<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 26, 2000
REGISTRATION NO. 333-
------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ECHOSTAR BROADBAND CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Colorado 5064 84-1560440
(State or other jurisdiction (Primary Standard Industrial Classification (IRS Employer
of incorporation or organization) Number) Identification No.)
</TABLE>
5701 South Santa Fe Drive
Littleton, Colorado 80120
(303) 723-1000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive office)
----------
David K. Moskowitz, Esq.
Senior Vice President, General Counsel and Secretary
EchoStar Communications Corporation
5701 South Santa Fe Drive
Littleton, Colorado 80120
(303) 723-1000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With copies to:
Raymond L. Friedlob, Esq.
John W. Kellogg, Esq.
Friedlob Sanderson Paulson & Tourtillott, LLC
1400 Glenarm Place, Third Floor
Denver, Colorado 80202
(303) 571-1400
----------
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following Box [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE PRICE PER OFFERING PRICE REGISTRATION
REGISTERED REGISTERED NOTE(1) (1) FEE
----------------------------------------- -------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C>
10 3/8% Senior Notes due 2007 $1,000,000,000 100% $1,000,000,000 $250,000
</TABLE>
(1) Pursuant to Rule 457(f)(2), the fee is calculated based upon the book
value of the 103/8% Senior Notes due 2007 as of December 22, 2000.
----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
(ii)
<PAGE> 3
The information in this prospectus 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 DECEMBER 26, 2000
================================================================================
PROSPECTUS CONFIDENTIAL
, 2001
---------------------
ECHOSTAR BROADBAND CORPORATION
OFFER TO EXCHANGE $1,000,000,000 OF ITS 10 3/8% SENIOR NOTES DUE 2007 WHICH
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR ALL OUTSTANDING
$1,000,000,000 OF ITS 10 3/8% SENIOR NOTES DUE 2007.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. EASTERN STANDARD TIME
ON JANUARY , 2001, UNLESS EXTENDED
---
THE EXCHANGE NOTES
The exchange notes are substantially identical to the old notes that we
issued on September 25, 2000, except for certain transfer restrictions,
registration rights and liquidated damages provisions relating to the old notes.
MATERIAL TERMS OF THE EXCHANGE OFFER
o You will receive an equal principal amount of exchange notes
for all old notes that you validly tender and do not validly
withdraw.
o The exchange will not be a taxable exchange for U.S. federal
income tax purposes.
o There has been no public market for the old notes and we
cannot assure you that any public market for the exchange
notes will develop. We do not intend to list the exchange
notes on any national securities exchange or any automated
quotation system.
CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 14 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 , 2001.
---------------
(iii)
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
WHERE YOU CAN FIND MORE INFORMATION.......................................................................................1
FORWARD-LOOKING STATEMENTS................................................................................................1
SUMMARY...................................................................................................................2
THE ECHOSTAR ORGANIZATION................................................................................................13
RISK FACTORS.............................................................................................................14
USE OF PROCEEDS..........................................................................................................31
THE EXCHANGE OFFER.......................................................................................................32
SELECTED FINANCIAL DATA..................................................................................................40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................44
BUSINESS.................................................................................................................56
MANAGEMENT...............................................................................................................78
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........................................................................84
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........................................................84
DESCRIPTION OF THE NOTES.................................................................................................87
DESCRIPTION OF OTHER DEBT...............................................................................................124
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS.................................................................126
UNITED STATES FEDERAL INCOME TAXATION OF NON-UNITED STATES HOLDERS......................................................127
BACKUP WITHHOLDING AND INFORMATION REPORTING............................................................................128
UNITED STATES ERISA CONSIDERATIONS......................................................................................129
PLAN OF DISTRIBUTION....................................................................................................130
LEGAL MATTERS...........................................................................................................131
INDEPENDENT ACCOUNTANTS.................................................................................................131
</TABLE>
(iv)
<PAGE> 5
WHERE YOU CAN FIND MORE INFORMATION
Upon effectiveness of the registration statement of which this
prospectus is in part, we become subject to and commence filing annual,
quarterly and special reports and other information with the SEC. Our parent,
EchoStar Communications Corporation, and our subsidiary, EchoStar DBS
Corporation, both file annual, quarterly and special reports, other information,
and proxy statements in the case of ECC, with the SEC. You may read and copy any
document that we or they file with the SEC at the SEC's public reference room at
450 Fifth Street, N.W., Washington, D.C. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. These SEC filings are
also available to you free of charge at the SEC's web site at
http://www.sec.gov. The Class A common stock of EchoStar Communications
Corporation is listed on the NASDAQ National Market under the symbol "DISH."
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 us or by officers,
directors or employees acting on our behalf, that are not statements of
historical fact constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known or unknown risks, uncertainties and other factors that
could cause our actual results to be materially different from historical
results or from any future results expressed or implied by such forward-looking
statements. The "Risk factors" section of this prospectus, commencing on page
14, summarizes certain of the material risks and uncertainties that could cause
our actual results to differ materially. In addition to statements that
explicitly describe such risks and uncertainties, readers are urged to consider
statements that include the terms "believes," "belief," "expects," "plans,"
"anticipates," "intends" or the like to be uncertain and forward-looking. All
cautionary statements made herein should be read as being applicable to all
forward-looking statements wherever they appear. In this connection, investors
should consider the risks described herein and should not place undue reliance
on any forward-looking statements.
1
<PAGE> 6
SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the consolidated financial statements and the notes
thereto appearing elsewhere in this prospectus. "We," "our" and the "Company" as
used in this prospectus refer to EchoStar Broadband Corporation, a Colorado
corporation, together with our subsidiaries. As used in this prospectus, "ECC"
refers to our parent, EchoStar Communications Corporation, a Nevada corporation,
or, if the context requires, to ECC together with its subsidiaries. Also, as
used in the prospectus, "EDBS" and "EOC" refer to EchoStar DBS Corporation and
EchoStar Orbital Corporation, respectively, Colorado corporations and our wholly
owned subsidiaries.
ECHOSTAR BROADBAND CORPORATION
We are a leading provider of direct broadcast satellite, or DBS,
television services in the United States through our DISH Network business unit.
We are also an 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 September 30, 2000, approximately 4.8 million
households subscribed to DISH Network programming services. From January 1, 2000
to September 30, 2000, our market share of net new DBS customers was 58%. We now
have six DBS satellites in orbit which enable us to provide over 500 video and
audio channels, together with data services and high definition and interactive
TV services, to consumers across the continental United States through the use
of one small satellite dish. 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. As of
September 30, 2000, approximately 15.1 million United States households
subscribed to direct broadcast satellite and other direct-to-home satellite
services. We believe that there continues to be significant unsatisfied demand
for high quality, reasonably priced television programming services.
In addition, we are developing a wide range of interactive, Internet
and high-speed data services. During 1999, we began offering to consumers our
first of its kind DISHPlayer, which combines a satellite receiver, digital VCR,
gaming and Internet access capabilities all in one box. Customers using our
current DISHPlayer receivers have the capability to store up to 12 hours of
programming on the receiver's hard drive. We have made strategic investments in
OpenTV and Wink Communications, two leading enablers of interactive technology.
We have also made strategic investments in StarBand Communications (formerly
Gilat-To-Home) and Wildblue Communications (formerly iSky, Inc.), both of which
intend to offer two-way "always-on" broadband Internet access across the
continental U.S. We began offering this access to existing and new DISH Network
customers along with our television services through a convenient single dish
solution beginning in November 2000.
ECHOSTAR TECHNOLOGIES CORPORATION
In addition to supplying EchoStar satellite receiver systems for the
DISH Network, our EchoStar Technologies Corporation subsidiary supplies similar
digital satellite receivers to international satellite TV service operators. Our
two major customers are Via Digital, a subsidiary of Telefonica, Spain's
national telephone company, and Bell ExpressVu, a subsidiary of Bell Canada,
Canada's national telephone company.
SATELLITE SERVICES
Our Satellite Services business unit primarily leases capacity on our
satellites to customers, including international services that broadcast foreign
language programming to our subscribers, and Fortune 1000 companies that use our
business television service to communicate with employees, customers,
distributors, and suppliers located around the United States.
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 plan to:
2
<PAGE> 7
o Leverage our significant share of the DBS spectrum to offer
more channels than any other video provider in the United
States, and by offering unique programming services that will
differentiate us from our competition. These services include
satellite-delivered local signals and niche and foreign
language services;
o Offer marketing promotions that will enhance our position as a
leading provider of value-oriented programming services and
receiver systems;
o Utilize our orbital assets and strategic relationships to
provide interactive and high speed Internet access to DISH
Network customers via a convenient single dish solution;
o Expand and improve DISH Network distribution channels;
o Develop our EchoStar Technologies Corporation and Satellite
Services businesses; and
o Emphasize one-stop shopping for DBS services and equipment and
superior customer service.
RECENT DEVELOPMENTS
10 3/8% Senior Notes due 2007
On September 25, 2000, we closed on the sale of the notes. The proceeds
of the notes will be used primarily by our subsidiaries for the construction and
launch of additional satellites, strategic acquisitions and other general
working capital purposes. Under the terms of the indenture governing the notes,
we have agreed to cause our subsidiary, EchoStar DBS Corporation ("EDBS") to
make an offer to exchange all of the outstanding notes for a new class of notes
issued by EDBS as soon as practical following the first date (as reflected in
EDBS' most recent quarterly or annual financial statements) on which EDBS is
permitted to incur indebtedness in an amount equal to the outstanding principal
balance of the notes under the "Indebtedness to Cash Flow Ratio" test contained
the indentures (the "EDBS Indentures") governing the EDBS 9 1/4% Senior Notes
due 2006 and 9 3/8% Senior Notes due 2009 (collectively the "EDBS Notes"), and
such incurrence of indebtedness would not otherwise cause any breach or
violation of, or result in a default under, the terms of the EDBS Indentures.
On October 25, 2000, as contemplated by the terms of the indenture
governing the notes, EDBS amended the terms of the EDBS Indentures to provide
that the recording of some or all of the indebtedness represented by the EBC
Notes on the EDBS balance sheet as a result of the application of generally
accepted accounting principles and related rules prior to the completion of the
EDBS Exchange Offer would not be deemed to constitute an incurrence of
indebtedness for certain purposes under the EDBS Indentures. These amendments
were approved by more than a majority in principal amount of each issue of the
EDBS Notes. The cost of obtaining these consents was immaterial to us.
Starsight
During October 2000, Starsight Telecast, Inc., a subsidiary of Gemstar
- TV Guide, filed a suit for patent infringement against us and certain of our
subsidiaries in the United States District Court for the Western District of
North Carolina, Asheville Division. The suit alleges infringement of United
States Patent No. 4,706,121 which relates to certain electronic program guide
functions. We have examined this patent and believe that it is not infringed by
any of our products or services. We are vigorously contesting the suit and have
filed counterclaims challenging both the validity and enforceability of this
patent.
We also recently filed suit against Gemstar - TV Guide International,
Inc. (and certain of its subsidiaries) in the United States District Court for
the District of Colorado alleging violations by Gemstar of various federal and
state antitrust laws and laws governing unfair competition. The suit seeks an
injunction and monetary damages.
Superguide Corp. also recently filed suit against us, DirecTV and
others in the same North Carolina court, alleging infringement of United States
Patent Nos. 5,038,211, 5,293,357 and 4,751,578 which relate to certain
electronic program guide functions, including the use of electronic program
guides to control VCRs. It is our understanding that these patents may be
licensed by Superguide to Gemstar, although Gemstar has not asserted the patents
against us. We have examined these patents and believe that they are not
infringed by any of our products or services. We intend to vigorously defend
against this action and assert a variety of counterclaims.
3
<PAGE> 8
In the event it is ultimately determined that we infringe on any of
these patents we may be subject to substantial damages, and/or an injunction
that could require us to materially modify certain user friendly electronic
programming guide and related features we currently offer to consumers. It is
too early to make an assessment of the probable outcome of either suit.
IPPV Enterprises
IPPV Enterprises, LLC and MAAST, Inc. filed a patent infringement suit
against us in the United States District Court for the District of Delaware. The
suit alleges infringement of 5 patents. The patents disclose various systems for
the implementation of features such as impulse-pay-per view, parental control
and category lock-out. One patent relates to an encryption technique. Three of
the patents have expired. We are vigorously defending against the suit based,
among other things, on non-infringement, invalidity and failure to provide
notice of alleged infringement.
In the event it is ultimately determined that we infringe on any of
these patents we may be subject to substantial damages, and/or an injunction
with respect to the two unexpired patents, that could require us to materially
modify certain user friendly features we currently offer to consumers. It is too
early to make an assessment of the probable outcome of either suit.
EchoStar VI
On October 13, 2000, we announced that EchoStar VI, our sixth direct
broadcast satellite which launched successfully on July 14, 2000, from Cape
Canaveral, Florida, had reached its final orbital location at 119 degrees West
Longitude as assigned under a special temporary authority by the FCC. It now is
broadcasting satellite TV channels to over 4.8 million DISH Network customers
nationwide, including Alaska and Hawaii. To date, all systems on the satellite
are operating normally. See "Risk factors -- Our business depends substantially
on FCC licenses that can expire or be revoked or modified."
THE EXCHANGE OFFER
The exchange offer relates to the exchange of up to $1,000,000,000
aggregate principal amount of outstanding 10 3/8% senior notes due 2007 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 we registered the exchange
notes under the Securities Act, and therefore they will not bear legends
restricting their transfer.
The exchange offer.......................... We are offering to exchange
$1,000,000,000 principal amount of
our exchange notes which we have
registered under the Securities
Act for each $1,000 principal
amount of outstanding old notes.
In order for us to exchange your
old notes, you must properly
tender them to us and we must
accept them. We will exchange all
outstanding old notes that are
validly tendered and not validly
withdrawn.
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 you may
offer for resale, resell and
otherwise transfer your exchange
notes without compliance with the
registration and prospectus
delivery provisions of the
Securities Act if you are not our
affiliate and you acquire the
exchange notes issued in the
exchange offer 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
we issue to you in the exchange
offer.
Each broker-dealer that receives
exchange notes in the exchange
offer for its own account in
exchange for old notes that it
acquired as a result of
market-making or other trading
activities must acknowledge that
it will delivery a prospectus
meeting the requirements of the
Securities Act, in connection with
any resale of the exchange notes
issued in the exchange offer. You
may not participate 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.
4
<PAGE> 9
Expiration date............................. The exchange offer will expire at
5:00 p.m., Eastern Standard Time,
January ___, 2001, unless we
decide to extend the expiration
date. 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 you registered your
notes 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 you registered your
old notes 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 you cannot
complete the procedure for
book-entry transfer on time or you
cannot deliver your certificates
for registered old notes on time,
you may tender you old notes
pursuant to the procedures
described in this prospectus under
the heading "The exchange
offer-How to use the guaranteed
delivery procedures if you will
not have enough time to send all
documents to us."
Withdrawal rights........................... You may withdraw the tender of
your old notes at any time before
5:00 p.m., Eastern Standard Time,
on January __, 2001, the business
day before the expiration date.
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 income tax
considerations-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.............................. You can reach U.S. Bank Trust
National Association at
Specialized Finance Group, 180
East 5th Street, St. Paul,
Minnesota 55101. For more
information with respect to the
exchange offer, the telephone
number for the exchange agent is
800-934-6802 and the fax number
for the exchange agent is (651)
244-1537.
THE NOTES
The exchange offer applies to $1 billion aggregate principal amount of
10 3/8% senior notes due 2007. Form and terms of the exchange notes are
substantially identical to the form and terms of the old notes, except that we
registered the exchange notes under the Securities Act, and therefore, the
exchange notes will not bear legends restricting their transfer. The exchange
notes will evidence the same debt as the old notes and will be entitled to the
benefits of the indenture. See "Description of the notes" below. As used in this
summary of the notes, "subsidiaries" refers to our direct and indirect
subsidiaries.
Total amount of notes offered .............. $1,000,000,000 aggregate principal
amount of 10 3/8% senior notes due
2007.
Maturity.................................... October 1, 2007.
Interest.................................... Interest on the notes will accrue
at the rate of 10 3/8% per annum
and will be payable semiannually
in cash on April 1 and October 1
of each year, commencing April 1,
2001.
5
<PAGE> 10
Ranking of the notes........................ The notes rank senior in right of
payment to all of our subordinated
indebtedness and on parity in
right of payment 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 are effectively junior
to our secured obligations to the
extent of the collateral securing
those obligations, including
borrowings under our future
secured credit facilities, if any.
The notes are also effectively
subordinated to all of our
subsidiaries' debt and other
liabilities.
Following the completion of this
offering, we will have no debt
outstanding other than the notes.
As of September 30, 2000, our
subsidiaries had long-term debt
and other liabilities that
aggregated approximately $3.8
billion. See "Description of the
notes" below.
Optional redemption......................... On or after October 1, 2004 we may
redeem some or all of the notes at
any time at the redemption prices
and subject to the limitations
described in the section
"Description of the notes--
Optional redemption." Prior to
October 1, 2003, we may redeem
some or all of the notes at a
redemption price equal to 110.375%
of the principal amount thereof
plus all accrued and unpaid
interest to the redemption date,
with the net proceeds of one or
more public or private sales of
our equity interests, other than
proceeds from a sale to any of our
subsidiaries, provided that at
least 65% of the notes remain
outstanding immediately after the
redemption.
Change of control........................... Upon the occurrence of a "change
of control" as defined in the
"Description of the notes," we
must 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, plus
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 must offer to
repurchase a specified amount of
the notes at a purchase price
equal to 101% of the principal
amount thereof, plus accrued and
unpaid interest thereon to the
date of repurchase.
Offer to exchange EDBS
exchange notes for notes.................... Subject to certain conditions, we
will cause EDBS to make an offer
to exchange its promissory notes
for the notes as soon as
practicable following the date
such exchange is permitted by the
terms of the indentures governing
EDBS' 9 1/4% senior notes due 2006
and EDBS' 9 3/8% senior notes due
2009. The EDBS exchange notes to
be issued will be substantially
the same as the notes, and the
indenture governing such EDBS
exchange notes will be
substantially the same as the
indenture governing the notes.
6
<PAGE> 11
Certain other covenants..................... The indenture will restrict, 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 indenture, 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 indenture.
Registration rights;
liquidated damages.......................... Pursuant to a registration rights
agreement among us and the initial
purchasers, we agreed:
o to file an exchange offer
registration statement on or
prior to December 26, 2000,
relating to an exchange
offer for the notes; and
o to use our best efforts to
cause the exchange offer
registration statement to be
declared effective by the
SEC on or prior to June 22,
2001.
We intend that the registration
statement relating to this
prospectus satisfies these
obligations.
7
<PAGE> 12
SUMMARY FINANCIAL DATA
We were formed in September 2000. Concurrent with the closing of the
offering of the notes on September 25, 2000, ECC contributed all of the
outstanding capital stock of EDBS and EOC to us. EOC, which was formed in
January, 2000, did not generate any revenue or incur any expenses during the
nine months ended September 30, 2000 and its activity during that nine month
period consisted solely of progress payments on certain satellites. In addition,
the impact of the contribution of EOC is immaterial to our balance sheet at the
effective date of the reorganization. These contributions have been accounted
for as a reorganization of entities under common control similar to a pooling of
interests. Accordingly, our historical results of operations and financial
condition for periods prior to September 25, 2000 are substantially equivalent
to those of EDBS. We derived the following summary financial data and the
selected financial data presented elsewhere in this prospectus as of and for
each of the five years ended December 31, 1999 from, and the data is qualified
by reference to, our audited consolidated financial statements. The following
summary financial data as of September 30, 2000 and with respect to the nine
months ended September 30, 1999 and 2000, is unaudited; however, in the opinion
of management, such data reflects all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the data for such interim
periods. Operating results for interim periods are not necessarily indicative of
the results that may be expected for a full year. You should read the data set
forth in this table in conjunction with "Management's discussion and analysis of
financial condition and results of operations," our consolidated financial
statements and the notes thereto, and other financial information included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1995 1996 1997 1998 1999 1999 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS, SUBSCRIBERS
AND PER SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS
DATA:
Revenue ............ $ 148,520 $ 197,103 $ 475,902 $ 985,909 $ 1,606,291 $ 1,092,039 $ 1,904,484
Operating loss ..... (8,006) (108,865) (224,336) (130,855) (353,569) (190,345) (318,302)
Net loss ........... (12,361) (101,676) (323,424) (294,375) (791,149) (565,785) (458,066)
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
------------------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable investment
securities(1) .......................................... $ 1,102,559
Total assets ............................................. 3,912,155
Total long-term obligations, net of current portion ...... 3,045,495
Total stockholder's deficit .............................. (881,938)
</TABLE>
8
<PAGE> 13
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1995 1996 1997 1998 1999 1999 2000
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
DISH Network subscribers ....... -- 350,000 1,040,000 1,940,000 3,410,000 2,972,000 4,765,000
Average monthly revenue
per subscriber ................. $ -- $ 35.50 $ 38.50 $ 39.25 $ 42.71 $ 42.31 $ 44.86
EBITDA(2) ...................... (4,892) (65,496) (51,500) (28,698) (182,478) (107,634) (156,424)
Net cash flows from:
Operating activities ........... (21,888) (22,836) (7,549) (53,949) (85,054) (104,610) (256,601)
Investing activities ........... (1,431) (294,962) (306,079) (43,340) 38,772 (14,410) (248,331)
Financing activities ........... 19,764 342,287 337,247 60,538 180,735 167,907 1,442,759
Ratio of earnings to fixed
charges(3) ................... -- -- -- -- -- -- --
Deficiency of earnings to
fixed charges(3) ............. $ (44,315) $ (188,347) $ (366,447) $ (315,923) $ (562,285) $ (336,943) $ (457,963)
</TABLE>
------------
(1) To satisfy insurance covenants related to the outstanding EDBS senior
notes, through September 30, 2000, EDBS reclassified approximately $90
million from cash and cash equivalents to cash reserved for satellite
insurance on its balance sheet.
(2) We believe it is common practice in the telecommunications industry for
investment bankers and others to use various multiples of current or
projected EBITDA, which stands for 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 flows 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
presentations of EBITDA may not be calculated consistently by different
entities in the same or similar businesses. We have shown EBITDA with
the add back for amortization of subscriber acquisition costs, which we
deferred through September 1997 and amortized over one year. Further,
our calculation of EBITDA for the year ended December 31, 1999 and for
the nine months ended September 30, 1999 and 2000 does not include
non-cash compensation expense totaling $61.1 million, $6 million and
$39 million, respectively, resulting from post-grant appreciation of
employee stock options.
9
<PAGE> 14
(3) 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 each of the five years ended
December 31, 1999 and the nine months ended September 30, 1999 and
2000, earnings were insufficient to cover the fixed charges.
10
<PAGE> 15
SUMMARY SATELLITE DATA
<TABLE>
<CAPTION>
ECHOSTAR I ECHOSTAR II ECHOSTAR III ECHOSTAR IV ECHOSTAR V ECHOSTAR VI
---------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Orbital slot ............ 148 degree 119 degree 61.5 degree 119 degree 110 degree 119 degree(1)
Transponders ............ 16 @ 24 MHz 16 @ 24 MHz 16/32 @ 24 8/16 @ 24 16/32 @ 24 16/32 @ 24
MHz(2) MHz(2) MHz(2) MHz(2)
Approximate
channel
capacity(3) ............. 128 128 128/256 80/160 160/256 160/256
Output power ............ 130 watts 130 watts 230/120 230/120 220/110 240/120
watts watts watts watts
Expected end of
commercial
life(5) ................. 2011 2011 2012 2004(6) 2014 2014
---- ---- ---- ------- ---- ----
Coverage area ........... Continental United States Eastern and Western and Central United States,
and certain regions of Central Continental United States, Alaska, Hawaii,
Canada and Mexico United States Puerto Rico and certain regions of Canada
and Mexico
<CAPTION>
EchoStar EchoStar ECHOSTAR
VII(4) VIII(4) IX(4)
------ ------- -----
<S> <C> <C> <C>
Orbital slot ............ 119 degree 110 degree 121 degree
Transponders ............ 16/32 @ 24 16/32 @ 24 16/32 @ 24
MHz(2) MHz(2) MHz(2)
Approximate
channel
capacity(3) ............. 160/256 160/256 160/256
Output power ............ 240/120 240/120 110 watts
watts watts
Expected end of
commercial
life(5) ................. 2015 2015 2015
---- ---- ----
Coverage area ...........
</TABLE>
11
<PAGE> 16
----------
(1) EchoStar VI has reached its final orbital location at 119 degree West
Longitude as assigned under a special temporary authority by the FCC.
(2) The transponders on each of EchoStar III, EchoStar IV, EchoStar V,
EchoStar VI, EchoStar VII and EchoStar VIII 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, EchoStar
VII and EchoStar VIII) to 32 transponders operating at 110 or 120 watts
of power each. Although EchoStar III has experienced anomalies, the
satellite has not experienced any loss of capacity to date. 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 and the failure of 26
transponders to date, a maximum of approximately 16 of the 44
transponders on EchoStar IV are available for use at this time. Due to
the normal degradation of the solar arrays, the number of available
transponders will further decrease over time. See "Risk factors --
Insurance coverage of our satellites is limited and we may be unable to
settle outstanding claims with insurers," below.
(3) Our direct broadcast satellite licenses do not allow full use of the
channel capacity on our satellites. They specifically cover the
following:
o 29 transponders at the 110 degree orbital location, a maximum
of approximately 261 video channels;
o 21 transponders at the 119 degree orbital location, a maximum
of approximately 189 video channels;
o 24 transponders at the 148 degree orbital location, a maximum
of approximately 216 video channels; and
o 11 transponders at the 61.5 degree orbital location, a maximum
of approximately 99 video channels.
With digital compression, each transponder or frequency can yield 9 or
more video channels, for example 9 in low-power mode or 10 in
high-power mode.
(4) EchoStar VII, EchoStar VIII and EchoStar IX are currently under
construction and are expected to operate at the orbital locations
listed above, subject to FCC approval.
(5) 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 FCC issued the licenses for ten year periods, and such
licenses 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."
(6) There can be no assurance that a total loss of use of EchoStar IV will
not occur in the near future.
12
<PAGE> 17
THE ECHOSTAR ORGANIZATION
The following chart illustrates the EchoStar corporate structure.
<TABLE>
<S> <C> <C> <C> <C>
ECHOSTAR COMMUNICATIONS CORPORATION
NASDAQ: DISH; DISHP
o Issuer of Series C Preferred Stock
o Issuer of the 4 7/8% Convertible Subordinated Notes Due 2007
ECHOSTAR BROADBAND
CORPORATION
o ISSUER OF THE NOTES
ECHOSTAR DBS CORPORATION ECHOSTAR ORBITAL
o Issuer of the 9 1/4% Senior Notes due 2006 CORPORATION
o Issuer of the 9 3/8% Senior Notes due 2009 o Contracts for EchoStar VII,
EchoStar VIII and EchoStar IX
ECHOSTAR ECHOSPHERE ECHOSTAR ECHOSTAR DISH
TECHNOLOGIES CORPORATION SATELLITE INTERNATIONAL NETWORK
CORPORATION o U.S. distribution CORPORATION CORPORATION SERVICE
o U.S. distribution of of DTH products o DISH Network and o International CORPORATION
EchoStar receiver and EchoStar Satellite Services distribution o Installation
systems for DISH receiver systems o EchoStar I Satellite of DTH products of DBS
Network and DTH for the DISH o EchoStar II Satellite products
products to Echosphere Network to o EchoStar III Satellite
and other distributors satellite retailers o EchoStar IV Satellite
o International o EchoStar V Satellite
distribution of DBS o EchoStar VI Satellite
and DTH products o 11 Frequencies 61.5 degrees WL
o Research and o 29 Frequencies 110 degrees WL
development of DBS o 21 Frequencies 119 degrees WL
stand-alone and o 24 Frequencies 148 degrees WL
integrated products o 22 Frequencies 175 degrees WL
o DBS Programming
contracts
o Wyoming digital broadcast center
o Arizona digital broadcast center
o Five customer service centers
</TABLE>
13
<PAGE> 18
RISK FACTORS
You should carefully consider all of the information contained in this
prospectus before deciding whether to invest in the notes and, in particular,
the following factors:
RISKS PRIMARILY RELATED TO OUR BUSINESS
WE WILL HAVE SUBSTANTIAL DEBT OUTSTANDING AFTER THE OFFERING AND MAY INCUR
ADDITIONAL DEBT, SO WE MAY BE UNABLE TO PAY INTEREST OR PRINCIPAL ON THE NOTES
As of September 30, 2000, our total debt, including the debt of our
subsidiaries, is approximately $3.0 billion.
Our substantial debt could have significant consequences to you,
including:
o making it more difficult to satisfy our obligations with
respect to the notes;
o increasing our vulnerability to general adverse economic
conditions, including changes in interest rates;
o limiting our ability to obtain additional financing, including
financing to satisfy our obligations with respect to the
notes;
o requiring us to devote a substantial portion of our cash flow
to make interest and principal payments on our debt, reducing
the amount of available cash for other purposes;
o limiting our financial flexibility in responding to changing
economic and competitive conditions; and
o placing us at a competitive disadvantage compared to our
competitors that have less debt.
RESTRICTIVE COVENANTS UNDER OUR INDEBTEDNESS MAY LIMIT OUR ABILITY TO OPERATE
OUR BUSINESS
The indentures relating to the notes and our other long-term
indebtedness contain restrictive covenants that may inhibit our ability to
manage our business, engage in certain transactions that we believe to be
beneficial to holders of the notes and to react to changing market conditions.
These restrictions, among other things, limit the ability of our subsidiaries
to:
o incur additional indebtedness;
o issue preferred stock;
o sell assets;
o create, incur or assume liens;
o merge, consolidate or sell assets;
o enter into transactions with affiliates; and
o pay dividends and make other distributions.
In particular, the indentures related to the outstanding EDBS senior
notes limit EDBS' ability to pay dividends or make distributions to us. Since we
are a holding company with no assets other than our ownership of our
subsidiaries, we will be dependent on the receipt of funds from EDBS or our
parent, ECC, to pay interest and principal on the notes and these limitations
could adversely affect our ability to make such payments on the notes.
14
<PAGE> 19
INCREASED SUBSCRIBER TURNOVER COULD AFFECT OUR FINANCIAL PERFORMANCE
We believe that our percentage churn, which has not increased during
the nine months ended September 30, 2000 as compared to the same period during
1999, continues to be lower than satellite and cable industry averages. While we
have successfully managed churn within a narrow range historically, our maturing
subscriber base, the effects of rapid growth, and other factors could cause
future increases in churn. Further, impacts from our litigation with the
networks in Miami, new FCC rules governing the delivery of superstations and
other factors, could cause us to terminate delivery of distant network channels
and superstations to a material portion of our subscriber base, which could
cause many of those customers to cancel their subscription to our other
services. Any such terminations could result in a small reduction in average
monthly revenue per subscriber and could result in increased churn. While there
can be no assurance, notwithstanding the issues discussed above we have and
expect to be able to continue to manage churn below industry averages during
2000.
INCREASED SUBSCRIBER ACQUISITION COSTS COULD AFFECT OUR FINANCIAL PERFORMANCE
As previously described, we subsidize the purchase and installation of
EchoStar receiver systems in order to attract new DISH Network subscribers.
Consequently, our subscriber acquisition costs are significant. Our average
subscriber acquisition expenses were $437 during the nine months ended September
30, 2000. Our Digital Dynamite promotion allows us to capitalize and depreciate
over 4 years equipment costs that would otherwise be expensed at the time of
sale, but also results in increased capital expenditures. Capital expenditures
under our Digital Dynamite promotion totaled approximately $26.5 million for the
nine months ended September 30, 2000. As a result of continuing competition and
our plans to attempt to continue to drive rapid subscriber growth, we expect our
per subscriber acquisition costs for 2000, including costs capitalized under the
Digital Dynamite Plan, will average approximately $450 to $475 for the full
year. Our subscriber acquisition costs, both in the aggregate and on a per new
subscriber activation basis, may materially increase to the extent that we
continue or expand our bounty program, our "free system/free installation"
program, the DISH Network One-Rate Plan, or other more aggressive promotions if
we determine that they are necessary to respond to competition, or for other
reasons.
Most of our core programming is broadcast from our satellites at the
119 degree orbital location, and almost all of our subscribers have EchoStar
receiver systems that can view programming from that location. With the
commencement of additional services from the 110 degree orbital location
following the successful launch of EchoStar V, our existing subscribers will
need to upgrade their dish and receiver systems in order to take advantage of
the additional services we now offer. To encourage existing subscribers to
upgrade their systems and remain subscribers, we are currently subsidizing
upgrades by existing subscribers to our DISH 500 system, which receives
programming from both the 110 degree and 119 degree orbital locations. The cost
of this program could be significant if utilized by a large number of our
existing subscribers, though upgrades should also result in increased revenue
per subscriber.
Any material increase in subscriber acquisition costs from current
levels could have a material adverse effect on our business and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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 forces,
installation capability, customer service operations and information systems,
and maintain our relationships with third party vendors. We also need to
continue to expand, train and manage our employee base, and our management
personnel must assume even greater levels of responsibility.
Significant increases in the number of new subscribers resulted in
customer service and installation delays and an increase in our subscriber churn
during the beginning of the second quarter of 2000. If we are unable to continue
to develop our installation capability and customer service operations in a
timely manner to effectively manage this growth, we may experience a decrease in
subscriber growth and an increase in subscriber churn which could have a
material adverse effect on our business and results of operations.
15
<PAGE> 20
WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE, IN ORDER TO CONTINUE
GROWING AND INCREASE EARNINGS AND TO MAKE PAYMENTS ON THE NOTES
Our ability to increase earnings, and the market value and liquidity of
our common stock will depend, in part, on our ability to continue growing our
business by maintaining and increasing our subscriber base. This may require
significant additional capital that we cannot be certain will be available to
us.
Currently the funds necessary to meet subscriber acquisition costs and
upgrades of existing subscribers to DISH 500 systems 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. We cannot assure you that additional financing will be available
on acceptable terms, or at all, if needed in the future.
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 (through a partly owned subsidiary) a
six satellite low earth orbit satellite system. We may need to raise additional
funds to fully develop these systems. 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, among other things, higher than
expected subscriber acquisition costs or a defect in or the loss of any
satellite. 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.
IMPEDIMENTS TO RETRANSMISSION OF LOCAL AND DISTANT BROADCAST SIGNALS; OUR LOCAL
AND DISTANT PROGRAMMING STRATEGY FACES UNCERTAINTY
The Copyright Act, as amended by the Satellite Home Viewer Improvement
Act of 1999, permits satellite retransmission of distant network channels only
to "unserved households." Whether a household qualifies as "unserved" for the
purpose of eligibility to receive a distant network channel depends, in part, on
whether that household can receive a signal of "Grade B intensity" as defined by
the FCC. In February 1999, the FCC released a report and order on these matters.
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. Later in 1999,
the FCC denied in part and granted in part our petition for reconsideration,
allowing us some additional flexibility in the method for measuring Grade B
intensity but denying our requests on other matters. 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. In addition, the Satellite Home Viewer Improvement Act,
enacted in November 1999, instructed the FCC to establish a predictive model
based on the model it had endorsed in February 1999 and also directed the FCC to
ensure that its predictive model takes account of terrain, building structures
and other land cover variations. The FCC recently issued a report and order that
does not adjust the model to reflect such variations for any VHF stations.
Failure to account for these variations could hamper our ability to retransmit
distant network and superstation signals. The broadcast interests and we have
filed petitions for reconsideration of the FCC's action. We cannot be sure that
the FCC's action on reconsideration will not be even more unfavorable to us.
The Satellite Home Viewer Improvement Act of 1999 has also established
a process whereby consumers predicted to be served by a local station may
request that this station waive the unserved household limitation so that the
requesting consumer may receive distant signals by satellite. If the waiver
request is denied, the Satellite Home Viewer Improvement Act of 1999 entitles
the consumer to request an actual test, with the cost to be borne by either us
or the broadcast station depending on the results. The FCC staff has informally
raised questions about our implementation of that process. We can provide no
assurance that the FCC will find that our implementation of the process is in
compliance with these rules. Furthermore, the FCC has recently identified a
third party organization to examine and propose tester qualification and other
standards for testing. We cannot be sure that this decision will not have an
adverse effect on our ability to test whether a consumer is eligible for distant
signals.
In addition, the Satellite Home Viewer Improvement Act of 1999 could
adversely affect us in several other respects. The legislation prohibits us from
carrying more than two distant signals for each broadcasting network and leaves
the FCC's Grade B intensity standard unchanged without future legislation. The
FCC recently released a report recommending that only minor changes be made to
the Grade B standard, a recommendation that is unfavorable to us. While the
Satellite Home Viewer
16
<PAGE> 21
Improvement Act of 1999 reduces the royalty rate that we currently pay for
superstation and distant network signals, it directs the FCC to require us
(within one year from November 29, 1999) to delete substantial programming
(including sports programming) from these signals. The FCC has recently released
rules implementing that directive, which have become effective. These
requirements may significantly hamper our ability to retransmit distant network
and superstation signals, and may require us to stop retransmitting many or all
superstation signals.
In connection with implementation of the Satellite Home Viewer
Improvement Act of 1999 and other factors, we believe hundreds of thousands of
consumers have lost or could lose access to network channels by satellite. In
anticipation of passage of the legislation, and for other reasons, we have
ceased providing distant network channels to tens of thousands of customers.
These turn offs, together with others, could result in a temporary material
increase in churn and a small reduction in revenue per subscriber. Further,
under the law, broadcasters could seek a permanent injunction on our sales of
both distant and local network channels, which would have a material adverse
effect on our churn, revenue, ability to attract new subscribers, and our
business operations generally.
The Satellite Home Viewer Improvement Act of 1999 generally gives
satellite companies a statutory copyright license to retransmit local-into-local
network programming, subject to obtaining the retransmission consent of the
local network station. Where the retransmission consent or short-term extensions
were not obtained from a particular local network station on or before May 29,
2000 (the six month anniversary of the act), we were required to cease
retransmission of the station's signals. Retransmission consent agreements are
important to us because a failure to reach such agreements with broadcasters
could have an adverse effect on our strategy to compete with cable and other
satellite companies, which provide local signals. The Satellite Home Viewer
Improvement Act of 1999 requires broadcasters to negotiate retransmission
consent agreements in good faith. In accordance with the requirements of the
Satellite Home Viewer Improvement Act of 1999, the FCC has promulgated rules
governing broadcasters' good faith negotiation obligation. These rules allow
satellite providers to file complaints with the FCC against broadcasters for
violating the duty to negotiate retransmission consent agreements in good faith.
Currently, the degree to which the rules will be of practical benefit to us in
our efforts to obtain all necessary retransmission consent agreements remains
unclear. While we filed three such complaints against broadcast organizations,
we have now settled all of these complaints. While we have been able to reach
retransmission consent agreements with each of the local network stations we
currently carry, our planned roll-out of local channels in more cities will
require additional agreements, and we cannot be sure that we will secure these
agreements, or that we will secure new agreements upon the expiration of our
current retransmission consent agreements, some of which are short term.
Many other provisions of the Satellite Home Viewer Improvement Act of
1999 could adversely affect us. Among other things, the law includes the
imposition of "must carry" requirements on DBS providers. The "must carry" rules
generally would require that commencing in January 2002 satellite distributors
carry all the local broadcast stations in areas they choose to offer local
programming, not just the four major networks. Since we have limited capacity,
the number of markets in which we can offer local programming would be reduced
by the "must carry" requirement to carry large numbers of stations in each
market we serve. The legislation also includes provisions which could expose us
to material monetary penalties, and permanent prohibitions on the sale of all
local and distant network channels, based on what could be considered even
inadvertent violations of the legislation, prior law, or the FCC rules.
Imposition of these penalties would have a material adverse effect on our churn,
revenue, ability to attract new subscribers, and our business operations
generally. Consistent with the requirements of the Satellite Home Viewer
Improvement Act of 1999, the FCC has now completed a rulemaking and adopted
detailed must-carry rules, including obligations to also carry several
non-commercial stations upon request. We cannot be sure that the FCC rules will
not have a further adverse impact on our operations.
17
<PAGE> 22
TV NETWORKS OPPOSE OUR STRATEGY OF DELIVERING DISTANT NETWORK SIGNALS
Until July 1998, we obtained distant broadcast network channels (ABC,
NBC, CBS and FOX) for distribution to our customers through PrimeTime 24. In
December 1998, the United States District Court for the Southern District of
Florida entered a nationwide permanent injunction requiring PrimeTime 24 to shut
off distant network channels to many of its customers, and henceforth to sell
those channels to consumers in accordance with certain stipulations in the
injunction.
In October 1998, we filed a declaratory judgment action against ABC,
NBC, CBS and FOX in Denver Federal Court. We asked the court to enter a judgment
declaring that our method of providing distant network programming did not
violate the Satellite Home Viewer Act and hence did not infringe the networks'
copyrights. In November 1998, the networks and their affiliate groups filed a
complaint against us in Miami Federal Court alleging, among other things,
copyright infringement. The court combined the case that we filed in Colorado
with the case in Miami and transferred it to the Miami court. The case remains
pending in Miami. While the networks have not sought monetary damages, they have
sought to recover attorney fees if they prevail.
In February 1999, the networks filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV,
Inc. in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. DirecTV settled this lawsuit with the networks. Under
the terms of the settlement between DirecTV and the networks, some DirecTV
customers were scheduled to lose access to their satellite-provided distant
network channels by July 31, 1999, while other DirecTV customers were to be
disconnected by December 31, 1999. Subsequently, PrimeTime 24 and substantially
all providers of satellite-delivered network programming other than us agreed to
this cut-off schedule, although we do not know if they adhered to this schedule.
In December 1998, the networks filed a Motion for Preliminary
Injunction against us in the Miami court, and asked the court to enjoin us from
providing network programming except under limited circumstances. A preliminary
injunction hearing was held on September 21, 1999. The court took the issues
under advisement to consider the networks' request for an injunction, whether to
hear live testimony before ruling upon the request, and whether to hear argument
on why the Satellite Home Viewer Act may be unconstitutional, among other
things.
In March 2000, the networks filed an emergency motion again asking the
court to issue an injunction requiring us to turn off network programming to
certain of our customers. At that time, the networks also argued that our
compliance procedures violate the Satellite Home Viewer Improvement Act. We
opposed the networks' motion and again asked the court to hear live testimony
before ruling upon the networks' injunction request.
On September 29, 2000, the Court granted the Networks' motion for
preliminary injunction, denied the Network's emergency motion and denied our
request to present live testimony and evidence. The Court's original order
required EchoStar to terminate network programming to certain subscribers "no
later than February 15, 1999", and contained other dates which would be
physically impossible to comply with. The order imposes restrictions on our past
and future sale of distant ABC, NBC, CBS and Fox channels similar to those
imposed on PrimeTime 24 (and, we believe, on DirecTV and others). Some of those
restrictions go beyond the statutory requirements imposed by the Satellite Home
Viewer Act and the Satellite Home Viewer Improvement Act. For these and other
reasons we believe the Court's order is, among other things, fundamentally
flawed, unconstitutional and should be overturned. However, it is very unusual
for a Court of Appeals to overturn a lower court's order and there can be no
assurance whatsoever that it will be overturned.
On October 3, 2000, and again on October 25, 2000, the Court amended
its original preliminary injunction order in an effort to fix some of the errors
in the original order. The twice amended preliminary injunction order required
us to shut off, by February 15, 2001, all subscribers who are ineligible to
receive distant network programming under the court's order. We have appealed
the September 29, 2000 preliminary injunction order and the October 3, 2000
amended preliminary injunction order. On November 22, 2000, the United States
Court of Appeals for the Eleventh Circuit stayed the Florida Court's preliminary
injunction order pending our appeal. At that time, the Eleventh Circuit also
expedited its consideration of our appeal. On November 24, 2000, we filed our
appeal brief with the Eleventh Circuit. On December 1, 2000, the SBCA submitted
an amicus brief in support of our
18
<PAGE> 23
appeal. The Consumer Federation of America and the Media Access Project have
also submitted an amicus brief in support of our appeal. Briefing before the
Eleventh Circuit is expected to be completed in January 2001. We can not predict
when the Eleventh Circuit will rule on our appeal, but it could be as early as
January 2001. Our appeal effort may not be successful and we may be required to
comply with the dates provided in the Court's preliminary injunction order. The
preliminary injunction could force us to terminate delivery of distant network
channels to a substantial portion of our distant network subscriber base, which
could also cause many of these subscribers to cancel their subscription to our
other services. Such terminations would result in a small reduction in our
reported average monthly revenue per subscriber and could result in a temporary
increase in churn.
WE DEPEND ON THE CABLE ACT FOR ACCESS TO OTHERS' PROGRAMMING
Any change in the Cable Consumer Protection and Competition Act of
1992, which we refer to as the Cable Act, and the FCC's rules that permit the
cable industry or cable-affiliated 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. Under the Cable Act and the FCC's rules, cable-affiliated
programmers generally must offer programming they have developed to all multi-
channel video programming distributors on non-discriminatory 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. While we have filed several complaints with the FCC alleging
discrimination, exclusivity, or refusals to deal, we have had limited success in
convincing the FCC to grant us relief. The FCC has denied or dismissed many of
our complaints, and we believe has generally not shown a willingness to enforce
the program access rules stringently. As a result, we may be limited in our
ability to obtain access (or non-discriminatory access) to cable-affiliated
programming. In addition, the FCC recently modified certain of its attribution
rules that determine whether a programmer is affiliated with a cable operator
and therefore subject to the program access obligations. We do not yet know the
implications or impact of these modified rules.
WE EXPECT OPERATING LOSSES THROUGH AT LEAST 2000 AND CANNOT BE CERTAIN THAT WE
WILL ACHIEVE OR SUSTAIN OPERATING PROFITABILITY OR POSITIVE CASH FLOW FROM
OPERATING ACTIVITIES
Due to the substantial expenditures necessary 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.
