStar also expects to be able to serve
Alaska, Hawaii, Puerto Rico and the United States territories in the
Caribbean from the 110DEG. WL orbital slot.
Beneficial interest in substantially all of the assets and rights to
be acquired by EchoStar in the 110 Acquisition will be transferred to the
Company promptly after closing.
TENDER OFFERS
On December 23, 1998, EchoStar commenced cash tender offers ("Tender
Offers") as part of a plan to refinance its indebtedness at more favorable
interest rates and terms. EchoStar offered to purchase any and all of the
following debt securities:
- the 12 7/8% Senior Secured Discount Notes due June 1, 2004 issued by
Dish, Ltd. (the "1994 Notes");
- the 13 1/8% Senior Secured Discount Notes due 2004 issued by ESBC (the
"1996 Notes"); and
- the 1997 Notes issued by the Company.
EchoStar also announced that it had sent to all holders of its
issued and outstanding 12 1/8% Series B Senior Redeemable Exchangeable
Preferred Stock due 2004 (the "Series B Preferred Stock") a notice to
exchange all of the outstanding shares of Series B Preferred Stock into 12
1/8% Senior Preferred Exchange Notes due 2004 (the "Senior Exchange Notes")
on the terms and conditions set forth in the certificate of designation
relating to the Series B Preferred Stock. The Senior Exchange Notes were
issued on January 4, 1999. Immediately following the exchange, EchoStar
commenced an offer to purchase any and all outstanding Senior Exchange Notes.
The Tender Offers for the first three issues of notes were
consummated on January 25, 1999. The Tender Offers were funded with proceeds
from the offering of the 9 1/4% Senior Notes due 2006 (the "Seven Year
Notes") and the 9 3/8% Senior Notes due 2009 (the "Ten Year Notes," and
together with the Seven Year Notes, the "Notes") described at Note 4, with
holders of more than 99% of each issue of debt securities tendering their
notes and consenting to certain amendments to the indentures governing the
notes that eliminated substantially all of the restrictive covenants and
amended certain other provisions. The Tender Offer for the Senior Exchange
Notes expired on February 1, 1999 and was funded by the Company with proceeds
from the issuance of the Notes. More than 99% of the outstanding Senior
Exchange Notes were validly tendered.
F-9
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PRO FORMA FINANCIAL INFORMATION
The following table sets forth: (i) certain historical balance sheet
data as of December 31, 1998, (ii) a balance sheet as of December 31, 1998 as
adjusted to give effect to the consummation of the Tender Offers and the
concurrent issuance of the Notes, and (iii) a balance sheet as of December
31, 1998 as further adjusted for the pro forma effects assuming consummation
of the 110 Acquisition.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
---------------------------------------------
AS ADJUSTED
ACTUAL AS ADJUSTED AND PRO FORMA
------------ ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Cash, cash equivalents, and marketable investment securities.... $ 32,308 $ 292,674 $ 292,674
Restricted cash and marketable investment securities............ 77,657 - -
----------- ----------- -----------
Total cash, cash equivalents and marketable investment
securities................................................... 109,965 292,674 292,674
----------- ----------- -----------
----------- ----------- -----------
Total assets $ 1,470,173 $ 1,656,971 $ 2,826,971
----------- ----------- -----------
----------- ----------- -----------
Long-term debt (net of current portion):
Mortgages and notes payable.................................. $ 43,450 $ 43,450 $ 43,450
Notes payable to ECC, including accrued interest............. 59,812 - -
1994 Notes................................................... 571,674 1,390 1,390
1996 Notes................................................... 497,955 950 950
1997 Notes................................................... 375,000 15 15
9 1/4% Senior Notes due 2006................................. - 375,000 375,000
9 3/8% Senior Notes due 2009................................. - 1,625,000 1,625,000
----------- ----------- -----------
Total long-term debt....................................... 1,547,891 2,045,805 2,045,805
Stockholder's Equity (Deficit):
Common Stock, $.01 par value, 3,000 shares
authorized, issued and outstanding......................... - - -
Additional paid-in capital................................... 145,164 345,164 1,515,164
Accumulated deficit.......................................... (733,301) (1,244,417) (1,244,417)
----------- ----------- -----------
Total stockholder's equity (deficit)............................ (588,137) (899,253) 270,747
----------- ----------- -----------
Total liabilities and stockholder's equity (deficit)............ $ 1,470,173 $ 1,656,971 $2,826,971
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Restrictions on cash held in escrow under the terms of indentures
were removed as a result of the Tender Offers. The restricted cash balances
as of December 31, 1998 have been reclassified and included in the "as
adjusted" amount of cash, cash equivalents and marketable investment
securities. The restriction on the insurance receivable of $106 million (not
shown) was also removed.
The increase in as adjusted and pro forma total assets includes a
net increase in cash available to the Company for working capital of
approximately $186 million as a result of the Notes offering, plus $1.17
billion of assets to be acquired by EchoStar pursuant to the 110 Acquisition
and contributed to the Company.
The increase in additional paid-in capital consists of $200 million
in cash to be contributed to the Company by ECC and additional assets valued
at $1.17 billion, to be acquired by EchoStar in the 110 Acquisition and
contributed to the Company.
The increase in accumulated deficit results from (a) a distribution
of the offering proceeds to EchoStar of approximately $269 million to retire
the Senior Exchange Notes, including related costs of that tender offer, (b)
interest expense of approximately $13.6 million from December 31, 1998
through January 25, 1999, the date of consummation of the Tender Offers on
debt repurchased and paid, and (c) the estimated extraordinary loss upon the
F-10
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
early retirement of the 1994 Notes, the 1996 Notes and the 1997 Notes
pursuant to the Tender Offers of approximately $229 million (approximately
$203 million of tender premiums and consent fees and approximately $26
million associated with the write-off of unamortized deferred financing costs
and other transaction-related costs) that the Company will report in 1999.
ORGANIZATION AND LEGAL STRUCTURE
Certain companies principally owned and controlled by Mr. Charles W.
Ergen were reorganized in 1993 into Dish, Ltd. (together with its
subsidiaries, "Dish, Ltd."). In April 1995, ECC was formed to complete an
initial public offering of its Class A common stock. Concurrently, Mr. Ergen
exchanged all of his then outstanding shares of Class B common stock and 8%
Series A Cumulative Preferred Stock of Dish, Ltd. for like shares of ECC. In
December 1995, ECC merged Dish, Ltd. with a wholly-owned subsidiary of ECC
(the "Merger"). Substantially all of EchoStar's operations are conducted by
subsidiaries of Dish, Ltd. The following table summarizes the organizational
structure of EchoStar and its principal subsidiaries as of December 31, 1998:
<TABLE>
<CAPTION>
REFERRED TO
LEGAL ENTITY HEREIN AS PARENT
- ---------------------------------------------------------- ----------- ---------------
<S> <C> <C>
EchoStar Communications Corporation ECC Publicly owned
EchoStar DBS Corporation DBS Corp ECC
EchoStar Space Corporation Space ECC
Direct Broadcasting Satellite Corporation DBSC ECC
EchoStar Satellite Broadcasting Corporation ESBC DBS Corp
Dish, Ltd. Dish, Ltd. ESBC
EchoStar Satellite Corporation ESC Dish, Ltd.
Echosphere Corporation Echosphere Dish, Ltd.
EchoStar Technologies Corporation (formerly HTS, a Texas
Corporation) ETC Dish, Ltd.
Houston Tracker Systems, Inc., a Colorado Corporation
formed in 1998 HTS Dish, Ltd.
DirectSat Corporation DirectSat Dish, Ltd.
EchoStar International Corporation EIC Dish, Ltd.
</TABLE>
SIGNIFICANT RISKS AND UNCERTAINTIES
SUBSTANTIAL LEVERAGE. The Company is highly leveraged, which makes
it vulnerable to changes in general economic conditions. At December 31,
1998, on a pro forma basis after giving effect to consummation of the Tender
Offers and the concurrent issuance of the Notes, the Company's outstanding
long-term debt (including both the current and long-term portions) would have
been approximately $2.07 billion. Beginning in 1999, the Company will have
semi-annual cash debt service requirements of approximately $94 million
related to the Notes. The Company's ability to meet its debt service
obligations will depend on, among other factors, the successful execution of
its business strategy, which is subject to uncertainties and contingencies
beyond the Company's control.
EXPECTED OPERATING LOSSES. Since 1996, the Company has reported
significant operating and net losses. Improvements in the Company's future
results of operations are largely dependent upon its ability to increase its
customer base while maintaining its overall cost structure, controlling
subscriber turnover and effectively managing its subscriber acquisition
costs. No assurance can be given that the Company will be effective with
regard to these matters. In addition, the Company incurs significant
acquisition costs to obtain DISH Network subscribers. The high cost of
obtaining new subscribers magnifies the negative effects of subscriber
turnover.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION AND CONSOLIDATION
The accompanying financial statements present the combination of DBS
Corp, Space and DBSC, each direct wholly-owned subsidiaries of ECC. All
significant intercompany transactions between DBS Corp, Space and DBSC
(consisting primarily of capital advanced by DBS Corp to Space and DBSC) and
between DBS Corp and its
F-11
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
subsidiaries have been eliminated. Advances to affiliates are recorded at
cost and represent the net amount of funds advanced to, or received from,
unconsolidated affiliates of DBS Corp.
The Company accounts for investments in 50% or less owned entities
using the equity method. At December 31, 1996, 1997 and 1998, these
investments were not material to the Company's combined and consolidated
financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each
reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES
The functional currency of the Company's foreign subsidiaries is the
U.S. dollar because their sales and purchases are predominantly denominated
in that currency. Transactions denominated in currencies other than U.S.
dollars are recorded based on exchange rates at the time such transactions
arise. Subsequent changes in exchange rates result in transaction gains and
losses which are reflected in income as unrealized (based on period-end
translation) or realized (upon settlement of the transaction). Net
transaction gains (losses) during 1996, 1997 and 1998 were not material to
the Company's results of operations.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents. Cash equivalents
as of December 31, 1997 and 1998 consist of money market funds, corporate
notes and commercial paper; such balances are stated at cost which equates to
market value.
F-12
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
STATEMENTS OF CASH FLOWS DATA
The following presents the Company's supplemental cash flow
statement disclosure (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash paid for interest............................................... $ 3,007 $ 5,953 $57,706
Cash paid for income taxes........................................... 383 209 83
Capitalized interest................................................. 31,818 43,169 21,619
Satellite launch payment for EchoStar II applied to
EchoStar I launch.................................................. 15,000 - -
Satellite vendor financing........................................... 31,167 14,400 12,950
Other notes payable.................................................. - 5,322 -
Contribution of satellite asset...................................... - - 20,000
The purchase price of Old DBSC was "pushed-down" by ECC
to the Company as follows in the related purchase accounting:
EchoStar III satellite under construction........................ - 51,241 -
FCC authorizations............................................... - 16,243 -
Notes payable to ECC, including accrued interest of $3,382....... - (49,382) -
Accounts payable and accrued expenses............................ - (1,279) -
Other notes payable.............................................. - (500) -
Additional paid-in capital....................................... - (16,323) -
</TABLE>
MARKETABLE INVESTMENT SECURITIES AND RESTRICTED CASH AND MARKETABLE
INVESTMENT SECURITIES
As of December 31, 1997 and 1998, the Company has classified all
marketable investment securities as available-for-sale. The fair market value
of marketable investment securities approximates the carrying value and
represents the quoted market prices at the balance sheet dates. Related
unrealized gains and losses, if material, are reported as a separate
component of stockholder's equity, net of related deferred income taxes, if
applicable. The specific identification method is used to determine cost in
computing realized gains and losses.
Restricted cash and marketable investment securities held in escrow
accounts, as reflected in the accompanying combined and consolidated balance
sheets, include cash restricted as of December 1997 and 1998 by the indenture
related to the 1997 Notes, plus investment earnings thereon. Restricted cash
and marketable investment securities are invested in certain permitted debt
and other marketable investment securities until disbursed for the express
purposes identified in the applicable indenture. The major components of
marketable investment securities and restricted cash and marketable
investment securities are as follows (in thousands):
<TABLE>
<CAPTION>
RESTRICTED CASH AND MARKETABLE
MARKETABLE INVESTMENT SECURITIES INVESTMENT SECURITIES
DECEMBER 31, DECEMBER 31,
--------------------------------- -----------------------------------
1997 1998 1997 1998
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Commercial paper....................... $ 3,906 $ - $ 128,734 $ 8,424
Corporate notes........................ - 7,000 38,093 54,360
Government bonds....................... - - 16,695 14,517
Certificates of deposit................ - - 2,245 -
Accrued interest....................... - - 1,995 356
---------------------------------- ----------------------------------
$ 3,906 $ 7,000 $ 187,762 $ 77,657
---------------------------------- ----------------------------------
---------------------------------- ----------------------------------
</TABLE>
Marketable investment securities and restricted cash and marketable
investment securities include debt securities of $85 million with contractual
maturities of one year or less. As of December 31, 1998 the Company did not
hold any debt securities with contractual maturities between one and five
years or with contractual maturities of more
F-13
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
than five years. Actual maturities may differ from contractual maturities as
a result of the Company's ability to sell these securities prior to maturity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values for the Company's 1994 Notes, 1996 Notes and 1997 Notes
are based on quoted market prices. The fair values of the Company's mortgages
and other notes payable are estimated using discounted cash flow analyses.
The interest rates assumed in such discounted cash flow analyses reflect
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The following table summarizes the book
and fair values of the Company's debt facilities at December 31, 1997 and
1998 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------------- ------------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
1994 Notes................................ $ 499,863 $ 570,960 $ 571,674 $ 636,480
1996 Notes................................ 438,512 488,650 497,955 580,000
1997 Notes................................ 375,000 406,875 375,000 431,250
Mortgages and other notes payable......... 69,731 69,127 66,129 61,975
</TABLE>
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method. Proprietary products are
manufactured by outside suppliers to the Company's specifications.
Manufactured inventories include materials, labor and manufacturing overhead.
Cost of other inventories includes parts, contract manufacturers' delivered
price, assembly and testing labor, and related overhead, including handling
and storage costs. Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
--------- --------
<S> <C> <C>
EchoStar receiver systems.................................. $ 7,649 $ 45,025
DBS receiver components.................................... 12,506 27,050
Consigned DBS receiver components.......................... 3,122 6,073
Finished goods - analog DTH equipment...................... 2,116 2,656
Spare parts and other...................................... 1,440 1,085
Reserve for excess and obsolete inventory.................. (3,840) (5,181)
--------- --------
$ 22,993 $ 76,708
--------- --------
--------- --------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Cost includes interest
capitalized of $26 million, $32 million and $16 million during the years
ended December 31, 1996, 1997 and 1998, respectively. The costs of satellites
under construction are capitalized during the construction phase, assuming
the eventual successful launch and in-orbit operation of the satellite. If a
satellite were to fail during launch or while in-orbit, the resultant loss
would be charged to expense in the period such loss was incurred. The amount
of any such loss would be reduced to the extent of insurance proceeds
received as a result of the launch or in-orbit failure. Depreciation is
recorded on a straight-line basis for financial reporting purposes. Repair
and maintenance costs are charged to expense when incurred. Renewals and
betterments are capitalized.
The Company reviews its long-lived assets and identifiable
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. For
assets which are held and used in operations, the asset would be impaired if
the book value of the asset exceeded the undiscounted future net cash flows
related to the asset. For those assets which are to be disposed of, the
assets
F-14
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
would be impaired to the extent the fair value does not exceed the book
value. The Company considers relevant cash flow, estimated future operating
results, trends and other available information including the fair value of
frequency rights owned, in assessing whether the carrying value of assets are
recoverable.
FCC AUTHORIZATIONS
FCC authorizations are recorded at cost and amortized using the
straight-line method over a period of 40 years. Such amortization commences
at the time the related satellite becomes operational; capitalized costs are
written off at the time efforts to provide services are abandoned. FCC
authorizations include interest capitalized of $6 million, $11 million and $6
million during the years ended December 31, 1996, 1997 and 1998, respectively.
REVENUE RECOGNITION
Revenue from the provision of DISH Network subscription television
services and satellite services is recognized as revenue in the period such
services are provided. Revenue from sales of digital set-top boxes and
related accessories is recognized upon shipment to customers. Revenue from
the provision of integration services is recognized as revenue in the period
the services are performed.
SUBSCRIBER PROMOTION SUBSIDIES AND SUBSCRIBER ACQUISITION COSTS
In August 1996, the Company began selling its EchoStar receiver
systems below its manufactured cost to consumers conditioned upon the
consumer's one-year prepaid subscription to the DISH Network's America's Top
50 CD programming package. From August 1996 through September 1997, the
excess of the Company's aggregate costs (equipment, programming and other)
over proceeds from equipment sales and prepaid programming was expensed
("subscriber promotion subsidies") upon shipment of the equipment. Remaining
costs were deferred ("subscriber acquisition costs") and amortized over the
term of the prepaid subscription (normally one year). Effective October 1997,
promotional programs changed and new subscribers were not required to prepay
for a year of programming. Consequently, the Company began expensing
subscriber acquisition costs as incurred. As of December 31, 1998, all
previously deferred costs were fully amortized.
DEFERRED DEBT ISSUANCE COSTS AND DEBT DISCOUNT
Costs of issuing the 1994 Notes, the 1996 Notes and the 1997 Notes
were deferred and are being amortized to interest expense over the terms of
the respective notes. The original issue discounts related to the 1994 Notes
and the 1996 Notes are being accreted to interest expense so as to reflect a
constant rate of interest on the accreted balance of the 1994 Notes and the
1996 Notes.
DEFERRED REVENUE
Deferred revenue principally consists of prepayments received from
subscribers for DISH Network programming. Such amounts are recognized as
revenue in the period the programming is provided to the subscriber.
F-15
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
LONG-TERM DEFERRED SATELLITE SERVICES REVENUE
Long-term deferred satellite services revenue consists of advance
payments from certain content providers for carriage of their signal on the
DISH Network. Such amounts are deferred and recognized as revenue on a
straight-line basis over the related contract terms (up to ten years).
ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1998
-------- ---------
<S> <C> <C>
Royalties and copyright fees...................... $ 21,573 $ 49,400
Programming....................................... 20,018 35,472
Marketing......................................... 4,660 33,463
Interest.......................................... 24,621 24,918
Other............................................. 26,218 32,905
-------- ---------
$ 97,090 $ 176,158
-------- ---------
-------- ---------
</TABLE>
ADVERTISING COSTS
Advertising costs, exclusive of subscriber promotion subsidies, are
expensed as incurred and totaled $18 million, $35 million and $48 million for
the years ended December 31, 1996, 1997 and 1998, respectively.
COMPREHENSIVE LOSS
In June 1997, the Financial Accounting Standards Board issued
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("FAS
No. 130"), which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. The Company
adopted FAS No. 130 effective as of the first quarter of 1998. FAS No. 130
establishes new rules for the reporting and display of comprehensive loss and
its components, however it has no impact on the Company's net loss or
stockholder's equity. The change in unrealized gain (loss) on
available-for-sale securities is the only component of the Company's other
comprehensive loss. Accumulated other comprehensive loss presented on the
accompanying combined and consolidated balance sheets consists of the
accumulated net unrealized loss on available-for-sale securities, net of
deferred taxes.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which
provides guidance that requires capitalization of certain costs incurred
during an internal-use software development project. SOP 98-1 is effective
for fiscal years beginning after December 15, 1998. The Company does not
expect that adoption of SOP 98-1 will materially affect its combined and
consolidated financial statements.
RECLASSIFICATIONS
Certain prior year balances in the combined and consolidated
financial statements have been reclassified to conform with the 1998
presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
F-16
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
--------- ------------
<S> <C> <C>
EchoStar I....................................... $ 201,607 $ 201,607
EchoStar II...................................... 228,694 228,694
EchoStar III..................................... - 234,083
EchoStar IV...................................... - 105,005
Furniture, fixtures and equipment................ 92,170 182,717
Buildings and improvements....................... 22,114 42,121
Tooling and other................................ 4,336 5,551
Land............................................. 1,636 1,640
Vehicles......................................... 1,321 1,288
Construction in progress......................... 393,189 18,329
--------- ------------
Total property and equipment................. 945,067 1,021,035
Accumulated depreciation......................... (85,783) (167,217)
--------- ------------
Property and equipment, net.................. $ 859,284 $ 853,818
--------- ------------
--------- ------------
</TABLE>
EchoStar III, which was launched in October 1997, commenced
commercial operation in January 1998. EchoStar IV, which was launched in May
1998, commenced commercial operation in August 1998. As of December 31, 1997
construction in progress primarily consisted of EchoStar III ($234 million)
and EchoStar IV ($120 million).
ECHOSTAR IV IMPAIRMENT
As previously announced, the south solar array on EchoStar IV did
not properly deploy subsequent to the launch of EchoStar IV on May 8, 1998.
This anomaly has resulted in a reduction of power available to operate the
satellite. In addition, an unrelated anomaly discovered during the third
quarter of 1998 resulted in the failure of six transponders. The satellite is
equipped with a total of 44 transponders. Only 24 transponders are necessary
to fully utilize the Company's 24 frequencies at 148DEG. WL, where the
satellite is located.
The Company is currently able to use a maximum of only 20
transponders as a result of the solar array anomaly described above. The
number of available transponders will decrease over time, but based on
existing data, the Company expects that approximately 16 transponders will
probably be available over the entire expected 12 year life of the satellite,
absent significant additional transponder or other failures. In September
1998, the Company filed a $219.3 million insurance claim for a total
constructive loss (as defined in the launch insurance policy) related to
EchoStar IV. However, if the Company were to receive $219.3 million for a
total constructive loss on the satellite, the insurers would obtain the sole
right to the benefits of salvage from EchoStar IV under the terms of the
launch insurance policy. While the Company believes it has suffered a total
constructive loss of EchoStar IV in accordance with that definition in the
launch insurance policy, the Company presently intends to negotiate a
settlement with the insurers that will compensate the Company for the reduced
satellite transmission capacity and allow the Company to retain title to the
asset.
Space originally contracted for the launch of EchoStar IV.
Accordingly, all costs associated with the launch of EchoStar IV were
recognized by Space. Funds necessary to pay for the launch of EchoStar IV
were advanced to Space by ECC ($20 million) and DBS Corp ($64 million).
However, because DBS Corp is the named insured under the terms of the
EchoStar IV launch insurance policy, it will be entitled to all proceeds from
any insurance settlement. Consequently, in September 1998, Space transferred
its cost-basis in EchoStar IV to DBS Corp and ECC in settlement of prior
advances. ECC then made a $20 million capital contribution of its basis in
EchoStar IV to DBS Corp. As a result of these transactions (and prior to the
impairment provision described below), all costs associated with the
construction, launch and insurance of EchoStar IV are reflected on the
Company's balance sheet.
F-17
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
During the third quarter of 1998, the Company recorded a $106
million provision for loss in connection with the estimated reduced
operational capacity of EchoStar IV. This loss provision represents the
Company's present estimate of the asset impairment attributable to lost
transmission capacity on EchoStar IV resulting from the solar array anomaly
described above. The Company also recorded a $106 million gain attributable
to an anticipated insurance claim receivable that it believes is probable of
receipt. While there can be no assurance as to the amount of the final
insurance settlement, the Company believes that it will receive insurance
proceeds related to EchoStar IV that will be sufficient to at least fully
offset its asset impairment attributable to the reduction in capacity
sustained by EchoStar IV. While the Company believes it has sustained a total
constructive loss, insurers have requested additional information and may
contest the claim. To the extent that it appears probable that the Company
will receive insurance proceeds in excess of the $106 million currently
recorded and that no further provision for loss is necessary, a gain will be
recognized for the incremental amount in the period that the amount of the
final settlement can be reasonably estimated. Likewise, if the satellite
insurers obtain the right to salvage from EchoStar IV by payment to the
Company of the $219.3 million insured amount, the Company will record an
additional loss for the remaining carrying value of EchoStar IV.
ECHOSTAR III ANOMALY
During 1998, three transponders on EchoStar III malfunctioned,
resulting in the failure of a total of six transponders on the satellite.