If we do not have sufficient income or another source of cash, it could
eventually affect our ability to service our debt and pay our other obligations.
Our operating losses were $224 million, $131 million and $354 million for the
years ended December 31, 1997, 1998 and 1999, respectively, and $190 million and
$318 million for the nine months ended September 30, 1999 and 2000. We had net
losses of $323 million, $294 million and $791 million for the years ended
December 31, 1997, 1998 and 1999, respectively, and $566 million and $458
million for the nine months ended September 30, 1999 and 2000. Improvements in
our results of operations depend largely upon our ability to increase our
customer base while maintaining our price structure, effectively managing our
costs and controlling churn. We cannot assure you that we will be effective with
regard to these matters. In addition, we incur significant acquisition costs to
obtain DISH Network subscribers. These costs, which may continue to increase,
magnify the negative effects of churn. We anticipate that we will continue to
experience operating losses through 2000. These operating losses may continue
beyond 2000.
WE COMPETE WITH CABLE TELEVISION AND OTHER LAND-BASED SYSTEMS, WHICH COULD
AFFECT OUR ABILITY TO GROW AND INCREASE EARNINGS
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 100 million U.S.
television households, and approximately 68% of total U.S. households currently
subscribe to cable. Cable television operators currently have an advantage
relative to us by providing service to multiple television sets within the same
household at no additional cost. Cable operators may also obtain a competitive
advantage through bundling their analog video service with expanded digital
video services
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delivered terrestrially or via satellite, efficient 2-way high speed data
transmission, improving their digital cable products, 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 has announced
that it is seeking to provide telephone service over Time Warner's cable system.
As a result of these and other factors, we may not be able to continue to expand
our subscriber base or compete effectively against cable television operators.
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, entities such as regional telephone companies,
which are likely to have greater resources than we have, are implementing and
supporting digital video compression over existing telephone lines and digital
"wireless cable." 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 has acquired cable operators TCI and MediaOne. We may not be
able to compete successfully with existing competitors or new entrants in the
market for subscription television services.
WE FACE INTENSE COMPETITION FROM DIRECT BROADCAST SATELLITE AND OTHER SATELLITE
SYSTEM OPERATORS, WHICH COULD AFFECT OUR ABILITY TO GROW AND INCREASE EARNINGS
Our ability to increase earnings will partly depend on our ability to
compete in the highly competitive subscription television industry. We compete
with companies offering video, audio and 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.
One competitor, DirecTV, has launched five high powered direct
broadcast satellites and has 46 direct broadcast satellite frequencies that are
capable of full coverage of the continental United States. DirecTV currently
offers more than 300 channels of combined video and audio programming and, as of
September 30, 2000, had over 9 million subscribers. DirecTV is, and will be for
the foreseeable future, 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 addition, other companies in the U.S., including a subsidiary of
Loral Space and Communications Limited and BellSouth have conditional permits or
have leased transponders 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, which could create significant additional
competition in the market for subscription television services.
OUR BUSINESS RELIES ON THE INTELLECTUAL PROPERTY OF OTHERS AND WE MAY
INADVERTENTLY INFRINGE THEIR PATENTS AND PROPRIETARY RIGHTS
Many entities, including some of our competitors, now have and may in
the future obtain patents and other intellectual property rights that cover or
affect products or services directly or indirectly related to those that we
offer. In general, if a court determines that one or more of our products
infringes on intellectual property 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 intellectual property, or to redesign
those products in such a way as to avoid infringing the patent claims. If a
competitor holds intellectual property rights, the entity might be predisposed
to exercise its right to prohibit our use of its intellectual property in our
products and services at any price, thus impacting our competitive position.
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We cannot assure you that we are aware of all patents and other
intellectual property rights that our products may potentially infringe. In
addition, patent applications in the United States are confidential until the
Patent and Trademark Office issues a patent and, accordingly, we cannot evaluate
the extent to which our products may infringe claims contained in pending patent
applications. Further, it is often not possible to determine definitively
whether a claim of infringement is valid, absent protracted litigation.
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. Those costs, and their impact on net income,
could be material. Damages in patent infringement cases can also include a
tripling of actual damages in certain cases. To the extent that we are required
to pay royalties to third parties to whom we are not currently making payments,
these increased costs of doing business could negatively affect our liquidity
and operating results. Various parties have asserted patent and other
intellectual property rights with respect to components within our direct
broadcast satellite system. We cannot be certain that these persons do not own
the rights they claim, that our products do not infringe on these rights, that
we would be able to obtain licenses from these persons 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.
During October 2000, Starsight Telecast, Inc., a subsidiary of Gemstar
- TV Guide, filed a suit for patent infringement against us and certain of our
subsidiaries in the United States District Court for the Western District of
North Carolina, Asheville Division. The suit alleges infringement of United
States Patent No. 4,706,121 which relates to certain electronic program guide
functions. We have examined this patent and believe that it is not infringed by
any of our products or services. We are vigorously contesting the suit and have
filed counterclaims challenging both the validity and enforceability of this
patent.
We also recently filed suit against Gemstar - TV Guide International,
Inc. (and certain of its subsidiaries) in the United States District Court for
the District of Colorado alleging violations by Gemstar of various federal and
state antitrust laws and laws governing unfair competition. The suit seeks an
injunction and monetary damages.
Superguide Corp. also recently filed suit against us, DirecTV and
others in the same North Carolina court, alleging infringement of United States
Patent Nos. 5,038,211, 5,293,357 and 4,751,578 which relate to certain
electronic program guide functions, including the use of electronic program
guides to control VCRs. It is our understanding that these patents may be
licensed by Superguide to Gemstar, although Gemstar has not asserted the patents
against us. We have examined these patents and believe that they are not
infringed by any of our products or services. We intend to vigorously defend
against this action and assert a variety of counterclaims.
IPPV Enterprises, LLC and MAAST, Inc. filed a patent infringement suit
against us in the United States District Court for the District of Delaware. The
suit alleges infringement of 5 patents. The patents disclose various systems for
the implementation of features such as impulse-pay-per view, parental control
and category lock-out. One patent relates to an encryption technique. Three of
the patents have expired. We are vigorously defending against the suit based,
among other things, on non-infringement, invalidity and failure to provide
notice of alleged infringement.
In the event it is ultimately determined that we infringe on any of
these patents we may be subject to substantial damages, and/or an injunction
that could require us to materially modify certain user friendly features we
currently offer to consumers. It is too early to make an assessment of the
probable outcome of any of these suits.
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 to assure only those who pay can receive the programming. It is
illegal to create, sell or otherwise distribute mechanisms or devices to
circumvent that encryption. Theft of cable and satellite programming has been
widely reported and our signal encryption has been pirated and could be further
compromised in the future. We continue to respond to compromises of our
encryption system with measures intended to make signal theft of our programming
commercially uneconomical. We utilize a variety of tools to continue to
accomplish this goal. Ultimately, if other measures are not
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successful, it could be necessary to replace the credit card size card that
controls the security of each consumer set-top box at a material cost to us. If
we can not promptly correct a compromise in our encryption technology, it would
adversely affect our revenue and our ability to contract for video and audio
services provided by programmers.
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 comply with regulatory obligations 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.
Under a requirement of the Cable Act, the FCC imposed public interest
requirements on direct broadcast satellite licensees, such as us, to set aside
four percent of channel capacity exclusively for noncommercial programming for
which we must charge programmers below-cost rates and for which we may not
impose additional charges on subscribers. This could also displace programming
for which we could earn commercial rates and could adversely affect our
financial results. The FCC has not reviewed our methodology for computing the
channel capacity we must set aside or for determining the rates that we charge
public interest programmers, and we cannot be sure that if the FCC were to
review these methodologies, it would find them in compliance with the public
interest requirements.
Under a requirement of the Telecommunications Act of 1996, the FCC
recently imposed upon broadcasters and certain multichannel video programming
distributors, including us, the responsibility of providing video description
for visually impaired persons. Video description involves the insertion into a
television program of narrated descriptions of settings and actions that are not
otherwise reflected in the dialogue, and is typically provided through the
Secondary Audio Programming (SAP) channel. Commencing April 12, 2002, affected
multichannel video programming distributors like us will be required to provide
video description for a minimum of 50 hours per calendar quarter (roughly four
hours per week) of prime time and/or children's programming on each of any of
the top five national non-broadcast networks they carry. In addition,
distributors will be required to "pass through" any video description they
receive from a broadcast station or non-broadcast network if the multichannel
video programming distributor has the technical capability necessary to do so
associated with the channel on which it distributes the programming with video
description. While the FCC acknowledged that programming networks, and not
multichannel video programming distributors, may actually describe the
programming, it declared that for ease of enforcement and monitoring compliance
it would hold distributors responsible for compliance. We cannot be sure that
these requirements will not impose an excessive burden on us.
The FCC has commenced a rulemaking which seeks to streamline and revise
its rules governing direct broadcast satellite operators. 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, and the new rules may include expanded geographic
service requirements for Alaska, Hawaii and Puerto Rico. The FCC has also
recently released a notice of proposed rulemaking regarding the current
restrictions on the flexibility of DBS companies to provide services other than
DBS, and may change these restrictions.
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-based FSS services. If the proposal is adopted, these satellite operations
could provide global high-speed data services. In addition to possible
interference concerns, this would, among other things, create additional
competition for satellite and other services. In the same rulemaking, the FCC
has also requested comment on a request that would allow a terrestrial service
proposed by Northpoint Communications, Inc. to retransmit local television or
other video and data services to DBS subscribers or others in the same DBS
spectrum that we use throughout the United States. Furthermore, the Satellite
Home Viewer Improvement Act of 1999 requires the FCC to make a determination by
November 29, 2000 regarding licenses for facilities that will retransmit
broadcast signals to underserved markets by using spectrum otherwise allocated
to commercial use, possibly including our DBS spectrum. Northpoint has been
allowed by the FCC to conduct experimental operations in Texas and Washington,
D.C. We have submitted numerous pleadings jointly with DirecTV to the FCC
expressing concern over the Northpoint request, which in our view, may cause
potential harmful and substantial interference to the service provided to DBS
customers. DirecTV and we have also jointly conducted tests of
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Northpoint's proposed technology and have presented our test results, which in
our view show harmful interference from Northpoint's proposed service, and
Northpoint has filed oppositions to our submissions. Furthermore, other entities
have now filed applications similar to the one filed by Northpoint. If
Northpoint, PDC Broadband Corporation or other entities become authorized to use
our spectrum, they could cause harmful and substantial interference into our
service. On December 8, 2000, the FCC released a Report and Order and Further
Notice of Proposed Rulemaking in this proceeding. Despite our objections, the
FCC concluded that a terrestrial "point-to-multipoint" service can generally
share the spectrum with DBS on a no interference basis -- a conclusion that may
have a significant adverse impact on our operation. At the same time, the FCC
initiated a further notice of proposed rulemaking to determine the appropriate
interference standards with which such a terrestrial service must comply. The
FCC also requested proposals on how to process applications for licenses for
the new service, and tentatively proposed excluding satellite companies from
such licenses. In addition, appropriations legislation that was recently enacted
requires independent testing of the Northpoint technology, and creates rural
loan guarantees for providers of certain types of services. We cannot be sure
whether and when these processes will result in the licensing of Northpoint
and/or companies proposing a similar service to operate in the spectrum
licensed to us, what the interference standards will be, and how significant
the interference into our operations will be.
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, a license to operate 11
frequencies on EchoStar III at the 61.5 degree orbital location, which expires
in 2008 and authorizations to launch and operate for 10 years EchoStar V and
EchoStar VI at the 110 degree and 119 degree orbital location, respectively. Our
authorization at the 148 degree orbital location requires us to construct a
satellite by December 20, 2000 and 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. At the 61.5 degree orbital location we
utilize certain channels beyond our licensed 11 channels, under special
temporary authority, which the FCC may refuse to renew, and which is subject to
several restrictive conditions. Third parties have opposed, and we expect them
to continue to oppose, some of our authorizations or pending and future requests
to the FCC for extensions, modifications, waivers and approvals.
In conjunction with our plan to provide local-into-local broadcast
service as well as cable programming from the 110 degree orbital location, we
moved EchoStar IV to the 119 degree orbital location in early 2000. We have an
authorization from the FCC to operate that satellite over certain frequencies at
that location, and we have received special temporary authority to operate the
satellite over additional frequencies. The move has allowed us to transition
some of the programming now on EchoStar I and EchoStar II to EchoStar IV, which
can provide service to Alaska and Hawaii from the orbital location. In
connection with that plan, we have also petitioned the FCC to declare that we
have met our due diligence obligations for the 148 degree orbital location, or
alternatively to extend the December 20, 2000 milestone for that location. The
State of Hawaii has opposed that request and there is no assurance that it will
be granted by the FCC. If our request is not granted by the FCC, our license for
the 148 degree orbital location may be revoked or canceled. EchoStar VI, which
launched successfully during July 2000, has reached its final orbital location
at 119 degree West Longitude as assigned under a special temporary authority by
the FCC which will expire on February 10, 2001. EchoStar VI was launched to the
148 degree orbital location for testing and was later relocated to the 119
degree orbital location where it now is broadcasting satellite TV channels to
approximately 4.8 million DISH Network customers nationwide, including Alaska
and Hawaii. To date, all systems on the satellite are operating normally. We
moved EchoStar I from the 119 degree orbital location to the 148 degree orbital
location. EchoStar VI commenced commercial service during October 2000. We had
initially received special temporary authority, and now have received a license
to operate EchoStar VI at the 119 degree orbital location. In general, our plans
have involved and still involve the relocation of satellites either within or
slightly outside the "cluster" of a particular orbital location, or from one
orbital location to another where we have various types of authorizations. These
changes require FCC approval, and we cannot be sure that we will receive all
needed approvals for our current and future plans. Furthermore, the states of
Alaska and Hawaii have requested the FCC to impose conditions on the license for
EchoStar VI, relating to certain aspects of our service such as prices and
equipment. While the FCC denied these condition requests, it cautioned that it
may impose similar requirements as a result of a pending rulemaking. Such
requirements could be very onerous for us. In general, the states of Alaska and
Hawaii have expressed views that our service to these states from various
orbital locations does not comply with our FCC-imposed obligations to serve
those states, and we cannot be sure that the FCC will not accept these views.
Such actions would have a material adverse affect on our business. Moreover,
because ECC cannot meet the geographic service requirements from the 148 degree
orbital location, we had to request and obtain a conditional waiver of these
requirements to allow operation of EchoStar I at that location. As a result, our
current authorization to operate EchoStar I at the 148 degree orbital location
is subject to several conditions that may be onerous.
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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 ruling in a rolemaking proceeding that will allow
commercial terrestrial service and hamper future satellite operations in the
"extended" C-band frequencies. This ruling might have negative implications for
us.
All of our FCC authorizations are subject to conditions as well as to
the FCC's authority to modify, cancel or revoke them. In addition, all of our
authorizations for satellite systems that are not yet operational, 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. Our conditional license for a
Ku-band satellite system is subject to still pending petitions for
reconsideration and cancellation. With respect to our license for the Ka-band
system, the FCC staff sent us a letter in late 1999 stating that we had not
submitted information to the FCC relating to the inter-satellite links of our
system and required us to submit certain information or become subject to more
expedited construction requirements. While we have submitted information in
response to that request, we cannot be sure that the FCC will view our
submission as sufficient or will not act to expedite our milestones. 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. Our license for our Ka-band system allows us to use only 500 MHz
of Ka-band spectrum in each direction, while other licensees have been
authorized to use 1,000 MHz in each direction. We have recently filed a
modification application to allow us to use additional spectrum, but we cannot
be sure that the FCC will not deny or otherwise fail to grant that application.
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. While we have filed with the FCC pending requests for
extensions of authorizations that have expired, we cannot be sure how the FCC
will rule on these requests.
In a recent decision, the FCC approved a transfer of majority control
over E-Sat, a non-geostationary mobile satellite service license from us to
another company, but warned that this approval is without prejudice to its
investigation of certain complaints relating to E-Sat. We cannot be sure whether
any such investigation will have implications for E-Sat's licensee.
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 cancellation provisions. We may not be able to renew
these agreements on favorable terms or at all, or these agreements may be
canceled prior to expiration of their original term. If we are unable to renew
any of these agreements or the other parties cancel the agreements, 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. In particular, the cost of sports programming has been rising
rapidly. 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 offer it attractively to our customers at
competitive prices.
RESTRICTIVE COVENANTS UNDER OUR INDEBTEDNESS MAY LIMIT OUR ABILITY TO OPERATE
OUR BUSINESS
The indentures relating to the notes and the senior notes of our
EchoStar DBS Corporation subsidiary and our other long-term indebtedness contain
restrictive covenants that may inhibit our ability to manage our business,
engage in certain transactions that we believe to be beneficial to holders of
our common stock and to react to changing market conditions. These restrictions,
among other things, limit the ability of our subsidiaries to:
o incur additional indebtedness;
o issue preferred stock;
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o sell assets;
o create, incur or assume liens;
o merge, consolidate or sell assets;
o enter into transactions with affiliates; and
o pay dividends and make other distributions.
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 cancellation provisions. We may not be able to renew
these agreements on favorable terms or at all, or these agreements may be
canceled prior to expiration of their original term. If we are unable to renew
any of these agreements or the other parties cancel the agreements, 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. In particular, the cost of sports programming has been rising
rapidly. 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 offer it attractively to our customers at
competitive prices.
OUR SATELLITES ARE SUBJECT TO RISKS DURING AND AFTER LAUNCH
Satellite launches 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. 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.
In November 1998 and 1999, certain meteoroid events occurred as the
Earth's orbit passed through the particulate trail of Comet 55P (Tempel-Tuttle).
Similar meteoroid events are expected to occur again in November 2000. These
meteoroid events pose a potential threat to all in orbit geosynchronous
satellites including our DBS satellites. While the probability that our
satellites will be damaged by space debris is very small, that probability will
increase by several orders of magnitude during these meteoroid events.
Due to the current peak in the 11-year solar cycle, increased solar
activity is likely for the next 1 1/2 years. Some of these solar storms pose a
potential threat to all in-orbit geosynchronous satellites including our DBS
satellites. While the probability that the effects from the storms will damage
our satellites or cause service interruptions is generally very small, that
probability will increase by several orders of magnitude during this solar cycle
peak.
OUR SATELLITES HAVE MINIMUM DESIGN LIVES OF 12 YEARS, BUT COULD FAIL BEFORE THEN
Our ability to earn revenue wholly depends on the usefulness of our
satellites. 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 ability to
continue to maintain proper orbit and the efficiency of the launch vehicle used.
The minimum design life of each of EchoStar I, EchoStar II, EchoStar III,
EchoStar IV, EchoStar V and EchoStar VI is 12 years. We can provide no
assurance, however, as to the useful lives of the satellites. Anomalies EchoStar
IV has experienced have reduced its remaining useful life to approximately 4
years. However, there can be no assurance that a total loss of use of this
satellite will not occur in the more immediate future. Our operating results
would be adversely affected if the useful life of any of our other satellites
were significantly shorter than 12 years. The satellite construction contracts
for our satellites contain no warranties if EchoStar I, EchoStar II, EchoStar
III, EchoStar IV, EchoStar V or EchoStar VI fails following launch. The
satellite construction contracts for the satellites under construction contain
no warranties if EchoStar VII, EchoStar VIII, or
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EchoStar IX fails following launch, except in the event that the relevant
failure is caused by the gross negligence or wilful misconduct of the
manufacturer. Additionally, moving any of these satellites, either temporarily
or permanently, to another orbital location, decreases the orbital life of the
satellite by up to six months per movement.
In the event of a failure or loss of any of our satellites, we may
relocate another satellite and use it 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 the replacement satellite would not cause
additional interference compared to the failed or lost satellite. If we choose
to use a satellite in this manner, we cannot assure you that this use would not
adversely affect our ability to meet the operation deadlines associated with our
permits. Failure to meet those deadlines could result in the loss of such
permits which would have an adverse effect on our operations.
INSURANCE COVERAGE OF OUR SATELLITES IS LIMITED AND WE MAY BE UNABLE TO SETTLE
OUTSTANDING CLAIMS WITH INSURERS
As a result of the failure of EchoStar IV solar arrays to fully deploy
and the failure of 26 transponders to date, a maximum of approximately 16 of the
44 transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar arrays, the number of available transponders
will further decrease over time. In addition to the transponder and solar array
failures, EchoStar IV experienced anomalies affecting its thermal systems and
propulsion system. There can be no assurance that further material degradation,
or total loss of use, of EchoStar IV will not occur in the immediate future.
In September 1998, we filed a $219.3 million insurance claim for a
constructive total loss under the launch insurance policies covering EchoStar
IV. The satellite insurance consists of separate identical policies with
different carriers for varying amounts which, in combination, create a total
insured amount of $219.3 million.
The insurance carriers offered us a total of approximately $88 million,
or 40% of the total policy amount, in settlement of the EchoStar IV insurance
claim. The insurers allege that all other impairment to the satellite occurred
after expiration of the policy period and is not covered. We strongly disagree
with the position of the insurers and we have filed an arbitration claim against
them for breach of contract, failure to pay a valid insurance claim and bad
faith denial of a valid claim, among other things. There can be no assurance
that we will receive the amount claimed or, if we do, that we will retain title
to EchoStar IV with its reduced capacity.
At the time we filed our claim in 1998, we recognized an impairment
loss of $106 million to write-down the carrying value of the satellite and
related costs, and simultaneously recorded an insurance claim receivable for the
same amount. We continue to believe we will ultimately recover at least the
amount originally recorded and do not intend to adjust the amount of the
receivable until there is greater certainty with respect to the amount of the
final settlement.
As a result of the thermal and propulsion system anomalies, we reduced
the estimated remaining useful life of EchoStar IV to approximately 4 years
during January 2000. This change will increase depreciation expense to be
recognized by us during the year ending December 31, 2000 by approximately $9.6
million. We will continue to evaluate the performance of EchoStar IV and may
modify our loss assessment as new events or circumstances develop.
The in-orbit insurance policies for EchoStar I, EchoStar II, and
EchoStar III expired July 25, 2000. The insurers have to date refused to renew
insurance on EchoStar I, EchoStar II and EchoStar III on reasonable terms. Based
on, among other things, the insurance carriers' unanimous refusal to negotiate
reasonable renewal insurance coverage, we believe that the carriers colluded and
conspired to boycott us unless we accept their offer to settle the EchoStar IV
claim for $88 million.
Based on the carriers' actions, we have added causes of action in our
EchoStar IV demand for arbitration for breach of the duty of good faith and fair
dealing, and unfair claim practices. Additionally, we have filed a lawsuit
against the insurance carriers in the United States District Court for the
District of Colorado asserting causes of action for violation of Federal and
State Antitrust laws. While we believe we are entitled to the full amount
claimed under the EchoStar IV insurance policy and believe the insurance
carriers are in violation of Antitrust laws and have
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committed further acts of bad faith in connection with their refusal to
negotiate reasonable insurance coverage on our other satellites, there can be no
assurance as to the outcome of these proceedings.
The indentures related to the outstanding senior notes of our EchoStar
DBS Corporation subsidiary contain restrictive covenants that require us to
maintain satellite insurance with respect to at least half of the satellites we
own. Insurance coverage is therefore required for at least three of our six
satellites currently in orbit. We have procured normal and customary launch
insurance for EchoStar VI. This launch insurance policy provides for insurance
of $225.0 million. The EchoStar VI launch insurance policy expires in July 2001.
We are currently self-insuring EchoStar I, EchoStar II, EchoStar III, EchoStar
IV and EchoStar V. To satisfy insurance covenants related to the outstanding
EchoStar DBS senior notes, on July 25, 2000, EchoStar DBS reclassified
approximately $60 million from cash and cash equivalents to restricted cash and
marketable investment securities on its balance sheet. In addition, EchoStar DBS
reclassified an amount equal to approximately $30 million, the depreciated cost
of an additional satellite, on September 23, 2000 after the expiration of the
initial period of coverage for EchoStar V. The reclassifications will continue
until such time, if ever, as the insurers are again willing to insure our
satellites on commercially reasonable terms.
WE MAY BECOME LIABLE IN A PENDING FEE DISPUTE
We had a contingent fee arrangement with the attorneys who represented
us in the litigation with News Corporation. The contingent fee arrangement
provides for the attorneys to be paid a percentage of any net recovery obtained
by us in the News Corporation litigation. The attorneys have asserted that they
may be entitled to receive payments totaling hundreds of millions of dollars
under this fee arrangement.
During mid-1999, we initiated litigation against the attorneys in the
Arapahoe County, Colorado, District Court arguing that the fee arrangement is
void and unenforceable. In December 1999, the attorneys initiated an arbitration
proceeding before the American Arbitration Association. The litigation has been
stayed while the arbitration is ongoing. A two week arbitration hearing has been
set to begin in late February 2001. It is too early to determine the outcome of
arbitration or litigation regarding this fee dispute. We are vigorously
contesting the attorneys' interpretation of the fee arrangement, which we
believe significantly overstates the magnitude of our liability.
WE USE ONLY ONE DIGITAL BROADCAST CENTER
We rely upon a single digital broadcast center located in Cheyenne,
Wyoming, for key operations for programming signals, such as reception,
encryption and compression. Although we recently acquired a digital broadcast
center located in Gilbert, Arizona, this digital broadcast center will require
significant time and expenditures to become fully operational. If a natural or
other disaster damaged the digital broadcast center in Cheyenne, Wyoming, we
cannot assure you that we would be able to continue to provide programming
services to our customers.
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 we expect. 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, if 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.
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OUR DEBT AND EQUITY SECURITIES ARE SUBJECT TO MARKET RISK
We are exposed to market risk in the normal course of our business
operations due to our on going investing and financial activities. Market risk
refers to the risk of loss arising from adverse changes in foreign currency
exchange rates, interest rates and stock prices. The risk of loss can be
assessed from the perspective of adverse changes in fair values, cash flows and
future earnings.
Our equity investments carry risks related, among other things, to all
of the factors that can result in adverse changes in securities markets
generally, as well as risks related to the performance of the companies whose
securities we have invested in, risks associated with specific industries, and
other factors. In addition to the foregoing risks, our debt securities are
subject to interest rate risks. In general, as interest rates rise, the market
value of high yield debt securities decreases, though the market prices for high
yield debt securities are sometimes more significantly impacted by the
performance of the company and other equity risks, than by interest rates. We
have not hedged or otherwise protected against the risks associated with our
investment in any of these securities. We may make additional investments in
other debt and equity securities in the future.
WE DEPEND PRIMARILY ON A SINGLE RECEIVER MANUFACTURER
SCI Technology, Inc., a high-volume contract electronics manufacturer,
is the primary manufacturer of EchoStar receiver systems. JVC and VTech also
manufacture some EchoStar receiver systems for use by us and other customers of
EchoStar Technologies Corporation. JVC also manufactures other consumer
electronics products incorporating our receiver systems. If any of these vendors
are 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 have manufacturing agreements or arrangements with consumer
products manufacturers other than JVC, VTech and Philips, and only JVC currently
manufactures 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 broadcast satellite
competitor, DirecTV. Our largest competitor's direct broadcast satellite systems
are sold in significantly more consumer electronics retailers than our receiver
systems, which, among other things, results in us having a competitive marketing
disadvantage compared to DirecTV.
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. 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 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
Charles W. Ergen, our Chairman, Chief Executive Officer and President,
currently beneficially owns approximately 50.5% of our total equity securities,
assuming exercise of vested employee stock options, and possesses approximately
91% of the total voting power. Thus, Mr. Ergen has the ability to elect a
majority of our directors and to control all other matters requiring the
approval of our stockholders. In addition, pursuant to a voting agreement among
Mr. Ergen, News Corporation and MCI WorldCom, News Corporation and MCI WorldCom
have agreed to vote their shares in accordance with the recommendation of our
Board of Directors for five years. For Mr. Ergen's total voting power to be
reduced to below 51%, his percentage ownership of the equity securities of ECC
would have to be reduced to below 10%.
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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, 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 is under challenge. 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
have recently informed the FCC that we have no common carrier plans with respect
to that system.
Currently, a subsidiary of News Corporation, an Australian corporation,
owns approximately 5.5% of our total outstanding stock, having 1% of our total
voting power. This ownership has increased the possibility that foreign
ownership of our stock may exceed the foreign ownership limitations if they
apply. In connection with the MCI WorldCom authorization that we received in
connection with our transactions with News Corporation, the FCC has decided to
waive any foreign ownership limitations to the extent applicable. Nevertheless,
we cannot foreclose the possibility that, in light of any subsequent FCC
decisions or policy changes, we may in the future need a separate FCC
determination that foreign ownership in excess of any applicable limits is
consistent with the public interest in order to avoid a violation of the
Communications Act or the FCC's rules.
RISKS PRIMARILY RELATED TO THE NOTES
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 you offer and sell them 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,
the law may deem that you have received restricted securities and, if so, you
must 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 letter of transmittal
that you have properly completed and duly executed and all other documents that
we require. 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. Eastern Standard Time on January __,
2001, 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 exercise certain rights
under the related indenture.
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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 the SEC 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:
o you are not our "affiliate" within the meaning of Rule 405
under the Securities Act;
o you acquire your exchange notes in the ordinary course of your
business; and
o you have no arrangement with any person to participate in the
distribution of such exchange notes.
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, engage in or intend to engage in or have any
arrangement or understanding with respect to a distribution of the exchange
notes that you or any person will acquire 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.
RESALES OF THE EXCHANGE NOTES MAY BE SUBJECT TO FURTHER RESTRICTIONS IN SOME
JURISDICTIONS
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. 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, you may
not offer or sell the exchange notes unless someone has registered or qualified
them for sale in such jurisdictions or an exemption from registration or
qualification is available.
WE HAVE SUBSTANTIAL INDEBTEDNESS AND ARE DEPENDENT ON OUR SUBSIDIARIES' EARNINGS
TO MAKE PAYMENTS ON OUR INDEBTEDNESS
We have substantial debt service requirements which make us vulnerable
to changes in general economic conditions. The indentures governing our
subsidiaries' debt restrict their ability to incur additional debt. Thus it is,
and will continue to be, difficult for our subsidiaries to obtain additional
debt if required or desired in order to implement our business strategy. Since
we conduct substantially all of our operations through our subsidiaries, our
ability to service our debt obligations 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. We have few assets of significance other
than the capital stock of our subsidiaries. Our subsidiaries are separate legal
entities. Furthermore, our subsidiaries are not obligated to make funds
available to us, and creditors of our subsidiaries will have a superior claim to
our subsidiaries' assets. In addition, our subsidiaries' ability to make any
payments to us will depend on their earnings, the terms of their indebtedness,
business and tax considerations and legal restrictions. The outstanding EDBS
senior notes currently restrict EDBS' ability to pay any dividends to us. We
cannot assure you that our parent, ECC, EDBS or other subsidiaries of us if any,
will be able to pay dividends or otherwise distribute or contribute funds to us
in an amount sufficient to pay the principal of or interest on the indebtedness
owed by us.
OUR SUBSIDIARIES HAVE SUBSTANTIAL INDEBTEDNESS WHICH EFFECTIVELY RANKS SENIOR TO
THE NOTES
As of September 30, 2000, our subsidiaries had outstanding debt of
approximately $2.04 billion and also had $1.8 billion of other liabilities. Our
subsidiaries may incur significant indebtedness in the future. In the event of
bankruptcy, liquidation or dissolution of any of our subsidiaries, the claims of
debtholders and other creditors of such subsidiary would effectively rank senior
to our claims as a stockholder of such subsidiary with respect to such
subsidiary's assets. Accordingly, such debts and other obligations would have to
be satisfied in full prior to any payments being made to us and there might be
insufficient assets available to satisfy your claims as a holder of the notes.
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WE MAY BE UNABLE TO PURCHASE NOTES THAT HOLDERS TENDER UPON A CHANGE OF CONTROL,
WHICH COULD ADVERSELY AFFECT THE VALUE OF YOUR NOTES
The indenture for the notes requires us to offer to purchase the notes
from all the holders 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." In addition, the
indentures governing the outstanding EDBS senior notes contain restrictions on
EDBS' ability to distribute funds to purchase the notes. In the event we become
subject to a change of control at a time when we do not have funds to purchase
the notes, we may seek consents from the holders of the outstanding EDBS senior
notes. We cannot assure you that we will be able to obtain such consents.
Furthermore, the terms of the outstanding EDBS senior notes and the outstanding
convertible notes of ECC also require us to offer to repurchase those securities
upon a change of control of ECC, further limiting the amount of funds available
to us, if any, to repurchase the notes. If we have insufficient funds to redeem
all notes that holders tender for purchase upon the occurrence of a change of
control, and we are unable to raise additional capital, an event of default
could occur under the indenture governing the notes. An event of default could
cause any other debt that we have to become automatically due, further
exacerbating our financial condition and diminishing the value and liquidity of
the notes. We cannot assure you that additional capital would be available on
acceptable terms, or at all.
THERE MAY BE NO PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON TRANSFER
We are offering the exchange notes to the holders of the old notes. We
offered and sold the old notes in September 2000 to a limited number of
institutional investors. The old notes are eligible for trading in the Portal
Market.
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
it fails to subsist, 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 fail to subsist 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.
USE OF PROCEEDS
We will receive no cash proceeds from the exchange offer. We intend the
exchange offer 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 that holders surrender 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.
After deducting the initial purchasers' discounts and commissions and
estimated offering expenses, we received approximately $989.4 million from the
sale of the old notes. We presently intend to use these proceeds for the
construction, launch, and insurance of additional satellites, strategic
acquisitions, and other 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 our obligations
with respect to the registration of the old notes. We originally issued and sold
the old notes on September 25, 2000. 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, we will offer 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, in exchange for
old notes.
We 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) SEC policy or applicable law will not permit the
applicable exchange offer; or
(2) You are a holder of "transfer restricted securities"
and you notify us within the specified time period
that:
o any law or SEC policy prohibits you from
participating in the exchange offer;
o you may not resell the exchange notes that
you acquired in the exchange offer to the
public without delivering a prospectus and
this prospectus is not appropriate or
available for such resales; or
o you are a broker-dealer and you own old
notes that you acquired directly from us or
our affiliate.
"Transfer restricted securities" means each old note until the
earliest of:
o 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;
o the date on which a broker-dealer disposes
of an old note pursuant to the "Plan of
distribution" in the exchange offer
registration statement, including delivery
of the prospectus;
o the date on which a holder of an old note
disposes those old notes in accordance with
a shelf registration statement that
effectively registers those old notes under
the Securities Act; or
o the date on which holders of old notes may
distribute their old notes to the public
pursuant to Rule 144(k) under the Securities
Act. See "Description of the
notes-Registration rights; liquidated
damages."
We require you to make certain representations to us which the
registration rights agreement describes, in order to participate in the exchange
offer and, if you wish to include your old notes in any shelf registration
statement, you must deliver information for use in connection with any 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 that we describe below.
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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 you may
exchange pursuant to this exchange offer, except that, generally, you may freely
transfer the exchange notes, 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 the holders
tendering, or us accepting, any minimum aggregate principal amount of old notes.
Based on our view of interpretations set forth in no-action letters
that the staff of the SEC has issued 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 you acquired such exchange notes 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, you may incur liability under the
Securities Act if you transfer any note that we issue to you in the exchange
offer and you do not deliver a prospectus meeting the requirement of the
Securities Act or you do not have an exemption from registration of your old
notes from such requirements. We do not assume or indemnify you against such
liability.
If you are a broker-dealer that resells exchange notes that you
received for your own account pursuant to the exchange offer, and if you
participate in a distribution of the exchange notes, you may 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 you receive may 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 we consummate the exchange offer, 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.
If you are tendering old notes, we will not require you 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
September 25, 2000. If we accept your old notes for exchange, you will waive the
right to have interest accrue, or to receive any payment in respect to interest,
on the old notes from September 25, 2000, to the date of the issuance of the
exchange notes. Interest on the exchange notes is payable semiannually in
arrears on April 1 and October 1 of each year, commencing April 1, 2001,
accruing from September 25, 2000.
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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 Standard Time, on January _____, 2001, unless we, in our sole
discretion, extend the period during which the exchange offer is open. If we
extend the period date 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. Eastern Standard Time on
the next business day following the expiration date, unless applicable law or
regulation requires otherwise, 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 "We may modify or terminate the exchange offer
under some circumstances" have occurred and we have not waived them. 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 Standard 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 that we
describe below and in the letter of transmittal for the exchange offer.
We have arranged to have this exchange offer eligible for the
Depository Trust Company's, or DTC's, Automated Tender Offer Program, or ATOP.
DTC participants that are accepting the exchange offer must transmit their
acceptance to DTC, which will verify the acceptance and execute a book-entry
delivery to the exchange agent's account at DTC. DTC will then send an agent's
message to the exchange agent for its acceptance. Delivery of the agent's
message by DTC will satisfy the terms of the exchange offer as to the tender of
old notes.
Unless acceptable through ATOP, 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" 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 that we describe below, to the exchange agent at its address
set forth on 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 that we describe below.
Your signature does not need to be guaranteed if you registered your
old notes in your name, you will register the exchange notes in your name and
you sign the letter of transmittal. In any other case, the registered holder of
your notes must endorse them or send them with duly executed written instruments
of transfer in the form satisfactory to us. Also, 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 must
guarantee the signature on the endorsement or instrument of transfer. If you
want us to deliver the exchange notes or non-exchanged old notes to an address
other than that of the registered holder appearing on the note register for the
old notes, an "eligible institution" must guarantee the signature on the letter
of transmittal.
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.
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<PAGE> 39
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, which is
your 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 you prove it
in a manner satisfactory to us and the exchange agent.
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 that you are tendering, the names in which you registered the old
notes and, if possible, the certificate numbers of the old notes that you are
tendering.
The eligible institution's correspondence to the exchange agent must
state that the correspondence constitutes the tender and guarantee that within
three New York Stock Exchange trading days after the date that the eligible
institution executes such correspondence, the eligible institution will deliver
the old notes, in proper form for transfer, 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 you do not tender your old notes and
accompanying documents by either the above-described method or by a timely
book-entry confirmation, and if you do not deposit your old notes and tender
documents with the exchange agent within the time period set forth above. Copies
of a notice of guaranteed delivery that eligible institutions may use for the
purposes described in this paragraph are available from the exchange agent.
Valid receipt of your tender will occur 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 that you 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.
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<PAGE> 40
WE RESERVE THE RIGHT TO DETERMINE VALIDITY OF ALL TENDERS
We will be the sole judge of all questions as to the validity, form,
eligibility, including time of receipt, and acceptance for exchange of your
tender of old notes and our judgment 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 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:
o you are not our "affiliate";
o you are not a broker-dealer that owns old notes you acquired
directly from us or our affiliate; and
o you are acquiring the exchange notes we are offering 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 assign, transfer and exchange the old notes. 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 we accept your old notes 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 our acceptance of any tendered old notes 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, the exchange agent must timely
receive your written or fax notice of withdrawal prior to the expiration date at
the exchange agent's address set forth on page 38 of this prospectus. Your
notice of withdrawal must specify the following information:
o The person named in the letter of transmittal as tendering old
notes you are withdrawing;
o The certificate numbers of old notes you are withdrawing;
o The principal amount of old notes you are withdrawing;
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<PAGE> 41
o A statement that you are withdrawing your election to have us
exchange such old notes; and
o 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.
The person or persons who signed your letter of transmittal, including any
eligible institutions that guaranteed signatures on your letter of transmittal,
must sign the notice of withdrawal in the same manner as their original
signatures on the letter of transmittal. If such persons and eligible
institutions cannot sign your notice of withdrawal, you must send it with
evidence satisfactory to us that you now hold beneficial ownership of the old
notes that you are withdrawing. 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 notices of withdrawals, including
time of receipt, and our determination will be final and binding on all parties.
HOW WE WILL EITHER EXCHANGE YOUR OLD NOTES FOR EXCHANGE NOTES OR RETURN THEM TO
YOU
On the exchange date, we will determine which old notes the holders
validly tendered and we will issue exchange notes in exchange for the validly
tendered old notes. The exchange agent will act as your agent for the purpose of
receiving exchange notes from us and sending the old notes to you in exchange
for exchange notes promptly after acceptance of the tendered old notes. If we do
not accept your old notes for exchange, we will return them 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, we do not
accept your old notes for exchange, DTC will credit your non-exchanged old notes
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
applicable law or regulation requires terminate the exchange offer in the
following circumstances:
o 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
o Any government or governmental authority, domestic or foreign
brings or threatens any law or legal action 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 we described above
in the interpretations of the staff of the SEC or would
otherwise make it inadvisable to proceed with the exchange
offer; or
o 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 a waiver of any such right, and each right will be 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.
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<PAGE> 42
Any determination by us concerning the fulfillment or nonfulfillment of
any conditions will be final and binding upon all parties.
In addition, we will not accept for exchange any tendered old notes,
and we will not issue exchange notes in exchange for any such old notes, if at
that time there is, or the SEC has threatened, any stop order 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
We have appointed U.S. Bank Trust National Association 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: (800) 934-6802
Facsimile: (651) 244-1537
Attentions: Specialized Finance Group
If you send your documents to any other address or fax number, you will
have not validly delivered them 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 that they incur 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 that this prospectus contains
If anyone else gives you information or representations about the
exchange offer, you should not rely upon that information or representation or
assume that we have authorized it. 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 this prospectus gives information. We are not making the
exchange offer to, nor will we accept tenders from or on behalf of, holders of
old notes in any jurisdiction in which it is unlawful to make the exchange offer
or to accept it. 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 a licensed
broker or dealer to make the exchange offer one or more registered brokers or
dealers that are licensed under the laws of that jurisdiction is making the
exchange offer on our behalf.
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.
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<PAGE> 43
FEDERAL INCOME TAX CONSEQUENCES TO YOU
Your exchange of old notes for exchange notes 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 FOR THE OLD NOTES 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 we
exchange old notes 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.
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<PAGE> 44
SELECTED FINANCIAL DATA
We were formed on September 11, 2000, for the purpose of offering the
notes. Our parent, ECC, contributed all of the outstanding stock of EDBS and EOC
to us, concurrently with the closing of the offering of the old notes on
September 25, 2000, making EDBS and EOC our wholly-owned subsidiaries. EOC,
which was formed in January 2000, did not generate any revenue or incur any
expenses during the nine months ended September 30, 2000 and its activity during
that nine month period consisted solely of progress payments on certain
satellites. In addition, the impact of the contribution of EOC was immaterial to
our balance sheet at the effective date of the reorganization. These
contributions were accounted for as a reorganization of entities under common
control similar to a pooling of interests. Accordingly, our historical results
of operations and financial condition for periods prior to September 25, 2000
are substantially equivalent to those of EDBS. We have derived the following
selected financial data as of, and for each of the five years in the period
ended December 31, 1999, from, and the data is qualified by reference to our
audited consolidated financial statements. The following selected financial data
at September 30, 2000, and for the nine months ended September 30, 1999 and
2000, is unaudited; however, in the opinion of management, such data reflects
all adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the data for such interim periods. You should read this data in
conjunction with our consolidated financial statements and the related notes
thereto, and "Management's discussion and analysis of financial condition and
results of operations" included elsewhere in this prospectus.
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<PAGE> 45
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
(IN THOUSANDS, EXCEPT RATIOS, SUBSCRIBERS AND
PER SUBSCRIBER DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenue:
DISH Network $ -- $ 57,888 $ 341,808 $ 682,109 $ 1,352,603 $ 933,512 $ 1,652,085
DTH equipment sales and
integration services 35,816 77,390 90,263 253,841 178,325 105,856 174,542
Satellite services -- 5,822 11,135 22,304 40,657 28,073 41,804
C-band and other 112,704 56,003 32,696 27,655 34,706 24,598 36,053
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenue 148,520 197,103 475,902 985,909 1,606,291 1,092,039 1,904,484
Costs and Expenses:
DISH Network operating
expenses -- 42,409 193,170 396,992 738,311 515,413 911,184
Cost of sales-- DTH
equipment and
integration services 30,404 75,984 60,918 174,615 149,527 77,189 134,683
Cost of sales-- C-band
and other 84,846 42,345 23,909 16,496 17,076 11,870 22,352
Marketing expenses 1,786 53,168 183,345 331,680 742,187 501,622 827,968
General and
administrative 36,376 48,693 66,060 94,824 141,668 93,539 164,721
Non-cash, stock-based
compensation -- -- -- -- 61,060 5,983 38,599
Depreciation and
amortization 3,114 43,369 172,836 102,157 110,031 76,728 123,279
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total costs and
expenses 156,526 305,968 700,238 1,116,764 1,959,860 1,282,384 2,222,786
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating loss $ (8,006) $ (108,865) $ (224,336) $ (130,855) $ (353,569) $ (190,345) $ (318,302)
=========== =========== =========== =========== =========== =========== ===========
Net loss $ (12,361) $ (101,676) $ (323,424) $ (294,375) $ (791,149) $ (565,785) $ (458,066)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
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<PAGE> 46
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 2000
------------------ ------------------------
1995 1996 1997 1998 1999 (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable investment
securities(1) $ 14,161 $ 57,247 $ 65,965 $ 32,308 $ 184,535 $ 1,102,559
Total assets 559,297 1,085,545 1,431,774 1,470,173 2,730,207 3,912,155
Long-term obligations, net
of current portion:
10 3/8% Seven Year Notes -- -- -- -- -- 1,000,000
9 1/4% Seven Year Notes -- -- -- -- 375,000 375,000
9 3/8% Ten Year Notes -- -- -- -- 1,625,000 1,625,000
1994 Notes 382,218 437,127 499,863 571,674 1,503 --
1996 Notes -- 386,165 438,512 497,955 1,097 --
1997 Notes -- -- 375,000 375,000 15 --
Mortgages and other notes
payable, net of current
portion 33,444 51,428 51,846 43,450 25,445 24,098
Notes payable to ECC,
including accumulated
interest -- 12,000 54,597 59,812 -- --
Other long-term
obligations -- 7,037 19,500 33,358 18,812 24,397
Total stockholder's
equity (deficit) $ 92,892 $ (6,673) $ (313,770) $ (588,137) $ (462,494) $ (881,938)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1995 1996 1997 1998 1999 1999 2000
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
DISH Network subscribers -- 350,000 1,040,000 1,940,000 3,410,000 2,972,000 4,765,000
Average monthly revenue
per $ -- $ 35.50 $ 38.50 $ 39.25 $ 42.71 $ 42.31 $ 44.86
subscriber
EBITDA(2) (4,892) (65,496) (51,500) (28,698) (182,478) (107,634) (156,424)
Net cash flows from:
Operating activities (21,888) (22,836) (7,549) (53,949) (85,054) (104,610) (256,601)
Investing activities (1,431) (294,962) (306,079) (43,340) 38,772 (14,410) (248,331)
Financing activities 19,764 342,287 337,247 60,538 180,735 167,907 1,442,759
Ratio of earnings to fixed
charges(3) -- -- -- -- -- -- --
Deficiency of earnings to
fixed charges(3) $ (44,315) $ (188,347) $ (366,447) $ (315,923) $ (562,285) $ (336,943) $ (457,963)
</TABLE>
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<PAGE> 47
----------
(1) To satisfy insurance covenants related to the outstanding EDBS senior
notes, as of September 30, 2000, we have reclassified approximately $90
million from cash and cash equivalents to cash reserved for satellite
insurance on our balance sheet.
(2) We believe it is common practice in the telecommunications industry for
investment bankers and others to use various multiples of current or
projected EBITDA, which stands for 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
flows 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
presentations of EBITDA may not be calculated consistently by different
entities in the same or similar businesses. We have shown EBITDA with
the add back for amortization of subscriber acquisition costs, which we
deferred through September 1997 and amortized over one year. Further,
our calculation of EBITDA for the year ended December 31, 1999 and for
the nine months ended September 30, 1999 and 2000 does not include
non-cash compensation expense totaling $61.1 million, $6 million and
$39 million, respectively, resulting from post-grant appreciation of
employee stock options.
(3) 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 each of the five years ended
December 31, 1999 and the nine months ended September 30, 1999 and
2000, earnings were insufficient to cover the fixed charges.
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<PAGE> 48
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.
We were formed on September 11, 2000, for the purpose of offering the
notes. Our parent, ECC, contributed all of the outstanding stock of EDBS and EOC
to us, concurrently with the closing of the offering of the old notes, making
EDBS and EOC our wholly-owned subsidiaries. EOC, which was formed in January
2000, did not generate any revenue or incur any expenses during the nine months
ended September 30, 2000 and its activity during that nine month period
consisted solely of progress payments on certain satellites. EOC had no
operations prior to its formation. These contributions were accounted for as a
reorganization of entities under common control similar to a pooling of
interest.
RESULTS OF OPERATIONS
Nine months ended September 30, 2000 compared to nine months ended September 30,
1999
Revenue. Total revenue for the nine months ended September 30, 2000 was
$1.904 billion, an increase of $812 million compared to total revenue for the
nine months ended September 30, 1999 of $1.092 billion. The increase in total
revenue was primarily attributable to DISH Network subscriber growth. We expect
that our revenues will continue to increase as the number of DISH Network
subscribers increases.
DISH Network subscription television services revenue totaled $1.646
billion for the nine months ended September 30, 2000, an increase of $719
million compared to the same period in 1999. DISH Network subscription
television services revenue principally consists of revenue from basic, premium
and pay-per-view subscription television services. This increase was directly
attributable to the increase in the number of DISH Network subscribers and
higher average revenue per subscriber. DISH Network net subscriber additions for
the nine months ended September 30, 2000 increased approximately 31% compared to
the same period in 1999. As of September 30, 2000, we had approximately 4.8
million DISH Network subscribers compared to 3.0 million at September 30, 1999.
The strong subscriber growth reflects the impact of aggressive marketing
promotions, including our free installation program, together with increased
interest in satellite television resulting from the availability of local
network channels by satellite, and generally good economic conditions and
positive momentum for the DISH Network. DISH Network subscription television
services revenue 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.
Monthly average revenue per subscriber was approximately $45.36 for the
quarter ended September 30, 2000 and approximately $43.13 during the same period
in 1999. The increase in monthly average revenue per subscriber is primarily
attributable to a $1.00 price increase in America's Top 100 CD, our most popular
programming package, during May 2000, the increased availability of local
channels by satellite together with the earlier successful introduction of our
$39.99 per month America's Top 150 programming package. During August 2000, we
announced a promotion offering consumers free premium movie channels. Under this
promotion, all new subscribers who order either our America's Top 100 CD or
America's Top 150 programming package and any or all of our four premium movie
packages between August 1, 2000 and January 31, 2001, will receive those premium
movie packages free for three months. This promotion had a negative impact on
monthly average revenue per subscriber since premium movie package revenue from
participating subscribers will be deferred until the expiration of each
participating subscriber's free service. While there can be no assurance, we
expect modest increases in monthly average revenue per subscriber during the
remainder of 2000.
For the nine months ended September 30, 2000, DTH equipment sales and
integration services totaled $175 million, an increase of $69 million compared
to the same period during 1999. DTH equipment sales consist of
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<PAGE> 49
sales of digital set-top boxes and other digital satellite broadcasting
equipment to international DTH service operators and sales of DBS accessories.
This increase in DTH equipment sales and integration services revenue was
primarily attributable to an increase in international demand for digital
set-top boxes as compared to the same period during 1999.
Substantially all of our EchoStar Technologies Corporation, or ETC,
revenues have resulted from sales to two international DTH providers. We
currently have agreements to provide equipment to DTH service operators in Spain
and Canada. Our future revenue from the sale of DTH equipment and integration
services in international markets depends largely on the success of those DTH
operators and continued demand for our digital set-top boxes. Since our ETC
business currently is economically dependent on these two DTH providers, there
can be no assurance as to total DTH equipment and integration services revenue
for the year ended December 31, 2000. Although we continue to actively pursue
additional distribution and integration service opportunities internationally,
no assurance can be given that any such efforts will be successful.
As previously reported, since 1998, Telefonica's Via Digital, one of
the two DTH service providers described above, has had recurrent discussions and
negotiations for a possible merger with Sogecable's Canal Satelite Digital, one
of its primary competitors. While we are not currently aware of any formal
negotiations between Via Digital and Canal Satelite Digital, there are again
rumors of a potential merger in the marketplace. Although we have binding
purchase orders from Via Digital for deliveries of DTH equipment in 2000, we
cannot predict the impact, if any, eventual consummation of this possible merger
might have on our future sales to Via Digital.
Satellite services revenue totaled $42 million during the nine months
ended September 30, 2000, an increase of $14 million as compared to the same
period during 1999. These revenues principally include fees charged to content
providers for signal carriage and revenues earned from business television, or
BTV customers. The increase in satellite services revenue was primarily
attributable to the addition of new full-time BTV customers and additional sales
of idle satellite capacity to occasional-use- customers.
In order, among other things, to commence compliance with the
injunction issued against us in our pending litigation with the four major
broadcast networks and their affiliate groups, we have terminated the delivery
of distant network channels to certain of our subscribers. Additionally, the FCC
recently issued rules which impair our ability to deliver certain superstation
channels to our customers. Those rules will increase the cost of our delivery of
superstations, and could require that we terminate the delivery of certain
superstations to a material portion of our subscriber base. In combination,
these terminations would result in a small reduction in average monthly revenue
per subscriber and could increase subscriber turnover. While there can be no
assurance, any such decreases could be offset by increases in average monthly
revenue per subscriber resulting from the delivery of local network channels by
satellite, and increases in other programming offerings with the commencement of
operation of EchoStar VI.
DISH Network Operating Expenses. DISH Network operating expenses
totaled $911 million during the nine months ended September 30, 2000, an
increase of $396 million or 77%, compared to the same period in 1999. DISH
Network operating expenses represented 55% and 56% of subscription television
services revenue during the nine months ended September 30, 2000 and 1999,
respectively. The increase in DISH Network operating expenses in total was
consistent with, and primarily attributable to, the increase in the number of
DISH Network subscribers.
Subscriber-related expenses totaled $693 million during the nine months
ended September 30, 2000, an increase of $288 million compared to the same
period in 1999. Such expenses, which include programming expenses, copyright
royalties, residuals currently payable to retailers and distributors, and
billing, lockbox and other variable subscriber expenses, represented 42% and 44%
of subscription television services revenues during the nine months ended
September 30, 2000 and 1999, respectively. Although we do not currently expect
subscriber-related expenses as a percentage of subscription television services
revenue to increase materially in future periods, there can be no assurance this
expense to revenue ratio will not materially increase.
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 other operating
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<PAGE> 50
expenses related to our service and installation business. Customer service
center and other expenses totaled $185 million during the nine months ended
September 30, 2000, an increase of $104 million as compared to the same period
in 1999. The increase in customer service center and other expenses primarily
resulted from increased personnel and telephone expenses to support the growth
of the DISH Network and from operating expenses related to the expansion of our
installation and service business. Customer service center and other expenses
totaled 11% of subscription television services revenue during the nine months
ended September 30, 2000, as compared to 9% during the same period in 1999. The
increase in this expense to revenue ratio primarily resulted from the on-going
construction and start-up costs of our fifth customer service center in
Virginia, and the continued build-out of our installation offices nationwide.
These expenses in total, and as a percentage of subscription television services
revenue, may continue to increase in future periods as we continue to develop
and expand our customer service centers and installation business to provide
additional customer support and help us better accommodate anticipated
subscriber growth, resulting in long term efficiency improvements.
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 $33 million during the nine months ended September
30, 2000, a $3 million increase compared to the same period in 1999. Satellite
and transmission expenses totaled 2% and 3% of subscription television services
revenue during the nine months ended September 30, 2000 and 1999, respectively.
We expect satellite and transmission expenses to increase in the future as
additional satellites or digital broadcast centers are placed in service, but do
not expect these expenses to increase as a percentage of subscription television
services revenue.
Cost of sales - DTH equipment and Integration Services. Cost of sales -
DTH equipment and integration services totaled $135 million during the nine
months ended September 30, 2000, an increase of $58 million compared to the same
period in 1999. 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 and DBS accessories. This
increase in cost of sales - DTH equipment and integration services is consistent
with the increase in DTH equipment sales and integration services revenue. Cost
of sales - DTH equipment and integration services represented 77% and 73% of DTH
equipment revenue, during the nine months ended September 30, 2000 and 1999,
respectively. The increase reflects price pressure resulting from increased
competition from other providers of DTH equipment.
Marketing Expenses. We currently subsidize the purchase and
installation of EchoStar receiver systems in order to attract new DISH Network
subscribers. Consequently, our subscriber acquisition costs are significant.
Marketing expenses totaled $828 million during the nine months ended September
30, 2000, an increase of $326 million compared to the same period in 1999. The
increase in marketing expenses was primarily attributable to an 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. Advertising and other expenses totaled $89 million and
$40 million during the nine months ended September 30, 2000 and 1999,
respectively.
During the quarter ended September 30, 2000, our marketing promotions
included our DISH Network One-Rate Plan, C-band bounty program, Great Rewards
program (PrimeStar bounty), Digital Dynamite Plan, cable bounty and a free
installation program. Our subscriber acquisition costs under these programs are
significantly higher than those under our marketing programs historically.
Under the DISH Network One-Rate Plan, consumers are eligible to receive
a rebate of up to $199 on the purchase of certain EchoStar receiver systems. To
be eligible for this rebate, a subscriber must make a one-year commitment to
subscribe to our America's Top 150 programming or our America's Top 100 CD
programming package plus one premium movie package (or equivalent additional
programming). Although subscriber acquisition costs are materially higher under
this plan compared to previous promotions, DISH Network One-Rate Plan customers
generally provide materially greater average revenue per subscriber than a
typical DISH Network subscriber. In addition, we believe that these customers
represent lower credit risk and therefore may be marginally less likely to
disconnect their service than other DISH Network subscribers. To the extent that
actual consumer participation levels exceed present expectations, subscriber
acquisition costs may increase. Although there can be no
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<PAGE> 51
assurance as to the ultimate duration of the DISH Network One-Rate Plan, we
intend to continue it through at least January 2001.
Under our bounty programs, current cable customers are eligible to
receive a free base-level EchoStar receiver system and free installation. To be
eligible for this program, a subscriber must make a one-year commitment to
subscribe to either our America's Top 100 CD programming package plus one
premium movie package (or equivalent additional programming) or our America's
Top 150 programming package and prove that they are a current cable customer.
Under our free installation program all customers who purchased an
EchoStar receiver system through April 2000, from May 24, 2000 to July 31, 2000
and from September 15, 2000 to January 31, 2001, are eligible to receive a free
professional installation. The free installation program was responsible, in
part, for the strong subscriber growth during the first half of 2000.
During July 2000, we announced the commencement of our new Digital
Dynamite promotion. The Digital Dynamite plans offer four choices to consumers,
ranging from the use of one EchoStar receiver system and our America's Top 100
CD programming package for $34.99 per month, to providing consumers two EchoStar
receiver systems and our America's Top 150 programming package for $49.99 per
month. With each plan, consumers receive in-home-service, must agree to a
one-year commitment and incur a one-time set-up fee of $49, which includes the
first month's programming payment.
During the quarter ended September 30, 200, our subscriber acquisition
expenses, inclusive of acquisition marketing expenses, totaled approximately
$284 million, or approximately $438 per new subscriber activation.
Comparatively, our subscriber acquisition expenses during the quarter ended
September 30, 1999, inclusive of acquisition marketing expenses, totaled $201
million, or approximately $390 per new subscriber activation. The increase in
our subscriber expenses, on a per new subscriber activation basis, principally
resulted from the impact of several aggressive marketing promotions to acquire
new subscribers, including most significantly our free installation offer which
was reinstated during September and is scheduled to conclude during January
2001.
Our per subscriber acquisition expenses increased compared to the
quarter ended June 30, 2000, as a result, among other things, of the
reinstatement of our free installation program during September 2000 and an
increase in our acquisition marketing expenditures during the quarter ended
September 30, 2000. This increase was offset by a decrease resulting from the
limited rollout of our Digital Dynamite promotion, which allows us to capitalize
and depreciate over 4 years equipment costs which would otherwise be expensed at
the time of sale. Capital expenditures under the Digital Dynamite promotion
totaled approximately $22.5 million for the quarter ended September 30, 2000. As
a result of continuing competition and our plans to attempt to continue to drive
rapid subscriber growth, we expect our per subscriber acquisition costs for
2000, including costs capitalized under the Digital Dynamite Plan, will average
approximately $450 to $475 for the full year.
Most of our core programming is broadcast from our satellites at the
119 degree orbital location, and almost all of our subscribers have EchoStar
receiver systems that can view programming from that location. With the
commencement of additional services from the 110 degree orbital location
following the successful launch of EchoStar V, our existing subscribers will
need to upgrade their dish and receiver systems in order to take advantage of
the additional services we now offer. To encourage existing subscribers to
upgrade their systems and remain subscribers, we are currently subsidizing
upgrades by existing subscribers to our DISH 500 system, which receives
programming from both the 110 degree and 119 degree orbital locations. The cost
of this program could be significant if utilized by a large number of our
existing subscribers, though upgrades should also result in increased revenue
per subscriber.
Our subscriber acquisition costs, both in the aggregate and on a per
new subscriber activation basis, may materially increase further to the extent
that we continue or expand our bounty program, our "free system/free
installation" program, the DISH Network One-Rate Plan, or other more aggressive
promotions if we determine that they are necessary to respond to competition, or
for other reasons.
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General and Administrative Expenses. General and administrative
expenses totaled $165 million during the nine months ended September 30, 2000,
an increase of $71 million as compared to the same period in 1999. The increase
in G&A expenses was principally attributable to increased personnel expenses to
support the growth of the DISH Network. G&A expenses represented 9% of total
revenue during each of the nine months ended September 30, 2000 and 1999.
Although we expect G&A expenses as a percentage of total revenue to remain near
the current level or decline modestly in future periods, this expense to revenue
ratio could increase.
Non-cash, Stock-based Compensation. During 1999, we adopted an
incentive plan which provided certain key employees with incentives including
stock options. The payment of these incentives was contingent upon our
achievement of certain financial and other goals. We met certain of these goals
during 1999. Accordingly, during 1999, we recorded approximately $179 million of
deferred compensation related to post-grant appreciation of stock options
granted pursuant to the 1999 incentive plan. The related deferred compensation
will be recognized over the five-year vesting period. Accordingly, during the
nine months ended September 30, 2000 and 1999 we recognized $39 million and $6
million, respectively, under this performance-based plan.
We report all non-cash compensation based on stock option appreciation
as a single expense category in our accompanying statements of operations. The
following table represents the other expense categories in our statements of
operations that would be affected if non-cash, stock-based compensation was
allocated to the same expense categories as the base compensation for certain
key employees who participated in the 1999 incentive plan:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 2000
------- -------
<S> <C> <C>
Customer service center and other ................ $ 510 $ 1,308
Satellite and transmission ....................... 369 2,296
General and administrative ....................... 5,104 34,995
------- -------
Total non-cash, stock based compensation ..... $ 5,983 $38,599
======= =======
</TABLE>
EBITDA. EBITDA represents earnings before interest, taxes,
depreciation, amortization, and non-cash, stock- based compensation. EBITDA was
negative $156 million during the nine months ended September 30, 2000, compared
to negative $108 million during the same period in 1999. This increase in EBITDA
principally resulted from an increase in DISH Network net subscriber additions
and monthly average revenue per subscriber, as well as other previously
described factors. It is important to note that EBITDA does not represent cash
provided or used by operating activities. Further, our calculation of EBITDA for
the nine months ended September 30, 2000 and 1999 does not include approximately
$39 million and $6 million, respectively, of non-cash compensation expense
resulting from post-grant appreciation of employee stock options. EBITDA should
not be considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
As previously discussed, to the extent we expand our current marketing
promotions and our subscriber acquisition costs materially increase, our EBITDA
results will be negatively impacted because subscriber acquisition costs are
generally expensed as incurred.
Depreciation and Amortization. Depreciation and amortization expenses
aggregated $123 million during the nine months ended September 30, 2000, a $46
million increase compared to the same period in 1999. The increase in
depreciation and amortization expenses principally resulted from an increase in
depreciation related to the commencement of operation of EchoStar V in November
1999 and other depreciable assets placed in service during 2000 and late 1999.
Other Income and Expense. Other expense, net totaled $140 million
during the nine months ended September 30, 2000, a decrease of $7 million
compared to the same period in 1999. This decrease primarily resulted from a
loss on disposal of assets during the nine months ended September 30, 1999, and
a decrease in interest expense during the nine months ended September 30, 2000.
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Year Ended December 31, 1999 compared to the year ended December 31, 1998
Revenue. Total revenue for the year ended December 31, 1999 was $1.6
billion, an increase of $620 million compared to total revenue for the year
ended December 31, 1998 of $986 million. The increase in total revenue was
primarily attributable to DISH Network subscriber growth.
DISH Network subscription television services revenue totaled $1.3
billion for the year ended December 31, 1999, an increase of $674 million
compared to the same period in 1998. This increase was directly attributable to
the increase in the number of DISH Network subscribers and higher average
revenue per subscriber. Average DISH Network subscribers for the year ended
December 31, 1999 increased approximately 85% compared to the same period in
1998. As of December 31, 1999, we had approximately 3.4 million DISH Network
subscribers compared to 1.9 million at December 31, 1998. Monthly revenue per
subscriber was approximately $43 during the year ended December 31, 1999 and
approximated $39 during the same period during 1998. DISH Network subscription
television services revenue principally consists of revenue from basic, premium
and pay-per-view subscription television services.
For the year ended December 31, 1999, DTH equipment sales and
integration services totaled $178 million, a decrease of $76 million compared to
the same period during 1998. DTH equipment sales consist of sales of digital
set- top boxes and other digital satellite broadcasting equipment to
international DTH service operators and sales of DBS accessories. This expected
decrease in DTH equipment sales and integration services revenue was primarily
attributable to a decrease in demand combined with a decrease in the sales price
of digital set-top boxes attributable to increased competition.
Satellite services revenue totaled $41 million during 1999, an increase
of $19 million as compared to the same period during 1998. These revenues
principally include fees charged to content providers for signal carriage and
revenues earned from business television, or BTV customers. The increase in
satellite services revenue was primarily attributable to increased BTV revenue
due to the addition of new full-time BTV customers.
DISH Network Operating Expenses. DISH Network operating expenses
totaled $738 million during 1999, an increase of $341 million or 86%, compared
to the same period in 1998. 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 55% and
59% of subscription television services revenue during the years ended December
31, 1999 and 1998, respectively.
Subscriber-related expenses totaled $581 million during 1999, an
increase of $283 million compared to the same period in 1998. Such expenses,
which include programming expenses, copyright royalties, residuals payable to
retailers and distributors, and billing, lockbox and other variable subscriber
expenses, represented 43% of subscription television services revenues during
the year ended December 31, 1999 compared to 45% during the same period in 1998.
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
$117 million during 1999, an increase of $45 million as compared to the same
period in 1998. 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 9% of
subscription television services revenue during 1999, as compared to 11% during
the same period in 1998.
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 $40 million during 1999, a $14 million increase
compared to the same period in 1998. This increase resulted from higher
satellite and other digital broadcast center operating expenses due to an
increase in the number of operational satellites. Satellite and transmission
expenses totaled 3% and 4% of subscription television services revenue during
the year ended December 31, 1999 and 1998, respectively.
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<PAGE> 54
Cost of sales -- DTH equipment and Integration Services. Cost of sales
-- DTH equipment and integration services totaled $150 million during 1999, a
decrease of $25 million compared to the same period in 1998. 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 and DBS accessories. Cost of sales -- DTH equipment and integration
services represented 84% and 69% of DTH equipment revenue, during the years
ended December 31, 1999 and 1998, respectively. The lower margin was principally
attributable to a $16.6 million loss provision primarily for component parts and
purchase commitments related to our first generation model 7100 set-top boxes,
for which production has been suspended in favor of our second generation model
7200 set-top boxes. The write-off partially offset the expected decrease in cost
of sales -- DTH equipment and integration services attributable to a decrease in
demand combined with increased competition.
Marketing Expenses. Marketing expenses totaled $742 million during
1999, an increase of $410 million compared to the same period in 1998. The
increase in marketing expenses was primarily attributable to an 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. Advertising and other expenses totaled $65 million and
$48 million during the years ended December 31, 1999 and 1998, respectively.
During 1999, our total subscriber acquisition costs, inclusive of
acquisition marketing expenses, totaled approximately $729 million, or
approximately $385 per new subscriber activation. Comparatively, our subscriber
acquisition costs during the year ended December 31, 1998, inclusive of
acquisition marketing expenses and deferred subscriber acquisition costs,
totaled $317 million, or approximately $285 per new subscriber activation. The
increase in our subscriber acquisition costs, on a per new subscriber activation
basis, principally resulted from the introduction of several aggressive
marketing promotions to acquire new subscribers.
We subsidize the purchase and installation of EchoStar receiver systems
in order to attract new DISH Network subscribers. Consequently, our subscriber
acquisition costs are significant. While our average subscriber acquisition cost
was $385 for all of 1999, it was higher during the fourth quarter, averaging
approximately $425 per subscriber.
General and Administrative Expenses. General and administrative
expenses totaled $142 million during 1999, an increase of $47 million as
compared to the same period in 1998. 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 increased to
9% during the year ended December 31, 1999 compared to 10% during the same
period in 1998.
Non-cash, Stock-based Compensation. During 1999, we adopted an
incentive plan which provided certain key employees with incentives including
stock options. The payment of these incentives was contingent upon our
achievement of certain financial and other goals. We met certain of these goals
during 1999. Accordingly, during 1999, we recorded approximately $179 million of
deferred compensation related to post-grant appreciation of stock options
granted pursuant to the 1999 incentive plan. The related deferred compensation
will be recognized over the five-year period. Accordingly, during the year ended
December 31, 1999 we recognized $61 million under this performance- based plan.
We report all non-cash compensation based on stock option appreciation
as a single expense category in our accompanying statements of operations. The
following table represents the other expense categories in our statements of
operations that would be affected if non-cash, stock-based compensation was
allocated to the same expense categories as the base compensation for key
employees who participate in the 1999 incentive plan:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
(IN THOUSANDS)
<S> <C>
Customer service center and other $ 4,328
Satellite and transmission 2,308
General and administrative 54,424
-------
Total non-cash, stock-based compensation $61,060
=======
</TABLE>
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Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA
represents earnings before interest, taxes, depreciation, amortization, and
non-cash, stock-based compensation. EBITDA was negative $182 million during the
year ended December 31, 1999 compared to negative $29 million during the same
period in 1998. EBITDA, as adjusted to exclude amortization of subscriber
acquisition costs, was negative $182 million for the year ended December 31,
1999 compared to negative $48 million for the same period in 1998. This decline
in EBITDA principally resulted from an increase in DISH Network operating and
marketing expenses. It is important to note that EBITDA does not represent cash
provided or used by operating activities. Further, our calculation of EBITDA for
the year ended December 31, 1999 does not include approximately $61 million of
non-cash compensation expense resulting from post-grant appreciation of stock
options granted to employees. EBITDA 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
aggregated $110 million during 1999, a $8 million increase compared to the same
period in 1998, during which subscriber acquisition costs were amortized.
Commencing October 1997, we instead expensed all of these costs at the time of
sale. The increase in depreciation and amortization expenses principally
resulted from an increase in depreciation related to the commencement of
operation of EchoStar IV in August of 1998, the commencement of operation of
EchoStar V in November 1999 and other depreciable assets placed in service
during 1999, partially offset by subscriber acquisition costs becoming fully
amortized during the third quarter of 1998.
Other Income and Expense. Other expense, net totaled $209 million
during 1999, an increase of $46 million compared to the same period in 1998.
This increase resulted from an increase in interest expense. In January 1999,
EDBS refinanced its outstanding 12 1/2% Senior Secured Notes due 2002 issued in
June 1997, its 12 7/8% Senior Secured Discount Notes due 2004 issued in 1994,
and its 13 1/8% Senior Secured Discount Notes due 2004 issued in 1996 at more
favorable interest rates and terms. In connection with the refinancing, EDBS
consummated an offering of 9 1/4% Senior Notes due 2006 and 9 3/8% Senior Notes
due 2009, which we have referred to as the outstanding EDBS senior notes.
Although the outstanding EDBS senior notes have lower interest rates than the
debt securities we repurchased, interest expense increased by approximately $23
million because we raised additional debt to cover tender premiums and consent
and other fees related to the refinancing.
Extraordinary Charge for Early Retirement of Debt. In connection with
the January 1999 refinancing, EDBS recognized an extraordinary loss of $229
million comprised of debt costs, discounts, tender costs, and premiums paid over
the accreted values of the debt retired.
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.
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.
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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.
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 BTV
customers. The increase in satellite services revenue was primarily attributable
to increased BTV revenue due to the addition of new full-time BTV customers.
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.
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.
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.
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 69% and 68%
during 1998 and 1997, respectively.
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
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<PAGE> 57
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 $317 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 $261 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.
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.
Earnings Before Interest, Taxes, Depreciation and Amortization. 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.
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 EDBS'
12 1/2% Senior Secured Notes due 2002 issued in June 1997, combined with
increased interest expense resulting from increased accreted balances on EDBS'
12 7/8% Senior Secured Discount Notes due 2004 issued in 1994 and EDBS' 13 1/8%
Senior Secured Discount Notes due 2004 issued in 1996.
NEW ACCOUNTING STANDARDS
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, "Views on Selected Revenue Recognition
Issues", which provides the staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. We are required to
adopt the provisions of SAB 101 and certain related EITF consensuses in the
quarter ended December 31, 2000 retroactively to January 1, 2000. We are
currently evaluating and are not yet able to reasonably estimate the potential
impact, the adoption of SAB 101 will have on our financial position and results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash Sources.
As of September 30, 2000, our unrestricted cash, cash equivalents and
marketable investment securities totaled $1.103 billion compared to $185 million
as of December 31, 1999. For the nine months ended September 30, 2000 and 1999,
we reported net cash flows from operating activities of negative $257 million
and negative $105 million, respectively. The increase in net cash flow used in
operating activities reflects, among other things, the significant increase in
subscriber acquisition costs associated with our rapid subscriber growth and our
"free installation" promotion, and the build up of our inventory to prepare for
historically strong subscriber additions during the third and fourth quarter.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied primarily 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
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amount of capital required to fund our 2000 working capital and capital
expenditure needs will vary, depending, among other things, on the rate at which
we acquire new subscribers and the cost of subscriber acquisition. 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. These factors could require that we raise additional
capital in the future.
Subscriber Turnover.
We believe that our percentage churn, which has not increased during
the nine months ended September 30, 2000 as compared to the same period during
1999, continues to be lower than satellite and cable industry averages. While we
have successfully managed churn within a narrow range historically, our maturing
subscriber base, the effects of rapid growth, and other actors could cause
future increases in churn. Further, impacts from our litigation with the
networks in Miami, new FCC rules governing the delivery of superstations and
other factors, could cause us to terminate delivery of distant network channels
and superstations to a material portion of our subscriber base, which could
cause many of those customers to cancel their subscription to our other
services. Any such terminations could result in a small reduction in average
monthly revenue per subscriber and could result in increased churn. While there
can be no assurance, notwithstanding the issues discussed above, we have and
expect to be able to continue to manage churn below industry averages during
2000.
Subscriber Acquisition Costs.
As previously described, we subsidize the purchase and installation of
EchoStar receiver systems in order to attract new DISH Network subscribers.
Consequently, our subscriber acquisition costs are significant. Our average
subscriber acquisition expenses were $437 during the nine months ended September
30, 2000. Our Digital Dynamite promotion allows us to capitalize and depreciate
over 4 years equipment costs that would otherwise be expensed at the time of
sale, but also results in increased capital expenditures. Capital expenditures
under our Digital Dynamite promotion totaled approximately $26.5 million for the
nine months ended September 30, 2000. As a result of continuing competition and
our plans to attempt to continue to drive rapid subscriber growth, we expect our
per subscriber acquisition costs for 2000, including costs capitalized under the
Digital Dynamite Plan, will average approximately $450 to $475 for the full
year. Our subscriber acquisition costs, both in the aggregate and on a per new
subscriber activation basis, may materially increase to the extent that we
continue to expand our bounty program, our "free system/free installation"
program, the DISH Network One-Rate Plan, or other more aggressive promotions if
we determine that they are necessary to respond to competition, or for other
reasons.
Funds necessary to meet 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, particularly if our Digital Dynamite promotion gains wide
acceptance. If we were required to raise capital today, a variety of debt and
equity funding sources would likely be available to us. However, there can be no
assurance that additional financing will be available on acceptable terms, or at
all, if needed in the future.
Conditional Access System.
The access control system is central to the security network that
prevents unauthorized viewing of programming. Theft of cable and satellite
programming has been widely reported and our signal encryption has been pirated
and could be further compromised in the future. If other measures are not
successful, it could be necessary to replace the credit card size card that
controls the security of each consumer set top box at a material cost to us.
Intellectual Property.
Many entities, including some of our competitors, now have and may in
the future obtain patents and other intellectual property rights that cover or
affect products or services directly or indirectly related to those that we
offer. In general, if a court determines that one or more of our products
infringes on intellectual property held by others, we would be required to cease
developing or marketing those product, to obtain licenses to develop and market
those products from the holders of the intellectual property, or to redesign
those products in such a way as to avoid infringing the patent claims. Various
parties have asserted patent and other intellectual property rights with
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respect to components within our direct broadcast satellite system. Certain of
these parties have filed suit against us, including Starsight, Superguide and
IPPV as described below. We cannot be certain that these persons do not own the
rights they claim, that our products do not infringe on these rights, that we
would be able to obtain licenses from these persons 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.
Obligations and Future Capital Requirements.
Semi-annual cash debt service requirements of approximately $94 million
related to our 9 1/4% Senior Notes due 2006 (Seven year Notes) and our 9 3/8%
Senior Notes due 2009 (Ten Year Notes), is payable in arrears on February 1 and
August 1 each year. Semi-annual cash debt service requirements of approximately
$24 million related to our parent's 4 7/8% Convertible Subordinated Notes due
2007 is payable in arrears on January 1 and July 1 of each year, commencing July
1, 2000. Semi-annual cash debt service requirements of approximately $52 million
related to our 10 3/8% Senior Notes due 2007 is payable in arrears on April 1
and October 1 of each year, commencing April 1, 2001. There are no scheduled
principal payment or sinking fund requirements prior to maturity of any of these
notes.
The indentures related to our 9 1/4% Senior Notes due 2006 (the "Seven
Year Notes") and our 9 3/8% Senior Notes due 2009 (the "Ten Year Notes")
(collectively, the "Seven and Ten Year Notes Indentures") contain restrictive
covenants that requires us to maintain satellite insurance with respect to at
least half of the satellites we own. Insurance coverage is therefore required
for at least three of our six satellites currently in orbit. We have procured
normal and customary launch insurance for EchoStar VI. This launch insurance
policy provides for insurance of $225.0 million. The EchoStar VI launch
insurance policy expires in July 2001. We are currently self-insuring EchoStar
I, EchoStar II, EchoStar III, EchoStar IV and EchoStar V. To satisfy insurance
covenants related to the outstanding EchoStar DBS senior notes, on July 25,
2000, EchoStar DBS reclassified approximately $60 million from cash and cash
equivalents to restricted cash and marketable investment securities on its
balance sheet. In addition, EchoStar DBS reclassified an amount equal to
approximately $30 million, the depreciated cost of an additional satellite, on
September 23, 2000 after the expiration of the initial period of coverage for
EchoStar V. The reclassifications will continue until such time, if ever, as the
insurers are again willing to insure our satellites on commercially reasonable
terms.
We utilized $91 million of satellite vendor financing for our first
four satellites. As of September 30, 2000, approximately $31 million of that
satellite vendor financing remained 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 satellite to which it relates. A portion of the
contract price with respect to EchoStar VII is payable over a period of 13 years
following launch with interest at 8%, and a portion of the contract price with
respect to EchoStar VIII and EchoStar IX is payable following launch with
interest at 8%. Those in orbit payments are contingent on the continued health
of the satellite.
Dividends on our parent's 6 3/4% Series C Cumulative Convertible
Preferred Stock began to accrue on November 2, 1999. Holders of the Series C
Preferred Stock are entitled to receive cumulative dividends at an annual rate
of 6 3/4% of the Liquidation Preference of $50 per share. Dividends are payable
quarterly in arrears, commencing February 1, 2000, when, as, and if declared by
our Board of Directors. All accumulated and unpaid dividends may, at our option,
be paid in cash, Class A common stock, or a combination thereof upon conversion
or redemption. We declared a cash dividend of approximately $208,000 or $0.84375
per share, payable on November 1, 2000 to Series C Preferred Stock shareholders
of record on October 20, 2000.
During the remainder of 2000, we anticipate total capital expenditures
of approximately $125-$210 million. This amount includes approximately $75-$100
million related to the construction and launch of EchoStar VII, EchoStar VIII
and EchoStar IX, approximately $35-$50 million or more related to EchoStar
receiver systems to be provided under our Digital Dynamite promotion and $20-$30
million for capital expenditures related to general corporate expansion.
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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 6-satellite Low Earth Orbit Mobile system. We will need to raise additional
capital to fully construct these satellites. We recently announced agreements
for the construction and delivery of three new satellites. Two of these
satellites, EchoStar VII and EchoStar VIII, will be advanced, high-powered DBS
satellites. The third satellite, EchoStar IX, will be a hybrid Ku/Ka-band
satellite.
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, among other things, upon our
ability to retain existing DISH Network subscriber, our ability to manage growth
of our subscriber base, and our ability to grow our ETC and Satellite Services
businesses. During the first nine months of 2000, subscriber growth was strong.
To the extent future subscriber growth exceeds our expectations, it may be
necessary for us to raise additional capital to fund increased working capital
requirements. There may be a number of other 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. 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. If we were required to raise capital today a variety of
debt and equity funding sources would likely be available to us. However, 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.
BUSINESS
General
Our parent company's common stock and series C preferred stock is
publicly traded on the Nasdaq National Market. We conduct substantially all of
our operations through our subsidiaries. We operate three business units:
o The DISH Network -- a direct broadcast satellite, which we
refer to as DBS, subscription television service in the United
States. As of September 30, 2000, we had approximately 4.8
million DISH Network subscribers.
o EchoStar Technologies Corporation -- engaged in the design,
distribution and sale of DBS set-top boxes, antennae and other
digital equipment for the DISH Network, which we refer to as
EchoStar receiver systems, the design and distribution of
similar equipment for international direct-to-home systems,
which we refer to as DTH, and the provision of uplink center
design, construction oversight and other project integration
services for international DTH ventures.
o 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.
DISH Network
We started offering subscription television services on the DISH
Network in March 1996. As of September 30, 2000, approximately 4.8 million
households subscribed to DISH Network programming services. From January 1, 2000
to September 30, 2000, our market share of net new DBS customers was 58%. We now
have six DBS satellites in orbit which enable us to provide over 500 video and
audio channels, together with data services and high definition and interactive
TV services, to consumers across the continental United States through the use
of one small satellite dish. 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. As of
September 30, 2000, approximately 15.1 million United States households
subscribed to direct broadcast satellite and other direct-to-home satellite
services. We believe that there continues to be significant unsatisfied demand
for high quality, reasonably priced television programming services.
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In addition, we are developing a wide range of interactive, Internet
and high-speed data services. During 1999, we began offering to consumers our
first of its kind DISHPlayer, which combines satellite receiver, digital VCR,
gaming and Internet access capabilities all in one box. Customers using our
current DISHPlayer receivers have the capability to store up to 12 hours of
programming on the receiver's hard drive. We have made strategic investments in
OpenTV and Wink Communications, two leading enablers of interactive technology.
We have also made strategic investments in StarBand Communications (formerly
Gilat-To-Home) and Wildblue Communications (formerly iSky, Inc.), both of which
intend to offer two-way "always-on" broadband Internet access across the
continental U.S. We began offering this access to existing and new DISH Network
customers along with our television service through a convenient single dish
solution November 2000.
Components of a DBS System
In order to provide programming services to DISH Network subscribers,
we have entered into agreements with video, audio and data 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 we then broadcast directly to DISH Network subscribers.
In order to receive DISH Network programming, a subscriber needs:
o a satellite antenna, which people sometimes refer to as a
"dish," and related components;
o an integrated receiver/decoder, which people sometimes refer
to as a "satellite receiver" or "set-top box"; and
o 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.
Conditional Access System. 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. ECC owns 50% of NagraStar LLC,
a joint venture that provides us with smart cards. NagraStar purchases these
smart cards from Nagra Plus SA, a Swiss company that owns the other 50% of
NagraStar LLC. These smart cards, which we can update or replace 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 set-top box then decompresses the programming and sends it to
the consumer's television.
The access control system is central to the security network that
prevents unauthorized viewing of programming. It is illegal to create, sell or
otherwise distribute mechanisms or devices to circumvent that encryption.
However, theft of cable and satellite programming has been widely reported and
our signal encryption has been pirated and could be further compromised in the
future. We continue to respond to compromises of our encryption system with
measures intended to make signal theft of our programming commercially
uneconomical. We utilize a variety of tools to continue to accomplish this goal.
Ultimately, if other measures are not successful, it could be necessary to
replace the credit card size card that controls the security of each consumer
set top box at a material cost to us. If we cannot promptly correct a compromise
in our encryption technology, it would adversely affect our revenue and our
ability to contract for video and audio services provided by programmers.
Programming. We use a "value-based" strategy in structuring the content
and pricing of programming packages available from the DISH Network. For
example, we currently 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
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typically consists of approximately 55 analog channels. We believe that our
"America's Top 100 CD" programming package, which we currently 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. In addition to the above mentioned programming packages, during
April 2000 we introduced our America's Top 150 programming package for $39.99
per month and during August 2000, we introduced our America's "Everything" Pak,
which combines our America's Top 150 programming package and all four premium
movie packages for $69.99 per month. We believe that these expanded offerings
will help us increase our average revenue per subscriber.
Our five operational satellites currently enable us to provide over 500
channels of video and audio programming, Internet and high-speed data services
and high definition television nationwide to a subscriber's single small
satellite dish. Since we use many of these channels for local programming, no
particular consumer could subscribe to all 500 channels, but a single dish could
receive all of those channels. See "-- Government regulation".
We currently offer up to seven premium movie channels for only $10.99
per month. We believe we offer more premium movie channels than cable at a
comparable price.
Currently we offer approximately 50 foreign-language channels including
Spanish, Arabic, French, Hindi, Russian, Greek and others. We believe we deliver
the most popular foreign-language programming to customers in the United States
at the best value. We believe foreign-language programming is a valuable niche
product that attracts a number of new subscribers who are unable to get similar
programming elsewhere.
Internet and High-Speed Data Services. We are expanding our offerings
to include Internet and high-speed data services. We have formed a joint venture
with OpenTV which will offer DISH Network customers an interactive digital
receiver with a built-in hard disk drive that will permit viewers to pause and
record live programs without the need for video tape. We also intend to offer
interactive television services developed by OpenTV, including a new electronic
program guide, a local weather application and other innovative interactive
applications for consumers. In addition, OpenTV is expected to develop and
produce a number of applications and interactive TV services for the joint
venture, which will include video replay, interactive TV advertising, and
entertainment services.
Through our strategic investment in StarBand Communications, we began
offering consumers two-way, high- speed satellite Internet access along with
DISH Network satellite television programming via a single dish in November
2000. We believe this technology is particularly well-suited for areas without
cable infrastructure. Two-way satellite service offers significant benefits for
consumers, including a persistent or "always on" connection that saves time over
dial-up methods and eliminates the need for a second phone line. DISH Network
customers will need an oblong dish, approximately 24 inches by 36 inches, and
other equipment to take advantage of two-way Internet satellite service. We
currently offer consumers a complete hardware and services solution for
broadband Internet access combined with DISH Network programming. In March 2000,
we invested $50 million in Wildblue Communications, a company that expects to
offer high-speed data services at rates of up to 1.5 Mbps, beginning in
mid-2002, to customers throughout the continental U.S. We have signed an
agreement whereby we will jointly develop a single receiver which will allow a
customer to receive both DISH Network video programming and Wildblue Internet
access. We are also seeking additional ways to expand our Internet and
high-speed data services that may include, but are not limited to, partnerships
with third parties who have particular expertise in the high speed transmission
of digital information. Although there can be no assurance, we believe we will
be able to increase our subscriber base and our average revenue per subscriber
by offering these and other similar services.
Local Strategy. In order to provide the strongest possible satellite
and cable competition, and thereby maximize our potential market, we currently
provide major local broadcast network channels to certain of our subscribers.
Subject to eligibility conditions, we currently offer satellite-delivered local
network signals to consumers in 34 of the largest markets in the continental
United States. EchoStar VII and EchoStar VIII will be equipped with spot- beam
technology that we believe will allow us to offer local channels in as many as
60 or more markets across the United States without reducing our current
programming offerings.
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EchoStar Receiver Systems. EchoStar receiver systems include a small
satellite dish, a digital satellite receiver that descrambles signals for
television viewing, a remote control, and other related components. 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 identification capability, event timers to
automatically tune into or record selected programming and one-touch VCR
recording. We also offer a variety of specialized receiver systems such as HDTV
receiver systems, receiver systems that include either a VCR or DVD player and
receivers capable of receiving Internet TV services. In addition, we offer a low
cost 'bare bones' receiver designed as a secondary unit for multiple television
locations. DISH Network reception equipment is incompatible with competitors'
systems in the United States.
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 manufactures consumer electronics products, including a digital VCR with
an integrated EchoStar receiver system.
During the first quarter of 2001, together with OpenTV we expect to
offer DISH Network customers and other video platforms around the world a low
cost, interactive digital receiver with a built-in hard disk drive that would
permit viewers to pause and record live programs without the need for video
tape. The new set-top box is also expected to offer interactive television
services developed by OpenTV, including an enhanced electronic program guide to
support digital video recording, a local weather application and other
innovative interactive applications for consumers.
Installation. While many consumers have the skills necessary to install
our equipment in their homes, we believe that most installations are best
performed by professionals, and that on time, quality installations are
important to our success. Consequently, we are currently expanding our
installation business, conducted through our DISH Network Service Corporation
subsidiary. We are expanding our DISH Network Service Corporation, and are
integrating business partners as external installation providers. Our external
installation business partners are held to DISH Network Service Corporation
service standards to attempt to ensure each DISH Network customer receives the
same quality installation and service. Our offices and external business
partners will be strategically located throughout the continental United States,
in order to enable us to provide service to a greater number of DISH Network
customers throughout the country. Currently, customers' installations may be
delayed due to rapid subscriber growth, resulting in a large demand for DISH
Network professional installation services. Although there can be no assurance,
we believe this expansion of our installation business will decrease wait time
on service calls and new installations and help us to better accommodate
anticipated subscriber growth.
Customer Service Centers. We currently own and operate customer service
centers in Thornton, Colorado, Littleton, Colorado, McKeesport, Pennsylvania, El
Paso, Texas, Christiansburg, Virginia and Bluefield, West Virginia. 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. Due to rapid
subscriber growth and recent marketing promotions, some customers are currently
experiencing longer than anticipated wait times.