While a maximum of 32 transponders can be operated at any time, the satellite
was equipped with a total of 44 transponders to provide redundancy. As a
result of this redundancy and because the Company is only licensed by the FCC
to operate 11 transponders at 61.5DEG. WL, where the satellite is
located, the transponder anomaly has not resulted in a loss of service to
date. The satellite manufacturer, Lockheed Martin, has advised the Company
that it believes it has identified the root cause of the failures, and that
while further transponder failures are possible, Lockheed Martin does not
believe it is likely that the operational capacity of EchoStar III will be
reduced below 32 transponders. Lockheed Martin also believes it is unlikely
that the Company's ability to operate at least the 11 licensed transponders
on the satellite will be affected. The Company will continue to evaluate the
performance of EchoStar III and may be required to modify its loss assessment
as new events or circumstances develop.
The time for filing a claim for a loss under the satellite insurance
policy that covered EchoStar III at the time of the transponder failures has
passed. While the insurance carriers were notified of the anomaly, as a
result of the built-in redundancy on the satellite and Lockheed Martin's
conclusions with respect to further failures, no claim for loss was filed.
During the anomaly investigation, the Company obtained a $200 million
in-orbit insurance policy on EchoStar III at standard industry rates, which
was renewed through June 25, 1999. However, the policy contains a
three-transponder deductible if the satellite is operating at 120 watts per
transponder, or a six-transponder deductible if the satellite is operating at
230 watts per transponder. As such, the policy would not cover transponder
failures unless transponder capacity is reduced to less than 26 transponders
in the 120 watt mode or 13 transponders in the 230 watt mode, during the
coverage period. As a result of the deductible, the Company could potentially
experience uninsured losses of capacity on EchoStar III. Although there can
be no assurance, the Company expects that in-orbit insurance can be procured
on more traditional terms in the future if no further failures occur in the
interim. If further failures do occur, the Company may not be able to obtain
additional insurance on EchoStar III on commercially reasonable terms. The
Company does not maintain insurance for lost profit opportunity.
F-18
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. LONG-TERM DEBT
As described in Note 1, except for residual aggregate non-tendered
debt of approximately $2.4 million, the 1994 Notes, 1996 Notes and the 1997
Notes that were outstanding at December 31, 1998 were retired in connection
with closing of the Tender Offers and the concurrent sale of the Seven and
Ten Year Notes. Additionally, substantially all of the restrictive covenants
contained in each of the respective indentures were removed upon closing of
the Tender Offers. A brief summary of the terms of the residual notes
outstanding follows.
1994 NOTES
In June 1994, Dish, Ltd. issued the 1994 Notes, which consisted of
12 7/8% Senior Secured Discount Notes due June 1, 2004 and Common Stock
Warrants (the "Warrants") (collectively, the "1994 Notes Offering"). The 1994
Notes Offering resulted in net proceeds to Dish, Ltd. of $323 million. The
1994 Notes bear interest at a rate of 12 7/8% computed on a semi-annual bond
equivalent basis. Interest on the 1994 Notes will not be payable in cash
prior to June 1, 1999, with the 1994 Notes accreting to a principal value at
stated maturity of $1,000 per bond (an aggregate of approximately $1.5
million for the bonds not tendered) by that date. Commencing in December
1999, interest on the 1994 Notes will be payable in cash on December 1 and
June 1 of each year. The remaining balance of 1994 Notes matures on June 1,
2004.
1996 NOTES
In March 1996, ESBC issued the 1996 Notes which consisted of 13 1/8%
Senior Secured Discount Notes due 2004 (the "1996 Notes Offering"). The 1996
Notes Offering resulted in net proceeds to ESBC of approximately $337
million. The 1996 Notes bear interest at a rate of 13 1/8%, computed on a
semi-annual bond equivalent basis. Interest on the 1996 Notes will not be
payable in cash prior to March 15, 2000, with the 1996 Notes accreting to a
principal amount at stated maturity of $1,000 per bond (an aggregate of
approximately $1.1 million for the bonds not tendered) by that date.
Commencing in September 2000, interest on the 1996 Notes will be payable in
cash on September 15 and March 15 of each year. The 1996 Notes that remain
outstanding following the Tender Offers mature on March 15, 2004.
1997 NOTES
In June 1997, the Company issued the 1997 Notes which consisted of
12 1/2% Senior Secured Notes due 2002 (the "1997 Notes Offering"). The 1997
Notes Offering resulted in net proceeds to the Company of approximately $363
million. Interest accrues on the 1997 Notes at a rate of 12 1/2% and is
payable in cash semi-annually on January 1 and July 1 of each year,
commencing January 1, 1998. Approximately $109 million of the net proceeds of
the 1997 Notes Offering was placed in the Interest Escrow to fund the first
five semi-annual interest payments (through January 1, 2000). Additionally,
approximately $112 million of the net proceeds of the 1997 Notes Offering was
placed in the Satellite Escrow to fund the construction, launch and insurance
of EchoStar IV. The 1997 Notes that remain outstanding following the Tender
Offers mature on July 1, 2002.
SEVEN AND TEN YEAR NOTES
On January 25, 1999, the Company sold $375 million principal amount
of 9 1/4% Senior Notes due 2006 (the Seven Year Notes) and $1.625 billion
principal amount of 9 3/8% Senior Notes due 2009 (the Ten Year Notes).
Interest accrues at annual rates of 9 1/4% and 9 3/8% on the Seven Year and
Ten Year Notes, respectively. Interest on the Seven and Ten Year Notes is
payable semi-annually in cash in arrears on February 1 and August 1 of each
year, commencing August 1, 1999.
Concurrently with the closing of the Notes offering, the Company
used approximately $1.658 billion of net proceeds received from the sale of
the Notes to complete the Tender Offers for its outstanding 1994 Notes, 1996
Notes and 1997 Notes. In February 1999, ECC used approximately $268 million
of net proceeds received from the sale of the Notes to complete the Tender
Offers related to the Senior Exchange Notes issued on January 4, 1999, in
exchange for all issued and outstanding 12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock. Following expiration
F-19
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
of the Tender Offers, and aggregate of approximately $2.4 million of 1994
Notes, 1996 Notes and 1997 Notes remain outstanding.
The Notes are general senior unsecured obligations, which (i) rank
PARI PASSU in right of payment to each other and to all existing and future
senior unsecured obligations, (ii) rank senior to all existing and future
junior obligations, and (iii) are effectively junior to secured obligations
to the extent of the collateral securing such obligations, including any
borrowings under future secured credit facilities. With the exception of
certain de minimis domestic and foreign subsidiaries, the Notes are fully,
unconditionally and jointly and severally guaranteed by all subsidiaries of
the Company, (collectively, the "Notes Guarantors").
Except under certain circumstances requiring prepayment premiums,
and in other limited circumstances, the Seven and Ten Year Notes are not
redeemable at the Company's option prior to February 1, 2003 and February 1,
2004, respectively. Thereafter, the Seven Year Notes will be subject to
redemption, at the option of the Company, in whole or in part, at redemption
prices decreasing from 104.625% during the year commencing February 1, 2003
to 100% on or after February 1, 2005, together with accrued and unpaid
interest thereon to the redemption date. The Ten Year Notes will be subject
to redemption, at the option of the Company, in whole or in part, at
redemption prices decreasing from 104.688% during the year commencing
February 1, 2004 to 100% on or after February 1, 2008, together with accrued
and unpaid interest thereon to the redemption date.
The indentures related to the Notes (the "Indentures") contain
restrictive covenants that, among other things, impose limitations on the
ability of the Company to: (i) incur additional indebtedness; (ii) apply the
proceeds of certain asset sales; (iii) create, incur or assume liens; (iv)
create dividend and other payment restrictions with respect to the Company's
subsidiaries; (v) merge, consolidate or sell assets; and (vi) enter into
transactions with affiliates. In addition, the Company may pay dividends on
its equity securities only if: (1) no default shall have occurred or is
continuing under the Indentures; and (2) after giving effect to such dividend
and the incurrence of any indebtedness (the proceeds of which are used to
finance the dividend), the Company's ratio of total indebtedness to cash flow
(calculated in accordance with the Indentures) would not exceed 8.0 to 1.0.
Moreover, the aggregate amount of such dividends generally may not exceed the
sum of the difference of cumulative consolidated cash flow (calculated in
accordance with the Indentures) minus 120% of consolidated interest expense
of the Company (calculated in accordance with the Indentures), in each case
from April 1, 1999 plus an amount equal to 100% of the aggregate net cash
proceeds received by the Company and its subsidiaries from the issuance or
sale of certain equity interests of the Company or EchoStar. In the event of
a change of control, as defined in the Indentures, the Company will be
required to make an offer to repurchase all of the Seven and Ten Year Notes
at a purchase price equal to 101% of the aggregate principal amount thereof,
together with accrued and unpaid interest thereon, to the date of repurchase.
F-20
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MORTGAGES AND OTHER NOTES PAYABLE
Mortgages and other notes payable consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1998
------------ -----------
<S> <C> <C>
8.25% note payable for satellite vendor financing for EchoStar I due in equal
monthly installments of $722, including interest, through February 2001...... $ 24,073 $ 17,137
8.25% note payable for satellite vendor financing for EchoStar II due in equal
monthly installments of $562, including interest, through November 2001...... 22,489 17,416
8.25% note payable for satellite vendor financing for EchoStar III due in equal
monthly installments of $294, including interest, through October 2002....... 13,812 12,183
8.25% note payable for satellite vendor financing for EchoStar IV due in equal
monthly installments of $264, including interest, through May 2003........... - 12,950
Mortgages and other unsecured notes payable due in installments through April
2009 with interest rates ranging from 8% to 10%.............................. 9,357 6,443
---------- ---------
Total....................................................................... 69,731 66,129
Less current portion........................................................ (17,885) (22,679)
---------- ---------
Mortgages and other notes payable, net of current portion................... $ 51,846 $ 43,450
---------- ---------
---------- ---------
</TABLE>
During 1995 and 1996, ECC advanced the Company $46 million in the
form of notes payable to enable the Company to make required payments under
its EchoStar III construction contract. The notes payable bear interest at
11.25%, which is being added to principle.
Future maturities of the Company's outstanding long-term debt, after
consummation of the Tender Offers and issuance of the Notes on January 25,
1999, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
MORTGAGES
AND OTHER
SEVEN YEAR TEN YEAR NOTES
NOTES NOTES PAYABLE TOTAL
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
YEAR ENDING DECEMBER 31,
1999...................... $ - $ - $ 22,679 $ 22,679
2000...................... - - 20,314 20,314
2001...................... - - 13,560 13,560
2002...................... - - 5,855 5,855
2003...................... - - 1,675 1,675
Thereafter................ 375,000 1,625,000 4,400 2,004,400
---------- ------------ ---------- ------------
Total........................ $ 375,000 $ 1,625,000 $ 68,483 $ 2,068,483
---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
</TABLE>
SATELLITE VENDOR FINANCING
The purchase price for satellites is required to be paid in progress
payments, some of which are non-contingent payments that are deferred until
after the respective satellites are in orbit (satellite vendor financing).
The Company utilized $36 million, $28 million, $14 million and $13 million of
satellite vendor financing for EchoStar I, EchoStar II, EchoStar III and
EchoStar IV, respectively. The satellite vendor financing with respect to
EchoStar I and EchoStar II is secured by substantially all assets of Dish,
Ltd. and its subsidiaries (subject to certain restrictions) and a corporate
guarantee of ECC. The satellite vendor financings for both EchoStar III and
EchoStar IV are secured by an ECC corporate guarantee.
F-21
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. INCOME TAXES
As of December 31, 1998, the Company had net operating loss
carryforwards ("NOLs") for Federal income tax purposes of approximately $448
million. The NOLs expire beginning in the year 2011. The use of the NOLs is
subject to statutory and regulatory limitations regarding changes in
ownership. Financial Accounting Standard No. 109, "Accounting for Income
Taxes," ("FAS No. 109") requires that the potential future tax benefit of
NOLs be recorded as an asset. FAS No. 109 also requires that deferred tax
assets and liabilities be recorded for the estimated future tax effects of
temporary differences between the tax basis and book value of assets and
liabilities. Deferred tax assets are offset by a valuation allowance if
deemed necessary.
In 1998, the Company increased its valuation allowance sufficient to
fully offset net deferred tax assets arising during the year. Realization of
net deferred tax assets is not assured and is principally dependent on
generating future taxable income prior to expiration of the NOLs. Management
believes existing net deferred tax assets in excess of the valuation
allowance will, more likely than not, be realized. The Company continuously
reviews the adequacy of its valuation allowance. Future decreases to the
valuation allowance will be made only as changed circumstances indicate that
it is more likely that not the additional benefits will be realized. Any
future adjustments to the valuation allowance will be recognized as a
separate component of the Company's provision for income taxes.
The temporary differences which give rise to deferred tax assets and
liabilities as of December 31, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
---------- ----------
<S> <C> <C>
Current deferred tax assets:
Accrued royalties............................................... $ 6,506 $ 15,971
Inventory reserves and cost methods............................. 1,180 1,759
Accrued expenses................................................ 6,391 9,845
Allowance for doubtful accounts................................. 517 1,098
Reserve for warranty costs...................................... 270 101
Unrealized holding loss on marketable investment securities..... 4 -
---------- ----------
Total current deferred tax assets................................. 14,868 28,774
Current deferred tax liabilities:
Subscriber acquisition costs and other.......................... (6,846) -
---------- ----------
Total current deferred tax liabilities............................ (6,846) -
---------- ----------
Gross current deferred tax assets................................. 8,022 28,774
Valuation allowance............................................... (5,081) (22,065)
---------- ----------
Net current deferred tax assets................................... 2,941 6,709
Noncurrent deferred tax assets:
General business and foreign tax credits........................ 2,224 2,072
Net operating loss carryforwards................................ 122,515 164,123
Amortization of original issue discount on 1994 Notes
and 1996 Notes................................................ 60,831 105,095
Other........................................................... 7,571 12,999
---------- ----------
Total noncurrent deferred tax assets.............................. 193,141 284,289
Noncurrent deferred tax liabilities:
Depreciation.................................................... (17,264) (24,115)
Other........................................................... (230) (144)
---------- ----------
Total noncurrent deferred tax liabilities......................... (17,494) (24,259)
---------- ----------
Gross deferred tax assets......................................... 175,647 260,030
---------- ----------
Valuation allowance............................................... (111,238) (199,392)
---------- ----------
Net noncurrent deferred tax assets................................ 64,409 60,638
---------- ----------
Net deferred tax assets........................................... $ 67,350 $ 67,347
---------- ----------
---------- ----------
</TABLE>
F-22
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The components of the benefit (provision for) from income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
--------- ------------ ----------
<S> <C> <C> <C>
Current benefit (provision):
Federal........................................ $ 4,596 $ (361) $ -
State.......................................... (49) (9) 6
Foreign........................................ (209) (137) (77)
-------- ----------- ---------
4,338 (507) (71)
Deferred benefit:
Federal........................................ 48,043 108,598 97,819
State.......................................... 2,472 8,082 7,319
Increase in valuation allowance................ - (116,319) (105,138)
-------- ----------- ---------
50,515 361 -
-------- ----------- ---------
Total benefit (provision)................... $ 54,853 $ (146) $ (71)
-------- ----------- ---------
-------- ----------- ---------
</TABLE>
The actual tax benefit (provision) for 1996, 1997 and 1998 are
reconciled to the amounts computed by applying the statutory Federal tax rate
to income before taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
----- ------ ------
<S> <C> <C> <C>
Statutory rate..................................... 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit......... 1.8 1.6 1.6
Research and development and foreign tax credits... - 0.7 -
Non-deductible interest expense.................... (1.4) (0.5) (1.3)
Other.............................................. (0.4) (0.8) 0.4
Increase in valuation allowance.................... - (36.0) (35.7)
----- ------ ------
Total benefit from income taxes.................... 35.0% -% -%
----- ------ ------
----- ------ ------
</TABLE>
6. STOCK COMPENSATION PLANS
STOCK INCENTIVE PLAN
In April 1994, EchoStar adopted a stock incentive plan (the "Stock
Incentive Plan") to provide incentive to attract and retain officers,
directors and key employees. EchoStar has reserved up to 10 million shares of
its Class A common stock for granting awards under the Stock Incentive Plan.
All stock options granted through December 31, 1998 have included exercise
prices not less than the fair market value of EchoStar's Class A common stock
at the date of grant, and vest, as determined by EchoStar's Board of
Directors, generally at the rate of 20% per year.
During 1998, EchoStar adopted the 1998 Incentive Plan which provided
certain key employees a contingent incentive that would be paid, at the key
employee's election, in stock options, a cash award or a combination thereof.
The payment of these incentives was contingent upon the achievement of
certain financial and other goals of EchoStar. EchoStar did not meet any of
the goals during 1998. Accordingly, no cash incentives were paid, all stock
options granted pursuant to the Incentive Plan were cancelled and no
compensation expense was recognized related to 1998 Incentive Plan. The Board
of Directors has approved a similar plan for 1999. Any payments under this
plan are contingent upon the achievement of certain financial and other goals.
F-23
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
A summary of EchoStar's incentive stock option activity for the
years ended December 31, 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------------------- ------------------------ -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning
of year...................... 1,117,133 $ 12.23 1,025,273 $14.27 1,524,567 $ 14.99
Granted........................ 138,790 27.02 779,550 17.05 698,135 18.78
Repriced....................... - - 255,794 17.00 - -
Exercised...................... (103,766) 10.24 (98,158) 9.64 (188,182) 12.52
Forfeited...................... (126,884) 13.27 (437,892) 19.46 (587,505) 17.08
--------- --------- --------- ---------- --------- -----------
Options outstanding, end of year 1,025,273 $ 14.27 1,524,567 $14.99 1,447,015 $ 16.29
--------- --------- --------- ---------- --------- -----------
--------- --------- --------- ---------- --------- -----------
Exercisable at end of year..... 258,368 $ 11.31 347,009 $12.15 482,303 $ 13.83
--------- --------- --------- ---------- --------- -----------
--------- --------- --------- ---------- --------- -----------
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 are
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ---------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE EXERCISABLE
AS OF REMAINING WEIGHTED- AS OF WEIGHTED-
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1998 LIFE EXERCISE PRICE 1998 EXERCISE PRICE
- ----------------- ------------ ----------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 9.333 - $11.870 306,379 3.72 $ 9.61 212,536 $ 9.57
17.000 - 18.290 937,546 6.19 17.04 265,271 17.03
22.000 - 26.688 203,090 7.28 22.88 4,496 26.69
- ----------------- ------------ ----------- -------------- ------------- ---------------
$ 9.333 - $26.688 1,447,015 5.82 $ 16.29 482,303 $13.83
- ----------------- ------------ ----------- -------------- ------------- ---------------
- ----------------- ------------ ----------- -------------- ------------- ---------------
</TABLE>
On July 1, 1997, the Board of Directors approved a repricing of
substantially all outstanding options with an exercise price greater than
$17.00 per share of Class A common stock to $17.00 per share. The Board of
Directors would not typically consider reducing the exercise price of
previously granted options. However, these options were repriced due to the
occurrence of certain events beyond the reasonable control of the employees
of EchoStar which significantly reduced the incentive these options were
intended to create. The fair market value of the Class A common stock was
$15.25 on the date of the repricing. Options to purchase approximately
256,000 shares of Class A common stock were affected by this repricing.
ACCOUNTING FOR STOCK-BASED COMPENSATION
EchoStar has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its stock-based compensation plans. Under
APB 25, EchoStar does not recognize compensation expense on the issuance of
stock under its Stock Incentive Plan because the option terms are fixed and
the exercise price equals the market price of the underlying stock on the
date of grant. In October 1995, the Financial Accounting Standards Board
issued Financial Accounting Standard No. 123, "Accounting and Disclosure of
Stock-Based Compensation," ("FAS No. 123") which established an alternative
method of expense recognition for stock-based compensation awards to
employees based on fair values. EchoStar elected to not adopt FAS No. 123 for
expense recognition purposes.
F-24
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Pro forma information regarding net income and earnings per share is
required by FAS No. 123 and has been determined as if EchoStar had accounted
for its stock-based compensation plans using the fair value method prescribed
by that statement. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting
period. All options are initially assumed to vest. Compensation previously
recognized is reversed to the extent applicable to forfeitures of unvested
options. The fair value of each option grant was estimated at the date of the
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate..................... 6.80% 6.09% 5.64%
Volatility factor........................... 62% 68% 67%
Dividend yield.............................. 0.00% 0.00% 0.00%
Expected term of options.................... 6 years 6 years 6 years
Weighted-average fair value of
options granted........................... $ 16.96 $ 10.38 $ 12.03
</TABLE>
The Company's pro forma net loss was $103 million, $325 million and
$297 million for the years ended December 31, 1996, 1997, and 1998,
respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock price characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its stock-based compensation awards.
7. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK PURCHASE PLAN
During 1997, the Board of Directors and shareholders approved an
employee stock purchase plan (the "ESPP"), effective beginning October 1,
1997. Under the ESPP, EchoStar is authorized to issue a total of 100,000
shares of Class A common stock. Substantially all full-time employees who
have been employed by EchoStar for at least one calendar quarter are eligible
to participate in the ESPP. Employee stock purchases are made through payroll
deductions. Under the terms of the ESPP, employees may not deduct an amount
which would permit such employee to purchase capital stock of EchoStar under
all stock purchase plans of EchoStar at a rate which would exceed $25,000 in
fair market value of capital stock in any one year. The purchase price of the
stock is 85% of the closing price of the Class A common stock on the last
business day of each calendar quarter in which such shares of Class A common
stock are deemed sold to an employee under the ESPP. The ESPP shall terminate
upon the first to occur of (i) October 1, 2007 or (ii) the date on which the
ESPP is terminated by the Board of Directors. During 1997 and 1998, employees
purchased 4,430 and 15,776 shares of Class A common stock through the ESPP,
respectively.
401(k) EMPLOYEE SAVINGS PLAN
EchoStar sponsors a 401(k) Employee Savings Plan (the "401(k) Plan")
for eligible employees. Voluntary employee contributions to the 401(k) Plan
may be matched 50% by EchoStar, subject to a maximum annual contribution by
EchoStar of $1,000 per employee. EchoStar also may make an annual
discretionary contribution to the plan with approval by EchoStar's Board of
Directors, subject to the maximum deductible limit provided by the Internal
Revenue Code of 1986, as amended. EchoStar's cash contributions to the 401(k)
Plan totaled $226,000, $329,000 and $314,000 during 1996, 1997 and 1998,
respectively. Additionally, EchoStar contributed 55,000 shares of its Class A
common stock in 1996 (fair value of $935,000) to the 401(k) Plan as a
discretionary contribution. During 1998, EchoStar contributed 80,000 shares
of its Class A common stock (fair value of approximately $2 million) to the
401(k) Plan related to its 1997 discretionary contribution. During 1999,
EchoStar expects to contribute 65,000 shares of its Class A common stock
(fair value of
F-25
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
approximately $3 million) to the 401(k) Plan related to its 1998
discretionary contribution.
8. OTHER COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
As of December 31, 1998, the Company's purchase commitments totaled
approximately $59 million. The majority of these commitments relate to
EchoStar receiver systems and related components. All of the purchases
related to these commitments are expected to be made during 1999. The Company
expects to finance these purchases from existing unrestricted cash balances
and future cash flows generated from operations, if any.
THE NEWS CORPORATION LIMITED
During February 1997, EchoStar and News Corporation announced an
agreement pursuant to which, among other things, News Corporation agreed to
acquire approximately 50% of the outstanding capital stock of EchoStar. News
Corporation also agreed to make available for use by EchoStar the DBS permit
for 28 frequencies at the 110DEG. WL orbital slot purchased by MCI for
more than $682 million following a 1996 FCC auction. During late April 1997,
substantial disagreements arose between the parties regarding their
obligations under this agreement. Those substantial disagreements led the
parties to litigation. In mid-1997, EchoStar filed a complaint seeking
specific performance of this agreement and damages, including lost profits.
News Corporation filed an answer and counterclaims seeking unspecified
damages, denying all of the material allegations and asserting numerous
defenses. Discovery commenced in July 1997, and the case was set for trial
commencing March 1999. In connection with the pending 110 Acquisition, the
litigation between EchoStar and News Corporation will be stayed and will be
dismissed with prejudice upon closing or if the transaction is terminated for
reasons other than the breach by, or failure to fill a condition within the
control of, News Corporation or MCI.