Digital Broadcast Operations Centers. Our principal digital broadcast
operations center is located in Cheyenne, Wyoming. During 1999, we acquired a
second digital broadcast operations center in Gilbert, Arizona. During 2000, we
plan to "build-out" the Gilbert facility to be used as a back up for our main
digital broadcast operations center in Cheyenne. Upon commercial operation of
EchoStar VII and EchoStar VIII we plan to also begin utilizing the Gilbert
facility as a primary digital broadcast operations center. 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
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broadcast operations center also maintains a number of large uplink antennas and
other equipment necessary to modulate and demodulate the programming and data
signals. Equipment at our digital broadcast operations center performs all
compression and encryption of the DISH Network's programming signals.
Subscriber Management. We presently use, and are dependent on, CSG
Systems Incorporated's software system, for all DISH Network subscriber
management and billing functions.
Sales and Marketing. Approximately 20,000 independent dealers and
distributors, retailers and consumer electronics stores currently sell EchoStar
receiver systems and DISH Network programming services. While we also sell
receiver systems and programming directly, independent dealers are responsible
for most of our sales. 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 continuing
to form alliances with nationally recognized distributors of other consumer
electronics products. We have formed strategic alliances with JVC and Philips.
JVC and Philips now distribute our receiver systems under their labels through
certain of their 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, resolve billing questions,
schedule installation or 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
commission program. The program pays qualified distributors and retailers an
activation bonus, along with a fixed monthly residual commission for programming
services while 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 displays,
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 these outlets quickly fulfill point-of-sale needs. Additionally, we
dedicate one DISH Network channel and provide a retailer specific website to
provide 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
manufactured cost. The amount of the subsidy varies depending on many factors.
Periodically we also provide varying levels of other subsidies and incentives to
attract customers, including free or subsidized installations, antennas,
programming and other items. We developed this marketing strategy to rapidly
build our subscriber base, expand retail distribution of our products, and build
consumer awareness of the DISH Network brand. This marketing strategy emphasizes
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 the consumer
up-front costs, we incur significant costs each time we acquire a new
subscriber. Although there can be no assurance, we believe that we will be able
to fully recoup the up-front costs of subscriber acquisition from future
subscription television services revenue.
During July 2000, we announced the commencement of our new Digital
Dynamite promotion. The Digital Dynamite plan offers four choices to consumers,
ranging from providing consumers the use of one EchoStar receiver system and the
America's Top 100 programming package for $34.99 per month, to providing
consumers two EchoStar receiver systems and the America's Top 150 programming
package for $49.99 per month. With each plan, consumers receive in-home service,
must agree to a one-year commitment and incur a one-time set-up fee of $49.00.
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We base our marketing promotions on current competitive conditions.
Currently, we offer promotions including product rebates and bounty programs.
These bounty programs are designed to entice subscribers to certain other pay TV
services to become DISH Network customers. 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. We presently have six 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
between seven and ten digital video channels from each transponder. The FCC
licensed us to operate 96 DBS frequencies at various orbital positions
including:
o 21 frequencies at the 119 degree orbital location and 29
frequencies at the 110 degree orbital location, both capable
of providing service to the entire continental United States;
o 11 frequencies at the 61.5 degree orbital location, capable of
providing service to the Eastern and Central United States;
o 24 frequencies at the 148 degree orbital location, capable of
providing service to the Western United States;
o 22 frequencies at the 175 degree orbital location, capable of
providing service to only the most western portion of the
United States; See "-- Government regulation;" and
o 11 additional as yet unassigned frequencies, likely to be made
available at the 175 degree orbital location, but only if
certain regulatory hurdles are met. See "-- Government
regulation."
We previously indicated that in connection with the launch of EchoStar
V and EchoStar VI we expected to incur material one-time expenses, primarily
during 2000, associated with repositioning existing subscribers' satellite
dishes from the 119 degree orbital location to the 110 degree orbital location.
We have now decided to utilize the 110 degree orbital location, where EchoStar V
will be located, to enhance revenue opportunities with new value added services
for our current and future subscribers, and to maintain our primary DBS service
at the 119 degree orbital location. Consequently, while we still expect to incur
costs to upgrade some subscribers to dishes capable of receiving signals from
both the 110 degree and 119 degree orbital locations, these costs are not
expected to be as significant during 2000 as previously planned.
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. EchoStar V has 32 transponders that operate at approximately 110 watts
per channel, switchable to 16 transponders operating at approximately 220 watts
per channel. Each transponder can transmit multiple digital video, audio and
data channels. Each of our satellites has a minimum design life of 12 years.
During the nine months ended September 30, 2000, two transponder pairs
on EchoStar III malfunctioned. Including the three transponder pairs that
malfunctioned during 1998, these anomalies have resulted in the failure of a
total of ten transponders on the satellite to date. 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 the
61.5 degree orbital location, the transponder anomaly has not resulted in a loss
of service to date. The satellite manufacturer, Lockheed Martin, has advised us
that it believes it has identified the root cause of the failures, and that
while further transponder failures are possible, based upon the root cause and
the operating configuration of the satellite, 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 frequencies on the satellite will be
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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.
As a result of the failure of EchoStar IV solar arrays to fully deploy
and the failure of 26 transponders to date, a maximum of approximately 16 of the
44 transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar arrays, the number of available transponders
will further decrease over time. In addition to the transponder and solar array
failures, EchoStar IV experienced anomalies affecting its thermal systems and
propulsion system during 1999. There can be no assurance that further material
degradation, or total loss of use, of EchoStar IV will not occur in the
immediate future.
Satellites under Construction. EchoStar VII, expected to operate from
the 119 degree orbital location, will be designed and manufactured by Lockheed
Martin Commercial Space Systems, subject to FCC approval. EchoStar VIII, which
is expected to operate at the 110 degree orbital location, subject to FCC
approval, and EchoStar IX, which is expected to operate at the 121 degree
orbital location, will be designed and manufactured by Space Systems/Loral.
EchoStar VII and EchoStar VIII will each be capable of operating 32 DBS
transponders at 120 watts each, switchable to 16 DBS transponders operating at
240 watts each. Both will include spot-beam technology which could allow DISH
Network to offer local channels or other value added services in as many as 60
or more markets across the United States. The spot beam payloads for each
satellite have been designed to work together to maximize the number of local
spot markets served across the United States, while providing mutual backup to
offer increased reliability to customers. EchoStar IX will be capable of
operating 32 Ku-band transponders at 110 watts each, in addition to a Ka band
payload. We also expect in the near future to contract for EchoStar X. We expect
that EchoStar X will have a combined C-band, Ku-band and Ka-band payload and
expect to operate it from the 83 degree orbital location.
Satellite Insurance. In September 1998, we filed a $219.3 million
insurance claim for a constructive total loss under the launch insurance
policies covering EchoStar IV. The satellite insurance consists of separate
identical policies with different carriers for varying amounts which, in
combination, create a total insured amount of $219.3 million.
The insurance carriers offered us a total of approximately $88 million,
or 40% of the total policy amount, in settlement of the EchoStar IV insurance
claim. The insurers allege that all other impairment to the satellite occurred
after expiration of the policy period and is not covered. We strongly disagree
with the position of the insurers and we have filed an arbitration claim against
them for breach of contract, failure to pay a valid insurance claim and bad
faith denial of a valid claim, among other things. There can be no assurance
that we will receive the amount claimed or, if we do, that we will retain title
to EchoStar IV with its reduced capacity.
At the time we filed our claim in 1998, we recognized an impairment
loss of $106 million to write-down the carrying value of the satellite and
related costs, and simultaneously recorded an insurance claim receivable for the
same amount. We continue to believe we will ultimately recover at least the
amount originally recorded and do not intend to adjust the amount of the
receivable until there is greater certainty with respect to the amount of the
final settlement.
As a result of the 1999 thermal and propulsion system anomalies, we
reduced the estimated remaining useful life of EchoStar IV to approximately 4
years during January 2000. This change will increase depreciation expense to be
recognized by us during the year ending December 31, 2000 by approximately $9.6
million. We will continue to evaluate the performance of EchoStar IV and may
modify our loss assessment as new events or circumstances develop.
The in-orbit insurance policies for EchoStar I, EchoStar II, and
EchoStar III expired July 25, 2000. The insurers have to date refused to renew
insurance on EchoStar I, EchoStar II and EchoStar III on reasonable terms. Based
on, among other things, the insurance carriers' unanimous refusal to negotiate
reasonable renewal insurance coverage, we believe that the carriers colluded and
conspired to boycott us unless we accept their offer to settle the EchoStar IV
claim for $88 million.
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Based on the carriers' actions, we have added causes of action in our
EchoStar IV demand for arbitration for breach of the duty of good faith and fair
dealing, and unfair claim practices. Additionally, we have filed a lawsuit
against the insurance carriers in the United States District Court for the
District of Colorado asserting causes of action for violation of Federal and
State Antitrust laws. While we believe we are entitled to the full amount
claimed under the EchoStar IV insurance policy and believe the insurance
carriers are in violation of Antitrust laws and have committed further acts of
bad faith in connection with their refusal to negotiate reasonable insurance
coverage on our other satellites, there can be no assurance as to the outcome of
these proceedings.
The indentures related to the outstanding EDBS senior notes, contain
restrictive covenants that require us to maintain satellite insurance with
respect to at least half of the satellites we own. In addition, the indenture
related to the notes contains a restrictive covenant that requires as to
maintain satellite insurance with respect to the losses of three of our
satellites or at best half of the satellites we own. Insurance coverage is
therefore required for at least three of our six satellites currently in orbit.
We have procured normal and customary launch insurance for EchoStar V and
EchoStar VI. These launch insurance policies each provide for insurance of
$225.0 million. The EchoStar V launch insurance policy expires on September 23,
2000. The EchoStar VI launch insurance policy expires in July 2001. We are
currently self- insuring EchoStar I, EchoStar II, EchoStar III and EchoStar IV.
To satisfy insurance covenants related to the outstanding EDBS senior notes, as
of September 30, 2000, we have reclassified approximately $90 million from cash
and cash equivalents to restricted cash and marketable investment securities on
its balance sheet. The reclassification will continue until such time, if ever,
as the insurers are again willing to insure our satellites on commercially
reasonable terms.
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 video, audio and data programming, quality of
picture and service, and cost are the key bases of competition.
Cable Television. 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
may have significant investments in, and access to, programming. Cable
television service is currently available to more than 90% of the approximately
100 million United States television households, and approximately 68% of total
United States households currently subscribe to cable. Cable television
operators currently have an advantage relative to us by providing service to
multiple television sets within the same household at no additional cost for the
programming. Cable operators may obtain a competitive advantage by bundling
their analog video service with expanded digital video services delivered
terrestrially or via satellite, efficient 2-way high speed data transmission,
and/or 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 provides telephone service over cable systems. As a result of
these and other factors, we may not be able to continue to expand our subscriber
base or to compete effectively against cable television operators.
In addition, entities such as regional telephone companies, which are
likely to have greater resources than we have, are implementing and supporting
digital video compression over existing telephone lines and digital "wireless
cable." 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 has acquired cable operators TCI and MediaOne.
Since a subscriber needs a direct line of sight to the satellite to
receive DBS service, some households may not be able to receive DISH Network
programming. Additionally, the cost required to receive DISH Network programming
on multiple television sets may deter some potential customers from switching to
DISH Network service. Furthermore, cable operators pay substantially lower
royalty rates for the retransmission of distant network, local affiliate and
superstation signals than we do.
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Other DBS and Direct-to-Home Satellite System Operators. Several other
companies have DBS licenses and can compete with us for home satellite
subscribers. Our primary competitor, DirecTV, operates five DBS satellites and
has 46 channel assignments at orbital slots that provide coverage to the entire
continental United States. DirecTV currently offers more than 300 channels of
combined video and audio programming and, as of September 30, 2000, had
approximately 9 million subscribers. DirecTV is, and will be for the foreseeable
future, in an advantageous position with regard to market entry, programming,
such as DirecTV's exclusive sports programming and, possibly, volume discounts
for programming offers. Further, DirecTV hardware and programming is available
for sale in Circuit City, Best Buy and Radio Shack. Our equipment is not
available at these, or most other large consumer electronics chains.
Additionally, DirecTV offers out of market NFL, NBA, NHL and other sports
programming that is not available to our subscribers.
Other 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, or if the number of DBS frequency assignments to our existing DBS
competitors increases, DISH Network subscriber growth could be adversely
affected.
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 the Consumer Electronics Manufacturers Association, 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.
We created our ETC division in connection with the development of the
DISH Network. We believe that we have an opportunity to grow this business
further in the future. The same employees who design EchoStar receiver systems
for the DISH Network also design the set-top boxes sold to international
direct-to-home satellite TV customers. Our satellite receivers are designed
around the DVB standard, which is widely used in Europe and Asia. 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.
In addition to supplying EchoStar receiver systems for the DISH
Network, ETC supplies similar digital satellite receivers to international
satellite TV service operators and a variety of digital and analog receivers to
consumers through our international distribution network. We believe that
direct-to-home satellite service is well-suited for countries without extensive
cable infrastructure. We also offer consulting and integration services to
development stage, international direct-to-home satellite operators, which may
result in sales of receiver systems to these customers. We are actively
soliciting new business for ETC, but we can not provide any assurance in that
regard.
Our two major international customers are Via Digital, a subsidiary of
Telefonica, Spain's national telephone company, and Bell ExpressVu, a subsidiary
of Bell Canada, Canada's national telephone company. Our future revenue in this
area depends largely on the success of these operators, 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.
ETC's business also includes our Atlanta-based EchoStar Data Networks
Corporation and our UK-based Eldon Technology Limited subsidiaries. EchoStar
Data Networks is a supplier of technology for distributing Internet and other
content over satellite networks. Eldon Technology designs various components of
digital televisions and
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set-top boxes, strengthening our product design capabilities for satellite
receivers and integrated televisions in both the international and United States
markets.
Competition for Our ETC Business. We compete with a substantial number
of foreign and domestic companies, many of which have significantly greater
resources, financial or otherwise, than we have. We expect new competitors to
enter this market because of rapidly changing technology. Our ability to
anticipate these technological changes and introduce enhanced products
expeditiously will be a significant factor in our ability to remain competitive.
Existing competitors' actions and new entrants may have a material adverse
impact on our revenues. We do not know if we will be able to successfully
introduce new products and technologies on a timely basis in order to remain
competitive.
Satellite Services. Our Satellite Services business unit primarily
leases capacity on our satellites to customers, including international services
that broadcast foreign-language programming to our subscribers, and Fortune 1000
companies that use our business television service to communicate with
employees, customers, distributors, and suppliers located around the United
States.
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. While there can
be no assurance, 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 can not predict either the
outcome of these proceedings or any potential impact they might have on the
industry or on our operations. This section sets forth a brief summary of
regulatory issues pertaining to our operations.
We are required to obtain authorizations and permits from the FCC and
other similar foreign regulatory agencies to construct, launch and operate our
satellites and other components of our DBS system. Additionally, as a private
operator of a United States satellite system, we are subject to the regulatory
authority of the FCC and the Radio Regulations promulgated by the International
Telecommunication Union. We also have to obtain import and general destination
export licenses from the United States Department of Commerce to 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 foreign launch services providers is subject to strict export control
and prior approval requirements.
FCC Permits and Licenses. The FCC has jurisdiction and review power
over the following general areas:
o assigning frequencies and authorizations;
o 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;
o authorizing individual satellites and earth stations;
o avoiding interference with other radio frequency emitters; and
o ensuring compliance with applicable provisions of the
Communications Act of 1934.
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All of our FCC authorizations are subject to conditions as well as to
the FCC's authority to modify, cancel or revoke them. In addition, all of our
authorizations for satellite systems that are not yet operational 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. Our conditional license for a
Ku-band satellite system is subject to pending petitions for reconsideration and
cancellation. With respect to our license for the Ka-band system, the FCC staff
sent us a letter in late 1999 stating that we had not submitted information to
the FCC relating to the inter-satellite links of our system and required us to
submit certain information or become subject to more expedited construction
requirements. While we have submitted information in response to that request,
we cannot be sure that the FCC will view our submission as sufficient or will
not act to expedite our milestones. 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. Our license for
our Ka-band system allows us to use only 500 MHz of Ka-band spectrum in each
direction, while other licensees have been authorized to use 1,000 MHz in each
direction. We have recently filed a modification application to allow us to use
additional spectrum, but we cannot be sure that the FCC will not deny or
otherwise fail to grant that application. 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. While we have
filed with the FCC pending requests for extensions of authorizations that have
expired, we cannot be sure how the FCC will rule on these requests.
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 a satellite operator's license or
authorize an 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.
We have licenses to operate EchoStar I and EchoStar II at the 119
degree orbital location, which both expire in 2006, a license to operate 11
frequencies on EchoStar III at the 61.5 degree orbital location, which expires
in 2008 and authorizations to launch and operate for 10 years EchoStar V and
EchoStar VI at the 110 degree and 119 degree orbital locations, respectively.
Our authorization at the 148 degree orbital location requires us to construct a
satellite by December 20, 2000 and 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. At the 61.5 degree orbital location we
utilize certain channels beyond our licensed 11 channels, under special
temporary authorization, which the FCC may refuse to renew, and which is subject
to several restrictive conditions. Third parties have opposed, and we expect
them to continue to oppose, some of our authorizations or pending and future
requests to the FCC for extensions, modifications, waivers and approvals.
In conjunction with our plan to provide local-into-local broadcast
service as well as cable programming from the 110 degree orbital location, we
moved EchoStar IV to the 119 degree orbital location in early 2000. We have an
authorization from the FCC to operate that satellite over certain frequencies at
that location, and we have received special temporary authority to operate the
satellite over additional frequencies. The move has allowed us to transition
some of the programming now on EchoStar I and EchoStar II to EchoStar IV, which
can provide service to Alaska and Hawaii from the orbital location. In
connection with that plan, we have also petitioned the FCC to declare that we
have met our due diligence obligations for the 148 degree orbital location, or
alternatively to extend the December 20, 2000 milestone for that location. The
State of Hawaii has opposed that request and there is no assurance that it will
be granted by the FCC. If our request is not granted by the FCC, our license for
the 148 degree orbital location may be revoked or canceled. EchoStar VI, was
successfully launched during July 2000, recently completed testing at the 148
degree orbital location and has been moved to its final 119 degree orbital
location under special temporary authority granted by the FCC. We have now
received a license to operate EchoStar VI at that location. We also moved
EchoStar I from the 119 degree
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orbital location to the 148 degree orbital location. EchoStar VI commenced
commercial service during October 2000. In general, our plans have involved and
still involve the relocation of satellites either within or slightly outside the
"cluster" of a particular orbital location, or from one orbital location to
another where we have various types of authorizations. These changes require FCC
approval, and we cannot be sure that we will receive all needed approvals for
our current and future plans. Furthermore, the states of Alaska and Hawaii have
requested the FCC to impose conditions on the license for EchoStar VI, relating
to certain aspects of our service such as prices and equipment. While the FCC
denied these requests for conditions, it cautioned that it may impose similar
requirements as a result of a pending rulemaking. Such requirements could be
very onerous for us. In general, the states of Alaska and Hawaii have expressed
views that our service to these states from various orbital locations does not
comply with our FCC-imposed obligations to serve those states, and we cannot be
sure that the FCC will not accept these views. Such actions would have a
material adverse affect on our business. Moreover, because ECC cannot meet the
geographic service requirements from the 148 degree orbital location, we had to
request and obtain a conditional waiver of these requirements to allow operation
of EchoStar I at the location. As a result, our current authorization to operate
EchoStar I at the 148 degree orbital location is subject to several conditions
that may be onerous.
In a recent decision, the FCC approved a transfer of majority control
over E-Sat, a non-geostationary mobile satellite service license from us to
another company, but warned that this approval is without prejudice to its
investigation of certain complaints relating to E-Sat. We cannot be sure whether
any such investigation will have implications for E-Sat's licensee.
In-Orbit Authorizations. 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 ruling in a rulemaking proceeding that
will allow commercial terrestrial services and hamper future satellite
operations in the "extended" C-band frequencies. This ruling might have negative
implications for us.
International Telecommunication Union Standards. Our DBS system also
must conform to the ITU broadcasting satellite service plan. If any of our
operations are not consistent with this plan, the ITU will only provide
authorization on a non-interference basis pending successful modification of the
plan or the agreement of all affected administrations to the non-conforming
operations. Accordingly, unless and until the ITU modifies its broadcasting
satellite service plan to include the technical parameters of DBS applicants'
operations, our satellites, along with those of other DBS operators, must not
cause harmful electrical interference to other assignments that are in
conformance with the plan. Further, DBS satellites are not presently entitled to
any protection from other satellites that are in conformance with the plan. We
believe the United States government has filed modification requests with the
ITU for EchoStar I, EchoStar II and EchoStar 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.
DBS 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.
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We also have a conditional permit for a total of 11 western frequencies
at the 175 degree orbital location that expired 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, a DBS provider that DirecTV acquired in 1999, 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 the
175 degree orbital location, which was set to expire on November 30, 1998. That
expiration date was pursuant to an extension granted by the FCC's International
Bureau in 1995. When it granted the extension, the FCC reserved the right to
cancel the permit if we failed to progress toward operation of the DBS system in
accordance with the timetable that we submitted to the FCC. That extension also
is subject to a still pending challenge by PrimeStar.
While we have timely filed requests for extension of all the western
permits, we cannot be sure how the FCC will act with respect to these requests.
Other Licenses and Conditional Authorizations. We also have received
licenses and conditional authorizations from the FCC to operate satellites in
the Ka-band and Ku-band and have an application pending for a system that would
use extended Ku-band frequencies (although that application has remained pending
for years). Use of those licenses and conditional authorizations are subject to
certain due technical and due diligence requirements, including the requirement
to construct and launch satellites. The granting of those licenses has been
challenged by parties with interests that are adverse to ours. Among other
things, our conditional license for a Ku-band satellite system is subject to
still pending petitions for reconsideration and cancellation. The construction,
completion and launch milestones for both Ku-band satellites have expired. We
have filed a timely request for the extension of these milestones for our
Ku-band system. With respect to our license for the Ka-band system, the FCC
staff sent us a letter in late 1999 stating that we had not submitted
information to the FCC relating to the inter-satellite links of our system and
required us to submit certain information or become subject to more expedited
construction requirements. While we have submitted information in response to
that request, we cannot be sure that the FCC will view our submission as
sufficient or will not act to expedite our milestones. If we fail to file
adequate reports or to demonstrate progress in the construction of our satellite
systems, the FCC has stated that is may cancel our authorizations for those
systems. Our license for our Ka-band system allows us to use only 500 MHz of
Ka-band spectrum in each direction, while other licensees have been authorized
to use 1,000 MHz in each direction. We have recently filed a modification
application to allow us to use additional spectrum, but we cannot be sure that
the FCC will not deny or otherwise fail to grant that application. If we
successfully construct and launch Ku-band, extended Ku-band and low Ka-band, 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.
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 from at least one of
their DBS satellites or they will
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have to relinquish their western assignments. We are presently not able to
satisfy this requirement from the 148 degree orbital location. With respect to
the EchoStar I satellite, we have received a waiver of that requirement subject
to several onerous conditions. We have also requested a waiver of that
requirement for EchoStar IV operation at the 148 degree orbital location.
EchoStar IV currently operates at the 119 degree orbital location. The state of
Hawaii has requested many conditions to such a waiver, and we have opposed
several of these conditions. In addition, we are required to serve Alaska and
Hawaii from the 110 degree orbital location. While we believe that our current
plan, which involves the use of our capacity at that location for
local-into-local broadcast as well as other programming, is in compliance with
that requirement, there can be no assurance that the FCC will consider this plan
as complying with the rule. In general, the states of Alaska and Hawaii have
expressed views that our service to these states from various orbital locations
does not comply with our FCC imposed obligations to serve those states, and we
cannot be sure that the FCC will not accept these views.
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.
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 comply with regulatory obligations 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.
Under a requirement of the Cable Act, the FCC imposed public interest
requirements on direct broadcast satellite licensees, such as us, to set aside
four percent of channel capacity exclusively for noncommercial programming for
which we must charge programmers below-cost rates and for which we may not
impose additional charges on subscribers. This could also displace programming
for which we could earn commercial rates and could adversely affect our
financial results. The FCC has not reviewed our methodology for computing the
channel capacity we must set aside or for determining the rates that we charge
public interest programmers, and we cannot be sure that, if the FCC were to
review these methodologies, it would find them in compliance with the public
interest requirements.
Under a requirement of the Telecommunications Act of 1996, the FCC
recently imposed upon broadcasters and certain multichannel video programming
distributors, including us, the responsibility of providing video description
for visually impaired persons. Video description involves the insertion into a
television program of narrated descriptions of settings and actions that are not
otherwise reflected in the dialogue, and is typically provided through the
Secondary Audio Programming (SAP) channel. Commencing April 12, 2002, affected
multichannel video programming distributors like us will be required to provide
video description for a minimum of 50 hours per calendar quarter (roughly four
hours per week) of prime time and/or children's programming on each of any of
the top five national non-broadcast networks they carry. In addition,
distributors will be required to "pass through" any video description they
receive from a broadcast station or non-broadcast network if the multichannel
video programming distributor has the technical capability necessary to do so
associated with the channel on which it distributes the programming with video
description. While the FCC acknowledged that programming networks, and not
multichannel video programming distributors, may actually describe the
programming, it declared that for ease of enforcement and monitoring compliance
it would hold distributors responsible for compliance. We cannot be sure that
these requirements will not impose an excessive burden on us.
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The FCC has commenced a rulemaking which seeks to streamline and revise
its rules governing direct broadcast satellite operators. 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, and the new rules may include expanded geographic
service requirements for Alaska, Hawaii and Puerto Rico. The FCC has also
recently released a notice of proposed rulemaking regarding the current
restrictions on the flexibility of DBS companies to provide services other than
DBS, and may change these restrictions.
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 foreign satellite systems to serve the United States if the
home country of the foreign-licensed satellite offers open "effective
competitive opportunities" in the same type of satellite service to United
States licensed satellites. In the February 1997 World Trade Organization
Agreement, the United States offer contained an exemption from market opening
commitments for, among other things, DBS and direct-to-home satellite services.
In November 1997, the FCC released new rules that maintained the effective
competitive opportunities test with respect to foreign-licensed satellites
seeking to provide DBS and direct-to-home satellite services in the United
States. The FCC also established a strong presumption in favor of authorizing
foreign-licensed satellites to provide services other than DBS and
direct-to-home satellite in the United States. The FCC has also reached
bilateral protocols allowing the provision of DBS service by satellites licensed
by Mexico and Argentina.
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-based FSS services. If the proposal is adopted, these satellite operations
could provide global high-speed data services. In addition to possible
interference concerns, this would, among other things, create additional
competition for satellite and other services. In the same rulemaking, the FCC
has also requested comment on a request that would allow a terrestrial service
proposed by Northpoint Communications, Inc. to retransmit local television or
other video and data services to DBS subscribers or others in the same DBS
spectrum that we use throughout the United States. Furthermore, the Satellite
Home Viewer Improvement Act of 1999 requires the FCC to make a determination by
November 29, 2000 regarding licenses for facilities that will retransmit
broadcast signals to underserved markets by using spectrum otherwise allocated
to commercial use, possibly including DBS spectrum. Northpoint has been allowed
by the FCC to conduct experimental operations in Texas and Washington, D.C. We
have submitted numerous pleadings jointly with DirecTV to the FCC expressing
concern over the Northpoint request, which in our view, may cause potential
harmful and substantial interference to the service provided to DBS' customers.
DirecTV and we have also jointly conducted tests of Northpoint's proposed
technology and have presented our test results, which in our view show harmful
interference from Northpoint's proposed service, and Northpoint has filed
oppositions to our submissions. Furthermore, other entities have now filed
applications similar to the one filed by Northpoint. If Northpoint, or other
entities become authorized to use our spectrum, they could cause harmful and
substantial interference into our service. On December 8, 2000, the FCC released
a Report and Order and Further Notice of Proposed Rulemaking in this proceeding.
Despite our objections, the FCC concluded that a terrestrial
"point-to-multipoint" service can generally share the spectrum with DBS on a no
interference basis -- a conclusion that may have a significant adverse impact on
our operation. At the same time, the FCC initiated a further notice of proposed
rulemaking to determine the appropriate interference standards with which such a
terrestrial service must comply. The FCC also requested proposals on how to
process applications for licenses for the new service, and tentatively proposed
excluding satellite companies from such licenses. In addition, appropriations
legislation that was recently enacted requires independent testing of the
Northpoint technology, and creates rural loan guarantees for providers of
certain types of services. We cannot be sure whether and when these processes
will result in the licensing of Northpoint and/or companies proposing a similar
service to operate in the spectrum licensed to us, what the interference
standards will be, and how significant the interference into our operations will
be.
Distant and Local Broadcast Signals. We believe that our ability to
deliver local programming via satellite into the markets from which the
programming originates helps 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 Improvement Act and Retransmission Consent. The
Copyright Act, as amended by the Satellite Home Viewer Improvement Act of 1999,
permits satellite retransmission of distant network channels only to "unserved
households." Whether a household qualifies as "unserved" for the purpose of
eligibility to receive a distant network channel depends, in part, on whether
that household can receive a signal of "Grade B intensity" as defined by the
FCC. In February 1999, the FCC released a report and order on these matters.
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. Later in 1999,
the FCC denied in part and granted in part our petition for reconsideration,
allowing us some additional flexibility in the method for measuring Grade B
intensity but denying our requests on other matters. 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. In addition, the
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Satellite Home Viewer Improvement Act enacted in November 1999, instructed the
FCC to establish a predictive model based on the model it had endorsed in
February 1999, and also directed the FCC to ensure that its predictive model
takes account of terrain, building structures and other land cover variations.
The FCC recently issued a report and order that does not adjust the model to
reflect such variations for any VHF stations. Failure to account for these
variations could hamper our ability to retransmit distant network and
superstation signals. The broadcast interests and we have filed petitions for
reconsideration of the FCC's action. We cannot be sure that the FCC's action or
reconsideration will not be even more unfavorable to us.
The Satellite Home Viewer Improvement Act of 1999 has also established
a process whereby consumers predicted to be served by a local station may
request that this station waive the unserved household limitation so that the
requesting consumer may receive distant signals by satellite. If the waiver
request is denied, the Satellite Home Viewer Improvement Act of 1999 entitles
the consumer to request an actual test, with the cost to be borne by either us
or the broadcast station depending on the results. The FCC staff has informally
raised questions about how we implement that process. We can provide no
assurance that the FCC will not find that our implementation of the process is
not in compliance with these rules. Furthermore, the FCC has recently identified
a third party organization to examine and propose tester qualification and other
standards for testing. We cannot be sure that this decision will not have an
adverse effect on our ability to test whether a consumer is eligible for distant
signals.
In addition, the Satellite Home Viewer Improvement Act of 1999 could
adversely affect us in several other respects. The legislation prohibits us from
carrying more than two distant signals for each broadcasting network and leaves
the FCC's Grade B intensity standard unchanged without future legislation. The
FCC recently released a report recommending that only minor changes be made to
the Grade B standard, a recommendation that is unfavorable to us. While the
Satellite Home Viewer Improvement Act of 1999 reduces the royalty rate that we
currently pay for superstation and distant network signals, it directs the FCC
to require us (within one year from November 29, 1999) to delete substantial
programming (including sports programming) from these signals. The FCC has
recently released rules implementing that directive, which have become
effective. These requirements may significantly hamper our ability to retransmit
distant network and superstation signals, and may require us to stop
retransmitting many or all superstation signals.
For existing customers the new legislation also permits hundreds of
thousands of consumers to continue to receive distant network channels who would
otherwise be required to be disconnected. The new law generally does not,
however, permit consumers predicted to receive a signal of "Grade A" intensity
to continue receiving distant network channels. As a result, we believe hundreds
of thousands of consumers have or could lose access to network channels by
satellite. In anticipation of passage of the legislation, and for other reasons,
we recently ceased providing distant network channels to tens of thousands of
customers. These turn offs, together with others, could result in a temporary
material increase in churn and a small reduction in revenue per subscriber.
Further, broadcasters could seek a permanent injunction on our sales of both
distant and local network channels, which would have a material adverse effect
on our churn, revenue, ability to attract new subscribers, and our business
operations generally.
The Satellite Home Viewer Improvement Act of 1999 generally gives
satellite companies a statutory copyright license to retransmit local-into-local
network programming, subject to obtaining the retransmission consent of the
local network station. Where the retransmission consent or short-term extensions
were not obtained from a particular local network station on or before May 29,
2000 (the six month anniversary of the act), we were required to cease
retransmission of the station's signals. Retransmission consent agreements are
important to us because a failure to reach such agreements with broadcasters
could have an adverse effect on our strategy to compete with cable and other
satellite companies, which provide local signals. The Satellite Home Viewer
Improvement Act of 1999 requires broadcasters to negotiate retransmission
consent agreements in good faith. In accordance with the requirements of the
Satellite Home Viewer Improvement Act of 1999, the FCC has promulgated rules
governing broadcasters' good faith negotiation obligation. These rules allow
satellite providers to file complaints with the FCC against broadcasters for
violating the duty to negotiate retransmission consent agreements in good faith.
Currently, the degree to which the rules will be of practical benefit to us in
our efforts to obtain all necessary retransmission consent agreements remain
unclear. While we filed three such complaints against broadcast organizations,
we have now settled all of these complaints. While we have been able to reach
retransmission consent agreements with each of the local network stations we
currently carry, our planned roll-out of local channels in more cities, however,
will require additional agreements, and we cannot be sure that we will secure
these agreements or that we will secure new agreements upon the expiration of
our current retransmission consent agreements, some of which are short term.
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Many other provisions of the Satellite Home Viewer Improvement Act of
1999 could adversely affect us. Among other things, the law includes the
imposition of "must carry" requirements on DBS providers. The "must carry" rules
generally would require that commencing in January 2002 satellite distributors
carry all the local broadcast stations in areas they choose to offer local
programming, not just four major networks. Since we have limited capacity, the
number of markets in which we can offer local programming would be reduced by
the "must carry" requirement to carry large numbers of stations in each market
we serve. The legislation also includes provisions which could expose us to
material monetary penalties, and permanent prohibitions on the sale of all local
and distant network channels, based on what could be considered even inadvertent
violations of the legislation, prior law, or the FCC rules. Imposition of these
penalties would have a material adverse effect on our churn, revenue, ability to
attract new subscribers, and our business operations generally. Consistent with
the requirements of the Satellite Home Viewer Improvement Act of 1999, the FCC
has now completed a rulemaking and adopted detailed must-carry rules, including
obligations to also carry several non-commercial stations upon request. We
cannot be sure that the FCC rules will not have a further adverse impact on our
operations.
Opposition to Our Delivery of Distant Signals. The national networks
and local affiliate stations successfully challenged, based upon copyright
infringement, PrimeTime 24's methods of selling network programming to
consumers. Until July 1998, we obtained distant broadcast network channels for
distribution to our customers through PrimeTime 24. In December 1998, the United
States District Court for the Southern District of Florida entered a nationwide
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 national networks in the Florida litigation
have admitted that the permanent injunction does not apply to us. A federal
district court in North Carolina also issued an injunction against PrimeTime 24
prohibiting certain distant signal retransmissions in the Raleigh area. We have
implemented Satellite Home Viewer Act compliance procedures which materially
restrict the market for the sale of network channels by us.
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. We 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
four major broadcast networks and their affiliate groups filed a complaint
against us in federal district court in Miami alleging, among other things,
copyright infringement. The court combined the case that we filed in Colorado
with the case in Miami and transferred it to the Miami court. The case remains
pending in Miami.
In February 1999, CBS, NBC, Fox and ABC filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV,
Inc. in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. Under the terms of a settlement between DirecTV and the
networks, some DirecTV customers were scheduled to lose access to their
satellite-provided network channels by July 31, 1999, while other DirecTV
customers were to be disconnected by December 31, 1999. Subsequently, PrimeTime
24 and substantially all providers of satellite-delivered network programming
other than us agreed to this cut-off schedule, although we do not know if they
adhered to this schedule.
The networks are pursuing a Motion for Preliminary Injunction in the
Miami court, asking the court to enjoin us from providing network programming
except under very limited circumstances. A preliminary injunction hearing was
held on September 21, 1999. The court took the issues under advisement to
consider the networks' request for an injunction, whether to hear live testimony
before ruling upon the request, and whether to hear argument on why the
Satellite Home Viewer Act may be unconstitutional, among other things. The court
did not say when a decision will be made, or whether an additional hearing will
be necessary prior to ruling upon the networks' preliminary injunction motion.
The court has not yet ruled upon the networks' request for an injunction or
indicated whether any additional hearing will be necessary.
In March 2000, the networks filed an emergency motion again asking the
court to issue an injunction requiring us to turn off network programming to
certain of our customers. At that time, the networks also argued that
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our compliance procedures violate the Satellite Home Viewer Improvement Act. We
have opposed the networks' motion and again asked the court to hear live
testimony before ruling upon the networks' injunction request. The judge has not
ruled upon the networks' motion and has not indicated whether live testimony
will be heard before the networks' motion is ruled upon.
If this case is decided against us, or a preliminary injunction is
issued, significant material restrictions on the sale of distant ABC, NBC, CBS
and Fox channels by us could result, including potentially a nationwide
permanent prohibition on our broadcast of ABC, NBC, CBS and Fox network channels
by satellite. The litigation and the Satellite Home Viewer Improvement Act,
among other things, could also cause us to terminate delivery of network signals
to a material portion of our subscriber base, which could cause many of these
subscribers to cancel their subscription to our other services. While the
networks have not sought monetary damages, they have sought to recover attorney
fees if they prevail. We have sent letters to some of our subscribers warning
that their access to distant broadcast network channels might be terminated and
have terminated ABC, NBC, CBS and Fox programming to many customers. Such
terminations will result in a small reduction in average monthly revenue per
subscriber and could result in increased churn.
Dependence on Cable Act for Program Access. Any change in the Cable Act
and the FCC's rules that permit the cable industry or cable-affiliated
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. Under the Cable Act
and the FCC's rules, cable-affiliated programmers generally must offer
programming they have developed to all multi-channel video programming
distributors on non-discriminatory 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. While we have filed several
complaints with the FCC alleging discrimination, exclusivity, or refusals to
deal, we have had limited success in convincing the FCC to grant us relief. The
FCC has denied or dismissed many of our complaints, and we believe has generally
not shown a willingness to enforce the program access rules stringently. As a
result, we may be limited in our ability to obtain access (or non-discriminatory
access) to cable-affiliated programming. In addition, the FCC recently modified
certain of its attribution rules that determine whether a programmer is
affiliated with a cable operator and therefore subject to the program access
obligations. We do not yet know the implications or impact of these modified
rules.
Patents and Trademarks. Many entities, including some of our
competitors, now have and may in the future obtain patents and other
intellectual property rights that cover or affect products or services directly
or indirectly related to those that we offer. In general, if a court determines
that one or more of our products infringes on intellectual property 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
intellectual property, or to redesign those products in such a way as to avoid
infringing the patent claims. If a competitor holds intellectual property
rights, the entity might be predisposed to exercise its right to prohibit our
use of its intellectual property in our products and services at any price, thus
impacting our competitive position.
We cannot assure you that we are aware of all patents and other
intellectual property rights that our products may potentially infringe. In
addition, patent applications in the United States are confidential until the
Patent and Trademark Office issues a patent and, accordingly, we cannot evaluate
the extent to which our products may infringe claims contained in pending patent
applications. Further, it is often not possible to determine definitively
whether a claim of infringement is valid, absent protracted litigation.
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. Those costs, and their impact on net income,
could be material. Damages in patent infringement cases can also include a
tripling of actual damages in certain cases. To the extent that we are required
to pay royalties to third parties to whom we are not currently making payments,
these increased costs of doing business could negatively affect our liquidity
and operating results. Various parties have asserted patent and other
intellectual property rights with respect to components within our direct
broadcast satellite system. We cannot be certain that these persons do not own
the rights they claim, that our
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products do not infringe on these rights, that we would be able to obtain
licenses from these persons 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. Among other things TV Guide/Gemstar has asserted that we
are required to obtain licenses for patents they own at rates which would
require us to pay them over $100 million for past satellite receiver sales.
Gemstar also asserts tens of millions more in royalties each year prospectively,
together with, among other things, the right to substantially all future
potential on screen programming guide banner advertising revenues.
Employees. We had 9,983 employees at September 30, 2000, of which 9,805
worked in our domestic operations and 178 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 ECC'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
EchoStar Technologies Corporation
engineering offices Englewood, Colorado 57,200 Owned
Office and distribution center Sacramento, California 78,500 Owned
Digital Broadcast Operations
Center Cheyenne, Wyoming 55,000 Owned
Digital Broadcast Operations
Center Gilbert, Arizona 120,000 Owned
Customer Service Center Thornton, Colorado 55,000 Owned
Customer Service Center McKeesport, 100,000 Leased
Pennsylvania
Customer Service Center El Paso, Texas 100,000 Owned
Customer Service Center Christiansburg, Virginia 100,000 Leased
Customer Service Center Bluefield, West Virginia 51,000 Owned
European headquarters and
warehouse Almelo, The Netherlands 53,800 Owned
Warehouse and distribution center Denver, Colorado 132,800 Leased
</TABLE>
Legal Proceedings.
DirecTV
During February 2000 EchoStar filed suit against DirecTV and Thomson
Consumer Electronics/RCA in the Federal District Court of Colorado. The suit
alleges that DirecTV has utilized improper conduct in order to fend off
competition from the DISH Network. According to the complaint, DirecTV has
demanded that certain retailers stop displaying EchoStar's merchandise and has
threatened to cause economic damage to retailers if they continue to offer both
product lines in head-to-head competition. The suit alleges, among other things,
that DirecTV has acted in violation of federal and state anti-trust laws in
order to protect DirecTV's market share. EchoStar is seeking injunctive relief
and monetary damages. On December 8, 2000, we submitted an Amended Complaint
adding claims against Circuit City, Radio Shack and Best Buy, alleging that
these retailers are engaging in improper conduct that has had an
anti-competitive impact on us. It is too early in the litigation to make an
assessment of the probable outcome. On October 5, 2000, however, DirecTV filed a
motion for summary judgment asking that the Court enter judgment in DirecTV's
favor on certain of our claims. We have filed a motion asking the Court to allow
us an opportunity to conduct discovery prior to having to substantively respond
to DirecTV's motion. DirecTV's motion for summary judgment and our motion remain
pending.
The DirecTV defendants filed a counterclaim against EchoStar. DirecTV
alleges that EchoStar tortuously interfered with a contract that DirecTV
allegedly had with Kelly Broadcasting Systems, Inc. ("KBS"). DirecTV
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alleges that EchoStar "merged" with KBS, in contravention of DirecTV's contract
with KBS. DirecTV also alleges that EchoStar has falsely advertised to consumers
about its right to offer network programming. DirecTV further alleges that
EchoStar improperly used certain marks owned by PrimeStar, now owned by DirecTV.
Finally, DirecTV alleges that EchoStar has been marketing National Football
League games in a misleading manner. The amount of damages DirecTV is seeking is
as yet unquantified. EchoStar intends to vigorously defend against these claims.
The case is currently in discovery. It is too early in the litigation to make an
assessment of the probable outcome.
Fee Dispute
EchoStar had a contingent fee arrangement with the attorneys who
represented EchoStar in the litigation with News Corporation. The contingent fee
arrangement provides for the attorneys to be paid a percentage of any net
recovery obtained by EchoStar in the News Corporation litigation. The attorneys
have asserted that they may be entitled to receive payments totaling hundreds of
millions of dollars under this fee arrangement.
During mid-1999, EchoStar initiated litigation against the attorneys in
the Arapahoe County, Colorado, District Court arguing that the fee arrangement
is void and unenforceable. In December 1999, the attorneys initiated an
arbitration proceeding before the American Arbitration Association. The
litigation has been stayed while the arbitration is ongoing. A two week
arbitration hearing has been set to begin in late February 2001. It is too early
to determine the outcome of arbitration or litigation regarding this fee
dispute. EchoStar is vigorously contesting the attorneys' interpretation of the
fee arrangement, which EchoStar believes significantly overstates the magnitude
of its liability.
WIC Premium Television Ltd.
During July 1998, a lawsuit was filed by WIC Premium Television Ltd.,
an Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner Communications, Inc., John Doe,
Showtime, United States Satellite Broadcasting Company, Inc., EchoStar
Communications Corporation, and two of EchoStar's wholly-owned subsidiaries,
EchoSphere Corporation and Dish, Ltd. 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.
During September 1998, WIC filed another lawsuit in the Court of
Queen's Bench of Alberta Judicial District of Edmonton against certain
defendants, including EchoStar. WIC is a company authorized to broadcast certain
copyrighted work, such as movies and concerts, to residents of Canada. WIC
alleges that the defendants engaged in, promoted, and/or allowed satellite dish
equipment from the United States to be sold in Canada and to Canadian residents
and that some of the defendants allowed and profited from Canadian residents
purchasing and viewing subscription television programming that is only
authorized for viewing in the United States. The lawsuit seeks, among other
things, an interim and permanent injunction prohibiting the defendants from
importing hardware into Canada and from activating receivers in Canada, together
with damages in excess of $175 million.
EchoStar filed motions to dismiss each of the actions for lack of
personal jurisdiction. The Court in the Alberta action recently denied
EchoStar's Motion to Dismiss, which EchoStar appealed. The Alberta Court also
granted a motion to add more EchoStar parties to the lawsuit. EchoStar Satellite
Corporation, EDBS, EchoStar Technologies Corporation, and EchoStar Satellite
Broadcast Corporation have been added as defendants in the litigation. The newly
added defendants have also challenged jurisdiction. The Court of Appeals denied
our appeal and the Alberta Court has asserted jurisdiction over all of the
EchoStar defendants. The Court in the Federal action has stayed that case
pending the outcome of the Alberta action. The case is now currently in
discovery. EchoStar intends to vigorously defend the suit. It is too early to
make an assessment of the probable outcome of the litigation or to determine the
extent of any potential liability or damages.
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Broadcast network programming
Until July 1998, EchoStar obtained distant broadcast network channels
(ABC, NBC, CBS and FOX) for distribution to its customers through PrimeTime 24.
In December 1998, the United States District Court for the Southern District of
Florida entered a nationwide permanent injunction requiring PrimeTime 24 to shut
off distant network channels to many of its customers, and henceforth to sell
those channels to consumers in accordance with certain stipulations in the
injunction.
In October 1998, EchoStar filed a declaratory judgment action against
ABC, NBC, CBS and FOX in Denver Federal Court. EchoStar asked the court to enter
a judgment declaring that its method of providing distant network programming
did not violate the Satellite Home Viewer Act and hence did not infringe the
networks' copyrights. In November 1998, the networks and their affiliate groups
filed a complaint against EchoStar in Miami Federal Court alleging, among other
things, copyright infringement. The court combined the case that EchoStar filed
in Colorado with the case in Miami and transferred it to the Miami court. The
case remains pending in Miami. While the networks have not sought monetary
damages, they have sought to recover attorney fees if they prevail.
In February 1999, the networks filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV,
Inc. in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. DirecTV settled this lawsuit with the networks. Under
the terms of the settlement between DirecTV and the networks, some DirecTV
customers were scheduled to lose access to their satellite-provided distant
network channels by July 31, 1999, while other DirecTV customers were to be
disconnected by December 31, 1999. Subsequently, PrimeTime 24 and substantially
all providers of satellite-delivered network programming other than EchoStar
agreed to this cut-off schedule, although EchoStar does not know if they adhered
to this schedule.
In December 1998, the networks filed a Motion for Preliminary
Injunction against EchoStar in the Miami court, and asked the court to enjoin
EchoStar from providing network programming except under limited circumstances.
A preliminary injunction hearing was held on September 21, 1999. The court took
the issues under advisement to consider the networks' request for an injunction,
whether to hear live testimony before ruling upon the request, and whether to
hear argument on why the Satellite Home Viewer Act may be unconstitutional,
among other things.
In March 2000, the networks filed an emergency motion again asking the
court to issue an injunction requiring EchoStar to turn off network programming
to certain of its customers. At that time, the networks also argued that
EchoStar's compliance procedures violate the Satellite Home Viewer Improvement
Act. EchoStar opposed the networks' motion and again asked the court to hear
live testimony before ruling upon the networks' injunction request.
On September 29, 2000, the Court granted the Networks' motion for
preliminary injunction, denied the Network's emergency motion and denied
EchoStar's request to present live testimony and evidence. The Court's original
order required EchoStar to terminate network programming to certain subscribers
"no later than February 15, 1999", and contained other dates which would be
physically impossible to comply with. The order imposes restrictions on
EchoStar's past and future sale of distant ABC, NBC, CBS and Fox channels
similar to those imposed on PrimeTime 24 (and, EchoStar believes, on DirecTV and
others). Some of those restrictions go beyond the statutory requirements imposed
by the Satellite Home Viewer Act and the Satellite Home Viewer Improvement Act.
For these and other reasons EchoStar believes the Court's order is, among other
things, fundamentally flawed, unconstitutional and should be overturned.
However, it is very unusual for a Court of Appeals to overturn a lower court's
order and there can be no assurance whatsoever that it will be overturned.
On October 3, 2000, and again on October 25, 2000, the Court amended
its original preliminary injunction order in an effort to fix some of the errors
in the original order. The twice amended preliminary injunction order required
EchoStar to shut off, by February 15, 2001, all subscribers who are ineligible
to receive distant network programming under the court's order. EchoStar has
appealed the September 29, 2000 preliminary injunction order and the October 3,
2000 amended preliminary injunction order. On November 22, 2000, the United
States Court of Appeals for the Eleventh Circuit stayed the Florida Court's
preliminary injunction order pending EchoStar's appeal. At that time, the
Eleventh Circuit also expedited its consideration of EchoStar's appeal. On
November 24, 2000,
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<PAGE> 81
EchoStar filed its appeal brief with the Eleventh Circuit. On December 1, 2000,
the SBCA submitted an amicus brief in support of EchoStar's appeal. The Consumer
Federation of America and the Media Access Project have also submitted an amicus
brief in support of EchoStar's appeal. Briefing before the Eleventh Circuit is
expected to be completed in January 2001. We cannot predict when the Eleventh
Circuit will rule on EchoStar's appeal, but it could be as early as January
2001. EchoStar's appeal effort may not be successful and EchoStar may be
required to comply with the dates provided in the Court's preliminary injunction
order. The preliminary injunction could force EchoStar to terminate delivery of
distant network channels to a substantial portion of its distant network
subscriber base, which could also cause many of these subscribers to cancel
their subscription to EchoStar's other services. Such terminations would result
in a small reduction in EchoStar's reported average monthly revenue per
subscriber and could result in a temporary increase in churn.
Starsight
During October 2000, Starsight Telecast, Inc., a subsidiary of Gemstar
- TV Guide, filed a suit for patent infringement against EchoStar and certain of
its subsidiaries in the United States District Court for the Western District of
North Carolina, Asheville Division. The suit alleges infringement of United
States Patent No. 4,706,121 which relates to certain electronic program guide
functions. EchoStar has examined this patent and believes that it is not
infringed by any of EchoStar's products or services. We are vigorously
contesting the suit and have filed counterclaims challenging both the validity
and enforceability of this patent.
We also recently filed suit against Gemstar - TV Guide International,
Inc. (and certain of its subsidiaries) in the United States District Court for
the District of Colorado alleging violations by Gemstar of various federal and
state anti- trust laws and laws governing unfair competition. The lawsuit seeks
an injunction and monetary damages.
Superguide Corp. also recently filed suit against EchoStar, DirecTv and
others in the same North Carolina court, alleging infringement of United States
Patent Nos. 5,038,211, 5,293,357 and 4,751,578 which relate to certain
electronic program guide functions, including the use of electronic program
guides to control VCRs. It is EchoStar's understanding that these patents may be
licensed by Superguide to Gemstar, although Gemstar has not asserted the patents
against EchoStar. EchoStar has examined these patents and believes that they are
not infringed by any of EchoStar's products or services. EchoStar intends to
vigorously defend against this action and assert a variety of counterclaims.
IPPV Enterprises
IPPV Enterprises, LLC and MAAST, Inc. filed a patent infringement suit
against us in the United States District Court for the District of Delaware. The
suit alleges infringement of 5 patents. The patents disclose various systems for
the implementation of features such as impulse-pay-per view, parental control
and category lock-out. One patent relates to an encryption technique. Three of
the patents have expired. We are vigorously defending against the suit based,
among other things, on non-infringement, invalidity and failure to provide
notice of alleged infringement.
In the event it is ultimately determined that we infringe on any of
these patents we may be subject to substantial damages, and/or an injunction
with respect to the two unexpired patents, that could require us to materially
modify certain user friendly features we currently offer to consumers. It is too
early to make an assessment of the probable outcome of either suit.
In the event it is ultimately determined that EchoStar infringes on any
of these patents EchoStar may be subject to substantial damages, and/or an
injunction that could require EchoStar to materially modify certain user
friendly electronic programming guide and related features it currently offers
to consumers. It is too early to make an assessment of the probable outcome of
either suit.
EchoStar is subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect EchoStar's financial position or results of operations.
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MANAGEMENT
Directors and Officers. We are a wholly owned subsidiary of ECC. The
following table sets forth information concerning certain officers and directors
of ECC and us:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Charles W. Ergen 47 Chairman and Chief Executive Officer of
ECC and Director of us
O. Nolan Daines 41 Director of ECC
Raymond L. Friedlob 55 Director of ECC
James DeFranco 47 Executive Vice President and Director of
ECC and us
Michael T. Dugan 51 President and Chief Operating Officer of
ECC
Steven B. Schaver 46 President of EchoStar International
Corporation
David K. Moskowitz 42 Senior Vice President, General Counsel,
Secretary and Director of ECC and us
Mark W. Jackson 39 Senior Vice President of EchoStar
Technologies Corporation
Soraya Hesabi-Cartwright 40 Executive Vice President of DISH Network
Michael R. McDonnell 36 Senior Vice President and Chief Financial
Officer of ECC and us
Michael Kelly 39 Senior Vice President of International
Programming
</TABLE>
Charles W. Ergen. Mr. Ergen has been Chairman of the Board of Directors
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).
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 Paulson
Tourtillott, LLC. Prior to 1995, Mr. Friedlob was a partner of Raskin &
Friedlob, where he has 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 positions with
ECC's subsidiaries. Mr. DeFranco, along with Mr. Ergen and Mr. Ergen's spouse,
was a co-founder of ECC in 1980.
Michael T. Dugan. Mr. Dugan is the President of ECC. In that capacity,
Mr. Dugan is responsible for, among other things, all operations at ECC. Until
April 2000, he was President of EchoStar Technologies Corporation. Previously he
was the Senior Vice President of the Consumer Products Division of ECC. Mr.
Dugan has been with ECC since 1990.
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<PAGE> 83
Steven B. Schaver. Mr. Schaver was named President of EchoStar
International Corporation in April 2000. Mr. Schaver also served as ECC's Chief
Financial Officer from February 1996 through August 2000, and served as ECC's
Chief Operating Officer from November 1996 until April 2000. From November 1993
to February 1996, Mr. Schaver was the Vice President of ECC's European and
African operations.
David K. Moskowitz. Mr. Moskowitz is the Senior Vice President,
Secretary and General Counsel of ECC. Mr. Moskowitz joined ECC in March 1990. He
was elected to our Board of Directors during 1998. Mr. Moskowitz is responsible
for all legal affairs and certain business functions for ECC and its
subsidiaries.
Mark W. Jackson. Mr. Jackson was named Senior Vice President of
EchoStar Technologies Corporation in April 2000. Mr. Jackson served as Senior
Vice President of Satellite Services from December 1997 until April 2000. From
April 1993 until December 1997 Mr. Jackson served as Vice President, Engineering
at EchoStar.
Soraya Hesabi-Cartwright. Ms. Hesabi-Cartwright was named Executive
Vice President of DISH Network in April 2000. Ms. Hesabi-Cartwright served as
Senior Vice President of Human Resources and Customer Service from November 1998
until April 2000. Ms. Hesabi-Cartwright joined ECC in 1994 as Director of Human
Resources and was promoted to Vice President of Human Resources in 1996. During,
1996, Ms. Hesabi-Cartwright transferred to ECC's Customer Service Center as Vice
President of Customer Service, where she served until her promotion in 1998.
Michael R. McDonnell. Mr. McDonnell joined ECC in August 2000 as Chief
Financial Officer. Mr. McDonnell is responsible for all accounting, finance and
administrative functions of the Company. Prior to joining ECC, Mr. McDonnell was
a Partner with PricewaterhouseCoopers LLP, serving on engagements for companies
in the technology and information communications industries. During 1995, Mr.
McDonnell was a Manager with PricewaterhouseCoopers for its high-tech group.
Michael Kelly. Mr. Kelly joined ECC in March 2000 as Senior Vice
President of International Programming upon consummation of ECC's acquisition of
Kelly Broadcasting Systems, Inc. From January 1991 until March 2000, Mr. Kelly
served as President of Kelly Broadcasting Systems, Inc. where he was responsible
for all components of the business, including operations, finance, and
international and domestic business development.
Executive Compensation. Executive officers are compensated by certain
of our subsidiaries. The following table sets forth the cash and non-cash
compensation for the fiscal years ended December 31, 1999, 1998 and 1997 for the
named executive officers.
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<PAGE> 84
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 1999 $250,007 $500,000 $ -- 520,000 $26,798
Chairman, President 1998 248,082 -- -- 240,000 21,510
and Chief Executive
Officer 1997 190,000 -- -- 240,000 13,044
James DeFranco 1999 $196,157 $ -- $ -- 680,000 $18,908
Executive Vice 1998 178,860 -- -- 240,000 15,995
President
and Director 1997 160,000 -- -- 240,000 13,094
Michael T. Dugan 1999 $221,154 $ -- $ -- 520,000 $15,303
President, EchoStar 1998 209,231 -- -- 120,000 14,235
Technologies 1997 160,000 -- -- 1,110,560 13,094
Corporation
David K. Moskowitz 1999 $194,789 $500,000 $ -- 520,000 $15,303
Senior Vice President,
Secretary, General 1998 187,311 500,000 -- 240,000 14,235
Counsel and Director 1997 157,692 -- -- 240,000 12,918
Steven B. Schaver 1999 $196,932 $ -- $ 9,734 680,000 $15,303
Chief Operating 1998 183,081 -- 15,074 312,720 13,765
Officer and Chief
Financial Officer 1997 158,462 -- 15,416 475,280 11,984
</TABLE>
----------
(1) With respect to Mr. Schaver, "Other annual compensation" includes
housing and car allowances related to his overseas assignments. While
each named executive officer enjoys certain other perquisites, such
perquisites do not exceed the lesser of $50,000 or 10% of each
officer's salary and bonus.
(2) "All other compensation" includes amounts contributed to ECC's 401(k)
Plan on behalf of the named executive officers. With respect to Messrs.
Ergen, DeFranco and Schaver for 1999, "All other compensation" also
includes payments made in connection with a tax indemnification
agreement between ECC and these individuals.
The following table provides information concerning grants of options
to purchase class A common stock of ECC, which we refer to as Class A Common
Stock, made in 1999 to the named executive officers:
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<PAGE> 85
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING PERCENT OF TOTAL
OPTIONS OPTIONS GRANTED EXERCISE GRANT DATE
GRANTED TO EMPLOYEES IN PRICE PER PRESENT
NAME (#) 1999 SHARE ($/SH) EXPIRATION DATE VALUE(4)
<S> <C> <C> <C> <C> <C>
Charles W. Ergen 120,000(1) 0.58% $6.60 February 17, 2009 $505,536
Charles W. Ergen 400,000(2) 1.93 6.60 February 17, 2009 --
James DeFranco 120,000(1) 0.58 6.00 February 17, 2009 505,536
James DeFranco 400,000(2) 1.93 6.00 February 17, 2009 --
James DeFranco 160,000(3) 0.77 6.00 February 17, 2009 674,048
Michael T. Dugan 120,000(1) 0.58 6.00 February 17, 2009 505,536
Michael T. Dugan 400,000(2) 1.93 6.00 February 17, 2009 --
David K. Moskowitz 120,000(1) 0.58 6.00 February 17, 2009 505,536
David K. Moskowitz 400,000(2) 1.93 6.00 February 17, 2009 --
Steven B. Schaver 120,000(1) 0.58 6.00 February 17, 2009 505,536
Steven B. Schaver 400,000(2) 1.93 6.00 February 17, 2009 --
Steven B. Schaver 160,000(3) 0.77 6.00 February 17, 2009 674,048
</TABLE>
----------
(1) On February 17, 1999, each of the named executives was granted an
option to purchase 120,000 shares of Class A Common Stock under ECC's
1999 incentive plan. The plan, which provided key employees with stock
options and cash incentives, the exercise and receipt of which was
contingent on the achievement of certain financial and other goals, was
adopted by ECC during February 1999. All of the goals upon which the
options were contingent were met. The options vest at the rate of 20%
per year, commencing March 31, 2000 and expire ten years from the date
of grant, subject to early termination in certain circumstances.
(2) On February 17, 1999, each of the named executives was granted an
option to purchase 400,000 shares of Class A Common Stock under ECC's
long term incentive plan. The plan, which provided key employees with
stock options, the exercise of which is contingent on the achievement
of certain long-term goals, was adopted by ECC during February 1999. As
of the date of this document the achievement of those goals and
consequent exercisability of the options, can not reasonably be
predicted. Subject to the contingency, the options vest at the rate of
20% per year, commencing March 31, 2000 and expire ten years from the
date of grant, subject to early termination in certain circumstances.
(3) In February 1999, ECC granted options to Mr. DeFranco, Mr. Schaver and
other executive officers and key employees to purchase Class A Common
Stock. The options vest at the rate of 20% per year, commencing March
31, 2000 and expire ten years from the date of grant, subject to early
termination in certain circumstances. See "-- Stock incentive plans."
(4) Option values reflect the 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. Currently, no valuation can be
provided for the options granted pursuant to the long term incentive
plan as the vesting of these options is contingent upon meeting certain
longer-term goals. 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. The assumptions
used in the model were expected volatility of 76%, risk free rate of
return of 5.38%, dividend yield of 0%, and time to exercise of six
years.
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<PAGE> 86
The following table provides information as of December 31, 1999,
concerning unexercised options to purchase Class A Common Stock:
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 IN-
SHARES OPTIONS AT THE-MONEY OPTIONS AT
ACQUIRED VALUE DECEMBER 31, 1999(#) DECEMBER 31, 1999($)(1)
ON EXERCISE REALIZED ---------------------------- ----------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Charles W. Ergen 428,544 $4,240,807 271,856 342,024 $12,659,806 $15,458,649
James DeFranco -- -- 514,128 442,824 24,299,778 19,561,669
Michael T. Dugan 614,328 9,959,051 342,184 655,816 15,954,329 30,112,421
David K. Moskowitz 257,000 5,272,920 483,026 332,862 22,877,156 15,054,690
Steven B. Schaver 415,392 8,619,602 23,703 660,529 1,105,152 29,684,455
</TABLE>
----------
(1) The dollar value of each exercisable and unexercisable option was
calculated by multiplying the number of shares of Class A Common Stock
underlying the option by the difference between the exercise price of
the option and the closing price (as quoted in the Nasdaq National
Market) of a share of Class A Common Stock on December 31, 1999.
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 1999, the Executive Compensation Committee consisted of Messrs. Friedlob
and Daines. Mr. Friedlob is a partner in the law firm of Friedlob Sanderson
Paulson & Tourtillott, LLC, which billed ECC approximately $158,000 in fees
related to legal services and securities offerings in 1999. O. Nolan Daines is
the founder of DiviCom. During 1999, ECC purchased approximately $17 million of
equipment for its Digital Broadcast Operation Center and for certain of its
other project integration services for international direct-to-home satellite TV
ventures from DiviCom.
Director Compensation. ECC's Directors who are not also employees
receive $500 for each meeting of the Board of Directors attended and are
reimbursed for reasonable travel expenses related to attendance at Board
meetings. ECC's Directors who are employees are not compensated for their
services as Directors. ECC's Directors 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, which we refer to as the
Director Plan, to acquire Class A Common Stock upon election to the Board.
Mr. Friedlob was granted an option to acquire 8,000 shares of Class A
Common Stock on December 22, 1995 pursuant to the Director Plan. These options
were 100% vested upon issuance and had an exercise price of $2.53125 per share
and a term of five years. These options were repriced to $2.1250 per share
during July 1997, as discussed below. In February 1997, Mr. Friedlob was granted
an option to acquire 40,000 shares of Class A Common Stock. These options were
100% vested upon issuance and have an exercise price of $2.1250 and a term of
five years. Additionally, in February 1999, Mr. Friedlob was granted an option
to acquire 40,000 shares of Class A Common Stock. These options were 100% vested
upon issuance and have an exercise price of $6.00 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 8,000 shares of Class A Common Stock. These
options were 100% vested upon issuance, have an exercise price of $2.75, and a
term of five years. Additionally, in February 1999, Mr. Daines was granted an
option to acquire 40,000 shares of Class A Common Stock. These options were 100%
vested upon issuance, have an exercise price of $6.00, and a term of five years.
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Stock Incentive Plans. ECC adopted Incentive Plans to provide
incentives to attract and retain Executive Officers and other key employees.
ECC's Executive Compensation Committee administers the Incentive Plans. Key
employees are eligible to receive awards under the Incentive Plans at the
Committee's discretion.
Awards available under the Incentive Plans 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 160 million shares of
Class A Common Stock for granting awards under the Incentive Plans. Under the
terms of the Incentive Plans, 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 Plans, ECC has granted options to its
Executive Officers and other key employees for the purchase of a total of
42,352,400 shares of Class A Common Stock. Options to purchase 27,843,640 shares
of Class A Common Stock were outstanding as of December 31, 1999. 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 generally been equal to or greater than the
fair market value at the date of grant, have ranged from $1.16625 to $48.75 per
share of Class A Common Stock. 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 $2.125 per
share of Class A Common Stock to $2.125 per share of Class A Common Stock. The
price to which the options were repriced exceeded the fair market value of a
share of Class A Common Stock as of the date of repricing. The market value of
Class A Common Stock on the date of repricing was $1.90625 per share of Class A
Common Stock. 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 $2.125, the intended incentive would be restored in
part.
Launch Bonus Plan. During 1999, in connection with the launch of
EchoStar V, ECC granted a performance award of ten shares of Class A Common
Stock to all eligible employees. Eligible employees included full-time employees
of ECC or one of its subsidiaries, with a hire date on or before June 1, 1999,
and part-time employees of ECC or one of its subsidiaries with a hire date on or
before June 1, 1999 who had worked at least 500 hours prior to June 1, 1999. All
eligible employees must have also been continuously employed with ECC or one of
its subsidiaries from June 1, 1999 through December 31, 1999. Approximately
63,000 shares of Class A Common Stock were distributed pursuant to the EchoStar
V launch bonus plan. ECC may elect to grant a similar performance award in
connection with the launch of future satellites.
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 19. 401(k)
Plan participants may contribute between 1% and 15% of their compensation in
each contribution period, subject to the maximum deductible limit provided by
the Internal Revenue Code. 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.
401(k) Plan participants are immediately vested in their voluntary
contributions, plus actual earnings thereon. The balance of the vesting in
401(k) Plan participants' accounts is based on years of service. A participant
becomes 20% vested after one year of service, 40% vested after two years of
service, 60% vested after three years of service, 80% vested after four years of
service, and 100% vested after five years of service.
In March 2000, ECC contributed approximately 120,000 shares of Class A
Common Stock, or approximately 8.33% of average employee salary (the percentage
for the highest salary employees was lower), to the 401(k) Plan as a
discretionary employer stock contribution. These shares, which were allocated to
individual
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<PAGE> 88
participant 401(k) Plan accounts in proportion to their 1999 eligible
compensation, are subject to the five-year vesting schedule previously
described. ECC allocated approximately 273 shares of Class A Common Stock to
each of the five highest compensated persons acting as an executive officer of
ECC, which we refer to as the Named Executive Officers, and 2,629 shares of
Class A Common Stock to all officers and directors as a group, pursuant to the
1999 discretionary employer stock contribution.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 8, 1999, ECC repurchased all of its outstanding series A
cumulative preferred stock from Messrs. Ergen and DeFranco for approximately
$90.9 million, including cumulative accrued dividends of $5.9 million. The
$52.611 purchase price per share was equal to or less than the closing price of
a share of Class A Common Stock on the date of purchase.
During 1999, the law firm of Friedlob Sanderson Paulson & Tourtillott,
LLC billed ECC approximately $158,000 in fees related to certain of ECC's 1999
securities offerings and other corporate legal advice. Mr. Friedlob, a member of
ECC's Board of Directors, is a member in that law firm.
During 1999, ECC purchased approximately $17 million of equipment for
its Digital Broadcast Operations Center and for certain of its other project
integration services for international DTH ventures from DiviCom, Inc. O. Nolan
Daines, a member of ECC's Board of Directors is the founder of DiviCom.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
On each of July 19, 1999, October 25, 1999 and March 22, 2000, ECC
completed two-for-one splits of its outstanding Class A and Class B Common
Stock. Accordingly, all share and per share amounts have been restated herein to
reflect these stock splits.
The following table sets forth, to the best knowledge of ECC, the
beneficial ownership of ECC's voting securities as of December 14, 2000 by: (i)
each person known by ECC to be the beneficial owner of more than five percent of
any class of ECC's voting shares; (ii) each director of ECC; (iii) 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.
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<PAGE> 89
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
NAME(1) SHARES OF CLASS
<S> <C> <C>
CLASS A COMMON STOCK(2):
Charles W. Ergen(3), (4), (16), (17) 240,963,390 50.5%
The News Corporation Limited(5) 26,021,168 5.5%
FMR Corp.(6) 22,554,360 4.7%
Morgan Stanley Dean Witter & Co.(7) 10,716,836 2.2%
MCI WorldCom, Inc.(8) 7,798,760 1.6%
James DeFranco(9), (16), (17) 7,707,509 1.6%
David K. Moskowitz(10), (16), (17) 771,016 *
Michael T. Dugan(11), (16), (17) 767,269 *
Steven B. Schaver(12), (16), (17) 135,068 *
O. Nolan Daines(13), (17) 58,000 *
Raymond L. Friedlob(14), (17) 38,000 *
All directors and executive officers as a group (13 persons)(15),
(16), (17) 251,429,079 52.6%
CLASS B COMMON STOCK:
Charles W. Ergen 238,435,208 100.0%
All directors and executive officers as a group (13
persons) 238,435,208 100.0%
</TABLE>
----------
* Less than 1%.
(1) Except as otherwise noted below, the address of each such person is
5701 South Santa Fe Drive, Littleton, Colorado 80120.
(2) The following table sets forth, to the best knowledge of ECC, the
actual ownership of ECC's Class A Common Stock (including options
exercisable within 60 Days) as of December 14, 2000 by: (i) each person
known by ECC to be the beneficial owner of more than five percent of
any class of ECC's voting shares; (ii) each director or nominee of ECC;
(iii) each Named Executive Officers; and (iv) all directors and
executive officers as a group:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
NAME SHARES OF CLASS
<S> <C> <C>
Class A Common Stock:
The News Corporation Limited 26,021,168 10.9%
FMR Corp 22,554,360 9.4%
Morgan Stanley Dean Witter & Co 10,716,836 4.5%
James DeFranco 7,707,509 3.2%
Charles W. Ergen 2,528,182 1.1%
David K. Moskowitz 771,016 *
Michael T. Dugan 767,269 *
Steven B. Schaver 135,068 *
O. Nolan Daines 58,000 *
Raymond L. Friedlob 38,000 *
All directors and executive officers as a
group (13 persons) 12,993,871 5.4%
</TABLE>
(3) Includes: (i) 17,825 shares of Class A Common Stock held in the 401(k)
employee savings plan, which we refer to as the 401(k) Plan; (ii) the
right to acquire 100,004 shares of Class A Common Stock within 60 days
upon the exercise of employee stock options; (iii) 238,435,208 shares
of Class A Common Stock
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<PAGE> 90
issuable upon conversion of Mr. Ergen's Class B Common Stock; and (iv)
800 shares of Class A Common Stock held as custodian for his minor
children.
(4) The percentage of total voting power held by Mr. Ergen is 91%, after
giving effect to the exercise of Mr. Ergen's options exercisable within
60 days.
(5) The address of The News Corporation Limited is 1211 Avenue of the
Americas, New York, New York 10036.
(6) The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts
02109.
(7) The address of Morgan Stanley Dean Witter & Co. is 1585 Broadway, New
York, New York 10036.
(8) The address of MCI WorldCom, Inc. is 1800 Pennsylvania Avenue, N.W.,
Washington, D.C. 20006.
(9) Includes: (i) 17,825 shares of Class A Common Stock held in the 401(k)
Plan; (ii) the right to acquire 122,824 shares of Class A Common Stock
within 60 days upon the exercise of employee stock options; (iii) 6,008
shares of Class A Common Stock held as custodian for his minor
children; and (iv) 2,200,000 shares of Class A Common Stock controlled
by Mr. DeFranco as general partner of a partnership.
(10) Includes: (i) 17,009 shares of Class A Common Stock held in the 401(k)
Plan; (ii) the right to acquire 269,405 shares of Class Common Stock
within 60 days upon the exercise of employee stock options; (iii) 1,328
shares of Class A Common Stock held as custodian for his minor
children; and (iv) 8,184 shares of Class A Common Stock held as trustee
for Mr. Ergen's children.
(11) Includes: (i) 17,017 shares of Class A Common Stock held in the 401(k)
Plan; and (ii) the right to acquire 669,912 shares of Class A Common
Stock within 60 days upon the exercise of employee stock options.
(12) Includes: 15,969 shares of Class A Common Stock held in the 401(k)
Plan.
(13) Includes the right to acquire 58,000 shares of Class A Common Stock
within 60 days upon the exercise of non-employee director stock
options.
(14) Includes the right to acquire 38,000 shares of Class A Common Stock
within 60 days upon the exercise of non-employee director stock
options.
(15) Includes: (i) 100,092 shares of Class A Common Stock held in the 401(k)
Plan; (ii) the right to acquire 1,804,748 shares of Class A Common
Stock within 60 days upon the exercise of employee stock options; (iii)
2,200,000 shares of Class A Common Stock held in a partnership; (iv)
238,435,208 shares of Class A Common Stock issuable upon conversion of
Class B Common Stock;and (v) 16,320 shares of Class A Common Stock held
in the name of, or in trust for, minor children and other family
members.
(16) Includes 1,547,813 shares of Class A Common Stock 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 Common Stock 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.
(17) Beneficial ownership percentage was calculated assuming exercise or
conversion of all Class B Common Stock, warrants and employee stock
options exercisable within 60 days, which we refer collectively to as
the Derivative Securities, into Class A Common Stock by all holders of
such Derivative Securities. Assuming exercise or conversion of
Derivative Securities by such person, and only by such person, the
beneficial ownership of Class A Common Stock would be as follows: Mr.
Ergen, 51.0%; Mr. DeFranco, 3.3%, less than one percent for Mr.
Moskowitz, Mr. Dugan, Mr. Schaver, Mr. Daines and Mr. Friedlob, and all
officers and directors as a group, 51.9%.
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<PAGE> 91
DESCRIPTION OF THE NOTES
The notes were issued under an indenture, dated as of September 25,
2000, to which we and U.S. Bank Trust National Association, as trustee, are
parties. The terms of the exchange notes are substantially identical to the
terms of the 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 description is a summary of the material provisions of
the indenture. It does not restate the indenture in its entirety. We urge you to
read the indenture and the registration rights agreement because they, and not
this description, define your rights as a holder of the notes. Copies of the
indenture and registration rights agreement are available to you upon request.
You can find the definitions of some of the capitalized terms used in
this section under the subheading "Certain Definitions." In this section of the
prospectus:
o when we use the terms "EBC," "we," "us," "our," "issuer" or
similar terms, we are referring only to EchoStar Broadband
Corporation, the issuer of the notes, and not to any of its
subsidiaries;
o references to "ECC" shall mean our parent, EchoStar
Communications Corporation, together with each Wholly Owned
Subsidiary of ECC that beneficially owns 100% of our Equity
Interests, but only so long as ECC beneficially owns 100% of
the Equity Interests of such subsidiary; and
o references to "EDBS" shall mean EchoStar DBS Corporation, our
wholly-owned subsidiary.
The terms of the notes include those stated in the indenture and those
made part of the 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 indenture and the Trust Indenture Act for a statement thereof.
BRIEF DESCRIPTION OF THE NOTES
The notes are:
o general unsecured obligations of us;
o ranked equally in right of payment with all of our existing
and future senior debt;
o ranked senior in right of payment to all of our other existing
and future subordinated debt; and
o ranked effectively junior to (i) all liabilities (including
trade payables) of our Subsidiaries and (ii) all of our
secured obligations, to the extent of the collateral securing
such obligations, including any borrowings under any of our
future secured credit facilities, if any.
The notes are issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples of $1,000. Any notes that remain
outstanding after the completion of the exchange offer, together with the
exchange notes issued in connection with the exchange offer, will be treated as
a single class of securities for all purposes under the indenture, including,
without limitation, waivers, amendments, redemptions, "Change of Control Offer"
and "Excess Proceeds Offer," each as discussed under their respective
subheadings, below.
As of September 30, 2000 there was:
o approximately $3.8 billion of outstanding debt and other
liabilities of our subsidiaries which effectively rank ahead
of the notes;
o no outstanding debt ranking equally with the notes; and
o no outstanding debt ranking behind the notes.
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<PAGE> 92
The indenture permits us to incur additional Indebtedness, including
secured and unsecured Indebtedness that ranks on parity 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.
As of the date of the indenture, all of our Subsidiaries will be
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.
ECC and its Subsidiaries (other than us) will not guarantee or
otherwise be obligated in respect of the notes.
GENERAL
The notes rank senior in right of payment to all of our subordinated
indebtedness and on parity in right of payment 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 are effectively junior to our secured obligations to the
extent of the collateral securing those obligations, including borrowings under
our future secured credit facilities, if any. The notes are also effectively
subordinated to all of our subsidiaries' debt and other liabilities.
As of September 30, 2000, our subsidiaries had long-term debt and other
liabilities that aggregated approximately $3.8 billion.
PRINCIPAL, MATURITY AND INTEREST
The notes were issued in an aggregate principal amount of $1.0 billion.
The notes will mature on October 1, 2007.
Interest on the notes accrues at the rate of 103/8% per annum and is
payable semiannually in cash on each April 1 and October 1, commencing April 1,
2001 to holders of record on the immediately preceding March 15 and September
15, respectively. Interest on the notes accrues 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 is computed on the basis of a 360- day year of
twelve 30-day months.
The notes are payable both as to principal and interest at our office
or agency 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.
OPTIONAL REDEMPTION
Except as provided in the next paragraph, the notes are not redeemable
at our option prior to October 1, 2004. Thereafter, the 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 October 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2004 105.188%
2005 102.594
2006 100.000
</TABLE>
Notwithstanding the foregoing, at any time prior to October 1, 2003, we
may redeem up to 35% of the aggregate principal amount of the notes outstanding
at a redemption price equal to 110.375% of the principal amount
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<PAGE> 93
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:
o at least 65% in aggregate principal amount of the notes
originally issued remain outstanding immediately after the
occurrence of such redemption; and
o the sale of such Equity Interests is made in compliance with
the terms of the indenture.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, selection
of notes for redemption will be made by the trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
notes are listed or, if the notes are not so listed, on a pro rata basis, by lot
or by such other method as the trustee deems fair and appropriate, provided that
no notes with a principal amount of $1,000 or less shall be redeemed in part.
Notice of redemption shall be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each holder of notes to be
redeemed at its registered address. If any note is to be redeemed in part only,
the notice of redemption that relates to such note shall state the portion of
the principal amount thereof to be redeemed. A new note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the holder
thereof upon cancellation of the original note. On and after the redemption
date, 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.
CHANGE OF CONTROL OFFER
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
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<PAGE> 94
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 upon a Change of Control. If we fail to repurchase all of the
notes tendered for purchase upon 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. If we were unable to obtain the consent of the holders of any such
other indebtedness to make a Change of Control Offer or make the Change of
Control Payment or to repay such indebtedness, a Default or Event of Default may
occur. See the subheading, "Certain covenants -- Events of default."
Except as described above with respect to a Change of Control, the
indenture does not contain a provision that permits the holders of the notes to
require that we repurchase or redeem the notes in the event of a takeover,
recapitalization or similar transaction.
EXCHANGE OF NOTES FOR EDBS EXCHANGE NOTES
Subject to the provisions described in this subheading, EDBS is
required to make the EDBS Exchange Offer to exchange all of the outstanding
notes for EDBS Exchange Notes as soon as practical following the date on which
EDBS is permitted to incur Indebtedness in an amount equal to the outstanding
principal amount of notes under the Indebtedness to Cash Flow Ratio test
contained in Section 4.09 of the 1999 EDBS Notes Indentures (the incurrence of
Indebtedness covenant contained therein) and such incurrence of Indebtedness
would not otherwise cause any breach or violation of, or result in a default
under, the terms of the 1999 EDBS Notes Indentures.
The EDBS Exchange Notes will be substantially identical to the notes,
however, among other things (i) EDBS shall be the issuer thereof instead of EBC,
(ii) to the extent described below, certain subsidiaries of EDBS (the "EDBS
Exchange Notes Guarantors") will guarantee (the "EDBS Exchange Guarantees") the
EDBS Exchange Notes to the same extent that such subsidiaries have guaranteed
the 1999 EDBS Notes and (iii) modifications may be made in the EDBS Exchange
Notes in order to assure that the execution and delivery of the EDBS Exchange
Notes by EDBS and the incurrence of such Indebtedness do not breach or violate
or cause a default under the 1999 EDBS Notes and 1999 EDBS Notes Indentures. The
EDBS Exchange Indenture will be substantially identical to the indenture
governing the notes offered hereby; provided, however, modifications will be
made to reflect the addition of the EDBS Exchange Guarantees, that the EDBS
Exchange Notes Guarantors are parties to the EDBS Exchange Indenture, and to
ensure that the execution and delivery of the EDBS Exchange Indenture by EDBS
does not breach or violate or cause a default under the 1999 EDBS Notes and 1999
EDBS Notes Indentures.
Presently, until EDBS achieves an Indebtedness to Cash Flow Ratio of
8.0 to 1 and is able to borrow an amount equal to the aggregate principal
balance of the notes offered hereby under the Indebtedness to Cash Flow Ratio
test contained in Section 4.09 of the 1999 EDBS Notes Indentures (the incurrence
of Indebtedness covenant contained therein) the exchange of the notes for the
EDBS Exchange Notes would be prohibited by, among other things, the incurrence
of Indebtedness covenant contained in the 1999 EDBS Notes Indentures. We cannot
assure you that the conditions in such covenants for the EDBS Exchange Offer
will be satisfied or that the exchange will occur. See "Description of other
debt."
As soon as reasonably practicable following the first date (as
reflected in EDBS' most recent quarterly or annual financial statements) on
which EDBS is permitted under the 1999 EDBS Notes Indentures to commence the
EDBS Exchange Offer (the "Exchange Trigger Date"), EBC shall cause EDBS and the
EDBS Exchange Notes Guarantors to (a) file a registration statement with the SEC
relating to the EDBS Exchange Offer, (b) use their reasonable efforts to cause
such registration statement to be declared effective as soon as practicable by
the SEC and
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<PAGE> 95
(c) qualify the indenture governing the EDBS Exchange Notes and the EDBS
Exchange Guarantees and the trustee thereunder under the Trust Indenture Act.
EBC agrees that from the date hereof and through the consummation of
the EDBS Exchange Offer it shall prevent EDBS and its Subsidiaries from
incurring Indebtedness pursuant to the Indebtedness to Cash Flow Ratio test set
forth in Section 4.09 of the 1999 EDBS Notes Indentures (the incurrence of
Indebtedness covenant contained therein) in amounts that would cause EDBS to not
be permitted to incur the Indebtedness represented by the EDBS Exchange Notes
pursuant to such ratio test. Notwithstanding the foregoing sentence, EDBS and
its Subsidiaries would be permitted to incur Indebtedness pursuant to other
provisions contained in the 1999 EDBS Notes Indentures.
At the time of the EDBS Exchange Offer, each Subsidiary of EDBS that is
a guarantor of the 1999 EDBS Notes will become an EDBS Exchange Notes Guarantor
in connection with the EDBS Exchange Offer except to the extent such Subsidiary
would, as a result of such subsidiary becoming an EDBS Exchange Notes Guarantor,
be in breach or violation of, or cause a default under the 1999 EDBS Notes and
the 1999 EDBS Notes Indentures, or in default under, any contract or agreement
that it is a party to or otherwise bound; provided that if after the EDBS
Exchange Offer such Subsidiary is still a guarantor of the 1999 EDBS Notes and
it could become an EDBS Exchange Notes Guarantor without breaching or violating
or being in default under any contract or agreement, EDBS shall promptly cause
such Subsidiary to become an EDBS Exchange Notes Guarantor. The indenture
governing the EDBS Exchange Notes will provide that only EDBS and the EDBS
Exchange Notes Guarantors may incur indebtedness pursuant to the Indebtedness to
Cash Flow Ratio test to be contained therein.
Within ten business days after the registration statement referred to
above has been declared effective by the SEC, EBC shall cause EDBS and the EDBS
Exchange Notes Guarantors to send a written notice of exchange by mail to each
holder of record of notes, which notice shall state (i) that EDBS and the EDBS
Exchange Notes Guarantors are making an offer to exchange the EDBS Exchange
Notes and the EDBS Exchange Guarantees for the notes pursuant to the indenture
and (ii) the date fixed for exchange (the "Exchange Date"), which date shall not
be less than 30 days nor more than 45 days following the date on which such
notice is mailed (except as provided in the last sentence of this paragraph). If
on the Exchange Date, holders of at least 90% in aggregate principal amount of
the notes have accepted the Exchange Offer, then, without any further action on
the part of EBC or EDBS or any EDBS Exchange Notes Guarantors, all of the notes
shall be deemed to have been exchanged for EDBS Exchange Notes and the related
EDBS Exchange Guarantees. On the Exchange Date, if the conditions set forth in
clauses (A) through (D) below are satisfied and if the exchange is then
permitted under the 1999 EDBS Notes Indentures, EBC shall cause EDBS and the
EDBS Exchange Notes Guarantors to issue, and EDBS and the EDBS Exchange Notes
Guarantors shall issue, the EDBS Exchange Notes and the EDBS Exchange Guarantees
in exchange for the notes as provided in the next paragraph, provided that on
the Exchange Date: (A) a registration statement relating to the EDBS Exchange
Notes and the EDBS Exchange Guarantees shall have been declared effective under
the Securities Act prior to such exchange and shall continue to be in effect on
the Exchange Date or EDBS shall have obtained a written opinion of counsel that
an exemption from the registration requirements of the Securities Act is
available for such exchange and that upon receipt of such EDBS Exchange Notes
and EDBS Exchange Guarantees pursuant to such exchange made in accordance with
such exemption, each holder (assuming such holder is not an Affiliate of EDBS)
thereof will not be subject to any restrictions imposed by the Securities Act
upon the resale thereof, except to the extent such holder is an Affiliate of
EDBS, and such exemption is relied upon by EDBS for such exchange; (B) the
indenture governing the EDBS Exchange Notes and EDBS Exchange Guarantees and the
trustee thereunder shall have been qualified under the Trust Indenture Act; (C)
immediately after giving effect to such exchange, no Default or Event of Default
(each as defined in the indenture governing the EDBS Exchange Notes) would exist
under the indenture governing the EDBS Exchange Notes and the EDBS Exchange
Guarantees; and (D) EDBS and the EDBS Exchange Notes Guarantors shall have
delivered to the trustee under the indenture governing the EDBS Exchange Notes
and EDBS Exchange Guarantees a written opinion of counsel, dated the date of
exchange, regarding the satisfaction of the conditions set forth in clauses (A),
(B) and (C). If (i) the issuance of the EDBS Exchange Notes and EDBS Exchange
Guarantees is not permitted on the Exchange Date or (ii) any of the conditions
set forth in clause (A) through (D) of the preceding sentence are not satisfied
on the Exchange Date, EBC shall cause EDBS and
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<PAGE> 96
the EDBS Exchange Notes Guarantors to use their reasonable efforts to satisfy
such conditions and effect such exchange as soon as practicable.
Upon any exchange pursuant to the preceding paragraph, the holders of
outstanding notes will be entitled to receive an amount of EDBS Exchange Notes
in principal amount equal to the principal amount of notes exchanged. The EDBS
Exchange Notes will be issued in registered form, without coupons. EDBS Exchange
Notes issued in exchange for notes will be issued in principal amounts of $1,000
and integral multiples of $1,000 to the extent possible. Interest will cease to
accrue on the notes tendered for exchange as of the last interest payment date
of the notes prior to the Exchange Date, and all rights of the holders of notes
(except the right to receive the EDBS Exchange Notes) will terminate. Interest
will accrue on the EDBS Exchange Notes beginning on the date immediately
following the last interest payment date of the notes. The person entitled to
receive the EDBS Exchange Notes issuable upon such exchange will be treated for
all purposes as the registered holder of such EDBS Exchange Note.
If less than 90% in aggregate principal amount of the notes accept the
Exchange Offer, the notes not accepting the Exchange Offer will remain
outstanding pursuant to the indenture and the notes tendered for exchange will
be exchanged for EDBS Exchange Notes and EDBS Exchange Guarantees.
We intend to comply with the provisions of the Exchange Act in
connection with the EDBS Exchange Offer, to the extent applicable.
CERTAIN COVENANTS
Restricted Payments. The indenture provides 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 of our Equity Interests other than dividends or
distributions payable in Equity Interests (other than
Disqualified Stock);
(b) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of ECC, us or any of its or our respective
Subsidiaries or Affiliates, other than any such Equity
Interests owned by us or by any Wholly Owned Restricted
Subsidiary of us;
(c) purchase, redeem, defease or otherwise acquire or retire for
value any Indebtedness that is expressly subordinated in right
of payment to the notes, except in accordance with the
scheduled mandatory redemption, 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:
(i) to us or any Wholly Owned Restricted Subsidiary of
us;
(ii) 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 (ii),
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;
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(ii) after giving effect to such Restricted Payment and
the incurrence of any Indebtedness the net proceeds
of which are used to finance such Restricted Payment,
the Indebtedness to Cash Flow Ratio of the issuer
would not have exceeded 8.0 to 1; and
(iii) such Restricted Payment, together with the aggregate
of all other Restricted Payments made by the issuer
after the date of the indenture, is less than the sum
of:
(A) the difference of:
(x) the cumulative Consolidated Cash
Flow of the issuer 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 the issuer, each as
determined for the period (taken as
one accounting period) from April 1,
1999 to the end of our 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 "Our Activities," 100% of
the fair market value of the aggregate net
proceeds other than cash received by us or
EDBS 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 us or
EDBS (other than Equity Interests sold to
any Subsidiary of the issuer), since the
date of the 1999 EDBS Notes Indentures, 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 the subheading "Optional Redemption;"
plus
(C) if any Unrestricted Subsidiary is designated
by us as a Restricted Subsidiary, an amount
equal to the fair market value of the net
Investment by us, EDBS 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 us, EDBS
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 us and our 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 our Investments and the
Investments of our Restricted Subsidiaries
since the date of the indenture 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 us 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 us or any
Restricted Subsidiary in such person which
were included in computations made pursuant
to this clause (iii).