In connection with the News Corporation litigation that arose in
1997, EchoStar has a contingent fee arrangement with its lawyers, which
provides for the lawyers to be paid a percentage of any net recovery obtained
in its dispute with News Corporation. Although they have not been specific,
the lawyers have asserted that they may be entitled to receive payments in
excess of $80 million to $100 million under this fee arrangement in
connection with the settlement of the dispute with News Corporation. EchoStar
intends to vigorously contest the lawyers' interpretation of the fee
arrangement, which it believes significantly overstates the magnitude of its
liability thereunder. If the lawyers and EchoStar are unable to resolve this
fee dispute under the fee arrangement, the fee dispute would be resolved
under arbitration. It is too early to determine the outcome of negotiations
or arbitration regarding this fee dispute.
WIC PREMIUM TELEVISION LTD.
On July 28, 1998, a lawsuit was filed by WIC Premium Television Ltd.
("WIC"), an Alberta corporation, in the Federal Court of Canada Trial
Division, against certain defendants which include: General Instrument
Corporation, HBO, Warner Communications, Inc., John Doe, Showtime, United
States Satellite Broadcasting Corporation, ECC and two of ECC's wholly-owned
subsidiaries, Dish, Ltd. and Echosphere. The lawsuit seeks, among other
things, an interim and permanent injunction prohibiting the defendants from
activating receivers in Canada and from infringing any copyrights held by
WIC. It is too early to determine whether or when any other lawsuits and/or
claims will be filed. It is also too early to make an assessment of the
probable outcome of the litigation or to determine the extent of any
potential liability or damages.
On September 28, 1998, WIC filed another lawsuit in the Court of
Queen's Bench of Alberta Judicial District of Edmonton against certain
defendants, which also include ECC, Dish, and Echosphere. WIC is a company
authorized to broadcast certain copyrighted work, such as movies and
concerts, to residents of Canada. WIC alleges that the defendants engaged in,
promoted, and/or allowed satellite dish equipment from the United States to
be sold in Canada and to Canadian residents and that some of the defendants
allowed and profited from Canadian residents purchasing and viewing
subscription television programming that is only authorized for viewing in
the United States. The lawsuit
F-26
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
seeks, among other things, interim and permanent injunction prohibiting the
defendants from importing hardware into Canada and from activating receivers
in Canada and damages in excess of the equivalent of US $175 million. It is
too early to determine whether or when any other lawsuits and/or claims will
be filed. It is also too early to make an assessment of the probable outcome
of the litigation or to determine the extent of any potential liability or
damages.
BROADCAST NETWORK PROGRAMMING
Section 119 of the Satellite Home Viewer Act authorizes EchoStar to
substitute satellite-delivered network signals its subscribers, but only if
those subscribers qualify as "unserved households", defined in the Satellite
Home Viewer Act, those that, among other things, "cannot receive, through the
use of a conventional outdoor rooftop receiving antenna, an over-the-air
signal of Grade B intensity (as defined by the FCC) of a primary network
station affiliated with that network." Historically, EchoStar obtained
distant broadcast network signals for distribution to its subscribers through
PrimeTime 24, Joint Venture ("PrimeTime 24"). PrimeTime 24 also distributes
network signals to certain of EchoStar's competitors in the satellite
industry.
The national networks and local affiliate stations have recently
challenged PrimeTime 24's methods of selling network programming (national
and local) to consumers based upon infringement of copyright. The United
States District Court for the Southern District of Florida has entered
nationwide preliminary and permanent injunctions preventing PrimeTime 24 from
selling its programming to consumers unless the programming was sold
according to certain stipulations in the injunction. The preliminary
injunction took effect on February 28, 1999, and the permanent injunction is
set to take effect on April 30, 1999. The injunctions cover "distributors" as
well. The plaintiff in the Florida litigation informed EchoStar that it
considered EchoStar a "distributor" for purposes of that injunction. A
federal district court in North Carolina has also issued an injunction
against PrimeTime 24 prohibiting certain distant signal retransmissions to
homes delineated by a contour in the Raleigh area. Other copyright litigation
against PrimeTime 24 is pending.
EchoStar ceased delivering PrimeTime 24 programming in July 1998,
and began uplinking and distributing network signals directly. EchoStar has
also implemented Satellite Home Viewer Act Section 119 compliance procedures
which will materially restrict the market for the sale of network signals by
EchoStar. CBS and other broadcast networks have informed EchoStar that they
believe EchoStar's method of providing distant network programming violates
the SHVA and hence infringes their copyright.
On October 19, 1998, EchoStar filed a declaratory judgment action in
the United States District Court for the District of Colorado against the
four major networks. In the future, EchoStar may attempt to certify a class
including the networks as well as any and all owned and operated stations and
any independent affiliates. EchoStar has asked the court to enter a judgment
declaring that its method of providing distant network programming does not
violate the Satellite Home Viewer Act and hence does not infringe the
networks' copyrights.
On November 5, 1998, several broadcast parties, acting on prior
threats filed a complaint alleging, among other things, copyright
infringement against EchoStar in federal district court in Miami. The
plaintiffs in that action have also requested the issuance of a preliminary
injunction against EchoStar. The networks also filed a counter claim
containing similar allegations against us in the Colorado litigation.
On February 24, 1999, CBS, NBC, Fox, and ABC filed with the court a
"Motion for Temporary Restraining Order, Preliminary Injunction, and Contempt
Finding" against DIRECTV, Inc. ("DIRECTV") in response to an announcement by
DIRECTV that it was discontinuing retransmission of the programming of the
four networks received from PrimeTime 24 and would instead distribute its own
package of network affiliates to its existing subscribers. On February 25,
1999, the court granted CBS and Fox a temporary restraining order requiring
DIRECTV and its agents and those who act in active concert or participation
with DIRECTV, not to deliver CBS or Fox programming to subscribers who do not
live in "unserved households." For purposes of determining whether a
subscriber is "unserved," the court referred to a modified version of the
Longley-Rice signal propagation model. The modifications in some respects
reflect an order adopted by the FCC on February 2, 1999. On March 12, 1999,
DIRECTV and the four major broadcast networks and their affiliates announced
that they have reached a settlement of
F-27
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
that dispute. Under the terms of the settlement, DIRECTV, stations and
networks have agreed on a timeframe to disconnect distant broadcast network
signals from subscribers predicted to be ineligible based on a modified
version of the Longley-Rice signal propagation model. Subscribers predicted
to be ineligible who obtain consent from the affected affiliate stations to
receive their signals via satellite will not lose receipt of their distant
network signals. EchoStar is not sure what effect this development will have
on its business.
On March 24, 1999, we have a hearing scheduled in a Denver court on
similar matters with similar parties. If we were to lose that hearing, it is
likely that the broadcasters would move forward on their lawsuit filed in
Miami and would seek similar remedies against us, including a temporary
restraining order requiring us to stop delivering network signals to
subscribers who do not live in "unserved households." Depending upon the
terms, a restraining order could result in us having to terminate delivery of
network signals to a material portion of our subscriber base, which could
result in decreases in subscriber activations and subscription television
services revenue and an increase in subscriber turnover.
EchoStar is subject to various other legal proceedings and claims
which arise in the ordinary course of its business. In the opinion of
management, the amount of ultimate liability with respect to those actions
will not materially affect the financial position or results of operations of
EchoStar.
METEOROID EVENTS
In November 1998 certain meteoroid events occurred as the earth's
orbit passed through the particulate trail of Comet 55P (Tempel-Tuttle).
While there can be no assurance, the Company believes that its DBS satellites
did not incur any significant damage as a result of these events. Similar
meteoroid events are expected to occur again in November 1999. These
meteoroid events continue to pose a potential threat to all in-orbit
geosynchronous satellites, including the Company's DBS satellites. While the
probability that the Company's spacecraft will be damaged by space debris is
very small, that probability will increase by several orders of magnitude
during the November 1999 meteoroid events. The Company is presently
evaluating the potential effects that the November 1999 meteoroid events may
have on its DBS satellites. At this time, the Company has not finally
determined the impact, if any, these meteoroid events may have on its DBS
satellites.
9. SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
With the exception of certain de minimis domestic and foreign
subsidiaries (collectively, the "Non-Guarantors"), the Seven and Ten Year
Notes are fully, unconditionally and jointly and severally guaranteed by all
subsidiaries of the Company.
F-28
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The combined assets, stockholders' equity, net loss and operating
cash flows of the Non-Guarantors represent less than 1% of the combined and
consolidated assets, stockholder's equity, net loss and operating cash flows
of the Company, including the non-guarantors during both 1997 and 1998.
Summarized combined and consolidated financial information for the Company
and the subsidiary guarantors is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................... $ 196,988 $ 475,877 $ 985,909
Expenses.................................. 305,705 700,104 1,116,733
---------- ---------- -----------
Operating loss............................ (108,717) (224,227) (130,824)
Other income (expense).................... (47,640) (98,941) (163,406)
---------- ---------- -----------
Net loss before taxes..................... (156,357) (323,168) (294,230)
Income tax benefit (provision), net....... 54,849 (146) (72)
---------- ---------- -----------
Net loss.................................. $ (101,508) $ (323,314) $ (294,302)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1998
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets.............................................. $ 183,215 $ 241,464
Property and equipment, net................................. 859,279 853,818
Other noncurrent assets..................................... 388,934 374,421
----------- -----------
Total assets................................................ $ 1,431,428 $ 1,469,703
----------- -----------
----------- -----------
Current liabilities......................................... $ 305,656 $ 476,296
Long-term liabilities....................................... 1,439,318 1,581,249
Stockholder's equity (deficit).............................. (313,546) (587,842)
----------- -----------
Total liabilities and stockholder's equity (deficit)........ $ 1,431,428 $ 1,469,703
----------- -----------
----------- -----------
</TABLE>
10. SEGMENT REPORTING
The Company adopted Financial Accounting Standard No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("FAS
No. 131") effective as of the year ended December 31, 1998. FAS No. 131
establishes standards for reporting information about operating segments in
annual financial statements of public business enterprises and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders and for related disclosures
about products and services, geographic areas, and major customers.
FAS No. 131 requires companies to use the "management approach" to
reporting segment information, which focuses on the financial information
that a company's chief decision maker uses to make operating decisions and to
assess the company's performance. EchoStar's management reviews information
for the Company to the extent necessary for debt compliance purposes.
However, operational decisions are based on EchoStar's consolidated financial
statements. Accordingly, in the following table EchoStar's consolidated
segment information has been reconciled to amounts presented in the
accompanying financial statements of the Company. "Other EchoStar Activity"
includes the operations of EchoStar conducted through subsidiaries other than
the Company. These operations consist primarily of direct equipment sales to
subscribers, consumer products financing activities and niche programming
revenue.
F-29
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
BUSINESS UNIT DESCRIPTIONS
The operations of EchoStar include three interrelated business units:
- THE DISH NETWORK - a DBS subscription television service in the
United States.
- ETC - the design, distribution and sale of EchoStar receiver
systems for the DISH Network as well as for direct-to-home
projects of other internationally, together with the provision
of uplink center design, construction oversight and other
project integration services for international direct-to-home
ventures.
- SATELLITE SERVICEs - engaged in the delivery of video, audio and
data services to business television customers and other
satellite users. These services my include satellite uplink
services, satellite transponder space usage, billing, customer
service and other services.
The accounting policies for the above business units are the same as
those described in the summary of significant accounting policies for the
combined and consolidated entity. Both EchoStar and the Company account for
intersegment sales and transfers at cost. All other revenue and expenses from
segments below the quantitative thresholds are attributable to sales of
C-band equipment and other corporate administrative functions. Only those
assets and measures of profit and loss that are included in the measure of
assets and profit and loss used by EchoStar's chief operating decision maker
are reported.
FINANCIAL DATA BY BUSINESS UNIT
<TABLE>
<CAPTION>
DBS CORP,
ECHOSTAR OTHER AFFILIATES
DISH SATELLITE ELIMINATIONS CONSOLIDATED ECHOSTAR AND
NETWORK ETC SERVICES AND OTHER TOTAL ACTIVITY SUBSIDIARIES
--------- --------- -------- ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Revenue...................... $ 142,913 $ 18,930 $ 2,542 $ 34,516 $ 198,901 $ (1,798) $ 197,103
Depreciation and amortization 2,356 1,143 - 39,915 43,414 (45) 43,369
Total expenses............... 161,404 26,007 1,724 119,111 308,246 (2,278) 305,968
EBITDA....................... (16,135) (7,685) 818 (42,929) (65,931) 435 (65,496)
Interest income.............. 1,894 730 - 13,006 15,630 (519) 15,111
Interest expense............. 2,015 3 - 59,469 61,487 943 62,430
Income tax benefit, net...... 34,117 3,708 - 16,868 54,693 160 54,853
Net income (loss)............ 3,541 (6,187) 818 (99,158) (100,986) (690) (101,676)
YEAR ENDED DECEMBER 31, 1997
Revenue...................... $ 378,377 $ 82,609 $ 3,458 $ 12,974 $ 477,418 $ (1,516) $ 475,902
Depreciation and amortization 158,992 1,659 - 12,625 173,276 (440) 172,836
Total expenses............... 569,998 73,081 329 58,281 701,689 (1,451) 700,238
EBITDA....................... (32,629) 11,186 3,129 (32,681) (50,995) (505) (51,500)
Interest income.............. 10,114 180 - 6,957 17,251 (4,739) 12,512
Interest expense............. 27,503 - - 76,689 104,192 5,811 110,003
Income tax provision, net.... (7) (32) - (107) (146) - (146)
Net income (loss)............ (231,223) 4,378 2,889 (88,869) (312,825) (10,599) (323,424)
YEAR ENDED DECEMBER 31, 1998
Revenue...................... $ 733,382 $ 251,958 $23,442 $ (26,116) $ 982,666 $ 3,243 $ 985,909
Depreciation and amortization 85,107 2,097 26 15,406 102,636 (479) 102,157
Total expenses............... 871,269 193,852 3,495 36,941 1,105,557 11,207 1,116,764
EBITDA....................... (52,781) 60,202 19,973 (47,649) (20,255) (8,443) (28,698)
Interest income.............. 9,280 - 2 21,004 30,286 (20,175) 10,111
Interest expense............. 49,042 282 - 118,205 167,529 5,413 172,942
Income tax benefit
(provision), net........... 17 (11) - (50) (44) (27) (71)
Net loss..................... (199,356) 30,333 18,409 (110,268) (260,882) (33,493) (294,375)
</TABLE>
F-30
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
OTHER
GEOGRAPHIC INFORMATION UNITED STATES EUROPE INTERNATIONAL TOTAL
------------- -------- ------------- ---------
<S> <C> <C> <C> <C>
1996
Total revenue*..................... $ 159,611 $ 26,984 $ 10,508 $ 197,103
Long-lived assets.................. 656,697 1,103 233 658,033
1997
Total revenue*..................... $ 446,461 $ 20,592 $ 8,849 $ 475,902
Long-lived assets.................. 957,166 1,217 121 958,504
1998
Total revenue*..................... $ 967,746 $ 18,163 $ - $ 985,909
Long-lived assets.................. 955,586 1,498 - 957,084
</TABLE>
* Revenues are attributed to geographic regions based upon the location from
which the sale originated.
TRANSACTIONS WITH MAJOR CUSTOMERS
During 1998, export sales to two customers together totaled $210 million
and accounted for approximately 21% of the Company's total revenue. Revenues
for these customers are included within the ETC business unit. Complete or
partial loss of one or both of these customers would have a material adverse
effect on the Company's results of operations.
11. VALUATION AND QUALIFYING ACCOUNTS
The Company's valuation and qualifying accounts as of December 31, 1996,
1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTIONS END OF YEAR
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Assets:
Allowance for doubtful accounts....... $ 1,106 $ 2,340 $ (1,952) $ 1,494
Loan loss reserve..................... 78 157 (94) 141
Reserve for inventory................. 2,797 4,304 (1,438) 5,663
Liabilities:
Reserve for warranty costs and other.. 1,105 (342) - 763
YEAR ENDED DECEMBER 31, 1997:
Assets:
Allowance for doubtful accounts....... $ 1,494 $ 4,343 $ (4,490) $ 1,347
Loan loss reserve..................... 141 7 (87) 61
Reserve for inventory................. 5,663 1,650 (3,473) 3,840
Liabilities:
Reserve for warranty costs and other.. 763 - (53) 710
YEAR ENDED DECEMBER 31, 1998:
Assets:
Allowance for doubtful accounts....... $ 1,347 $ 10,692 $ (9,043) $ 2,996
Loan loss reserve..................... 61 31 (92) -
Reserve for inventory................. 3,840 1,744 (403) 5,181
Liabilities:
Reserve for warranty costs and other.. 710 - (435) 275
</TABLE>
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly results of operations are summarized as follows
(in thousands):
F-31
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Total revenue............... $ 68,967 $ 97,831 $ 129,662 $ 179,442
Operating loss.............. (43,328) (43,503) (91,202) (46,303)
Net loss.................... (63,303) (66,067) (119,567) (74,487)
Year Ended December 31, 1998:
Total revenue............... $ 214,024 $ 246,165 $ 236,755 $ 288,965
Operating loss.............. (21,682) (17,106) (17,206) (74,861)
Net loss.................... (57,261) (53,122) (60,577) (123,415)
</TABLE>
13. SUBSEQUENT EVENTS
PRIMESTAR
On February 26, 1999, EchoStar announced that it had sent a letter
to the Board of Directors of PrimeStar expressing its desire and willingness
to make an offer to purchase PrimeStar's high-powered DBS assets. These
assets consist of two high-powered DBS satellites, Tempo I and Tempo II, and
11 of the 32 DBS frequencies capable of coverage of the entire continental
United States, located at the 119DEG. WL orbital position. EchoStar's
letter stated that it was ready, willing and able to make an offer to pay
$600 million of total consideration (including assumed liabilities) for these
assets on terms, other than price, substantially the same as those contained
in an agreement among PrimeStar, Hughes Electronics Corporation, and certain
other persons dated January 22, 1999. The deadline for a response to this
letter has subsequently expired. Finalization of a future offer would be
conditioned on the ability of PrimeStar to enter into and perform its
obligations under a definitive agreement with EchoStar without breaching any
contract to which PrimeStar or any of its affiliates is a party or by which
they are otherwise bound.
F-32
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The following subparagraphs briefly describe indemnification provisions
for directors, officers and controlling persons of the Company against
liability, including liability under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933, as amended (the "Securities Act") and is, therefore, unenforceable.
COLORADO CORPORATIONS
As provided in the Articles of Incorporation of the Company, a Colorado
corporation, the Company may eliminate or limit the personal liability of a
director to the Company or to its shareholders for monetary damages for breach
of fiduciary duty as a director; except that such provision shall not eliminate
or limit the liability of a director to the Company or to its shareholders for
monetary damages for: any breach of the director's duty of loyalty to the
Company or to its shareholders; acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law; acts specified in
Section 7-108-403 of the Colorado Business Corporation Act; or any transaction
from which the director derived an improper personal benefit. No such provisions
eliminate or limit the liability of a director to the Company or to its
shareholders for monetary damages for any act or omission occurring prior to the
date when such provision becomes effective.
1. Under provisions of the Bylaws of the Company and the Colorado
Business Corporation Act (the "Colorado Act"), each person who is or was a
director of officer of the Company will be indemnified by the Company as a
matter of right summarized as follows:
(a) Under the Colorado Act, a person who is wholly successful on the
merits in defense of a suit or proceeding brought against him by reason of the
fact that he is a director or officer of the Company shall be indemnified
against reasonable expenses (including attorneys' fees) in connection with such
suit or proceeding.
(b) Except as provided in subparagraph (c) below, a director may be
indemnified under such law against both (1) reasonable expenses (including
attorneys' fees), and (2) judgments, penalties, fines and amounts paid in
settlement, if he acted in good faith and reasonably believed, in the case of
conduct in his official capacity as a director, that his conduct was in the
Company's best interests, or in all other cases that his conduct was not opposed
to the best interests of the Company, and with respect to any criminal action,
he had no reasonable cause to believe his conduct was unlawful, but the Company
may not indemnify the director if the director is found liable to the Company or
is found liable on the basis that personal benefit was improperly received by
the director in connection with any suit or proceeding charging improper
personal benefit to the director;
(c) In connection with a suit or proceeding by or in the right of the
Company, indemnification is limited to reasonable expenses incurred in
connection with the suit or proceeding, but the Company may not indemnify the
director if the director was found liable to the Company; and
<PAGE>
(d) Officers of the Company will be indemnified to the same extent as
directors as described in (a), (b) and (c) above.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT DESCRIPTION
NO. -----------
- -------
3.1(a) Articles of Incorporation of the Company (incorporated by reference
to Exhibit 3.4(a) to the Company's Registration Statement on
Form S-4, Registration No. 333-31929).
3.1(b) Bylaws of the Company (incorporated by reference to Exhibit 3.4(b)
to the Company's Registration Statement on Form S-4, Registration
No. 333-31929).
4.1* Indenture relating to the Seven Year Notes, dated as of January 25,
1999, by and among the Company, the Guarantors and U.S. Bank Trust
National Association, as trustee.
4.2 Form of Series A Note for Seven Year Notes (included in
Exhibit 4.1).
4.3* Indenture relating to the Ten Year Notes, dated as of January 25,
1999, by and among the Company, the Guarantors and U.S. Bank Trust
National Association, as trustee.
4.4 Form of Series A Note for Ten Year Notes (included in Exhibit 4.3).
4.5* Registration Rights Agreement relating to the Seven Year Notes by
and among the Company, the Guarantors and the parties named therein.
4.6* Registration Rights Agreement relating to the Ten Year Notes by and
among the Company, the Guarantors and the parties named therein.
5.1* Opinion of Winthrop, Stimson, Putnam & Roberts regarding legality of
securities being registered.
5.2* Opinion of Friedlob Sanderson Raskin Paulson & Tourtillott, LLC
regarding the legality of securities being registered.
10.1(a) Satellite Construction Contract, dated as of February 6, 1990,
between EchoStar Satellite Corporation ("ESC") and Martin Marietta
as successor to General Electric, EchoStar, Astro-Space Division
("General Electric") (incorporated by reference to Exhibit 10.1(a)
to the Registration Statement on Form S-1 of Dish, Ltd. ("Dish")
Registration No. 33-76450).
10.1(b) First Amendment to the Satellite Construction Contract, dated as of
October 2, 1992, between ESC and Martin Marietta as successor to
General Electric (incorporated by reference to Exhibit 10.1(b) to
the Registration Statement on Form S-1 of Dish, Registration No.
33-76450).
10.1(c) Second Amendment to the Satellite Construction Contract, dated as of
October 30, 1992, between ESC and Martin Marietta as successor to
General Electric (incorporated by
II-2
<PAGE>
reference to Exhibit 10.1(c) to the Registration Statement on
Form S-1 of Dish, Registration No. 33-76450).
10.1(d) Third Amendment to the Satellite Construction Contract, dated as of
April 1, 1993, between ESC and Martin Marietta (incorporated by
reference to Exhibit 10.1(d)to the Registration Statement on
Form S-1 of Dish, Registration No. 33-76450).
10.1(e) Fourth Amendment to the Satellite Construction Contract, dated as of
August 19, 1993, between ESC and Martin Marietta (incorporated by
reference to Exhibit 10.1(e) to the Registration Statement on
Form S-1 of Dish, Registration No. 33-76450).
10.1(f) Form of Fifth Amendment to the Satellite Construction Contract,
between ESC and Martin Marietta (incorporated by reference to
Exhibit 10.1(f) to the Registration Statement on Form S-1 of Dish,
Registration No. 33-81234).
10.1(g) Sixth Amendment to the Satellite Construction Contract, dated as of
June 7, 1994, between ESC and Martin Marietta (incorporated by
reference to Exhibit 10.1(g) to the Registration Statement on
Form S-1 of Dish, Registration No. 33-81234).
10.1(h) Eighth Amendment to the Satellite Construction Contract, dated as of
July 18, 1996, between ESC and Martin Marietta (incorporated by
reference to Exhibit 10.1(h) to the Quarterly Report on Form 10-Q of
EchoStar for the quarter ended June 30, 1996, Commission File
No. 0-26176).
10.2 Master Purchase and License Agreement, dated as of August 12, 1986,
between Houston Tracker Systems, Inc. ("HTS") and Cable/Home
Communications Corp. (a subsidiary of General Instruments
Corporation) (incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
10.3 Master Purchase and License Agreement, dated as of June 18, 1986,
between Echosphere Corporation and Cable/Home Communications Corp.
(a subsidiary of General Instruments Corporation) (incorporated by
reference to Exhibit 10.5 to the Registration Statement on Form S-1
of Dish, Registration No. 33-76450).