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The foregoing provisions will not prohibit the following (provided that
with respect to clauses (2), (3), (5), (6), (7), (8), (9), (11) and (12) below,
no Default or Event of Default shall have occurred and be continuing):
(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 of our Equity Interests 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 us (other than Equity Interests issued
or sold to any Subsidiary of us);
(3) Investments in an aggregate amount not to exceed $125 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 us 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 us or
any Restricted Subsidiary in such person pursuant to this
clause (3);
(4) Investments to fund the financing activity of Dish Network
Credit Corporation in the ordinary course of its business in
an amount not to exceed, as of the date of determination, the
sum of
(A) $50 million, plus
(B) 50% of the aggregate cost to Dish Network Credit
Corporation for each Satellite Receiver purchased by
Dish Network Credit Corporation and leased by Dish
Network Credit Corporation 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 under the subheading
"Incurrence of Indebtedness");
(7) Investments in an amount equal to 100% of the aggregate net
proceeds (whether or not in cash) received by us or any Wholly
Owned Restricted Subsidiary, from capital contributions from
ECC or from the issue and sale (including a sale to ECC) of
Equity Interests (other than Disqualified Stock) of us (other
than Equity Interests issued or sold to a Subsidiary of ECC),
on or after the date of the 1999 EDBS Notes Indentures; 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 us or to a Wholly
Owned Restricted Subsidiary of us 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 us or any Restricted Subsidiary of us in such person
pursuant to this clause (7) in each case, provided that such
Investments are in businesses of the type described under "Our
Activities;"
(8) Investments in any Restricted Subsidiary which is not a Wholly
Owned Restricted Subsidiary, but which is a guarantor of the
1999 EDBS Notes;
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(9) Investments in businesses strategically related to businesses
described in "Our Activities" in an aggregate amount not to
exceed $60 million;
(10) 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 $10 million in the aggregate;
(11) the making of any Restricted Payment (including the receipt of
any Investment) permitted under or resulting from any
transaction permitted under the covenants described under
"Dispositions of ETC and non-core assets;" provided that all
conditions to any such Restricted Payment set forth in such
covenants are satisfied;
(12) Investments made as a result of the receipt of non-cash
proceeds from Asset Sales made in compliance with the
covenants described under "Asset Sales";
(13) any Restricted Payment permitted under the 1999 EDBS Notes
Indentures or the EDBS Exchange Indenture;
(14) Investments which are used to pay for the construction,
launch, operation or insurance of a satellite owned by any of
our Subsidiaries in an amount not to exceed $200 million; or
(15) Investments in a foreign direct-to-home satellite provider in
an amount not to exceed $60 million, provided that the
Investments are made through the supply of satellite receivers
and related equipment to the provider, or the proceeds from
the Investments are used to purchase satellite receivers and
related equipment from ECC or a Subsidiary of ECC.
Restricted Payments made pursuant to clauses (1), (2), (4), (7) (but
only to the extent that net proceeds received by us as set forth in such clause
(7) were included in the computations made in clause (iii)(B) of the first
paragraph of this covenant), (10) and (13) (but only to the extent such
Restricted Payment is included as a Restricted Payment in any computation made
pursuant to clause (iii) of the first paragraph of the Restricted Payments
covenants contained in the 1999 EDBS Notes Indentures or the EDBS Exchange
Indenture), 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 us 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), (11), (13) (to the extent such Restricted Payment is
not included as a Restricted Payment in any computation made pursuant to clause
(iii) of the first paragraph of the Restricted Payments covenants contained in
the 1999 EDBS Notes Indentures or the EDBS Exchange Indenture), (14) and (15)
shall not be included as Restricted Payments in any computation made pursuant to
clause (iii) of the first paragraph of this covenant.
If we 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, to the
extent such Investment resulted 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 ten business 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 the date of the request, 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 latest available financial statements.
Incurrence of Indebtedness. The indenture provides that we shall not,
and shall not permit any of our 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, we 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
the issuer would not have exceeded 8.0 to 1.
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The foregoing limitation does not apply to any of the following
incurrences of Indebtedness:
(1) Indebtedness represented by the notes and the indenture;
(2) the incurrence by us or any of our Restricted Subsidiaries of
Acquired Subscriber Debt not to exceed $1,750 per Acquired
Subscriber;
(3) the incurrence by us or any of our Restricted Subsidiaries of
Deferred Payments and letters of credit with respect thereto;
(4) Indebtedness of us or any of our Restricted Subsidiaries in an
aggregate principal amount not to exceed $1,050,000,000 at any
one time outstanding, which Indebtedness may be secured to the
extent permitted under the covenant described under "Liens";
(5) Indebtedness between and among us and any of our Restricted
Subsidiaries;
(6) Acquired Debt of a person, incurred prior to the date upon
which such person was acquired by us or any Restricted
Subsidiary (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) $50 million in the
aggregate for all such persons other than those described in
the immediately following clause (B); and (B) Acquired Debt
owed to us or any of our Restricted Subsidiaries;
(7) Existing Indebtedness;
(8) the incurrence of Purchase Money Indebtedness by us or any of
our Restricted Subsidiaries in an amount not to exceed the
cost of construction, acquisition or improvement of assets
used in any business permitted under the covenant "Our
Activities," as well as any launch costs and insurance
premiums related to such assets;
(9) Hedging Obligations of us or any of our Restricted
Subsidiaries covering Indebtedness of us 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 us and our Restricted Subsidiaries from
fluctuation in interest rates on Indebtedness incurred in
accordance with the indenture;
(10) Indebtedness of us or any of our Restricted Subsidiaries in
respect of performance bonds or letters of credit of us or any
Restricted Subsidiary or surety bonds provided by us 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 "Our Activities";
(11) Indebtedness of us or any of our Restricted Subsidiaries the
proceeds of which are used solely to finance the construction
and development of a call center owned by us or any of our
Restricted Subsidiaries in Christiansburg, Virginia or any
refinancing thereof; provided that the aggregate of all
Indebtedness incurred pursuant to this clause (11) shall in no
event exceed $25 million at any one time outstanding;
(12) the incurrence by us or any of our Restricted Subsidiaries 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) and (8), 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 exchanged, extended,
refinanced,
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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 equal to or 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
exchanged, extended, refinanced, renewed, replaced or
refunded; and
(C) the Refinancing Indebtedness shall be subordinated in
right of payment to the notes, if at all, on terms at
least as favorable to the holders of notes as those
contained in the documentation governing the
Indebtedness being extended, refinanced, renewed,
replaced or refunded (a "Permitted Refinancing");
(13) the guarantee by us or any of our Restricted Subsidiaries of
Indebtedness of us or a Restricted Subsidiary that was
permitted to be incurred by another provision of this
covenant;
(14) Indebtedness under Capital Lease Obligations of us or any of
our Restricted Subsidiaries with respect to no more than three
direct broadcast satellites at any time; or
(15) Indebtedness represented by the EDBS Exchange Notes and the
EDBS Exchange Indenture.
For purposes of determining compliance with this covenant, if an item
of Indebtedness meets the criteria of more than one of the categories described
in clauses (1) through (15) 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 (15) above, we shall, in our
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 we 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 us or a Wholly Owned
Restricted Subsidiary of us by us or any Restricted
Subsidiary of us;
(3) sales or other dispositions of accounts receivable to
Dish Network Credit Corporation 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 our assets shall be
governed by the provisions of the indenture described
below under the subheading "Merger, Consolidation, or
Sale of Assets"); or
(b) issues or sells Equity Interests of any Restricted Subsidiary
of us (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 $50 million (as
determined in good faith by our Board of Directors
evidenced by a resolution of the Board of Directors
set forth in an officers' certificate delivered to
the trustee); or
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(2) are sold or otherwise disposed of for net proceeds in
excess of $50 million (each of the foregoing, an
"Asset Sale"), then:
(A) we 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 a resolution of our Board of
Directors evidenced by a resolution of the
Board of Directors) and set forth in an
officers' certificate delivered to the
trustee not later than ten business days
following a request from the trustee, which
certificate shall cover each Asset Sale made
in the six months preceding the date of the
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 us 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 us 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, we shall be deemed to
have made a Restricted Payment in
the amount by which such fair
market value exceeds the cash
received upon conversion; and/or
(z) properties and capital assets
(excluding Equity Interests) to be
used by us or any of our Restricted
Subsidiaries in a business
permitted as described under "Our
Activities";
provided, however, that up to $40 million of assets in addition to assets
specified in clause (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 indenture also provides that the Net Proceeds from an 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, our business as described under "Our
Activities," to repurchase notes, 1999 EDBS Notes or EDBS
Exchange Notes or if we sell any of our satellites after
launch such that us or our 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 properly designated by us in connection with an Asset
Sale as being subject to this paragraph; and
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(2) with respect to which the aggregate fair market value at the
time of receipt of all consideration received by us or any
Restricted Subsidiary in all such Asset Sales so designated
does not exceed the amount that EDBS and its subsidiaries are
permitted to designate as a result of the cash contributions
made to EDBS by ECC pursuant to the 1999 EDBS Notes Indentures
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 our Board of
Directors 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 essential to the direct broadcast
satellite business are contributed to a joint venture
between us or one of our 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 we or
one of our 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
us or any Restricted Subsidiary of us would
constitute Indebtedness or Equity Interests of a
person that is not an Affiliate of ECC, us 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 this
clause (z) we and our Restricted Subsidiaries
continue to own at least three satellites, one uplink
center and one call center.
Liens. The indenture provides that we 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 indenture provides that at all times,
that we, EDBS or a Wholly Owned Restricted Subsidiary of us will maintain and be
the named beneficiary under Satellite Insurance with respect to the lesser of
(x) at least one-half or (y) three of the satellites owned or leased by us or
our Subsidiaries (insured in an amount at least equal to the depreciated cost of
such satellites) ("Insured Satellites").
If we or any of our Restricted Subsidiaries receive proceeds from any
Satellite Insurance covering any satellite owned by us or any of our Restricted
Subsidiaries, or if we or any of our Restricted 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 we and our
Restricted Subsidiaries then own less than the required number
of Insured Satellites as provided in the first paragraph of
this subheading, 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 "Our
Activities" if at such time we and our Restricted Subsidiaries
own the required number of Insured Satellites as provided in
the first paragraph of this subheading (or in accordance with
clause (3) below); or
(3) to the extent that such proceeds are not applied or
contractually committed to be applied as described in clause
(1) or (2) above within 365 days of the receipt of such
proceeds as "Excess
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Proceeds" to be applied to an offer to purchase notes as set
forth under "Excess Proceeds Offer," below.
Our Activities. The indenture provides that neither we nor any of our
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," if the
Indebtedness to Cash Flow Ratio of the issuer would not have exceeded 6.0 to 1
on a pro forma basis after giving effect to the sale of all of our or our
Subsidiaries' 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) provided that we designate ETC as an Unrestricted Subsidiary,
ETC shall be discharged and released 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, we
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 us or our
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 us
or our Wholly Owned Restricted Subsidiaries
(or, in the case of a non- Wholly Owned
Restricted Subsidiary, the pro rata portion
thereof attributable to us); minus
(z) $50 million; and
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(2) any contract, agreement or understanding between ETC and us or
any Restricted Subsidiary of us and any loan or advance to or
guarantee with, or for the benefit of, ETC issued or made by
us or one of our Restricted Subsidiaries, is on terms that are
less favorable to us or our Restricted Subsidiaries than those
that would have been obtained in a comparable transaction by
us or such Restricted Subsidiaries with an unrelated person,
all as evidenced by a resolution of our Board of Directors set
forth in an officers' certificate delivered within ten
business days of a request by 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.
If 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 us or one of our Restricted Subsidiaries pay in cash an
amount to us or our 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
us; 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 us and was not paid by another person as permitted by the
preceding sentence, we 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.
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) provided we designate such Non-Core Asset as an Unrestricted
Subsidiary, such Non-Core Asset shall be released 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 Payout:
(1) after giving pro forma effect to such Payout, we 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 us or our 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 us or our Wholly Owned
Restricted Subsidiaries (or, in the case of a
non-Wholly Owned Restricted Subsidiary, the pro rata
portion thereof attributable to us); minus
(z) $50 million in the aggregate for all such Payouts and
$10 million for any single such Payout; and
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(2) any contract, agreement or understanding between or relating
to a Non-Core Asset and us or a Restricted Subsidiary of us
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 us or one of our Restricted Subsidiaries, is
on terms that are less favorable to us or our Restricted
Subsidiaries than those that would have been obtained in a
comparable transaction by us or such Restricted Subsidiaries
with an unrelated person, all as evidenced by a resolution of
our Board of Directors as set forth in an officers'
certificate delivered within ten business days of a request by
the trustee certifying that each such contract, agreement,
understanding, loan, advance and guarantee has been approved
by a majority of such Board.
If 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 us or
one of our Restricted Subsidiaries pay in cash an amount to us such that, after
taxes, such amount, is greater than or equal to the Non-Core Asset 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 us; 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
us and was not paid by another person as permitted by the preceding sentence, we
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,
within ten business days of a request by the trustee, we shall deliver to the
trustee an officers' certificate to the trustee setting forth the Investments
made by us or our 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.
Notwithstanding anything contained in this subheading to the contrary,
any disposition of ETC or Non- Core Assets permitted pursuant to the 1999 EDBS
Notes Indentures and EDBS Exchange Indenture shall also be permitted pursuant to
this indenture and shall not be considered a "Restricted Payment" or "Asset
Sale" for purposes of this indenture.
Dividend and Other Payment Restrictions Affecting Subsidiaries. The
indenture provides that we shall not, and shall not permit any Restricted
Subsidiary of us 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 us or any of
our Restricted Subsidiaries on our or their Capital Stock or
with respect to any other interest or participation in, or
measured by, its profits, or pay any Indebtedness owed to us
or any of our Subsidiaries;
(b) make loans or advances to us or any of our Subsidiaries; or
(c) transfer any of its properties or assets to us or any of our
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
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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) any Indebtedness permitted to be incurred pursuant to the 1999
EDBS Notes Indentures or the EDBS Exchange Indenture other
than pursuant to the Indebtedness to Cash Flow Ratio in the
1999 EDBS Notes Indentures or the EDBS Exchange Indenture;
(viii) Permitted Liens; or
(ix) 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 restriction is effective, such sale (together
with any other sales pending) would be permitted under the
terms of the indenture.
Accounts Receivable Subsidiary. The indenture provides that we:
(a) may, and may permit any of our 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 us
and our 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 our 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);
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(c) shall not permit an Accounts Receivable Subsidiary to sell any
accounts receivable purchased from us or our 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 us or any of our Subsidiaries with respect to
the accounts receivable sold by us or any of our Subsidiaries
to an Accounts Receivable Subsidiary or with respect to the
servicing thereof; provided that neither us nor any of our
Subsidiaries shall at any time guarantee or be otherwise
liable for the collectibility of accounts receivable sold by
them;
(e) shall not permit an Accounts Receivable Subsidiary to engage
in any business or transaction other than the purchase and
sale of accounts receivable or participation interests therein
of us and our 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 us 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 us
or a Restricted Subsidiary of us 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 us;
(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 us and our 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;
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(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.
Merger, Consolidation, or Sale of Assets. The indenture provides that
we may not consolidate or merge with or into (whether or not it is the surviving
entity), or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our properties or assets in one or more related
transactions to, another person unless:
(a) we are the surviving person or the person formed by or
surviving any such consolidation or merger (if other than us)
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 us) or the person to which such sale,
assignment, transfer, lease, conveyance or other disposition
will have been made assumes all the obligations of us 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) we or the person formed by or surviving any such consolidation
or merger (if other than us) 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 the issuer immediately
preceding the transaction; and
(ii) would, at the time of such transaction after giving
pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the
Indebtedness to Cash Flow Ratio test set forth in the
covenant described under "Incurrence of
Indebtedness," above.
Notwithstanding the foregoing, we may merge with another person if:
(a) we are the surviving person;
(b) the consideration issued or paid by us in such merger consists
solely of our Equity Interests (other than Disqualified Stock)
or Equity Interests of ECC; and
(c) immediately after giving effect to such merger, our
Indebtedness to Cash Flow Ratio does not exceed our
Indebtedness to Cash Flow Ratio immediately prior to such
merger.
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Transactions with Affiliates. The indenture provides that we shall not
and shall not permit any Restricted Subsidiary to, sell, lease, transfer or
otherwise dispose of any of our or 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 us or our Restricted Subsidiaries than those that
would have been obtained in a comparable transaction by us or
such Subsidiaries with an unrelated person; and
(b) if such Affiliate Transaction involves aggregate payments in
excess of $25 million, such Affiliate Transaction has been
approved by a majority of the disinterested members of our
Board of Directors, and we deliver to the trustee no later
than ten business days following a request from the trustee a
resolution of our Board of Directors 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 us and our Wholly Owned
Subsidiaries (other than Unrestricted Subsidiaries of
us);
(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),
(4), (5), (6), (8), (9), (10), (11), (14) and (15) 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 us or any of our
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 us or any Restricted
Subsidiary of us and any Affiliate of us the Equity
Interests of which Affiliate are owned solely by us
or one of our Restricted Subsidiaries, on the one
hand, and by persons who are not Affiliates of us or
Restricted Subsidiaries of us, 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, we will 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 we 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 certified public accountants.
Payments for Consent. We shall not, and shall not permit any of our
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.
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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 $25 million, we
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; provided, however, that the Excess
Proceeds shall first be applied to repurchase the 1999 EDBS Notes and the EDBS
Exchange Notes, if any, that remain outstanding as of the date the Excess
Proceeds Offer is required to be made, pursuant to the terms of the 1999 EDBS
Notes Indentures and the EDBS Exchange Indenture, respectively, and any
Indebtedness that is on parity with the 1999 EDBS Notes or the EDBS Exchange
Notes and is required to be repurchased with such Excess Proceeds prior to the
application of any Excess Proceeds to the repurchase of the notes and
Indebtedness on parity with the notes in an Excess Proceeds Offer. To the extent
we or a Restricted Subsidiary is required under the terms of Indebtedness of us
or such Restricted Subsidiary which is on parity 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 indenture, we shall make
a pro rata offer to the holders of all other parity Indebtedness (including the
notes) with such proceeds. If the aggregate principal amount of notes and other
parity indebtedness surrendered by holders thereof exceeds the amount of such
Excess Proceeds, the trustee shall select the notes and other parity
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, we 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
The 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;
(b) default in payment when due of principal of the notes at
maturity, upon repurchase, redemption or otherwise;
(c) failure to comply with the provisions described under "Change
of Control Offer," "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 us pursuant to the indenture;
(e) failure by us for 60 days after notice from the trustee or the
holders of at least 25% in principal amount then outstanding
of the notes to comply with any of our other agreements in the
indenture or the notes;
(f) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by us or any of
our Restricted Subsidiaries (or the payment of which is
guaranteed by us or any of our 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 $50 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 us or any of
our Restricted Subsidiaries (or the payment of which is
guaranteed by us or any of our Restricted
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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 $50 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 $90 million shall be
deemed not to constitute an acceleration pursuant to this
clause (g);
(h) failure by us or any of our 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 $50 million, which judgments are not
stayed within 60 days after their entry; and
(i) certain events of bankruptcy or insolvency with respect to
ECC, us or certain of our 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).
If any Event of Default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount then outstanding of the notes may
declare all the notes to be due and payable immediately (plus, in the case of an
Event of Default that is the result of an action by us or any of our
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 us
or any of our 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 the notes, by notice to the trustee, may on behalf of the holders
of all of the notes waive any existing Default or Event of Default and its
consequences under the indenture, except a continuing Default or Event of
Default in the payment of interest or premium on, or principal of, the notes.
We are required to deliver to the trustee annually a statement
regarding compliance with the indenture, 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 indenture 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 us or
any of our Affiliates, as such, shall have any liability for any obligations of
us or any of our 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.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The indenture provides that with respect to the notes, we may, at our
option and at any time, elect to have all obligations discharged with respect to
the outstanding notes ("Legal Defeasance"). Such Legal Defeasance means that we
will be deemed to have paid and discharged the entire indebtedness represented
by the outstanding notes, except for:
(a) the rights of holders of outstanding notes to receive payments
in respect of the principal of, premium, if any, and interest
on the notes when such payments are due, or on the redemption
date, as the case may be;
(b) our obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed,
lost or stolen notes and the maintenance of an office or
agency for payment and money for security payments held in
trust;
(c) the rights, powers, trust, duties and immunities of the
trustee, and our obligations in connection therewith; and
(d) the Legal Defeasance provisions of the indenture.
In addition, the indenture provides that with respect to the 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. If
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance,
the indenture provides that with respect to the notes:
(i) we must irrevocably deposit with the trustee, in
trust, for the benefit of the holders of the notes,
cash in U.S. dollars, non-callable U.S. government
obligations, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public
accountants selected by the trustee, to pay the
principal of, premium, if any, and interest on the
outstanding notes on the stated maturity or on the
applicable optional redemption date, as the case may
be;
(ii) in the case of Legal Defeasance, 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 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 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;
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(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;
(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 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 the notes have
been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next paragraph, the 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 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 may be waived with the consent of the
holders of a majority in principal amount of the then outstanding notes
(including consents obtained in connection with a tender offer or exchange offer
for the notes).
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 by the
holders of at least a majority in aggregate principal amount
of the notes and a waiver of the payment default that resulted
from such acceleration);
(e) make any note payable in money other than that stated in the
notes;
(f) make any change in the provisions of the 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 or mandatory redemption with
respect to any note; or
(h) make any change in the foregoing amendment and waiver
provisions.
In addition, without the consent of holders of at least 66 2/3% of the
principal amount of the notes then outstanding, an amendment or a waiver may not
make any change to the covenants in the indenture entitled "Asset Sales,"
"Change of Control Offer," "Excess Proceeds Offer" and "Exchange of Notes for
EDBS Exchange Notes" (including, in each case, the related definitions) as such
covenants apply to the notes.
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Notwithstanding the foregoing, without the consent of any holder of
notes, we and the trustee may amend or supplement the indenture, the notes to
cure any ambiguity, defect or inconsistency, to provide for uncertificated notes
in addition to or in place of certificated notes, to provide for the assumption
of our obligations to holders of the notes in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the holders of the notes or that does not adversely affect the legal
rights under the 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
The indenture contains certain limitations on the rights of the
trustee, if the trustee becomes a creditor of us, 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 the notes, the holders of a majority in principal
amount of the then outstanding notes will have the right to direct the time,
method and place of conducting any proceeding for exercising any remedy
available to the trustee, subject to certain exceptions. The 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 initially will be in the form of one or more global
notes without interest coupons. Upon issuance, the global exchange notes will be
deposited with the trustee, as custodian for The Depository Trust Company
("DTC"), 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.
Beneficial interests in all global exchange notes and all certificated
notes, if any, will be subject to certain restrictions on transfer and will bear
a restrictive legend as described under "Notice to Investors." In addition,
transfer of beneficial interests in any global exchange notes will be subject to
the applicable rules and procedures of DTC and its direct or indirect
participants including, if applicable, those of the Euroclear System
("Euroclear") and Clearstream Banking ("Clearstream"), which may change from
time to time.
The global exchange notes may be transferred, in whole and not 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 certified form in certain limited circumstances.
See "Transfers of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The
notes may be presented for registration of transfer and exchanger at the offices
of the Registrar.
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Depositary Procedures
DTC has advised us that DTC is a limited-purpose trust company created
to hold securities for its direct participating organizations 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), banks, trust companies, clearing corporations and certain
other organizations, including Euroclear and Clearstream. 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 (collectively, the
"indirect participants").
DTC has advised us that, pursuant to DTC's procedures, (i) upon deposit
of the global exchange notes, DTC will credit the accounts of the direct
participants designated by the initial purchasers with portions of the principal
amount of the global exchange notes that have been allocated to them by the
initial purchasers, and (ii) 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.
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 that are direct participants in DTC.
The laws of some states in the United 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 indenture for any purpose.
Under the terms of the indenture, the issuer 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 the 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
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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 or us under the indenture. Neither we 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 Clearstream,
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 Clearstream 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 notes
through Euroclear or Clearstream, on the other hand, will be effected by
Euroclear's or Clearstream's respective nominee through DTC in accordance with
DTC's rules on behalf of Euroclear or Clearstream; however, delivery of
instructions relating to crossmarket transactions must be made directly to
Euroclear or Clearstream, as the case may be, by the counterparty in accordance
with the rules and procedures of Euroclear or Clearstream and within their
established deadlines, which is Brussels time for Euroclear and UK time for
Clearstream. Indirect participants who hold interest in the exchange notes
through Euroclear and Clearstream may not deliver instructions directly to
Euroclear's or Clearstream's nominee. Euroclear or Clearstream will, if the
transaction meets its settlement requirements, deliver instructions to its
respective nominee to deliver or receive interests on Euroclear's or
Clearstream'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 Clearstream 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 Clearstream during the European business day
immediately following the settlement date of DTC in New York. Although recorded
in DTC's accounting records as of DTC's settlement date in New York, Euroclear
and Clearstream 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 Clearstream
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 Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the global exchange notes
among direct participants, including Euroclear and Clearstream, they are under
no obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the issuer, the initial
purchasers nor the trustee shall have any responsibility for the performance by
DTC, Euroclear or Clearstream 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
Clearstream and their book-entry systems has been obtained from sources that we
believe are reliable, but we take no responsibility for the accuracy thereof.
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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, we, at our option, may notify the trustee in
writing that we elect 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. 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 exchange 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 exchange 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 exchange 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 nor the trustee will be liable for any delay by the holder
of the global exchange 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 exchange note or DTC for
all purposes.
Same Day Settlement And Payment
The 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 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.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
We are making the exchange offer to comply with our obligations under the
registration rights agreement to register the exchange of the exchange notes for
the old notes. In the registration rights agreement, we also agreed under
certain circumstances, described below, to file a shelf registration statement
to register the resale of certain old notes and exchange notes.
The initial purchasers and us entered into the registration rights
agreement on September 25, 2000. In the registration rights agreement relating
to the notes, we agreed to file the exchange offer registration statement
relating to the notes with the SEC within 90 days of the closing date of the
initial sale of the notes to the initial purchasers, and use our best efforts to
have it then declared effective within 270 days of the closing date. We also
agreed to use our best efforts to cause that exchange offer registration
statement to be effective continuously, to keep the exchange offer open for a
period of not less than 20 business days and cause the exchange offer to be
consummated no later than the 295th 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.
If (i) the exchange offer is not permitted by applicable law or policy
of the SEC or (ii) any holder of notes which are transfer restricted securities
notifies us prior to the 20th business day following the consummation of such
exchange offer that (a) it is prohibited by law or policy of the SEC from
participating in the exchange offer, (b) it may not resell the exchange notes
acquired by it in the exchange offer to the public without delivering a
prospectus, and the prospectus contained in the exchange offer registration
statement is not appropriate or available for such resales by it, or (c) it is a
broker-dealer and holds notes acquired directly from us or any of our
affiliates, we will file
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with the SEC a shelf registration statement to register for public resale the
transfer restricted securities held by any such holder who provides us with
certain information for inclusion in the shelf registration statement.
For purposes of the registration rights agreement, "transfer restricted
securities" means each note until the earliest on the date of which (i) such
note is exchanged in the exchange offer and is entitled to be resold to the
public by the holder thereof without complying with the prospectus delivery
requirements of the Securities Act, (ii) such note has been disposed of in
accordance with the shelf registration statement, (iii) such note is disposed of
by a broker-dealer pursuant to the "Plan of Distribution" contemplated by the
exchange offer registration statement (including delivery of the prospectus
contained therein) or (iv) such note may be distributed to the public pursuant
to Rule 144 under the Securities Act.
The registration rights agreement provides that the following events
will constitute a "registration default":
o if we 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;
o if the exchange offer registration statement is not declared
effective by the SEC on or prior to the 270th day after that
closing date;
o if the exchange offer is not consummated on or before the
295th day after that closing date;
o if obligated to file the shelf registration statement and we
fail to file the shelf registration statement with the SEC on
or prior to the 120th day after that closing date or the 30th
day after such filing obligation arises;
o 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
o 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, except in
certain circumstances for an aggregate amount not to exceed 90
days.
If there is a registration default, then we will 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 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 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 agreement, 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 agreement in order to have their notes included in the shelf registration
statement and benefit from the provisions regarding liquidated damages set forth
above.
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CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the indenture.
Reference is made to the 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
us specifically designated as an Accounts Receivable Subsidiary for the purpose
of financing our accounts receivable and provided that any such designation
shall not be deemed to prohibit us 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.
"Acquired Subscriber" means a subscriber to a telecommunications
service provided by a telecommunications service provider that is not an
Affiliate of us at the time we or one of our Restricted Subsidiaries purchases
the right to provide telecommunications services to such subscriber from such
telecommunications service provider, whether directly or through the acquisition
of the entity providing telecommunications services or assets used or to be used
to provide telecommunications 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 telecommunications services 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 telecommunications
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 telecommunications
services made available by us or any of our 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 us or an officer of ECC or us with a policy making function,
shall be deemed an Affiliate of us or any of our Subsidiaries solely by reason
of such individual's employment, position or responsibilities by or with respect
to ECC, us or any of their or our 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.
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"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 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) 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); (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 our
Equity Interests.
"Consolidated Cash Flow" means, with respect to any person for any
period, the Consolidated Net Income of such person for such period, plus, to the
extent deducted in computing Consolidated Net Income: (a) provision for taxes
based on income or profits; (b) Consolidated Interest Expense; (c) depreciation
and amortization (including amortization of goodwill and other intangibles) of
such person for such period; and (d) any extraordinary loss and any net loss
realized in connection with any Asset Sale, in each case, on a consolidated
basis determined in accordance with GAAP, provided that Consolidated Cash Flow
shall not include interest income derived from the net proceeds of the offering
of the notes.
"Consolidated Interest Expense" means, with respect to any person for
any period, consolidated interest expense of such person for such period,
whether paid or accrued, including amortization of original issue discount and
deferred financing costs, non-cash interest payments and the interest component
of Capital Lease Obligations, on a consolidated basis determined in accordance
with GAAP; provided, however, that with respect to the calculation of the
consolidated interest expense of the issuer, 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 or,
if such person is the issuer, of the issuer and its Restricted 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 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
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such dividends may be declared and paid only out of net earnings in respect of
the year of such declaration and payment, but only to the extent of any cash
received by such person upon issuance of such preferred stock, less: (i) all
write-ups (other than write-ups resulting from foreign currency translations and
write-ups of tangible assets of a going concern business made within 12 months
after the acquisition of such business) subsequent to the date of the 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 on a consolidated
basis 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 us and one or more banks or
other financial institutions providing financing for our business of and our
Restricted Subsidiaries business, provided that the lenders party to the Credit
Agreement may not be Affiliates of ECC, us or their respective Subsidiaries.
"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 us or our Restricted
Subsidiaries used by them in the businesses described in the covenant "Our
Activities" in an amount not to exceed at any one time outstanding in the
aggregate $200 million.
"Dish Network Credit Corporation" 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 the issuer 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.
"EDBS" means EchoStar DBS Corporation, a Colorado corporation.
"EDBS Exchange Indenture" means the indenture, by and between EDBS and
U.S. Bank Trust National Association, which will be entered into upon the
completion of the EDBS Exchange Offer.
"EDBS Exchange Notes" means the notes to be issued by EDBS upon the
completion of the EDBS Exchange Offer.
"EDBS Exchange Offer" means the offer by EDBS to exchange the EDBS
Exchange Notes for the notes as discussed in the subheading "Exchange of Notes
for EDBS Exchange Notes."
"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.
"EOC" means EchoStar Orbital Corporation, a Colorado corporation.
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"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).
"ESC" means EchoStar Satellite Corporation, a Colorado corporation.
"ETC" means EchoStar Technologies Corporation, a Texas corporation.
"Existing Indebtedness" means the notes and any other Indebtedness of
us and our Subsidiaries in existence on the date of the indenture 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
indenture.
"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 EBC, of EBC 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) if such person or any of its
Subsidiaries (or, if such person is the issuer, any of its Restricted
Subsidiaries) consummates a material acquisition or an Asset Sale or other
disposition of assets subsequent to the commencement of the Measurement Period
but prior to the event for which the calculation of the Indebtedness to Cash
Flow Ratio is made, then the Indebtedness to Cash Flow Ratio shall be calculated
giving pro forma effect to
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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 the issuer) with an
Investment Grade rating, at the time as of which any investment therein is made,
issued or offered by an Eligible Institution; (d) any bankers' acceptances or
money market deposit accounts issued or offered by an Eligible Institution; and
(e) any fund investing exclusively in investments of the types described in
clauses (a) through (d) above.
"Maximum Secured Amount" means at any time (i) if EDBS at such time has
a rating or has received in writing an indicative rating on the 1999 EDBS Notes
or the EDBS Exchange 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) if EDBS does not have both of such
ratings or indicative ratings at such time, $500 million.
"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).
"Net Proceeds" means the aggregate cash proceeds received by us or any
of our 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 us or any Restricted Subsidiary of us to cash.
"1999 EDBS Notes" means (i) the $375 million principal amount of 9 1/4%
Senior Notes due 2006 issued by EDBS and (ii) the $1,625,000 principal amount of
9 3/8% Senior Notes due 2009 issued by EDBS.
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"1999 EDBS Notes Indentures" means each of the indentures dated January
25, 1999 among EDBS, the guarantors of the 1999 EDBS Notes named therein and
U.S. Bank Trust National Association, as Trustee, as the same may be amended,
modified or supplemented from time to time.
"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 us and/or any of our Subsidiaries at any time, including
without limitation the authorizations for 22 DBS frequencies at 175 degree
orbital location 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 us and/or any of
our Subsidiaries at any time, including without limitation the license of ESC
for a two satellite Ku-band system at 83 degree and 121 degree orbital location,
the license of ESC for a two satellite Ka-band system at 83 degree orbital
location and 121 degree orbital location, and the application of ESC to add
C-band capabilities to a Ku-band satellite authorized at 83 degree orbital
location; (3) all intangible authorizations, rights, interests and other
intangible assets related to the Mobile-Satellite Service held by us and/or any
of our 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 us 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 us or in a Wholly
Owned Restricted Subsidiary of (b) Investments in Cash Equivalents and
Marketable Securities; and (c) Investments by us or any of our Subsidiaries in a
person if, as a result of such Investment: (i) such person becomes a Wholly
Owned Restricted Subsidiary of us, 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 us; provided that if at any time a Restricted Subsidiary of us
shall cease to be a Subsidiary of us, we shall be deemed to have made a
Restricted Investment in the amount of its remaining investment, if any, in such
former Subsidiary.
"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 "Incurrence of Indebtedness", above; 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 of our assets or our 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, provided that such Indebtedness was
permitted to be incurred by the terms of the indenture and such Liens do not
extend to any of our assets or our 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 us, 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
us or any Restricted Subsidiary of us, provided that such Liens were not
incurred in connection with, or in contemplation of, such merger or
consolidation, other
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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 us or any Restricted Subsidiary of us; provided that such Liens were not
incurred in connection with, or in contemplation of, such acquisition and do not
extend to any assets of us or any of our 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 indenture; (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 our business or any Restricted Subsidiary of us (including,
without limitation, Liens securing Purchase Money Indebtedness) with respect to
obligations that do not exceed $25 million in principal amount in the aggregate
at any one time outstanding; (n) Liens securing Indebtedness in an amount not to
exceed $25 million incurred pursuant to clause (11) of the second paragraph of
the covenant described under "Incurrence of Indebtedness;" (o) Liens on any
asset of us or a Restricted Subsidiary of us 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 "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 Obligations; provided that such
Capital Lease Obligation is permitted under the other provisions of the
Indenture; (r) Liens permitted to be incurred under the 1999 EDBS Notes
Indentures or the EDBS Exchange Indenture; (s) Liens not provided for in clauses
(a) through (r) above, securing Indebtedness incurred in compliance with the
terms of the indenture 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 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 us, or any of
our Restricted Subsidiaries 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 us or any of our
Restricted Subsidiaries: (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 $50 million of such Indebtedness at any one time outstanding
is recourse to us or any of our Restricted Subsidiaries or any of their
respective assets, other than the assets so purchased; or (ii) Indebtedness of
us, or any of our Restricted Subsidiaries 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
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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
ECC 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" or "Restricted Subsidiaries" means any
corporation, association or other business entity of which more than 50% of the
total voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
the issuer or one or more Subsidiaries of the issuer or a combination thereof,
other than Unrestricted Subsidiaries.
"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 our consolidated balance sheet,
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 us
for purposes of the preceding sentence.
"Satellite Receiver" means any satellite receiver capable of receiving
programming from the EchoStar Dish Network.
"SkyVista" means SkyVista Corporation, a Colorado corporation.
"Subsidiary" or "Subsidiaries" 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.
"Trailing Cash Flow Amount" means the Consolidated Cash Flow of the
issuer during the most recent four fiscal quarters of the issuer for which
financial statements are available.
"Unrestricted Subsidiary" or "Unrestricted Subsidiaries" 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 us designated as an Unrestricted
Subsidiary in a resolution of our Board of Directors (a) no portion of the
Indebtedness or any other obligation (contingent or otherwise) of which,
immediately after such designation: (i) is guaranteed by us or any other
Subsidiary of us (other than another Unrestricted Subsidiary); (ii) is recourse
to or obligates us or any other Subsidiary of us (other than another
Unrestricted Subsidiary) in any way; or (iii) subjects any property or asset of
us or any other Subsidiary of us (other than another Unrestricted Subsidiary),
directly or indirectly, contingently or otherwise, to satisfaction thereof; (b)
with which
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neither us nor any other Subsidiary of us (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 our Affiliates; and (c) with which
neither us nor any other Subsidiary of us (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 EDBS, ESC
and Echosphere Corporation may be designated as Unrestricted Subsidiaries. At
any time after the date of the indenture we designate an additional Subsidiary
(other than ETC or a Subsidiary that constitutes a Non-Core Asset) as an
Unrestricted Subsidiary, we will be deemed to have made a Restricted Investment
in an amount equal to the fair market value (as determined in good faith by our
Board of Directors evidenced by a resolution of our Board of Directors and set
forth in an officers' certificate delivered to the trustee no later than ten
business days following a request from the trustee, which certificate shall
cover the six months preceding the date of the request of such Subsidiary and to
have incurred all Indebtedness of such Unrestricted Subsidiary. An Unrestricted
Subsidiary may be designated as a Restricted Subsidiary of us if, at the time of
such designation after giving proforma 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
us 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.
DESCRIPTION OF OTHER DEBT
EDBS has $375 million principal amount of 9 1/4% Senior Notes due 2006
and $1.625 billion principal amount of 9 3/8% Senior Notes Due 2009 outstanding.
Interest on the outstanding EDBS senior notes is payable semiannually in cash in
arrears on February 1 and August 1. The entire principal balance of the
outstanding EDBS senior notes due 2006 is due on February 1, 2006 and the entire
principal balance of the outstanding EDBS senior notes due 2009 is due on
February 1, 2009.
With the exception of certain immaterial subsidiaries, the outstanding
EDBS senior notes are fully, unconditionally and jointly and severally
guaranteed by all of the subsidiaries of EDBS. The outstanding EDBS senior notes
are general unsecured obligations of EDBS which:
o rank in parity to each other and to all existing and future
senior secured obligation of EDBS;
o rank senior to all existing and future junior obligations of
EDBS;
o effectively rank senior to the notes; and
o effectively rank junior to secured obligations of EDBS to the
extent of the collateral securing such obligations, including
any borrowings under future secured credit facilities of EDBS,
if any.
Except under limited circumstances requiring prepayment premiums, and
in other limited circumstances, the outstanding EDBS senior notes are not
redeemable at EDBS' option prior to February 1, 2003, with respect to the
outstanding EDBS senior notes due 2006, or February 1, 2004, with respect to the
outstanding EDBS senior notes due 2009. Thereafter, the outstanding EDBS senior
notes are subject to redemption at the option of EDBS, in whole or in part, at
specified redemption prices. With respect to the outstanding EDBS senior notes
due 2006, the
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redemption price ranges from 104.625% during the year commencing February 1,
2003 to 100% for any year commencing on or after February 1, 2005. With respect
to the outstanding EDBS senior notes due 2009, the redemption price ranges from
104.688% for the year commencing February 1, 2004 to 100% for any year
commencing on or after February 1, 2008.
In the event of a change of control, as described in the indentures
related to the outstanding EDBS senior notes, EDBS will be required to make an
offer to each holder of the outstanding EDBS senior notes to repurchase all of
such holders' outstanding EDBS senior notes at a purchase price equal to 101% of
the aggregate principal amount of such outstanding EDBS senior notes, plus
accrued and unpaid interest thereon to the date of purchase.
The indentures related to the outstanding EDBS senior notes contains
essentially similar restrictive covenants as the notes with respect to EDBS that
limit the ability of EDBS and its subsidiaries to among other things:
o incur additional indebtedness;
o apply the proceeds of certain asset sales;
o create, incur or assume liens;
o create dividend and other payment restrictions with respect to
EDBS's subsidiaries;
o merge, consolidate or sell assets; and
o enter into transactions with affiliates.
In addition to the above limitations, EDBS may only pay dividends on
its equity securities, including securities owned by us, if it is not in default
under the terms of the indentures related to the 1999 EDBS Notes and, after
giving effect to the dividend and any related financing necessary to fund the
dividend, EDBS's ratio of total indebtedness to cash flow would not exceed 8.0
to 1.0. In addition, the aggregate amount of dividends generally may not exceed
the sum of the difference of EDBS's cumulative consolidated cash flow, less 120%
of the consolidated interest expense of EDBS, plus the amount of net cash
proceeds received by EDBS or any of its subsidiaries from the sale of equity
interests in EDBS or ECC.
These restrictions limit and potentially eliminate the availability of
cash funds to us to pay the principal and interest on the notes.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the material United States
federal income tax consequences of participating in the exchange offer, the
acquisition, ownership and disposition of the notes to beneficial owners of the
notes that are United States holders and the material United States federal
income and estate tax consequences of the acquisition, ownership and disposition
of the notes to beneficial owners of the notes that are non-United States
holders, as defined below. This discussion applies only to initial beneficial
owners that purchase notes for cash at their "issue price" (i.e., the first
price at which a substantial amount of the notes are sold for cash to the
public, not including bond houses, brokers or similar persons or organizations
acting in the capacity of underwriters, placement agents or wholesalers) and
that will hold notes as capital assets, within the meaning of Section 1221 of
the Code. This discussion is based upon the Code, United States Treasury
Regulations promulgated thereunder and rulings and judicial decisions now in
effect, all of which are subject to change, possibly with retroactive effect.
In this section we generally do not address any tax considerations
relevant to holders that may be subject to special tax rules, such as banks,
insurance companies, dealers in securities, holders of 10% or more of the voting
stock of ECC, 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
United States holder means a beneficial owner of a note that is (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized under the laws of the United States, any state thereof or
the District of Columbia, (iii) 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 (iv) an estate the income of which is subject to United States
federal income tax regardless of its source. A non-United States holder means a
beneficial owner of a note that is not a United States holder.
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 "Disposition of notes."
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." According to United States
Treasury regulations, the possibility of a change in the interest rate will not
initially affect the amount of interest income recognized by a United States
holder (or the timing of such recognition) if the likelihood of the change, as
of the date the notes are issued, is remote. Although not entirely free from
doubt, we believe that the likelihood of a change in the interest rate on the
notes is remote and do not intend to treat the possibility of a change in the
interest rate as affecting the yield to maturity of any note. In the unlikely
event that the interest rate on a note is increased, the such increased interest
may be treated as original issue discount, includible by a United States holder
in income as such interest accrues, in advance of receipt of any cash payment
thereof. If, as anticipated, the issue price of the notes will equal their
stated principal amount and because the likelihood of a change in the interest
rate is remote, the notes will not be issued with original issue discount. You
should consult your own tax advisor regarding the possible payment of liquidated
damages.
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<PAGE> 131
Disposition of notes. Gain or loss recognized by a holder on a
disposition (including a sale, exchange or redemption) of a 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 tax basis in the note. A
holder's adjusted tax basis in a note generally will equal the holder's cost of
the note. Gain or loss recognized on a disposition of a note generally will be
long-term capital gain or loss if, at the time of the disposition, the 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.
Exchange of notes for EBDS exchange notes. An exchange of notes for
EDBS Exchange Notes as described in "Description of the notes -- Exchange of
notes for EDBS Exchange Notes" should be a taxable event for United States
federal income tax purposes. The exchange of notes for EDBS Exchange Notes
should be treated as an "exchange" for United States federal income tax
purposes. Gain or loss should be recognized by a holder upon the receipt of EDBS
Exchange Notes as described above under "-- Dispositions of notes." A holder
should have an adjusted tax basis in the EDBS Exchange Notes equal to their cost
and the holding period for the EDBS Exchange Notes should begin on the day
immediately after the exchange.
UNITED STATES FEDERAL INCOME TAXATION OF NON-UNITED STATES HOLDERS
Interest on the notes. The payment to a non-United States holder of
interest on a note will not be subject to United States federal withholding tax
pursuant to the "portfolio interest exception," provided that (1) the non-United
States holder does not actually or constructively own 10% or more of the total
combined voting power of all classes of our stock entitled to vote and is not a
"controlled foreign corporation" that is related to us, actually or
constructively, through stock ownership and either (2)(A) the beneficial owner
of the notes certifies to us or our agent, under penalties of perjury, that it
is not a United States holder and provides its name and address on United States
Treasury Form W-8 or Form W8-BEN, or a suitable substitute form, or (B) a
securities clearing organization, bank or other financial institution that holds
the notes on behalf of such non-U.S. holder in the ordinary course of its trade
or business must certify under penalties of perjury that such Form W-8 or Form
W8-BEN, or suitable substitute form, has been received from the beneficial owner
by it or by a financial institution between it and the beneficial owner and must
furnish the payer with a copy thereof.