10.4 Merchandising Financing Agreement, dated as of June 29, 1989,
between Echo Acceptance Corporation and Household Retail Services,
Inc. (incorporated by reference to Exhibit 10.6 to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
10.5 Key Employee Bonus Plan, dated as of January 1, 1994 (incorporated
by reference to Exhibit 10.7 to the Registration Statement on
Form S-1 of Dish, Registration No. 33-76450).
10.6 Consulting Agreement, dated as of February 17, 1994, between ESC and
Telesat Canada (incorporated by reference to Exhibit 10.8 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
10.7 Form of Satellite Launch Insurance Declarations (incorporated by
reference to Exhibit 10.10 to the Registration Statement on Form S-1
of Dish, Registration No. 33-81234).
10.8 Dish 1994 Stock Incentive Plan (incorporated by reference to Exhibit
10.11 to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
II-3
<PAGE>
10.9 Form of Tracking, Telemetry and Control Contract between AT&T Corp.
and ESC (incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-81234).
10.10 Manufacturing Agreement, dated as of March 22, 1995, between Houston
Tracker Systems, Inc. and SCI Technology, Inc. (incorporated by
reference to Exhibit 10.12 to the Registration Statement on Form S-1
of Dish, Commission File No. 33-81234).
10.11 Manufacturing Agreement dated as of April 14, 1995 by and between
ESC and Sagem Group (incorporated by reference to Exhibit 10.13 to
the Registration Statement on Form S-1 of EchoStar Communications
Corporation ("ECC"), Registration No. 33-91276).
10.12 Statement of Work, dated January 31, 1995 from ESC to Divicom Inc.
(incorporated by reference to Exhibit 10.14 to the Registration
Statement on Form S-1 of ECC, Registration No. 33-91276).
10.13 Launch Services Contract, dated as of June 2, 1995, by and between
EchoStar Space Corporation and Lockheed-Khrunichev-Energia
International, Inc. (incorporated by reference to Exhibit 10.15 to
the Registration Statement on Form S-1 of ECC, Registration
No. 33-91276).
10.14 EchoStar 1995 Stock Incentive Plan (incorporated by reference to
Exhibit 10.16 to the Registration Statement on Form S-1 of ECC,
Registration No. 33-91276).
10.15(a) Eighth Amendment to Satellite Construction Contract, dated as of
February 1, 1994, between DirectSat Corporation and Martin Marietta
(incorporated by reference to Exhibit 10.17(a) to the Quarterly
Report on Form 10-Q of ECC for the quarter ended June 30, 1996,
Commission File No. 0-26176).
10.15(b) Ninth Amendment to Satellite Construction Contract, dated as of
February 1, 1994, between DirectSat Corporation and Martin Marietta
(incorporated by reference to Exhibit 10.15 to the Registration
Statement of Form S-4 of ECC, Registration No. 333-03584).
10.15(c) Tenth Amendment to Satellite Construction Contract, dated as of July
18, 1996, between DirectSat Corporation and Martin Marietta
(incorporated by reference to Exhibit 10.17(b) to the Quarterly
Report on Form 10-Q of ECC for the quarter ended June 30, 1996,
Commission File No. 0-26176).
10.16 Satellite Construction Contract, dated as of July 18, 1996, between
EDBS and Lockheed Martin Corporation (incorporated by reference to
Exhibit 10.18 to the Quarterly Report on Form 10-Q of ECC for the
quarter ended June 30, 1996, Commission File No. 0-26176).
10.17 Confidential Amendment to Satellite Construction Contract between
DBSC and Martin Marietta, dated as of May 31, 1995 (incorporated by
reference to Exhibit 10.14 to the Registration Statement of Form S-4
of ECC, Registration No. 333-03584).
10.18 Right and License Agreement by and among HTS and Asia Broadcasting
and Communications Network, Ltd., dated December 19, 1996
(incorporated by reference to Exhibit 10.18 to the Annual Report on
Form 10-K of ECC for the year ended December 31, 1996, as amended,
Commission file No. 0-26176).
II-4
<PAGE>
10.19 Agreement between HTS, ESC and ExpressVu Inc., dated January 8,
1997, as amended (incorporated by reference to Exhibit 10.18 to the
Annual Report on Form 10-K of ECC for the year ended December 31,
1996, as amended, Commission file No. 0-26176).
10.20 Amendment No. 9 to Satellite Construction Contract, effective as of
July 18, 1996, between Direct Satellite Broadcasting Corporation, a
Delaware corporation ("DBSC") and Martin Marietta Corporation
(incorporated by reference to Exhibit 10.1 to the Quarterly Report
on Form 10-Q of ECC for the quarterly period ended June 30, 1997,
Commission File No. 0-26176).
10.21 Amendment No. 10 to Satellite Construction Contract, effective as of
May 31, 1996, between DBSC and Lockheed Martin Corporation
(incorporated by reference to Exhibit 10.2 to the Quarterly Report
on Form 10-Q of ECC for the quarterly period ended June 30, 1997,
Commission File No. 0-26176).
10.22 Contract for Launch Services, dated April 5, 1996, between Lockheed
Martin Commercial Launch Services, Inc. and EchoStar Space
Corporation (incorporated by reference to Exhibit 10.3 to the
Quarterly Report on Form 10-Q of ECC for the quarterly period ended
June 30, 1997, Commission File No. 0-26176).
10.23 OEM Manufacturing, Marketing and Licensing Agreement, dated as of
February 17, 1998, by and among HTS, ESC and Philips Electronics
North America Corporation (incorporated by reference to Exhibit 10.1
to the Quarterly Report on Form 10-Q of ECC for the quarterly period
ended March 31, 1998, Commission File No. 0-26176).
10.24 Licensing Agreement, dated as of February 23, 1998, by and among
HTS, ESC and VTech Communications Ltd. (incorporated by reference to
Exhibit 10.2 to the Quarterly Report on Form 10-Q of ECC for
quarterly period ended March 31, 1998, Commission File No. 0-26176).
10.25 Agreement to form NagraStar LLC, dated as of June 23, 1998 by and
between Kudelski S.A., ECC and ESC (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q of ECC for
quarterly period ended June 30, 1998, Commission File No. 0-26176).
10.26 Purchase Agreement by and among American Sky Broadcasting, LLC, The
News Corporation Limited, MCI Telecommunications Corporation and
EchoStar Communications Corporation, dated November 30, 1998.
(incorporated by reference to Exhibit 10.1 to the Form 8-K filed by
ECC on November 30, 1998, Commission File No. 0-26176).
10.27 Form of Registration Rights Agreement to be entered into among
EchoStar Communications Corporation, MCI Telecommunications
Corporation, and a to-be-named wholly-owned subsidiary of MCI
Telecommunications Corporation, American Sky Broadcasting, LLC, and
a to-be-named wholly-owned subsidiary of The News Corporation
Limited (incorporated by reference to Exhibit 10.2 to the Current
Report on Form 8-K of EchoStar, filed as of December 1, 1998).
10.28 Voting Agreement dated November 30, 1998, among EchoStar
Communications Corporation, American Sky Broadcasting, LLC, The News
Corporation Limited and MCI
II-5
<PAGE>
Telecommunications Corporation (incorporated by reference to Exhibit
10.3 to the Current Report on Form 8-K of EchoStar, filed as of
December 1, 1998).
12** Statements re computation of ratios.
21* Subsidiaries of the Company.
23.1 Consent of Winthrop, Stimson, Putnam & Roberts (included in
Exhibit 5.1).
23.2 Consent of Friedlob Sanderson Raskin Paulson & Tourtillott, LLC
(included in Exhibit 5.2).
23.3** Consent of Arthur Andersen LLP.
24.1* Power of Attorney (included in the signature pages to this
Registration Statement).
25.1* Statement of Eligibility on Form T-1 under the Trust Indenture Act
of 1939 of U.S. Bank Trust National Association, as Trustee of the
Indenture, relating to the Seven Year Notes (separately bound).
25.2* Statement of Eligibility on Form T-1 under the Trust Indenture Act
of 1939 of U.S. Bank Trust National Association, as Trustee of the
Indenture, relating to the Ten Year Notes (separately bound).
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
- --------------
* Previously filed
** Filed herewith
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the Prospectus pursuant
to items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporating documents by first class mail or
other equally prompt means. This includes information contained in the documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
II-6
<PAGE>
(c) The undersigned Registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act.
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Act of 1933, as amended, the
Registrants have duly caused this Amendment No. 2 to the Registration Statement
to be signed on their behalf by the undersigned, thereunto duly authorized in
the City of Littleton, State of Colorado, as of April 13, 1999.
<TABLE>
<S> <C>
ECHOSTAR DBS CORPORATION HOUSTON TRACKER SYSTEMS, INC.
DIRECTSAT CORPORATION ECHOSTAR NORTH AMERICA CORPORATION
ECHO ACCEPTANCE CORPORATION SKY VISTA CORPORATION
ECHOSPHERE CORPORATION ECHOSTAR INDONESIA, INC.
DISH INSTALLATION NETWORK CORPORATION DIRECT BROADCASTING SATELLITE CORPORATION
ECHOSTAR TECHNOLOGIES CORPORATION ECHOSTAR SATELLITE BROADCASTING CORPORATION
HT VENTURES, INC. DISH, LTD.
ECHOSTAR INTERNATIONAL CORPORATION ECHOSTAR SPACE CORPORATION
SATELLITE SOURCE, INC.
ECHOSTAR SATELLITE CORPORATION
</TABLE>
By: *
---------------------------------
Charles W. Ergen
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 2 to the Registration Statement has been signed
below on April 13, 1999, by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------- --------
* Chairman, Chief Executive Officer and
- ----------------------- Director (Principal Executive Officer)
Charles W. Ergen
* Chief Operating Officer and
- ----------------------- Chief Financial Officer
Steven B. Schaver (Principal Financial and Accounting Officer)
* Director
- -----------------------
James DeFranco
Director
/s/ David K. Moskowitz
- -----------------------
David K. Moskowitz
*By /s/ David K. Moskowitz
------------------------
David K. Moskowitz
Attorney-in-Fact
II-8
<PAGE>
Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NUMBER
- ------- ----------- -----------
<S> <C> <C>
3.1(a) Articles of Incorporation of the Company (incorporated by reference
to Exhibit 3.4(a) to the Company's Registration Statement on
Form S-4, Registration No. 333-31929).
3.1(b) Bylaws of the Company (incorporated by reference to Exhibit 3.4(b)
to the Company's Registration Statement on Form S-4, Registration
No. 333-31929).
4.1* Indenture relating to the Seven Year Notes, dated as of January 25,
1999, by and among the Company, the Guarantors and U.S. Bank Trust
National Association, as trustee.
4.2 Form of Series A Note for Seven Year Notes (included in
Exhibit 4.1).
4.3* Indenture relating to the Ten Year Notes, dated as of January 25,
1999, by and among the Company, the Guarantors and U.S. Bank Trust
National Association, as trustee.
4.4 Form of Series A Note for Ten Year Notes (included in Exhibit 4.3).
4.5* Registration Rights Agreement relating to the Seven Year Notes by
and among the Company, the Guarantors and the parties named therein.
4.6* Registration Rights Agreement relating to the Ten Year Notes by and
among the Company, the Guarantors and the parties named therein.
5.1* Opinion of Winthrop, Stimson, Putnam & Roberts regarding legality of
securities being registered.
5.2* Opinion of Friedlob Sanderson Raskin Paulson & Tourtillott, LLC
regarding the legality of securities being registered.
10.1(a) Satellite Construction Contract, dated as of February 6, 1990,
between EchoStar Satellite Corporation ("ESC") and Martin Marietta
as successor to General Electric, EchoStar, Astro-Space Division
("General Electric") (incorporated by reference to Exhibit 10.1(a)
to the Registration Statement on Form S-1 of Dish, Ltd. ("Dish")
Registration No. 33-76450).
10.1(b) First Amendment to the Satellite Construction Contract, dated as of
October 2, 1992, between ESC and Martin Marietta as successor to
General Electric (incorporated by reference to Exhibit 10.1(b) to
the Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
10.1(c) Second Amendment to the Satellite Construction Contract, dated as of
October 30, 1992, between ESC and Martin Marietta as successor to
General Electric (incorporated by reference to Exhibit 10.1(c) to
the
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Registration Statement on Form S-1 of Dish, Registration No.
33-76450).
10.1(d) Third Amendment to the Satellite Construction Contract, dated as of
April 1, 1993, between ESC and Martin Marietta (incorporated by
reference to Exhibit 10.1(d)to the Registration Statement on
Form S-1 of Dish, Registration No. 33-76450).
10.1(e) Fourth Amendment to the Satellite Construction Contract, dated as of
August 19, 1993, between ESC and Martin Marietta (incorporated by
reference to Exhibit 10.1(e) to the Registration Statement on
Form S-1 of Dish, Registration No. 33-76450).
10.1(f) Form of Fifth Amendment to the Satellite Construction Contract,
between ESC and Martin Marietta (incorporated by reference to
Exhibit 10.1(f) to the Registration Statement on Form S-1 of Dish,
Registration No. 33-81234).
10.1(g) Sixth Amendment to the Satellite Construction Contract, dated as of
June 7, 1994, between ESC and Martin Marietta (incorporated by
reference to Exhibit 10.1(g) to the Registration Statement on
Form S-1 of Dish, Registration No. 33-81234).
10.1(h) Eighth Amendment to the Satellite Construction Contract, dated as of
July 18, 1996, between ESC and Martin Marietta (incorporated by
reference to Exhibit 10.1(h) to the Quarterly Report on Form 10-Q of
EchoStar for the quarter ended June 30, 1996, Commission File
No. 0-26176).
10.2 Master Purchase and License Agreement, dated as of August 12, 1986,
between Houston Tracker Systems, Inc. ("HTS") and Cable/Home
Communications Corp. (a subsidiary of General Instruments
Corporation) (incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
10.3 Master Purchase and License Agreement, dated as of June 18, 1986,
between Echosphere Corporation and Cable/Home Communications Corp.
(a subsidiary of General Instruments Corporation) (incorporated by
reference to Exhibit 10.5 to the Registration Statement on Form S-1
of Dish, Registration No. 33-76450).
10.4 Merchandising Financing Agreement, dated as of June 29, 1989,
between Echo Acceptance Corporation and Household Retail Services,
Inc. (incorporated by reference to Exhibit 10.6 to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
10.5 Key Employee Bonus Plan, dated as of January 1, 1994 (incorporated
by reference to Exhibit 10.7 to the Registration Statement on
Form S-1 of Dish, Registration No. 33-76450).
10.6 Consulting Agreement, dated as of February 17, 1994, between ESC and
Telesat Canada (incorporated by reference to Exhibit 10.8 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
10.7 Form of Satellite Launch Insurance Declarations (incorporated by
reference to Exhibit 10.10 to the Registration Statement on Form S-1
of Dish, Registration No. 33-81234).
10.8 Dish 1994 Stock Incentive Plan (incorporated by reference to Exhibit
10.11 to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
10.9 Form of Tracking, Telemetry and Control Contract between AT&T Corp.
and ESC (incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-81234).
10.10 Manufacturing Agreement, dated as of March 22, 1995, between Houston
Tracker Systems, Inc. and SCI Technology, Inc. (incorporated by
reference to Exhibit 10.12 to the Registration Statement on Form S-1
of Dish, Commission File No. 33-81234).
10.11 Manufacturing Agreement dated as of April 14, 1995 by and between
ESC and Sagem Group (incorporated by reference to Exhibit 10.13 to
the Registration Statement on Form S-1 of EchoStar Communications
Corporation ("ECC"), Registration No. 33-91276).
10.12 Statement of Work, dated January 31, 1995 from ESC to Divicom Inc.
(incorporated by reference to Exhibit 10.14 to the Registration
Statement on Form S-1 of ECC, Registration No. 33-91276).
10.13 Launch Services Contract, dated as of June 2, 1995, by and between
EchoStar Space Corporation and Lockheed-Khrunichev-Energia
International, Inc. (incorporated by reference to Exhibit 10.15 to
the Registration Statement on Form S-1 of ECC, Registration
No. 33-91276).
10.14 EchoStar 1995 Stock Incentive Plan (incorporated by reference to
Exhibit 10.16 to the Registration Statement on Form S-1 of ECC,
Registration No. 33-91276).
10.15(a) Eighth Amendment to Satellite Construction Contract, dated as of
February 1, 1994, between DirectSat Corporation and Martin Marietta
(incorporated by reference to Exhibit 10.17(a) to the Quarterly
Report on Form 10-Q of ECC for the quarter ended June 30, 1996,
Commission File No. 0-26176).
10.15(b) Ninth Amendment to Satellite Construction Contract, dated as of
February 1, 1994, between DirectSat Corporation and Martin Marietta
(incorporated by reference to Exhibit 10.15 to the Registration
Statement of Form S-4 of ECC, Registration No. 333-03584).
10.15(c) Tenth Amendment to Satellite Construction Contract, dated as of
July 18, 1996, between DirectSat Corporation and Martin Marietta
(incorporated by reference to Exhibit 10.17(b) to the Quarterly
Report on Form 10-Q of ECC for the quarter ended June 30, 1996,
Commission File No. 0-26176).
10.16 Satellite Construction Contract, dated as of July 18, 1996, between
EDBS
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C>
and Lockheed Martin Corporation (incorporated by reference to
Exhibit 10.18 to the Quarterly Report on Form 10-Q of ECC for the
quarter ended June 30, 1996, Commission File No. 0-26176).
10.17 Confidential Amendment to Satellite Construction Contract between
DBSC and Martin Marietta, dated as of May 31, 1995 (incorporated by
reference to Exhibit 10.14 to the Registration Statement of Form S-4
of ECC, Registration No. 333-03584).
10.18 Right and License Agreement by and among HTS and Asia Broadcasting
and Communications Network, Ltd., dated December 19, 1996
(incorporated by reference to Exhibit 10.18 to the Annual Report on
Form 10-K of ECC for the year ended December 31, 1996, as amended,
Commission file No. 0-26176).
10.19 Agreement between HTS, ESC and ExpressVu Inc., dated January 8,
1997, as amended (incorporated by reference to Exhibit 10.18 to the
Annual Report on Form 10-K of ECC for the year ended December 31,
1996, as amended, Commission file No. 0-26176).
10.20 Amendment No. 9 to Satellite Construction Contract, effective as of
July 18, 1996, between Direct Satellite Broadcasting Corporation, a
Delaware corporation ("DBSC") and Martin Marietta Corporation
(incorporated by reference to Exhibit 10.1 to the Quarterly Report
on Form 10-Q of ECC for the quarterly period ended June 30, 1997,
Commission File No. 0-26176).
10.21 Amendment No. 10 to Satellite Construction Contract, effective as of
May 31, 1996, between DBSC and Lockheed Martin Corporation
(incorporated by reference to Exhibit 10.2 to the Quarterly Report
on Form 10-Q of ECC for the quarterly period ended June 30, 1997,
Commission File No. 0-26176).
10.22 Contract for Launch Services, dated April 5, 1996, between Lockheed
Martin Commercial Launch Services, Inc. and EchoStar Space
Corporation (incorporated by reference to Exhibit 10.3 to the
Quarterly Report on Form 10-Q of ECC for the quarterly period ended
June 30, 1997, Commission File No. 0-26176).
10.23 OEM Manufacturing, Marketing and Licensing Agreement, dated as of
February 17, 1998, by and among HTS, ESC and Philips Electronics
North America Corporation (incorporated by reference to Exhibit 10.1
to the Quarterly Report on Form 10-Q of ECC for the quarterly period
ended March 31, 1998, Commission File No. 0-26176).
10.24 Licensing Agreement, dated as of February 23, 1998, by and among
HTS, ESC and VTech Communications Ltd. (incorporated by reference to
Exhibit 10.2 to the Quarterly Report on Form 10-Q of ECC for
quarterly period ended March 31, 1998, Commission File No. 0-26176).
10.25 Agreement to form NagraStar LLC, dated as of June 23, 1998 by and
between Kudelski S.A., ECC and ESC (incorporated by reference to
Exhibit
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C>
10.1 to the Quarterly Report on Form 10-Q of ECC for quarterly
period ended June 30, 1998, Commission File No. 0-26176).
10.26 Purchase Agreement by and among American Sky Broadcasting, LLC, The
News Corporation Limited, MCI Telecommunications Corporation and
EchoStar Communications Corporation, dated November 30, 1998.
(incorporated by reference to Exhibit 10.1 to the Form 8-K filed by
ECC on November 30, 1998, Commission File No. 0-26176).
10.27 Form of Registration Rights Agreement to be entered into among
EchoStar Communications Corporation, MCI Telecommunications
Corporation, and a to-be-named wholly-owned subsidiary of MCI
Telecommunications Corporation, American Sky Broadcasting, LLC, and
a to-be-named wholly-owned subsidiary of The News Corporation
Limited (incorporated by reference to Exhibit 10.2 to the Current
Report on Form 8-K of EchoStar, filed as of December 1, 1998).
10.28 Voting Agreement dated November 30, 1998, among EchoStar
Communications Corporation, American Sky Broadcasting, LLC, The News
Corporation Limited and MCI Telecommunications Corporation
(incorporated by reference to Exhibit 10.3 to the Current Report on
Form 8-K of EchoStar, filed as of December 1, 1998).
12** Statements re computation of ratios.
21* Subsidiaries of the Company.
23.1 Consent of Winthrop, Stimson, Putnam & Roberts (included in
Exhibit 5.1).
23.2 Consent of Friedlob Sanderson Raskin Paulson & Tourtillott, LLC
(included in Exhibit 5.2).
23.3** Consent of Arthur Andersen LLP.
24* Power of Attorney (included in the signature pages to this
Registration Statement).
25.1* Statement of Eligibility on Form T-1 under the Trust Indenture Act
of 1939 of U.S. Bank Trust National Association, as Trustee of the
Indenture, relating to the Seven Year Notes (separately bound).
25.2* Statement of Eligibility on Form T-1 under the Trust Indenture Act
of 1939 of U.S. Bank Trust National Association, as Trustee of the
Indenture, relating to the Ten Year Notes (separately bound).
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
</TABLE>
- --------------
* Previously filed
** Filed herewith
5
<PAGE>
EXHIBIT 12
PAGE 1 OF 1
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES AND AFFILIATES
COMPUTATION OF RATIOS
(IN THOUSANDS)
(UNAUDITED)
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998
----------- ---------- ---------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before taxes.. $ 18,734 $ 489 $ (18,552) $ (156,529) $ (323,278) $ (294,304)
Interest expense............ 632 21,408 23,985 62,430 110,003 172,942
Capitalized interest........ 370 5,695 25,763 31,818 43,169 21,619
Interest component of rent
expense (1)............... 78 94 71 84 64 57
----------- ---------- ---------- ---------- -----------------------
Total fixed charges....... 1,080 27,197 49,819 94,332 153,236 194,618
Earnings before fixed
charges................... $ 19,444 $ 21,991 $ 5,504 $ (94,015) $(213,211) $ (121,305)
Ratio of earnings to fixed
charges................... 18.00 0.81 0.11 (1.00) (1.39) (0.62)
----------- ---------- ---------- ---------- -----------------------
----------- ---------- ---------- ---------- -----------------------
Deficiency of available
earnings to fixed charges.. - $ (5,206) $ (44,315) $ (188,347) $ (366,447) $ (315,923)
----------- ---------- ---------- ---------- -----------------------
----------- ---------- ---------- ---------- -----------------------
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
--------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998
--------------------- ---------------------
<S> <C> <C>
Income (loss) before taxes....... $(310,532) $(234,749)
Interest expense................. 97,257 113,387
Capitalized interest............. 30,120 16,455
Interest component of rent
expense (2).................... 48 57
--------------------- ---------------------
Total fixed charges............ 127,426 129,899
Earnings before fixed charges.... $(213,227) $(121,305)
Ratio of earnings to fixed
charges........................ (1.67) (0.93)
--------------------- ---------------------
--------------------- ---------------------
Deficiency of available earnings
to fixed charges............... $(340,653) $(251,204)
--------------------- ---------------------
--------------------- ---------------------
</TABLE>
- -------------------
(1) The interest component of rent expense has been estimated by taking the
difference between the gross rent expense and net present value of rent
expense using a weighted-average cost of capital of approximately 13%.
This cost of capital is representative of the Company's outstanding
secured borrowings.
(2) The interest component of rent expense has been estimated by taking the
difference between the gross rent expense and net present value of rent
expense using a pro forma, annualized cost of capital of approximately
9.6% for the years ended December 31, 1997 and 1998.
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Denver, Colorado
APRIL 13, 1999