Recently adopted regulations that will be effective January 1, 2001
provide alternative methods for satisfying the certification requirement
described in (2) above. These regulations will generally require, in the case of
notes held by a foreign partnership, that the certificate described in (2) above
be provided by the partners rather than by the foreign partnership, and that the
partnership provide certain information including a United States tax
identification number.
If a non-United States holder cannot satisfy the requirements of the
portfolio interest exception described above, payments of interest made to such
non-United States holder will be subject to a 30% withholding tax, unless the
beneficial owner of the note provides us or our paying agent, as the case may
be, with a properly executed (1) IRS form 1001 or Form W8-BEN, or successor
form, claiming an exemption from or reduction in the rate of withholding under
the benefit of a tax treaty or (2) IRS Form 4224 or Form W8-EC1, or successor
form, stating that interest paid on the note is not subject to withholding tax
because it is effectively connected with the beneficial owner's conduct of a
trade or business in the United States.
If a non-United States holder of a note is engaged in a trade or
business in the United States and interest on the note is effectively connected
with the conduct of such trade or business, such non-United States holder will
be subject to United States federal income tax on such interest in the same
manner as if it were a United States holder. In addition, if such non-United
States holder is a foreign corporation, it may be subject to a branch profits
tax equal to 30% of its effectively connected earnings and profits, subject to
adjustment, for that taxable year unless it qualifies for a lower rate under an
applicable income tax treaty.
It is unclear whether the payment of liquidated damages in the form of
additional interest to a non-United States holder would be subject to
withholding of United States federal income tax. Prospective purchasers should
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consult their own tax advisors as to the withholding and any other tax
considerations that relate to the payment or potential payment of such
liquidated damages.
Dispositions of notes. Any capital gain realized on the sale. exchange,
redemption, retirement or other taxable disposition of a note by a non-United
States holder generally will not be subject to United States federal income tax
provided (1) such gain is not effectively connected with the conduct by such
holder of a trade or business in the United States, (2) in the case of gains
derived by an individual, such individual is not present in the United States
for 183 days or more in the taxable year of the disposition and certain other
conditions are met and (3) the non-United States holder is not subject to tax
pursuant to the provisions of United States federal income tax law applicable to
certain expatriates.
Exchange offer. The exchange of notes for exchange notes pursuant to
the exchange offer should not be treated as a taxable exchange for United States
federal income tax purposes. As a result, there should be no United States
federal income tax consequences to non-United States holders exchanging notes
for exchange notes pursuant to the exchange offer.
The exchange of notes for EDBS Exchange Notes should be treated as a
taxable exchange for United States federal income tax purposes. The United
States federal income tax consequences to non-United States holders exchanging
notes for EDBS Exchange Notes are set forth above.
Estate Tax. Subject to applicable estate tax treaty provisions, notes
held by an individual who is not a citizen or resident of the United States for
federal estate tax purposes at the time of his or her death will not be subject
to United States federal estate tax if the interest on the notes qualifies for
the portfolio interest exemption from United Stated federal withholding tax
under the rules described above.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, payments of interest on, and the proceeds from the sale,
redemption or other disposition of notes made to a United States holder (other
than 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.
Non-United States holders other than corporations may be subject to
backup withholding and information reporting requirements. However, backup
withholding and information reporting requirements do not apply to payments of
portfolio interest made by us or our paying agent to non-United States holders
if the appropriate certification described in (2) of the first paragraph under
"United States Federal Income Taxation of Non-United States Holders -- Payments
of interest" is received, provided that the payer does not have actual knowledge
that the holder is a United States Holder. If any payments of principal and
interest are made to the beneficial owner of a note by or through the foreign
office of a foreign custodian, foreign nominee or other foreign agent of such
beneficial owner, or if the foreign office of a foreign "broker," as defined in
the applicable Treasury regulations, pays the proceeds of the sale, redemption
or other disposition of note or a coupon to the seller of such note or coupon,
backup withholding and information reporting requirements will not apply.
Information reporting requirements, but not backup withholding, will apply,
however, to a payment by a foreign office of a broker that is a United States
person or is a foreign person that derives 50% of more of its gross income for
certain periods from the conduct of a trade or business in the United States, or
that is a "controlled foreign corporation," that is, a foreign corporation
controlled by certain United States shareholders, with respect to the United
States unless the broker has documentary evidence in it records that the holder
is a non-United States holder and certain other conditions are met or the holder
otherwise establishes an exemption. Payment by a United States office of a
broker is subject to both backup withholding at a rate of 31% and information
reporting unless the holder certifies under penalties of perjury that it is a
non-United States holder or otherwise establishes an exemption.
In October 1997, Treasury regulations were issued which alter the
foregoing rules in certain respects and which generally will apply to any
payments in respect of a note or proceeds from the sale of a note that are made
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after December 31, 2000. Among other things, such regulations expand the number
of foreign intermediaries that are potentially subject to information reporting
and address certain documentary evidence requirements relating to exemption from
the backup withholding requirements. Holders of the notes are advised to consult
their tax advisers concerning the possible application of such regulations to
any payments made on or with respect to the notes.
Any amounts withheld under the backup withholding rules from a payment
to a holder of the notes will be allowed as a refund or a credit against such
holder's United States federal income tax liability, provided that the required
information is furnished to the IRS.
We must report annually to the IRS and to each non-United States holder
any interest that is subject to withholding, or that is exempt from United
States federal withholding tax pursuant to a tax treaty, or interest that is
exempt from United States federal tax under the portfolio interest exception.
Copies of these information returns may also be available under the provisions
of a specific treaty or agreement to the tax authorities of the country in which
the non-United States holder resides.
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, which we
refer to as ERISA, and the prohibited transaction provisions of ERISA and the
Code.
ERISA and the 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 and/or the Code,
which we refer 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 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 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 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, which we refer to as an 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 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, which we refer to as DOL, such
as Prohibited Transaction Class Exemption, which we refer to as PTCE 84-14 (an
exemption for certain transactions determined by an independent qualified
professional asset manager), PTCE 91-38 (an exemption for certain transactions
involving bank collective investment funds) or PTCE 90-1 (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
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, we believe that exchange notes issued pursuant to
the exchange notes 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 the 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 delivery 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.
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, on 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.
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LEGAL MATTERS
Friedlob Sanderson Paulson & Tourtillott, LLC, Denver, Colorado, will
pass on the validity of the notes. Mr. Friedlob, a member of the firm, is also a
member of ECC's Board of Directors and owns options to acquire 38,000 shares of
Class A Common Stock.
INDEPENDENT PUBLIC ACCOUNTANTS
The audited financial statements 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 said firm as experts in giving said report.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ECHOSTAR BROADBAND CORPORATION:
Report of Independent Public Accountants.................................................................. F-2
Consolidated Balance Sheets at December 31, 1998 and 1999................................................. F-3
Consolidated Statements of Operations and Comprehensive Loss for the years ended
December 31, 1997, 1998 and 1999....................................................................... F-4
Consolidated Statements of Changes in Stockholder's Equity for the years ended
December 31, 1997, 1998 and 1999....................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999................ F-6
Notes to Consolidated Financial Statements................................................................ F-7
Condensed Consolidated Balance Sheets at December 31, 1999 and September 30, 2000 (Unaudited)............. F-31
Condensed Consolidated Statements of Operations for the
nine months ended September 30, 1999 and 2000 (Unaudited).............................................. F-32
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 2000 (Unaudited).............................................. F-33
Notes to Condensed Consolidated Financial Statements (Unaudited).......................................... F-34
</TABLE>
F-1
<PAGE> 137
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EchoStar Broadband Corporation:
We have audited the accompanying consolidated balance sheets of
EchoStar Broadband Corporation (a Colorado corporation) and subsidiaries (after
corporate reorganization -- see Note 14), as of December 31, 1998 and 1999, and
the related 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, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
EchoStar Broadband Corporation and subsidiaries as of December 31, 1998 and
1999, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 10, 2000 (except for the matter discussed in Note 14, as to which the date
is September 25, 2000).
F-2
<PAGE> 138
ECHOSTAR BROADBAND CORPORATION
CONSOLIDATED BALANCE SHEETS
(After Corporate Reorganization -- see Note 14)
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ........................................................ $ 25,309 $ 159,762
Marketable investment securities ................................................. 7,000 24,774
Trade accounts receivable, net of allowance for uncollectible accounts of
$2,996 and $13,109, respectively .............................................. 107,743 157,944
Insurance receivable ............................................................. -- 106,000
Inventories ...................................................................... 76,708 123,184
Other current assets ............................................................. 24,823 27,027
----------- -----------
Total current assets ................................................................ 241,583 598,691
Restricted Assets:
Interest and satellite escrows and other restricted cash and marketable
investment securities ............................................................... 77,657 --
Insurance receivable ............................................................. 106,000 --
----------- -----------
Total restricted assets ............................................................. 183,657 --
Property and equipment, net ......................................................... 853,818 1,314,007
FCC authorizations, net ............................................................. 103,266 722,234
Deferred tax assets ................................................................. 60,638 56,061
Other noncurrent assets ............................................................. 27,212 39,215
----------- -----------
Total assets ................................................................... $ 1,470,174 $ 2,730,208
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable ........................................................... $ 90,562 $ 187,703
Deferred revenue ................................................................. 132,857 181,034
Accrued expenses ................................................................. 176,158 483,635
Advances from affiliates, net .................................................... 54,805 272,440
Current portion of long-term debt ................................................ 22,679 21,017
----------- -----------
Total current liabilities ........................................................... 477,061 1,145,829
Long-term obligations, net of current portion:
1994 Notes ....................................................................... 571,674 1,503
1996 Notes ....................................................................... 497,955 1,097
1997 Notes ....................................................................... 375,000 15
Seven Year Notes ................................................................. -- 375,000
Ten Year Notes ................................................................... -- 1,625,000
Mortgages and other notes payable, net of current portion ........................ 43,450 25,445
Notes payable to ECC, including accumulated interest ............................. 59,812 --
Long-term deferred satellite services revenue and other long-term liabilities .... 33,358 18,812
----------- -----------
Total long-term obligations, net of current portion ................................. 1,581,249 2,046,872
----------- -----------
Total liabilities .............................................................. 2,058,310 3,192,701
Commitments and Contingencies (Note 8)
Stockholder's Equity (Deficit):
Common Stock, $.01 par value, 100,000 shares authorized: 1,000 shares, issued and
outstanding ...................................................................... -- --
Additional paid-in capital ....................................................... 145,165 1,448,325
Deferred stock-based compensation ................................................ -- (117,780)
Accumulated deficit .............................................................. (733,301) (1,793,038)
----------- -----------
Total stockholder's equity (deficit) ................................................ (588,136) (462,493)
----------- -----------
Total liabilities and stockholder's equity (deficit) ........................... $ 1,470,174 $ 2,730,208
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE> 139
ECHOSTAR BROADBAND CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(After Corporate Reorganization -- see Note 14)
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
DISH Network:
Subscription television services ........................... $ 298,883 $ 669,310 $ 1,343,234
Other ...................................................... 42,925 12,799 9,369
----------- ----------- -----------
Total DISH Network ........................................... 341,808 682,109 1,352,603
DTH equipment sales and integration services ................. 90,263 253,841 178,325
Satellite services ........................................... 11,135 22,304 40,657
C-band and other ............................................. 32,696 27,655 34,706
----------- ----------- -----------
Total revenue ................................................... 475,902 985,909 1,606,291
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ................................ 143,529 298,443 580,979
Customer service center and other .......................... 35,078 72,482 117,249
Satellite and transmission ................................. 14,563 26,067 40,083
----------- ----------- -----------
Total DISH Network operating expenses ........................ 193,170 396,992 738,311
Cost of sales - DTH equipment and integration
services .................................................. 60,918 174,615 149,527
Cost of sales - C-band and other ............................. 23,909 16,496 17,076
Marketing:
Subscriber promotion subsidies ............................. 148,502 283,694 677,527
Advertising and other ...................................... 34,843 47,986 64,660
----------- ----------- -----------
Total marketing expenses ..................................... 183,345 331,680 742,187
General and administrative ................................... 66,060 94,824 141,668
Non-cash, stock-based compensation ........................... -- -- 61,060
Amortization of subscriber acquisition costs ................. 121,428 18,819 --
Depreciation and amortization ................................ 51,408 83,338 110,031
----------- ----------- -----------
Total costs and expenses ........................................ 700,238 1,116,764 1,959,860
----------- ----------- -----------
Operating loss .................................................. (224,336) (130,855) (353,569)
Other Income (Expense):
Interest income .............................................. 12,512 10,111 12,566
Interest expense, net of amounts capitalized ................. (110,003) (172,942) (196,390)
Other ........................................................ (1,451) (618) (24,892)
----------- ----------- -----------
Total other income (expense) .................................... (98,942) (163,449) (208,716)
----------- ----------- -----------
Loss before income taxes ........................................ (323,278) (294,304) (562,285)
Income tax provision, net ....................................... (146) (71) (131)
----------- ----------- -----------
Net loss before extraordinary charges ........................... (323,424) (294,375) (562,416)
Extraordinary charge for early retirement of debt, net
of tax ........................................................ -- -- (228,733)
----------- ----------- -----------
Net loss ........................................................ $ (323,424) $ (294,375) $ (791,149)
=========== =========== ===========
Change in unrealized gain (loss) on available-for-sale
securities, net of tax ....................................... 4 8 --
----------- ----------- -----------
Comprehensive loss .............................................. $ (323,420) $ (294,367) $ (791,149)
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 140
ECHOSTAR BROADBAND CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(After Corporate Reorganization -- see Note 14)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT AND
DEFERRED UNREALIZED
COMMON STOCK ADDITIONAL STOCK- HOLDING
------------------------ PAID-IN BASED GAINS
SHARES AMT. CAPITAL COMPENSATION (LOSSES) TOTAL
----------- ------- ----------- ------------ ------------ -----------
(Note 1)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 .................... 1 $ -- $ 108,842 $ -- $ (115,514) $ (6,672)
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 .................... 1 -- 125,165 -- (438,934) (313,769)
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 .................... 1 -- 145,165 -- (733,301) (588,136)
Contribution of satellite assets
acquired by ECC from News Corporation
and MCI .................................. -- -- 1,124,320 -- -- 1,124,320
Deferred stock-based compensation funded
by ECC ................................... -- -- 178,840 (178,840) -- --
Deferred stock-based compensation
recognized ............................... -- -- -- 61,060 -- 61,060
Capital contribution to ECC ................ -- -- -- -- (268,588) (268,588)
Net loss ................................... -- -- -- -- (791,149) (791,149)
----------- ------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 .................... 1 $ -- $ 1,448,325 $ (117,780) $(1,793,038) $ (462,493)
=========== ======= =========== =========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 141
ECHOSTAR BROADBAND CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(After Corporate Reorganization -- See Note 14)
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................................ $ (323,424) $ (294,375) $ (791,149)
Adjustments to reconcile net loss to net cash flows from operating activities:
Extraordinary charge for early retirement of debt ................................ -- -- 228,733
Loss on impairment of satellite (Note 3) ......................................... -- -- 13,741
Loss on disposal of assets ....................................................... -- -- 9,846
Deferred stock-based compensation recognized ..................................... -- -- 61,060
Depreciation and amortization .................................................... 51,408 83,338 110,031
Amortization of subscriber acquisition costs ..................................... 121,428 18,819 --
Interest on notes payable to ECC added to principal .............................. 5,215 5,215 330
Deferred income tax benefit ...................................................... (361) -- --
Amortization of debt discount and deferred financing costs ....................... 83,221 125,724 13,440
Change in reserve for excess and obsolete inventory .............................. (1,823) 1,341 (1,301)
Change in long-term deferred satellite services revenue and other long-term
liabilities ................................................................... 12,056 13,858 10,173
Superstar exclusivity fee ........................................................ -- -- (10,000)
Other, net ....................................................................... 403 -- --
Changes in current assets and current liabilities:
Trade accounts receivable, net ................................................. (52,562) (41,698) (50,201)
Inventories .................................................................... 51,597 (55,056) (45,175)
Subscriber acquisition costs ................................................... (72,118) -- --
Other current assets ........................................................... 13,359 (11,611) 2,373
Trade accounts payable ......................................................... 27,808 21,526 97,141
Deferred revenue ............................................................... 18,120 10,642 48,177
Accrued expenses and other current liabilities ................................. 58,124 68,328 217,727
----------- ----------- -----------
Net cash flows from operating activities ............................................ (7,549) (53,949) (85,054)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ....................................... (36,586) (8,970) (186,866)
Sales of marketable investment securities ........................................... 51,513 5,868 169,092
Purchases of restricted marketable investment securities ............................ (1,495) -- --
Funds released from escrow and restricted cash and marketable investment
securities ........................................................................ 120,215 116,468 77,657
Offering proceeds and investment earnings placed in escrow .......................... (227,561) (6,343) --
Repayments from (advances to) affiliates, net ....................................... 9,976 -- --
Purchases of property and equipment ................................................. (221,750) (153,513) (87,597)
Advances from News Corporation and MCI for satellite payments ....................... -- -- 67,804
Other ............................................................................... (391) 3,150 (1,318)
----------- ----------- -----------
Net cash flows from investing activities ............................................ (306,079) (43,340) 38,772
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates ............................................................ -- 77,090 217,635
Net proceeds from issuance of 1997 Notes ............................................ 362,500 -- --
Proceeds from issuance of Seven Year Notes .......................................... -- -- 375,000
Proceeds for issuance of Ten Year Notes ............................................. -- -- 1,625,000
Debt issuance costs and prepayment premiums ......................................... -- -- (233,721)
Retirement of 1994 Notes ............................................................ -- -- (575,674)
Retirement of 1996 Notes ............................................................ -- -- (501,350)
Retirement of 1997 Notes ............................................................ -- -- (378,110)
Capital contribution to ECC ......................................................... -- -- (268,588)
Repayment of note payable to ECC .................................................... (12,000) -- (60,142)
Repayments of mortgage indebtedness and other notes payable ......................... (13,253) (16,552) (22,180)
Other ............................................................................... -- -- 2,865
----------- ----------- -----------
Net cash flows from financing activities ............................................ 337,247 60,538 180,735
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ................................ 23,619 (36,751) 134,453
Cash and cash equivalents, beginning of year ........................................ 38,441 62,060 25,309
----------- ----------- -----------
Cash and cash equivalents, end of year .............................................. $ 62,060 $ 25,309 $ 159,762
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 142
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(After Corporate Reorganization -- See Note 14)
1. ORGANIZATION AND BUSINESS ACTIVITIES
Basis of Presentation
EchoStar DBS Corporation ("EDBS") is a wholly-owned subsidiary of
EchoStar Broadband Corporation ("EBC," or the "Company"), which 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 (see Note 14). 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 placed ownership of all of its direct broadcast satellites and related
FCC licenses into EchoStar Satellite Corporation ("ESC"). DirectSat Corporation,
Direct Broadcasting Satellite Corporation ("DBSC") and EchoStar Space
Corporation ("Space") were merged into ESC. Dish, Ltd., and EchoStar Satellite
Broadcasting Company ("ESBC") were merged into EDBS. EchoStar IV and the related
FCC licenses were transferred to ESC. The accompanying financial statements
retroactively reflect this reorganization.
EDBS was formed under Colorado law in January 1996 for the initial
purpose of participating in an FCC auction. On January 26, 1996, EDBS submitted
the winning bid of $52.3 million for 24 direct broadcast satellite ("DBS")
frequencies at the 148(degree) West Longitude ("WL") orbital location. Funds
necessary to complete the purchase of the DBS frequencies and commence
construction of the ECC's fourth DBS satellite, EchoStar IV, were advanced to
the EDBS by ECC. In June 1997, EDBS 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
EDBS. As a result of the Contribution, ESBC became a wholly-owned subsidiary of
EDBS. This transaction was accounted for as a reorganization of entities under
common control in which ESBC is treated as the predecessor of EDBS.
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. 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.
Principal Business
Unless otherwise stated herein, or the context otherwise requires,
references herein to EchoStar shall include ECC, EBC and all direct and indirect
wholly-owned subsidiaries thereof. Substantially all of EchoStar's operations
are conducted by subsidiaries of EBC. The operations of EchoStar include three
interrelated business units:
o The DISH Network - a direct broadcast satellite ("DBS")
subscription television service in the United States. As of
December 31, 1999, EchoStar had approximately 3.4 million DISH
Network subscribers.
o EchoStar Technologies Corporation ("ETC") - engaged in the
design 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 DTH ventures.
F-7
<PAGE> 143
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
o 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," "EchoStar IV," and "EchoStar V"), digital satellite receivers,
digital broadcast operations centers, 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.
Organization and Legal Structure
In December 1995, ECC merged Dish, Ltd. with a wholly-owned subsidiary
of ECC. During the first quarter of 1999, EchoStar placed ownership of all of
its direct broadcast satellites and related FCC licenses into ESC. DirectSat
Corporation, DBSC and Space were merged into ESC. Dish, Ltd. and ESBC were
merged into EDBS. EchoStar IV and the related FCC licenses were transferred to
ESC. Substantially all of EchoStar's operations are conducted by subsidiaries of
EBC.
The following table summarizes the organizational structure of EchoStar
and its principal subsidiaries as of December 31, 1999:
<TABLE>
<CAPTION>
REFERRED TO
LEGAL ENTITY HEREIN AS PARENT
------------ ----------- ------
<S> <C> <C>
EchoStar Communications Corporation ECC Publicly owned
EchoStar DBS Corporation DBS Corp EBC
EchoStar Satellite Corporation ESC DBS Corp
Echosphere Corporation Echosphere DBS Corp
EchoStar Technologies Corporation ETC DBS Corp
</TABLE>
Significant Risks and Uncertainties
Substantial Leverage. The Company is highly leveraged, which makes it
vulnerable to changes in general economic conditions. As of December 31, 1999,
the Company had outstanding long-term debt (including both the current and
long-term portions) totaling approximately $2.0 billion. In August 1999, Company
began paying semi-annual cash debt service payments of approximately $94 million
related to its 9 1/4% Senior Notes due 2006 (the "Seven Year Notes") and its 9
3/8% Senior Notes due 2009 (the "Ten Year 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 its 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.
F-8
<PAGE> 144
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The Company accounts for investments in 50% or less owned entities
using the equity method. At December 31, 1997, 1998 and 1999, these investments
were not material to the Company's consolidated financial statements. All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. Actual results could differ from those estimates.
Foreign Currency Transaction Gains and Losses
The functional currency of 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 1997, 1998 and 1999 were not material to the Company's results of
operations.
Statements of Cash Flows Data
The following presents the Company's supplemental cash flow statement
disclosure (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid for interest ........................................................ $ 5,953 $ 57,706 $ 126,172
Cash paid for income taxes .................................................... 209 83 119
Capitalized interest .......................................................... 43,169 21,619 --
Satellite vendor financing .................................................... 14,400 12,950 --
Other notes payable ........................................................... 5,322 -- --
Contribution of satellite asset ............................................... -- 20,000 --
Assets acquired from News Corporation and MCI:
FCC licenses and other ..................................................... -- -- 626,120
Satellites ................................................................. -- -- 451,200
Digital broadcast operations center ........................................ -- -- 47,000
Capital contribution from ECC ................................................. -- -- 1,124,320
The purchase price of DBSC was allocated as follows in the related purchase
accounting:
EchoStar III satellite under construction .................................. 51,241 -- --
FCC authorizations ......................................................... 16,243 -- --
Note 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>
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, 1998 and 1999 consist of money market funds, corporate notes and
commercial paper; such balances are stated at cost which equates to market
value.
F-9
<PAGE> 145
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
Marketable Investment Securities and Restricted Cash and Marketable Investment
Securities
As of December 31, 1998 and 1999, 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 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, as reflected in
the accompanying consolidated balance sheets, include cash restricted by the
indenture related to the 1997 Notes, plus investment earnings thereon and
restricted cash placed in trust for the purpose of repaying a note payable, as
of December 31, 1998 and 1999, respectively. The major components of marketable
investment securities and restricted cash and marketable investment securities
are as follow (in thousands):
<TABLE>
<CAPTION>
RESTRICTED CASH AND MARKETABLE
MARKETABLE INVESTMENT SECURITIES INVESTMENT SECURITIES
DECEMBER 31, DECEMBER 31,
-------------------------------- ------------------------------
1998 1999 1998 1999
------- ------- ------- --------
<S> <C> <C> <C> <C>
Commercial paper .................. $ -- $ 9,053 $ 8,424 $ --
Corporate notes and bonds ......... 7,000 7,742 54,360 --
Government bonds .................. -- 7,979 14,517 --
Accrued interest .................. -- -- 356 --
------- ------- ------- --------
$ 7,000 $24,774 $77,657 $ --
======= ======= ======= ========
</TABLE>
At December 31, 1999 marketable investment securities include debt
securities of $25 million with contractual maturities of one year or less and no
debt securities with maturities greater than one year. 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, 1997 Notes, Seven
Year Notes, and Ten Year 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, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
---------------------------- ----------------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1994 Notes ........................... $ 571,674 $ 636,480 $ 1,503 $ 1,503
1996 Notes ........................... 497,955 580,000 1,097 1,097
1997 Notes ........................... 375,000 431,250 15 15
Seven Year Notes ..................... -- -- 375,000 377,813
Ten Year Notes ....................... -- -- 1,625,000 1,637,188
Mortgages and other notes payable .... 66,129 61,975 46,462 46,065
</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
F-10
<PAGE> 146
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
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, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Finished goods - DBS ............................. $ 44,936 $ 63,054
Raw materials .................................... 8,473 35,751
Finished goods - reconditioned and other ......... 18,406 19,509
Work-in-process .................................. 2,420 7,666
Consignment ...................................... 7,654 1,084
Reserve for excess and obsolete inventory ........ (5,181) (3,880)
--------- ---------
$ 76,708 $ 123,184
========= =========
</TABLE>
During December 1999, the Company provided for losses of $16.6 million,
primarily for component parts and purchase commitments related to its first
generation model 7100 set-top boxes. Production of model 7100 has been suspended
in favor of its second generation model 7200 set-top boxes.
Property and Equipment
Property and equipment are stated at cost. Cost includes interest
capitalized of $32 million and $16 million during the years ended December 31,
1997 and 1998, respectively. No interest was capitalized during 1999. 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 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 $11 million and $6 million during
the years ended December 31, 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.
F-11
<PAGE> 147
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
Subscriber Promotion Subsidies and Subscriber Acquisition Costs
In August 1996, the Company began selling its receiver systems below
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.
During November 1999, EchoStar entered into an exclusive multi-year
agreement with Superstar/Netlink Group ("Superstar"), a subsidiary of TV Guide,
Inc., to convert its current and inactive C-band subscribers to EchoStar's DBS
services. Under the terms of the agreement, Superstar will actively solicit its
C-band subscribers to convert to EchoStar's DBS services and will not provide
its subscriber lists to cable providers or other DBS providers. In exchange, in
December 1999, EchoStar paid Superstar a $10,000,000 exclusivity fee. In
addition, EchoStar will incur substantial subscriber acquisition costs,
including payments to Superstar and the retailer, and for equipment and other
incentives to the consumer for each Superstar subscriber who actually converts
to and remains a subscriber to our DBS services. The exclusivity fee will be
amortized to expense as subscribers projected to be converted are activated for
DISH Network services.
Deferred Debt Issuance Costs and Debt Discount
Costs of issuing debt are deferred and amortized to interest expense
over the terms of the respective notes. Prior to being refinanced during January
1999, the original issue discounts related to the 1994 Notes and the 1996 Notes
were being accreted to interest expense so as to reflect a constant rate of
interest on the accreted balance of the 1994 Notes and the 1996 Notes.
Deferred Revenue
Deferred revenue principally consists of prepayments received from
subscribers for DISH Network programming. Such amounts are recognized as revenue
in the period the programming is provided to the subscriber.
Long-Term Deferred Satellite Services Revenue
Long-term deferred satellite services revenue consists of advance
payments from certain content providers for carriage of their signal on the DISH
Network. Such amounts are deferred and recognized as revenue on a straight-line
basis over the related contract terms (up to ten years).
Accrued Expenses
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
-------- --------
<S> <C> <C>
Marketing ....................................................... $ 33,463 $ 88,204
Royalties and copyright fees .................................... 49,400 87,390
Interest ........................................................ 24,918 78,460
Programming ..................................................... 35,472 59,769
Advances from News Corporation and MCI for satellite payments ... -- 67,804
Other ........................................................... 32,905 102,008
-------- --------
$176,158 $483,635
======== ========
</TABLE>
F-12
<PAGE> 148
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
Advertising Costs
Advertising costs, exclusive of subscriber promotion subsidies, are
expensed as incurred and totaled $35 million, $48 million and $65 million for
the years ended December 31, 1997, 1998 and 1999, respectively.
Research and Development Costs
Research and development costs are expensed as incurred. Research and
development costs totaled $6 million, $8 million and $10 million for the years
ended December 31, 1997, 1998, and 1999, respectively.
Comprehensive Loss
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 consolidated balance
sheets consists of the accumulated net unrealized loss on available-for-sale
securities, net of deferred taxes.
New Accounting Standard
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Views on Selected Revenue
Recognition Issues", which provides the staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. The
Company is required to adopt the provisions of SAB 101 and certain related EITF
consensuses in the quarter ended December 31, 2000 retroactive to January 1,
2000. The Company is currently evaluating and is not yet able to reasonably
estimate the potential impact, the adoption of SAB 101 will have on its
financial position and results of operations.
Reclassifications
Certain prior year balances in the consolidated financial statements
have been reclassified to conform with the 1999 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
LIFE -------------------------------
(IN YEARS) 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
EchoStar I ............................. 12 $ 201,607 $ 201,607
EchoStar II ............................ 12 228,694 228,694
EchoStar III ........................... 12 234,083 234,083
EchoStar IV ............................ 10 105,005 89,505
EchoStar V ............................. 12 -- 208,578
Furniture, fixtures and equipment ...... 2-12 182,717 241,527
Buildings and improvements ............. 7-40 42,121 47,745
Land ................................... -- 1,640 1,659
Tooling and other ...................... 2 5,551 5,811
Vehicles ............................... 7 1,288 1,119
Construction in progress ............... -- 18,329 319,308
----------- -----------
Total property and equipment ....... 1,021,035 1,579,636
Accumulated depreciation ............... (167,217) (265,629)
----------- -----------
Property and equipment, net ........ $ 853,818 $ 1,314,007
=========== ===========
</TABLE>
F-13
<PAGE> 149
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
Construction in progress consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
-------- --------
<S> <C> <C>
Progress amounts for satellite construction, launch, and launch
insurance:
EchoStar VI ..................................................... $ -- $243,633
Digital broadcast operations center .................................. -- 47,000
Other ................................................................ 18,329 28,675
-------- --------
$ 18,329 $319,308
======== ========
</TABLE>
EchoStar IV Impairment
As a result of the failure of EchoStar IV solar arrays to fully deploy
and the unrelated failure of 20 transponders to date, a maximum of approximately
16 of the 44 transponders on EchoStar IV are currently available for use at this
time. Due to the normal degradation of the solar arrays, the number of available
transponders may further decrease over time. Based on current data from Lockheed
Martin, we expect that at least 10 high power transponders or 5 extra-high power
transponders will probably be available over the remaining useful life of the
satellite, absent significant additional transponder problems or other failures.
In addition to transponder failures, EchoStar IV experienced anomalies
affecting its heating systems and fuel system during 1999. As a result of the
heating system and fuel system anomalies, the remaining useful life of EchoStar
IV has been reduced to less than 10 years. Accordingly, as of November 1, 1999,
EchoStar prospectively revised the remaining useful life of EchoStar IV. This
change, after the additional loss provision discussed below, increased
EchoStar's net loss for 1999 by approximately $357,000.
During September 1998, EchoStar recorded a $106 million provision for
loss in connection with the partial failure of EchoStar IV solar arrays to
deploy. During December 1999, EchoStar recorded an additional $13.7 million
provision for loss related to the reduction in the remaining useful life of
EchoStar IV. The aggregate loss provision of $119.7 million represented
EchoStar's estimate, at December 31, 1999, of the asset impairment attributable
to lost transmission capacity on EchoStar IV resulting from the solar array
anomaly described above. EchoStar also recorded a $106 million gain, during
September 1998, attributable to an anticipated insurance claim receivable that
it believes is probable of receipt. While there can be no assurance as to the
amount of the final insurance settlement, EchoStar believes that it will receive
insurance proceeds at least equal to the $106 million receivable recorded. To
the extent that it appears probable that EchoStar will receive insurance
proceeds in excess of the $106 million currently recorded and that no further
provision for loss is necessary, a gain will be recognized for the incremental
amount in the period that the amount of the final settlement can be reasonably
estimated.
In September 1998, EchoStar filed a $219.3 million insurance claim for
a constructive total loss under the launch insurance policy related to EchoStar
IV. However, if the Company 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 under that
definition in the launch insurance policy, we intend to negotiate a settlement
with the insurers to compensate us for the reduced satellite transmission
capacity and allow us to retain title to the asset.
The satellite insurance policy for EchoStar IV consists of separate
identical policies with different carriers for varying amounts which, in
combination, create a total insured amount of $219.3 million. Two of the
participants in EchoStar's insurance line have notified EchoStar they believe
that its alleged delay in providing required insurance claim information may
reduce their obligation to pay any settlement related to the claim. One carrier
recently asserted it has no obligation to pay. EchoStar strongly disagrees with
the position taken by those insurers
F-14
<PAGE> 150
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
and continues to believe that the EchoStar IV insurance claim will be resolved
in a manner satisfactory to EchoStar. However, there can be no assurance that
EchoStar will receive the amount claimed or, if it does, that EchoStar will
retain title to EchoStar IV with its reduced capacity. EchoStar met with its
insurance carriers in November 1999 and is continuing discussions to resolve its
claim.
While there can be no assurance, we do not currently expect a material
adverse impact on short or medium term satellite operations. We will continue to
evaluate the performance of EchoStar IV and may modify our loss assessment as
new events or circumstances develop.
4. LONG-TERM DEBT
Tender Offers
Tender offers for EchoStar's 12 7/8% Senior Secured Discount Notes due
June 1, 2004, (the "1994 Notes"), 13 1/8% Senior Secured Discount Notes due
2004, (the "1996 Notes") and 12 1/2% Senior Secured Discount Notes due 2002,
(the "1997 Notes") were consummated on January 25, 1999. The tender offers were
funded with proceeds from the offering of the Seven Year Notes and the Ten Year
Notes. Except for residual aggregate non-tendered debt of approximately $2.6
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. As a
result of the January 1999 refinancing, an extraordinary loss of $269 million
was recognized, comprised of deferred debt costs, discounts, tender costs, and
premiums paid over the accreted values of the debt retired. A brief summary of
the terms of the residual notes outstanding follows.
1994 Notes
In June 1994, Dish, Ltd. issued the 1994 Notes 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 (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, EDBS issued the 1997 Notes (the "1997 Notes Offering").
The 1997 Notes Offering resulted in net proceeds to EDBS 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
F-15
<PAGE> 151
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
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, EDBS 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 Seven and Ten Year Notes offering,
EchoStar used approximately $1.658 billion of net proceeds received from the
sale of the Seven and Ten Year Notes to complete tender offers for its
outstanding 1994 Notes, 1996 Notes and 1997 Notes. In February 1999, EchoStar
used approximately $268 million of net proceeds received from the sale of the
Seven and Ten Year Notes to complete the tender offers related to the 12 1/8%
Senior Exchange Notes due 2004, (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 ("Series B Preferred Stock").
With the exception of certain de minimis domestic and foreign
subsidiaries, the Seven and Ten Year Notes are fully, unconditionally and
jointly and severally guaranteed by all subsidiaries of EDBS, (collectively, the
"Seven and Ten Year Notes Guarantors"). The Seven and Ten Year Notes are general
senior unsecured obligations which:
o rank pari passu in right of payment to each other and to all
existing and future senior unsecured obligations;
o rank senior to all existing and future junior obligations; and
o are effectively junior to secured obligations to the extent of
the collateral securing such obligations, including any
borrowings under future secured credit facilities.
Except under certain circumstances requiring prepayment premiums, and
in other limited circumstances, the Seven and Ten Year Notes are not redeemable
at EDBS' 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
EDBS, 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 EDBS, 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 Seven and Ten Year Notes (the "Seven and
Ten Year Notes Indentures") contain restrictive covenants that, among other
things, impose limitations on the ability of EDBS to:
o incur additional indebtedness;
o apply the proceeds of certain asset sales;
o create, incur or assume liens;
o create dividend and other payment restrictions with respect to
EDBS' subsidiaries;
o merge, consolidate or sell assets; and
o enter into transactions with affiliates.
In addition, EDBS may pay dividends on its equity securities only if no
default shall have occurred or is continuing under the Seven and Ten Year Notes
Indentures; and after giving effect to such dividend and the incurrence of any
indebtedness (the proceeds of which are used to finance the dividend), EDBS'
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 EDBS (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 EDBS and its subsidiaries from the
issuance or sale of certain equity interests of EDBS or EchoStar.
F-16
<PAGE> 152
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
In the event of a change of control, as defined in the Seven and Ten
Year Notes Indentures, EDBS 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.
Mortgages and Other Notes Payable
Mortgages and other notes payable consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
-------- --------
<S> <C> <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 ..................................................................... $ 17,137 $ 9,606
8.25% note payable for satellite vendor financing for EchoStar II due in equal
monthly installments of $562, including interest, through November 2001 ........... 17,416 11,909
8.25% note payable for satellite vendor financing for EchoStar III due in equal
monthly installments of $294, including interest, through October 2002 ............ 12,183 8,645
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 9,409
Mortgages and other unsecured notes payable due in installments through November
2009 with interest rates ranging from 4% to 10% ................................... 6,443 6,893
-------- --------
Total ............................................................................... 66,129 46,462
Less current portion ................................................................ (22,679) (21,017)
-------- --------
Mortgages and other notes payable, net of current portion ........................... $ 43,450 $ 25,445
======== ========
</TABLE>
Future maturities of the Company's outstanding long-term debt are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
RESIDUAL
NOTES,
MORTGAGES AND
SEVEN YEAR TEN YEAR OTHER NOTES
NOTES NOTES PAYABLE TOTAL
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
YEAR ENDING DECEMBER 31,
2000 ................... $ -- $ -- $ 21,017 $ 21,017
2001 ................... -- -- 13,776 13,776
2002 ................... -- -- 6,080 6,080
2003 ................... -- -- 1,909 1,909
2004 ................... -- -- 3,253 3,253
Thereafter ............. 375,000 1,625,000 3,042 2,003,042
---------- ---------- ---------- ----------
Total $ 375,000 $1,625,000 $ 49,077 $2,049,077
========== ========== ========== ==========
</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 EDBS 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-17
<PAGE> 153
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
5. INCOME TAXES
As of December 31, 1999, the Company had net operating loss
carryforwards ("NOLs") for Federal income tax purposes of approximately $1.530
billion. The NOLs expire beginning in the year 2012. 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 1999, 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 than 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 that give rise to deferred tax assets and
liabilities as of December 31, 1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
--------- ---------
<S> <C> <C>
Current deferred tax assets:
Accrued royalties ....................................................... $ 15,971 $ 30,018
Inventory reserves and cost methods ..................................... 1,759 1,355
Accrued expenses ........................................................ 9,845 29,263
Allowance for doubtful accounts ......................................... 1,098 4,842
Reserve for warranty costs .............................................. 101 78
Unrealized holding loss on marketable investment securities ............. -- --
--------- ---------
Total current deferred tax assets ......................................... 28,774 65,556
Current deferred tax liabilities:
Subscriber acquisition costs and other .................................. -- (28)
--------- ---------
Total current deferred tax liabilities .................................... -- (28)
--------- ---------
Gross current deferred tax assets ......................................... 28,774 65,528
Valuation allowance ....................................................... (22,065) (54,242)
--------- ---------
Net current deferred tax assets ........................................... 6,709 11,286
Noncurrent deferred tax assets:
General business and foreign tax credits ................................ 2,072 2,504
Net operating loss carryforwards ........................................ 164,123 568,859
Amortization of original issue discount on 1994 Notes and 1996 Notes .... 105,095 --
Other ................................................................... 12,999 9,551
--------- ---------
Total noncurrent deferred tax assets ...................................... 284,289 580,914
Noncurrent deferred tax liabilities:
Depreciation ............................................................ (24,115) (43,949)
Other ................................................................... (144) (245)
--------- ---------
Total noncurrent deferred tax liabilities ................................. (24,259) (44,194)
--------- ---------
Gross deferred tax assets ................................................. 260,030 536,720
--------- ---------
Valuation allowance ....................................................... (199,392) (480,659)
--------- ---------
Net noncurrent deferred tax assets ........................................ 60,638 56,061
--------- ---------
Net deferred tax assets ................................................... $ 67,347 $ 67,347
========= =========
</TABLE>
F-18
<PAGE> 154
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
The components of the benefit from (provision for) income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Current benefit (provision):
Federal ............................ $ (361) $ -- $ --
State .............................. (9) 6 (46)
Foreign ............................ (137) (77) (85)
--------- --------- ---------
(507) (71) (131)
Deferred benefit:
Federal ............................ 108,598 97,819 285,724
State .............................. 8,082 7,319 27,720
Increase in valuation allowance .... (116,319) (105,138) (313,444)
--------- --------- ---------
361 -- --
--------- --------- ---------
Total benefit (provision) ....... $ (146) $ (71) $ (131)
========= ========= =========
</TABLE>
The actual tax benefit (provision) for 1997, 1998 and 1999 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,
----------------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Statutory rate ........................................ 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit ............ 1.6 1.6 2.3
Research and development and foreign tax credits ...... 0.7 -- --
Non-deductible interest expense ....................... (0.5) (1.3) (0.3)
Other ................................................. (0.8) 0.4 1.5
Increase in valuation allowance ....................... (36.0) (35.7) (38.5)
------ ------ ------
Total benefit from income taxes ....................... --% --% --%
====== ====== ======
</TABLE>
6. STOCK COMPENSATION PLANS
On each of July 19, 1999, October 25, 1999, and March 22, 2000,
EchoStar completed two-for-one splits of its outstanding class A and class B
common stock. As the following footnote reflects activity for the year ended
December 31, 1999, all references in the following footnote retroactively give
effect to the stock splits completed in July and October 1999, but not the March
2000 stock split.
Stock Incentive Plan
In April 1994, EchoStar adopted a stock incentive plan to provide
incentive to attract and retain officers, directors and key employees. EchoStar
currently has reserved up to 40 million shares of its Class A common stock for
granting awards under its 1995 Stock Incentive Plan and an additional 40 million
shares of its Class A common stock for granting awards under its 1999 Stock
Incentive Plan. In general, stock options granted through December 31, 1999 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 1999, EchoStar adopted the 1999 Incentive Plan which provided
certain key employees a contingent incentive including stock options and cash.
The payment of these incentives was contingent upon the achievement of certain
financial and other goals of EchoStar. EchoStar met certain of these goals
during 1999. Accordingly, EchoStar accrued $675,000 related to cash incentives
to be paid. EchoStar also recorded approximately $179 million of deferred
compensation related to post-grant appreciation of options to purchase
approximately 2.1 million shares, granted pursuant to the 1999 Incentive Plan.
The related deferred compensation will be recognized over the
F-19
<PAGE> 155
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
five-year vesting period. As a result of substantial post-grant appreciation of
options, variable plan accounting principles require that EchoStar recognize
during 1999, $61 million of the total of $179 million of deferred stock-based
compensation under this performance based plan. The remainder will be recognized
over the remaining vesting period.
Options to purchase an additional 5.6 million shares were granted at
fair market value during 1999 pursuant to the Long Term Incentive Plan. Vesting
of these options is contingent on meeting certain longer-term goals, the
achievement of which can not be reasonably predicted as of December 31, 1999.
Accordingly, no compensation was recorded during 1999 related to these long-term
options. EchoStar will continue to evaluate the likelihood of achieving these
long-term goals and will record the related compensation at the time achievement
of these goals becomes probable. The Board of Directors has approved a 2000
Incentive Plan. Any future payments under this plan are contingent upon the
achievement of certain financial and other goals.
A summary of EchoStar's incentive stock option activity for the years
ended December 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------------------------- ------------------------------ -----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- ---------------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
year ............................. 4,101,092 $ 3.57 6,098,268 $ 3.75 5,788,060 $ 4.07
Granted ............................. 3,118,200 4.26 2,792,540 4.70 10,423,856 15.42
Repriced ............................ 1,023,176 4.25 -- -- -- --
Exercised ........................... (392,632) 2.41 (752,728) 3.13 (1,904,057) 3.67
Forfeited ........................... (1,751,568) 4.87 (2,350,020) 4.27 (386,039) 9.84
----------- ----------- ----------- ----------- ----------- -----------
Options outstanding, end of year .... 6,098,268 $ 3.75 5,788,060 $ 4.07 13,921,820 $ 12.51
=========== =========== =========== =========== =========== ===========
Exercisable at end of year .......... 1,388,036 $ 3.04 1,929,212 $ 3.46 1,377,716 $ 3.71
=========== =========== =========== =========== =========== ===========
</TABLE>
Exercise prices for options outstanding as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ---------------------------------
NUMBER NUMBER
OUTSTANDING WEIGHTED-AVERAGE EXERCISABLE
AS OF REMAINING WEIGHTED- AS OF WEIGHTED-
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1999 LIFE EXERCISE PRICE 1999 EXERCISE PRICE
------------------- ------------ ---------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ 2.333 - $ 2.967 509,759 2.79 $ 2.37 482,795 $ 2.33
4.250 - 4.573 2,509,249 5.51 4.27 814,814 4.27
5.500 - 6.868 658,198 6.62 5.70 73,318 5.92
8.243 - 10.00 204,036 7.21 9.97 2,327 8.24
10.973 - 13.200 8,410,426 8.61 12.01 4,462 11.39
20.406 - 20.406 1,034,152 7.29 20.41 -- --
38.360 - 38.360 288,000 9.50 38.36 -- --
45.407 - 45.407 128,000 9.75 45.41 -- --
97.500 - 97.500 180,000 10.00 97.50 -- --
------------------- ---------- ----------- -------- --------- -------
$ 2.333 - $ 97.500 13,921,820 7.67 $ 12.51 1,377,716 $ 3.71
=================== ========== =========== ======== ========= =======
</TABLE>
F-20
<PAGE> 156
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
On July 1, 1997, the Board of Directors approved a repricing of
substantially all outstanding options with an exercise price greater than $4.25
per share of Class A common stock to $4.25 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 $3.81 on the date of the
repricing. Options to purchase approximately 1,024,000 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 generally does not recognize compensation expense on the issuance
of stock under its Stock Incentive Plan because the option terms are typically
fixed and typically 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.
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,
--------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate ............................... 6.09% 5.64% 5.38%
Volatility factor ..................................... 68% 67% 76%
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 ........ $ 2.60 $ 3.01 $ 14.27
</TABLE>
The Company's pro forma net loss was $325 million, $297 million and
$741 million for the years ended December 31, 1997, 1998 and 1999, respectively.
The pro forma net loss for 1999 is less than the loss reported in the statement
of operations because the $61 million charge for the post-grant appreciation of
stock-based compensation, determined under APB 25 and reported by the Company,
is greater than the amount of stock-based compensation that would have been
reported by the Company under the provisions of FAS No. 123.
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.
F-21
<PAGE> 157
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
7. EMPLOYEE BENEFIT PLANS
On each of July 19, 1999, October 25, 1999, and March 22, 2000,
EchoStar completed two-for-one splits of its outstanding class A and class B
common stock. As the following footnote reflects activity for the year ended
December 31, 1999, all references in the following footnote retroactively give
effect to the stock splits completed in July and October 1999, but not the March
2000 stock split.
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 400,000 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, 1998 and 1999, employees purchased
approximately 16,000, 64,000 and 22,000 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 $329,000 in
1997, and $314,000 in 1998 and 1999. Additionally, during 1998, EchoStar
contributed 320,000 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 contributed 260,000 shares of its Class A
common stock (fair value of approximately $3 million) to the 401(k) Plan related
to its 1998 discretionary contribution. During 2000, EchoStar expects to
contribute approximately 60,000 shares of its Class A common stock (fair value
of approximately $6 million) to the 401(k) Plan related to its 1999
discretionary contribution.
8. OTHER COMMITMENTS AND CONTINGENCIES
Leases
Future minimum lease payments under noncancelable operating leases as
of December 31, 1999, are as follows (in thousands):
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
2000..................................................... $ 6,662
2001..................................................... 6,565
2002..................................................... 5,912
2003..................................................... 4,996
2004..................................................... 2,195
Thereafter............................................... 5,760
--------
Total minimum lease payments.......................... $ 32,090
========
</TABLE>
Total rental expense for operating leases approximated $1 million in
1997 and 1998 and $3 million in
1999.
F-22
<PAGE> 158
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
Purchase Commitments
As of December 31, 1999, the Company's purchase commitments totaled
approximately $209 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 2000. The Company expects to finance
these purchases from existing unrestricted cash balances and future cash flows
generated from operations, if any.
Patents and Intellectual Property
Many entities, including some of EchoStar's competitors, now have and
may in the future obtain patents and other intellectual property rights that
cover or affect products or services directly or indirectly related to those
that EchoStar offers. EchoStar may not be aware of all patents and other
intellectual property rights that its products may potentially infringe. Damages
in patent infringement cases can include a tripling of actual damages in certain
cases. Further, EchoStar cannot estimate the extent to which it 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 asserted patent
and other intellectual property rights with respect to components within
EchoStar's direct broadcast satellite system. EchoStar cannot be certain that
these persons do not own the rights they claim, that its products do not
infringe on these rights, that it would be able to obtain licenses from these
persons on commercially reasonable terms or, if it was unable to obtain such
licenses, that it would be able to redesign its products to avoid infringement.
The News Corporation Limited
During February 1997, News Corporation agreed to acquire approximately
50% of the outstanding capital stock of EchoStar. During late April 1997,
substantial disagreements arose between the parties regarding their obligations
under this agreement. Those substantial disagreements led to litigation which
the parties subsequently settled. In connection with the News Corporation
litigation, EchoStar has a contingent fee arrangement with the attorneys who
represented EchoStar in that litigation, which provides for the attorneys to be
paid a percentage of any net recovery obtained in the News Corporation
litigation. The attorneys have asserted that they may be entitled to receive
payments totaling hundreds of millions of dollars under this fee arrangement.
EchoStar is vigorously contesting the attorneys' interpretation of the fee
arrangement, which it believes significantly overstates the magnitude of its
liability. EchoStar also believes that the fee arrangement is void and
unenforceable because the attorneys who represented EchoStar are seeking a fee
that it believes is unreasonable and excessive, among other things. If EchoStar
is unable to resolve this fee dispute with the attorneys, it would be resolved
through arbitration or litigation. During mid-1999, EchoStar initiated
litigation against the attorneys in the District Court, Arapahoe County,
Colorado, arguing that the fee arrangement is void and unenforceable. EchoStar
has also asserted claims for breach of fiduciary duty, constructive fraud,
breach of the fee arrangement, and misappropriation of trade secrets against the
attorneys. In December 1999, the attorneys initiated an arbitration proceeding
before the American Arbitration Association. It is too early to determine the
outcome of negotiations, arbitration or litigation regarding this fee dispute.
WIC Premium Television Ltd.
During July 1998, a lawsuit was filed by WIC Premium Television Ltd.,
an Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner
F-23
<PAGE> 159
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
Communications, Inc., John Doe, Showtime, United States Satellite Broadcasting
Company, Inc., EchoStar, and two of EchoStar's wholly-owned subsidiaries. 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.
During September 1998, WIC filed another lawsuit in the Court of
Queen's Bench of Alberta Judicial District of Edmonton against certain
defendants, including EchoStar. WIC is a company authorized to broadcast certain
copyrighted work, such as movies and concerts, to residents of Canada. WIC
alleges that the defendants engaged in, promoted, and/or allowed satellite dish
equipment from the United States to be sold in Canada and to Canadian residents
and that some of the defendants allowed and profited from Canadian residents
purchasing and viewing subscription television programming that is only
authorized for viewing in the United States. The lawsuit seeks, among other
things, an interim and permanent injunction prohibiting the defendants from
importing hardware into Canada and from activating receivers in Canada, together
with damages in excess of $175 million.
EchoStar filed motions to dismiss each of the actions for lack of
personal jurisdiction. The Court in the Alberta court action recently denied its
Motion to Dismiss. The Alberta Court also granted a motion to add more EchoStar
parties to the lawsuit. EchoStar Satellite Corporation, EchoStar DBS
Corporation, EchoStar Technologies Corporation, and EchoStar Satellite Broadcast
Corporation have been added as defendants in the litigation. The newly added
defendants have also challenged jurisdiction. The Court in the Federal court
action has stayed that case before ruling on EchoStar's motion to dismiss.
EchoStar intends to vigorously defend the suits in the event its motions are
denied. 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
Under the Satellite Home Viewer Act, the determination of whether a
household qualifies as "unserved" for the purpose of eligibility to receive a
distant network channel depends, in part, on whether that household can receive
a signal of "Grade B intensity" as defined by the FCC.
During 1998, the national networks and local affiliate stations
challenged, based upon copyright infringement, PrimeTime 24's methods of selling
network programming to consumers. Historically, we obtained distant broadcast
network signals for distribution to our customers through PrimeTime 24. The
United States District Court for the Southern District of Florida entered a
nationwide 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 injunction covers distributors as
well. The plaintiffs in the Florida litigation informed us they considered us a
distributor for purposes of that injunction. A federal district court in North
Carolina also issued an injunction against PrimeTime 24 prohibiting certain
distant signal retransmissions in the Raleigh area. The Fourth Circuit Court of
Appeals recently affirmed the North Carolina Court's decision. We have
implemented Satellite Home Viewer Act compliance procedures which materially
restrict the market for the sale of network channels by us.
In October 1998, EchoStar filed a declaratory judgment action in the
United States District Court for the District of Colorado against the four major
networks. EchoStar 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 four major broadcast networks and their affiliate groups filed a
complaint against EchoStar in federal court in Miami alleging, among other
things, copyright infringement. The court combined the case that EchoStar filed
in Colorado with the case in Miami and transferred it to the Miami court.
F-24
<PAGE> 160
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
In February 1999, CBS, NBC, Fox and ABC filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV
in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. Under the terms of a settlement between DirecTV and the
networks, some DirecTV customers were scheduled to lose access to their
satellite-provided network channels by July 31, 1999, while other DirecTV
customers were to be disconnected by December 31, 1999. Subsequently, PrimeTime
24 and substantially all providers of satellite-delivered network programming
other than us agreed to this cut-off schedule.
The networks are pursuing a Motion for Preliminary Injunction in the
Miami Court, asking the Court to enjoin EchoStar from providing network
programming except under very limited circumstances. In general, the networks
want EchoStar to turn off programming to its customers on the same schedule
agreed to by DirecTV.
A preliminary injunction hearing was held during September 1999. The
Court took the issues under advisement to consider the networks' request for an
injunction, whether to hear live testimony before ruling upon the request, and
whether to hear argument on why the Satellite Home Viewer Act may be
unconstitutional, among other things. The Court did not say when a decision will
be made, or whether an additional hearing will be necessary prior to ruling on
the networks' preliminary injunction motion.
If this case is decided against EchoStar, or a preliminary injunction
is issued, significant material restrictions on the sale of distant ABC, NBC,
CBS and Fox channels by EchoStar could result, including potentially a
nationwide permanent prohibition on its broadcast of ABC, NBC, CBS and Fox
network channels by satellite. The litigation and the new legislation discussed
above, among other things, could also require EchoStar to terminate delivery of
network signals to a material portion of our subscriber base, which could cause
many of these subscribers to cancel their subscription to EchoStar's other
services. While the networks have not sought monetary damages, they have sought
to recover attorney fees if they prevail. EchoStar has sent letters to some of
its subscribers warning that their access to distant broadcast network channels
might be terminated soon and have terminated ABC, NBC, CBS and Fox programming
to many customers.
In November 1999, Congress passed new legislation regarding the
satellite delivery of network programming and it was signed into law by
President Clinton. This new law has the potential of reducing the number of
customers whose network channels EchoStar may otherwise be required to terminate
as the law "grandfathers" in many subscribers.
Meteoroid Events
In November 1998 and 1999, certain meteoroid events occurred as the
Earth's orbit passed through the particulate trail of Comet 55P (Tempel-Tuttle).
Similar meteoroid events are expected to occur again in November 2000. These
meteoroid events pose a potential threat to all in orbit geosynchronous
satellites including our DBS satellites. While the probability that our
satellites will be damaged by space debris is very small, that probability will
increase by several orders of magnitude during these meteoroid events.
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 EDBS.
F-25
<PAGE> 161
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
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
EDBS, including the non-guarantors during both 1998 and 1999.
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.
The accounting policies for the Company's business units are the same
as those described in the summary of significant accounting policies for the
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 (in thousands).
F-26
<PAGE> 162
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
Financial Data by Business Unit
<TABLE>
<CAPTION>
ECHOSTAR OTHER ECHOSTAR
DISH SATELLITE ELIMINATIONS CONSOLIDATED ECHOSTAR BROADBAND
NETWORK ETC SERVICES AND OTHER TOTAL ACTIVITY CORPORATION
----------- -------- ----------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
YEAR ENDED DECEMBER 31, 1999
Revenue ......................... $ 1,373,789 $160,276 $ 47,312 $ 21,464 $ 1,602,841 $ 3,450 $ 1,606,291
Depreciation and amortization ... 97,899 4,434 193 10,702 113,228 (3,197) 110,031
Total expenses .................. 1,622,928 165,238 15,956 145,810 1,949,932 9,928 1,959,860
EBITDA .......................... (151,241) (528) 31,549 (52,733) (172,953) (9,675) (182,628)
Interest income ................. 26,205 1 375 (402) 26,179 (13,613) 12,566
Interest expense ................ (201,356) (253) -- (4) (201,613) 5,223 (196,390)
Income tax benefit
(provision), net .............. -- (46) -- (108) (154) 23 (131)
Net income (loss) ............... (1,949,914) (31,884) 27,273 1,161,678 (792,847) 1,698 (791,149)
</TABLE>
Geographic Information
<TABLE>
<CAPTION>
OTHER
UNITED STATES EUROPE INTERNATIONAL TOTAL
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
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
1999
Total revenue* .......... $1,583,442 $ 22,849 $ -- $1,606,291
Long-lived assets ....... 2,033,142 3,099 -- 2,036,241
</TABLE>
* Revenues are attributed to geographic regions based upon the location from
which the sale originated.
Transactions with Major Customers
During 1999, export sales to two customers together totaled $126
million and accounted for approximately 8% of the Company's total revenue.
Revenues from these customers are included within the EchoStar Technologies
F-27
<PAGE> 163
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
Corporation 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,
1997, 1998 and 1999 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, 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
YEAR ENDED DECEMBER 31, 1999:
Assets:
Allowance for doubtful accounts .............. $ 2,996 $ 23,481 $(13,368) $ 13,109
Reserve for inventory ........................ 5,181 1,718 (3,019) 3,880
Liabilities:
Reserve for warranty costs and other ......... 275 -- (65) 210
</TABLE>
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly results of operations are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Year Ended December 31, 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)
Year Ended December 31, 1999:
Total revenue ........................ $ 310,335 $ 350,445 $ 431,259 $ 514,252
Operating loss ....................... (57,437) (53,285) (79,623) (163,224)
Net loss before extraordinary
charges ........................... (104,584) (105,936) (126,532) (225,364)
Net loss ............................. (333,317) (105,936) (126,532) (225,364)
</TABLE>
The portion of the revenue received from certain Satellite Services
customers, over and above guaranteed minimum channel lease payments, has been
reclassified to subscription television services for each of the first three
F-28
<PAGE> 164
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
quarters. The total amount of the reclassification was approximately $9.6
million. The related expense items have been similarly reclassified.
13. SUBSEQUENT EVENTS
On February 1, 2000, EchoStar filed suit against DirecTV and Thomson
Consumer Electronics/RCA in the Federal District Court of Colorado. The suit
alleges that DirecTV has utilized improper conduct in order to fend off
competition. According to the complaint, DirecTV has demanded that certain
retailers stop displaying EchoStar merchandise and has threatened to cause
economic damage to retailers if they continued to offer both product lines in
head-to-head competition. The suit alleges that DirecTV has acted in violation
of federal and state anti-trust laws in order to protect DirecTV's market share.
EchoStar is seeking injunctive relief and monetary damages. It is too early in
the litigation to make an assessment of the probable outcome.
During February 2000, EchoStar announced the formation of a joint
venture with OpenTV Corp. intended to offer DISH Network customers and other
video platforms around the world a low cost, interactive digital receiver with a
built-in hard disk drive that will permit viewers to pause and record live
programs without the need for video tape. The new set-top box is expected to be
available during the fourth quarter of 2000. In connection with formation of the
joint venture, OpenTV and EchoStar licensed certain intellectual property rights
to the joint venture and EchoStar was issued 2,252,252 shares of OpenTV common
stock. The shares of OpenTV common stock are subject to forfeiture if EchoStar
fails to activate the OpenTV system in at least 500,000 set top boxes on or
before February 23, 2003.
During February 2000, EchoStar also announced agreements for the
construction and delivery of three new satellites. Two of these satellites,
EchoStar VII and EchoStar VIII, will be advanced, high-powered DBS satellites.
Both will include spot-beam technology which could allow DISH Network to offer
local channels or other value added services in as many as 60 or more markets
across the United States. The third satellite, EchoStar IX, will be a hybrid
Ku/Ka-band satellite, which may provide EchoStar with increased opportunities to
attract business customers and may provide DISH Network customers with expanded
services such as Internet, data and potentially two-way wireless communications.
During March 2000, EchoStar announced the acquisition of Kelly
Broadcasting Systems, Inc. ("KBS"), a New Jersey based provider of international
and foreign-language programming in the United States. In connection with the
acquisition, EchoStar issued approximately 255,000 shares of its Class A common
stock, valued at the date of issuance at approximately $31 million, and paid
$3.5 million in cash, for 100% ownership of KBS.
During March 2000, EchoStar announced a $50 million investment in iSKY
Inc. Pursuant to the agreement between EchoStar and iSKY, following the launch
of iSKY's service, currently anticipated during late 2001, EchoStar would also
distribute the iSKY satellite Internet service along with DISH Network satellite
TV service through its more than 23,000 retailers nationwide. With this
investment, EchoStar will own 12% of iSKY and receive warrants which, based on
reaching iSKY customer targets, could increase its stake up to 20.8% on an
outstanding basis.
14. EVENTS SUBSEQUENT TO ORIGINAL DATE OF AUDITOR'S REPORT
EBC was formed on September 11, 2000 for the purpose of completing a
private offering (the "EBC Notes Offering"), pursuant to Rule 144A of the
Securities Act of 1933, as amended of 10 3/8% Senior Notes due 2007 (the "10
3/8% Seven Year Notes"), resulting in net proceeds of approximately $989
million. The EBC Notes Offering was consummated on September 25, 2000. In
connection with the EBC Notes Offering, EchoStar contributed all of the
outstanding capital stock of its wholly owned subsidiaries, EDBS and EchoStar
Orbital Corporation ("EOC"), to EBC concurrent with the closing of the offering.
EOC did not generate any revenue or incur any expenses during the nine months
ended September 30, 2000 and its activity during that nine month period
consisted solely of progress payments on certain satellites. EOC had no
operations prior to its formation on January 27, 2000. This transaction has been
accounted for as a reorganization of entities under common control similar to a
pooling of
F-29
<PAGE> 165
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 14)
interests. EBC is subject to all, and EchoStar is subject to certain of, the
terms and conditions of the Indenture related to the 10 3/8% Seven Year Notes.
F-30
<PAGE> 166
ECHOSTAR BROADBAND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(After Corporate Reorganization -- see Note 1)
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ........................................................ $ 159,762 $ 1,097,588
Marketable investment securities ................................................. 24,774 4,971
Trade accounts receivable, net of allowance for uncollectible accounts of
$13,109 and $18,354, respectively ............................................. 157,944 209,015
Insurance receivable ............................................................. 106,000 106,000
Inventories ...................................................................... 123,184 188,636
Other current assets ............................................................. 27,027 18,677
----------- -----------
Total current assets ................................................................ 598,691 1,624,887
Cash reserved for satellite insurance ............................................... -- 89,591
Property and equipment, net ......................................................... 1,314,007 1,376,134
FCC authorizations, net ............................................................. 722,234 714,427
Other noncurrent assets ............................................................. 95,276 107,116
----------- -----------
Total assets ................................................................... $ 2,730,208 $ 3,912,155
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable ........................................................... $ 187,703 $ 217,373
Deferred revenue ................................................................. 181,034 252,115
Accrued expenses ................................................................. 483,635 525,308
Advances from affiliates, net .................................................... 272,440 737,657
Current portion of long-term debt ................................................ 21,017 16,145
----------- -----------
Total current liabilities ........................................................... 1,145,829 1,748,598
Long-term obligations, net of current portion:
1994 Notes ....................................................................... 1,503 --
1996 Notes ....................................................................... 1,097 --
1997 Notes ....................................................................... 15 --
9 1/4% Seven Year Notes .......................................................... 375,000 375,000
9 3/8% Ten Year Notes ............................................................ 1,625,000 1,625,000
10 3/8% Seven Year Notes ........................................................ -- 1,000,000
Mortgages and other notes payable, net of current portion ........................ 25,445 21,098
Long-term deferred satellite services revenue and other long-term liabilities .... 18,812 24,397
----------- -----------
Total long-term obligations, net of current portion ................................. 2,046,872 3,045,495
----------- -----------
Total liabilities .............................................................. 3,192,701 4,794,093
Commitments and Contingencies (Note 6)
Stockholder's Equity (Deficit):
Common Stock, $.01 par value, 100,000 shares authorized; 1,000 shares
issued and
outstanding .................................................................... -- --
Additional paid-in capital ....................................................... 1,448,325 1,440,253
Deferred stock-based compensation ................................................ (117,780) (71,059)
Accumulated other comprehensive loss ............................................. -- (28)
Accumulated deficit .............................................................. (1,793,038) (2,251,104)
----------- -----------
Total stockholder's equity (deficit) ................................................ (462,493) (881,938)
----------- -----------
Total liabilities and stockholder's equity (deficit) ........................... $ 2,730,208 $ 3,912,155
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-31
<PAGE> 167
ECHOSTAR BROADBAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(After Corporate Reorganization -- see Note 1)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 2000
----------- -----------
<S> <C> <C>
REVENUE:
DISH Network:
Subscription television services .................. $ 926,888 $ 1,645,514
Other ............................................. 6,624 6,571
----------- -----------
Total DISH Network .................................. 933,512 1,652,085
DTH equipment sales and integration services ........ 105,856 174,542
Satellite services .................................. 28,073 41,804
C-band and other .................................... 24,598 36,053
----------- -----------
Total revenue .......................................... 1,092,039 1,904,484
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ....................... 404,746 693,225
Customer service center and other ................. 80,643 184,677
Satellite and transmission ........................ 30,024 33,282
----------- -----------
Total DISH Network operating expenses ............... 515,413 911,184
Cost of sales - DTH equipment and integration
services .......................................... 77,189 134,683
Cost of sales - C-band and other .................... 11,870 22,352
Marketing:
Subscriber promotion subsidies .................... 461,302 739,163
Advertising and other ............................. 40,360 88,805
----------- -----------
Total marketing expenses ............................ 501,662 827,968
General and administrative .......................... 93,539 164,721
Non-cash, stock-based compensation .................. 5,983 38,599
Depreciation and amortization ....................... 76,728 123,279
----------- -----------
Total costs and expenses ............................... 1,282,384 2,222,786
----------- -----------
Operating loss ......................................... (190,345) (318,302)
Other Income (Expense):
Interest income ..................................... 10,834 9,880
Interest expense, net of amounts capitalized ........ (147,616) (146,948)
Other ............................................... (9,816) (2,593)
----------- -----------
Total other income (expense) ........................... (146,598) (139,661)
----------- -----------
Loss before income taxes ............................... (336,943) (457,963)
Income tax provision, net .............................. (109) (103)
----------- -----------
Net loss before extraordinary charges .................. (337,052) (458,066)
Extraordinary charge for early retirement of debt,
net of tax .......................................... (228,733) --
----------- -----------
Net loss ............................................... $ (565,785) $ (458,066)
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-32
<PAGE> 168
ECHOSTAR BROADBAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(After Corporate Reorganization -- see Note 1)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1999 2000
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................................ $ (565,785) $ (458,066)
Adjustments to reconcile net loss to net cash flows from operating activities:
Extraordinary charge for early retirement of debt ................................ 228,733 --
Loss on disposal of assets ....................................................... 9,770 1,166
Deferred stock-based compensation recognized ..................................... 5,983 38,599
Depreciation and amortization .................................................... 76,728 123,279
Interest on notes payable to ECC added to principal .............................. 330 --
Amortization of debt discount and deferred financing costs ....................... 12,621 2,481
Change in reserve for excess and obsolete inventory .............................. (409) 4,748
Change in long-term deferred satellite services revenue and other
long-term liabilities .......................................................... 24,977 5,586
Other, net ....................................................................... -- 1,855
Changes in current assets and current liabilities ................................ 102,442 23,751
----------- -----------
Net cash flows from operating activities ............................................ (104,610) (256,601)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ....................................... (181,148) --
Sales of marketable investment securities ........................................... 152,644 19,775
Cash reserved for satellite insurance (Note 4) ...................................... -- (89,591)
Funds released from escrow and restricted cash and marketable investment
securities ........................................................................ 77,657 --
Purchases of property and equipment ................................................. (63,338) (178,515)
Other ............................................................................... (225) --
----------- -----------
Net cash flows from investing activities ............................................ (14,410) (248,331)
CASH FLOWS FROM FINANCING ACTIVITIES:
Non-interest bearing advances from affiliates ....................................... 202,511 465,217
Proceeds from issuance of 9 1/4% Seven Year Notes ................................... 375,000 --
Proceeds from issuance of 9 3/8% Ten Year Notes ..................................... 1,625,000 --
Proceeds from issuance of 10 3/8% Seven Year Notes .................................. -- 989,375
Debt issuance costs and prepayment premiums ......................................... (233,721) --
Retirement of 1994 Notes ............................................................ (575,674) --
Retirement of 1996 Notes ............................................................ (501,350) --
Retirement of 1997 Notes ............................................................ (378,110) --
Capital contribution to ECC ......................................................... (268,588) --
Repayment of notes payable to ECC ................................................... (60,142) --
Repayments of mortgage indebtedness and notes payable ............................... (17,019) (9,219)
Other ............................................................................... -- (2,614)
----------- -----------
Net cash flows from financing activities ............................................ 167,907 1,442,759
----------- -----------
Net increase (decrease) in cash and cash equivalents ................................ 48,887 937,827
Cash and cash equivalents, beginning of period ...................................... 25,308 159,761
----------- -----------
Cash and cash equivalents, end of period ............................................ $ 74,195 $ 1,097,588
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Assets acquired from News Corporation and MCI:
FCC licenses and other ........................................................... $ 626,120 $ --
Satellites ....................................................................... 451,200 --
Digital broadcast operations center .............................................. 47,000 --
Capital contribution from ECC ....................................................... 1,124,320 --
Forfeitures of deferred non-cash, stock-based compensation .......................... -- 8,072
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-33
<PAGE> 169
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(After Corporate Reorganization -- see Note 1)
(Unaudited)
1. ORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
EchoStar Broadband Corporation ("EBC") 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, EBC was
formed on September 11, 2000 for the purpose of completing a private offering
(the "EBC Notes Offering"), pursuant to Rule 144A of the Securities Act of 1933,
as amended of 10 3/8% Senior Notes due 2007 (the "10 3/8% Seven Year Notes"),
resulting in net proceeds of approximately $989 million. The EBC Notes Offering
was consummated on September 25, 2000. In connection with the EBC Notes
Offering, EchoStar contributed all of the outstanding capital stock of its
wholly owned subsidiaries, EchoStar DBS Corporation ("EDBS") and EchoStar
Orbital Corporation ("EOC"), to EBC concurrent with the closing of the offering.
EOC did not generate any revenue or incur any expenses during the nine months
ended September 30, 2000 and its activity during that nine month period
consisted solely of progress payments on certain satellites. EOC had no
operations prior to its formation on January 27, 2000. This transaction has been
accounted for as a reorganization of entities under common control similar to a
pooling of interests.
Unless otherwise stated herein, or the context otherwise requires,
references herein to EchoStar shall include ECC, EBC, DBS Corp and all direct
and indirect wholly-owned subsidiaries thereof. EBC's management refers readers
of this Quarterly Report on Form 10-Q to EchoStar's Quarterly Report on Form
10-Q for the nine months ended September 30, 2000. Substantially all of
EchoStar's operations are conducted by subsidiaries of EBC. The operations of
EchoStar include three interrelated business units:
o The DISH Network - a direct broadcast satellite ("DBS")
subscription television service in the United States. As of
September 30, 2000, we had approximately 4.8 million DISH
Network subscribers.
o 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 international direct-to-home ("DTH") systems.
ETC has also provided uplink center design, construction
oversight and other project integration services for
international DTH ventures.
o 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, six DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," "EchoStar IV," "EchoStar V," and "EchoStar VI"), EchoStar
receiver systems, digital broadcast operations centers, 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.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and with the instructions to Form 10-Q and Article 10 of Regulation S-X for
interim financial information. Accordingly, these statements do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. All significant intercompany
accounts and transactions have been eliminated in
F-34
<PAGE> 170
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- See Note 1)
(Unaudited)
consolidation. Operating results for the nine months ended September 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in EDBS' Annual Report on
Form 10-K for the year ended December 31, 1999.
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.
Comprehensive Loss
The components of comprehensive loss, net of tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
NINE-MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 2000
--------- ---------
(Unaudited)
<S> <C> <C>
Net loss ........................................................ $(565,785) $(458,066)
Change in unrealized loss on available-for-sale securities ...... -- (28)
--------- ---------
Comprehensive loss .............................................. $(565,785) $(458,094)
========= =========
</TABLE>
Accumulated other comprehensive loss presented on the accompanying
condensed consolidated balance sheets consists of the accumulated net unrealized
loss on available-for-sale securities, net of deferred taxes.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("FAS 133"), which was originally required
to be adopted in years beginning after June 15, 1999. In June 2000, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FASB No. 133" ("FAS 137"), which defers for
one year the effective date of SFAS 133. We anticipate that the adoption of SFAS
133 will not have a significant effect on our financial condition or results of
operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101"), which is required to be adopted in the fourth quarter of 2000 and
applied retroactively for the year. SAB 101 sets forth certain criteria,
including the existence of persuasive evidence of an arrangement, which must be
met in order that revenue be recognized. We are currently evaluating and are not
yet able to reasonably estimate the potential impacts the adoption of SAB 101
will have on our financial position and results of operations.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business
F-35
<PAGE> 171
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 1)
(Unaudited)
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44
cover specific events that occurred after either December 15, 1998 or January
12, 2000. The application of FIN 44 has not had a material impact on our
financial position or results of operations.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Finished goods - DBS ............................. $ 63,054 $ 101,991
Raw materials .................................... 35,751 58,678
Finished goods - reconditioned and other ......... 19,509 23,349
Work-in-process .................................. 7,666 11,823
Consignment ...................................... 1,084 1,423
Reserve for excess and obsolete inventory ........ (3,880) (8,628)
--------- ---------
$ 123,184 $ 188,636
========= =========
</TABLE>
4. PROPERTY AND EQUIPMENT
Digital Dynamite Plans
During July 2000, we announced the commencement of our new Digital
Dynamite promotion. The Digital Dynamite plans offer four choices to consumers,
ranging from the use of one EchoStar receiver system and our America's Top 100
programming package for $34.99 per month, to providing consumers two EchoStar
receiver systems and our America's Top 150 programming package for $49.99 per
month. With each plan, consumers receive in-home-service, must agree to a
one-year commitment and incur a one-time set-up fee of $49, which includes the
first month's programming payment. Since the equipment in the Digital Dynamite
plans are owned by us, those equipment costs are capitalized and depreciated
over a period of 4 years.
EchoStar III
During the second quarter 2000, two transponder pairs on EchoStar III
malfunctioned. Including the three transponder pairs that malfunctioned during
1998, these anomalies have resulted in the failure of a total of ten
transponders on the satellite to date. 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 the 61.5 degree orbital
location (together with an additional six leased transponders), the transponder
anomalies have not resulted in a loss of service to date. The satellite
manufacturer, Lockheed Martin, has advised us that it believes it has identified
the root cause of the failures, and that while further transponder failures are
possible, based upon the root cause and the operating configuration of the
satellite, 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 frequencies, and the six leased 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.
EchoStar V
EchoStar V is equipped with a total of 48 transponders, including 16
spares. Two transponders on the satellite have failed, the most recent loss
occurring during July 2000. While the failures have not impacted the operational
F-36
<PAGE> 172
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 1)
(Unaudited)
capacity of the satellite and the satellite manufacturer has advised that the
anomalies are probably unrelated, until the root cause of the most recent
anomaly is finally determined, there can be no assurance future similar
anomalies will not cause further transponder losses which could reduce
operational capacity.
Satellite Insurance
As a result of the failure of EchoStar IV solar arrays to fully deploy
and the failure of 26 transponders to date, a maximum of approximately 16 of the
44 transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar arrays, the number of available transponders
will further decrease over time. In addition to the transponder and solar array
failures, EchoStar IV experienced anomalies affecting its thermal systems and
propulsion system. There can be no assurance that further material degradation,
or total loss of use, of EchoStar IV will not occur in the immediate future.
In September 1998, EchoStar filed a $219.3 million insurance claim for
a constructive total loss under the launch insurance policies covering EchoStar
IV. The satellite insurance consists of separate identical policies with
different carriers for varying amounts which, in combination, create a total
insured amount of $219.3 million.
The insurance carriers offered EchoStar a total of approximately $88
million, or 40% of the total policy amount, in settlement of the EchoStar IV
insurance claim. The insurers allege that all other impairment to the satellite
occurred after expiration of the policy period and is not covered. EchoStar
strongly disagrees with the position of the insurers and has filed an
arbitration claim against them for breach of contract, failure to pay a valid
insurance claim and bad faith denial of a valid claim, among other things. There
can be no assurance that EchoStar will receive the amount claimed or, if
EchoStar does, that EchoStar will retain title to EchoStar IV with its reduced
capacity.
At the time EchoStar filed its claim in 1998, EchoStar recognized an
impairment loss of $106 million to write-down the carrying value of the
satellite and related costs, and simultaneously recorded an insurance claim
receivable for the same amount. EchoStar continues to believe it will ultimately
recover at least the amount originally recorded and does not intend to adjust
the amount of the receivable until there is greater certainty with respect to
the amount of the final settlement.
As a result of the thermal and propulsion system anomalies, EchoStar
reduced the estimated remaining useful life of EchoStar IV to approximately 4
years during January 2000. This change will increase depreciation expense to be
recognized by EchoStar during the year ending December 31, 2000 by approximately
$9.6 million. EchoStar will continue to evaluate the performance of EchoStar IV
and may modify its loss assessment as new events or circumstances develop.
The in-orbit insurance policies for EchoStar I, EchoStar II, and
EchoStar III expired July 25, 2000. The insurers have to date refused to renew
insurance on EchoStar I, EchoStar II and EchoStar III on reasonable terms. Based
on, among other things, the insurance carriers' unanimous refusal to negotiate
reasonable renewal insurance coverage, EchoStar believes that the carriers
colluded and conspired to boycott EchoStar unless EchoStar accepts their offer
to settle the EchoStar IV claim for $88 million.
Based on the carriers' actions, EchoStar has added causes of action in
its EchoStar IV demand for arbitration for breach of the duty of good faith and
fair dealing, and unfair claim practices. Additionally, EchoStar has filed a
lawsuit against the insurance carriers in the United States District Court for
the District of Colorado asserting causes of action for violation of Federal and
State Antitrust laws. While EchoStar believes it is entitled to the full amount
claimed under the EchoStar IV insurance policy and believes the insurance
carriers are in violation of Antitrust laws and have committed further acts of
bad faith in connection with their refusal to negotiate reasonable insurance
coverage on EchoStar's other satellites, there can be no assurance as to the
outcome of these proceedings.
The indentures related to the outstanding senior notes of EDBS contain
restrictive covenants that require EchoStar to maintain satellite insurance with
respect to at least half of the satellites it owns. Insurance coverage is
therefore required for at least three of EchoStar's six satellites currently in
orbit. EchoStar has procured normal and customary launch insurance for EchoStar
VI. This launch insurance policy provides for insurance of $225.0 million. The
EchoStar VI launch insurance policy expires in July 2001. EchoStar is currently
self-insuring EchoStar I, EchoStar
F-37
<PAGE> 173
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 1)
(Unaudited)
II, EchoStar III, EchoStar IV and EchoStar V. To satisfy insurance covenants
related to our outstanding EchoStar DBS senior notes, on July 25, 2000, EchoStar
reclassified approximately $60 million from cash and cash equivalents to
restricted cash and marketable investment securities on its balance sheet. In
addition, EchoStar reclassifed an amount equal to approximately $30 million, the
depreciated cost of an additional satellite, on September 23, 2000 after the
expiration of the initial period of coverage for EchoStar V. The
reclassifications will continue until such time, if ever, as the insurers are
again willing to insure EchoStar's satellites on commercially reasonable terms.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Programming ...................................... $ 59,769 $157,201
Royalties and copyright fees ..................... 87,390 90,447
Marketing ........................................ 88,204 69,526
Advances from News/MCI for Echo VI ............... 67,804 35,810
Interest ......................................... 78,460 34,936
Other ............................................ 102,008 137,388
-------- --------
$483,635 $525,308
======== ========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
DirecTV
During February 2000 EchoStar filed suit against DirecTV and Thomson
Consumer Electronics/RCA in the Federal District Court of Colorado. The suit
alleges that DirecTV has utilized improper conduct in order to fend off
competition from the DISH Network. According to the complaint, DirecTV has
demanded that certain retailers stop displaying EchoStar's merchandise and has
threatened to cause economic damage to retailers if they continue to offer both
product lines in head-to-head competition. The suit alleges, among other things,
that DirecTV has acted in violation of federal and state anti-trust laws in
order to protect DirecTV's market share. EchoStar is seeking injunctive relief
and monetary damages. It is too early in the litigation to make an assessment of
the probable outcome.
The DirecTV defendants filed a counterclaim against EchoStar. DirecTV
alleges that EchoStar tortuously interfered with a contract that DirecTV
allegedly had with Kelly Broadcasting Systems, Inc. ("KBS"). DirecTV alleges
that EchoStar "merged" with KBS, in contravention of DirecTV's contract with
KBS. DirecTV also alleges that EchoStar has falsely advertised to consumers
about its right to offer network programming. DirecTV further alleges that
EchoStar improperly used certain marks owned by PrimeStar, now owned by DirecTV.
Finally, DirecTV alleges that EchoStar has been marketing National Football
League games in a misleading manner. The amount of damages DirecTV is seeking is
as yet unquantified. EchoStar intends to vigorously defend against these claims.
The case is currently in discovery. It is too early in the litigation to make an
assessment of the probable outcome.
Fee Dispute
EchoStar had a contingent fee arrangement with the attorneys who
represented EchoStar in the litigation with News Corporation. The contingent fee
arrangement provides for the attorneys to be paid a percentage of any net
recovery obtained by EchoStar in the News Corporation litigation. The attorneys
have asserted that they may be entitled to receive payments totaling hundreds of
millions of dollars under this fee arrangement.
F-38
<PAGE> 174
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 1)
(Unaudited)
During mid-1999, EchoStar initiated litigation against the attorneys in
the Arapahoe County, Colorado, District Court arguing that the fee arrangement
is void and unenforceable. In December 1999, the attorneys initiated an
arbitration proceeding before the American Arbitration Association. The
litigation has been stayed while the arbitration is ongoing. A two week
arbitration hearing has been set to begin in late February 2001. It is too early
to determine the outcome of negotiations, arbitration or litigation regarding
this fee dispute. EchoStar is vigorously contesting the attorneys'
interpretation of the fee arrangement, which EchoStar believes significantly
overstates the magnitude of its liability.
WIC Premium Television Ltd.
During July 1998, a lawsuit was filed by WIC Premium Television Ltd.,
an Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner Communications, Inc., John Doe,
Showtime, United States Satellite Broadcasting Company, Inc., EchoStar, and two
of EchoStar's wholly-owned subsidiaries. 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.
During September 1998, WIC filed another lawsuit in the Court of
Queen's Bench of Alberta Judicial District of Edmonton against certain
defendants, including EchoStar. WIC is a company authorized to broadcast certain
copyrighted work, such as movies and concerts, to residents of Canada. WIC
alleges that the defendants engaged in, promoted, and/or allowed satellite dish
equipment from the United States to be sold in Canada and to Canadian residents
and that some of the defendants allowed and profited from Canadian residents
purchasing and viewing subscription television programming that is only
authorized for viewing in the United States. The lawsuit seeks, among other
things, an interim and permanent injunction prohibiting the defendants from
importing hardware into Canada and from activating receivers in Canada, together
with damages in excess of $175 million.
EchoStar filed motions to dismiss each of the actions for lack of
personal jurisdiction. The Court in the Alberta action recently denied
EchoStar's Motion to Dismiss, which is currently under appeal. The Alberta Court
also granted a motion to add more EchoStar parties to the lawsuit. EchoStar
Satellite Corporation, EDBS, EchoStar Technologies Corporation, and EchoStar
Satellite Broadcast Corporation have been added as defendants in the litigation.
The newly added defendants have also challenged jurisdiction. The Court in the
Federal action has stayed that case before ruling on EchoStar's motion to
dismiss. EchoStar intends to vigorously defend the suits in the event its
motions are denied. 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
Until July 1998, EchoStar obtained distant broadcast network channels
(ABC, NBC, CBS and FOX) for distribution to its customers through PrimeTime 24.
In December 1998, the United States District Court for the Southern District of
Florida entered a nationwide permanent injunction requiring PrimeTime 24 to shut
off distant network channels to many of its customers, and henceforth to sell
those channels to consumers in accordance with certain stipulations in the
injunction.
In October 1998, EchoStar filed a declaratory judgment action against
ABC, NBC, CBS and FOX in Denver Federal Court. EchoStar asked the court to enter
a judgment declaring that its method of providing distant network programming
did not violate the Satellite Home Viewer Act and hence did not infringe the
networks' copyrights. In November 1998, the networks and their affiliate groups
filed a complaint against EchoStar in Miami Federal Court alleging, among other
things, copyright infringement. The court combined the case that EchoStar filed
in Colorado with the case in Miami and transferred it to the Miami court. The
case remains pending in Miami. While the networks have not sought monetary
damages, they have sought to recover attorney fees if they prevail.
F-39
<PAGE> 175
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 1)
(Unaudited)
In February 1999, the networks filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV,
Inc. in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. DirecTV settled this lawsuit with the networks. Under
the terms of the settlement between DirecTV and the networks, some DirecTV
customers were scheduled to lose access to their satellite-provided distant
network channels by July 31, 1999, while other DirecTV customers were to be
disconnected by December 31, 1999. Subsequently, PrimeTime 24 and substantially
all providers of satellite-delivered network programming other than EchoStar
agreed to this cut-off schedule, although EchoStar does not know if they adhered
to this schedule.
In December 1998, the networks filed a Motion for Preliminary
Injunction against EchoStar in the Miami court, and asked the court to enjoin
EchoStar from providing network programming except under limited circumstances.
A preliminary injunction hearing was held on September 21, 1999. The court took
the issues under advisement to consider the networks' request for an injunction,
whether to hear live testimony before ruling upon the request, and whether to
hear argument on why the Satellite Home Viewer Act may be unconstitutional,
among other things.
In March 2000, the networks filed an emergency motion again asking the
court to issue an injunction requiring EchoStar to turn off network programming
to certain of its customers. At that time, the networks also argued that
EchoStar's compliance procedures violate the Satellite Home Viewer Improvement
Act. EchoStar opposed the networks' motion and again asked the court to hear
live testimony before ruling upon the networks' injunction request.
On September 29, 2000, the Court granted the Networks' motion for
preliminary injunction, denied the Network's emergency motion and denied
EchoStar's request to present live testimony and evidence. The Court's original
order required EchoStar to terminate network programming to certain subscribers
"no later than February 15, 1999", and contained other dates which would be
physically impossible to comply with. The order imposes restrictions on
EchoStar's past and future sale of distant ABC, NBC, CBS and Fox channels
similar to those imposed on PrimeTime 24 (and, EchoStar believes, on DirecTV and
others). Some of those restrictions go beyond the statutory requirements imposed
by the Satellite Home Viewer Act and the Satellite Home Viewer Improvement Act.
For these and other reasons EchoStar believes the Court's order is, among other
things, fundamentally flawed, unconstitutional and should be overturned.
However, it is very unusual for a Court of Appeals to overturn a lower court's
order and there can be no assurance whatsoever that it will be overturned.
On October 3, 2000, and again on October 25, 2000, the Court amended
its original preliminary injunction order in an effort to fix some of the errors
in the original order. The twice amended preliminary injunction order requires
EchoStar to shut off, by February 15, 2001, all subscribers who are ineligible
to receive distant network programming under the court's order. EchoStar has
appealed the September 29, 2000 preliminary injunction order and the October 3,
2000 amended preliminary injunction order. EchoStar has also asked the United
States Court of Appeals for the Eleventh Circuit to stay the preliminary
injunction orders pending the appeal. The Eleventh Circuit ordered the networks
to file a brief with the Court of Appeals by November 6, 2000, and that EchoStar
respond to that brief by November 9, 2000. Both briefs have been filed.
Additional briefing schedules and rulings from the Miami Court and from the
Court of Appeals could occur at any time. EchoStar's effort to seek a stay of
the preliminary injunction may not be successful and EchoStar may be required to
comply with the dates provided in the Court's preliminary injunction order. The
preliminary injunction could force EchoStar to terminate delivery of distant
network channels to a substantial portion of its distant network subscriber
base, which could also cause many of these subscribers to cancel their
subscription to EchoStar's other services. Such terminations would result in a
small reduction in EchoStar's reported average monthly revenue per subscriber
and could result in a temporary increase in churn.
Starsight
During October 2000, Starsight Telecast, Inc., a subsidiary of Gemstar
- TV Guide, filed a suit for patent infringement against EchoStar and certain of
its subsidiaries in the United States District Court for the Western District of
North Carolina, Asheville Division. The suit alleges infringement of United
States Patent No. 4,706,121 which relates to certain electronic program guide
functions. EchoStar has examined this patent and believes that it is
F-40
<PAGE> 176
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 1)
(Unaudited)
not infringed by any of EchoStar's products or services. EchoStar intends to
vigorously defend against this action and to assert a variety of counterclaims.
Superguide Corp. also recently filed suit against EchoStar, DirecTv and
others in the same North Carolina court, alleging infringement of United States
Patent Nos. 5,038,211, 5,293,357 and 4,751,578 which relate to certain
electronic program guide functions, including the use of electronic program
guides to control VCRs. It is EchoStar's understanding that these patents may be
licensed by Superguide to Gemstar, although Gemstar has not asserted the patents
against EchoStar. EchoStar has examined these patents and believes that they are
not infringed by any of EchoStar's products or services. EchoStar intends to
vigorously defend against this action and assert a variety of counterclaims.
In the event it is ultimately determined that EchoStar infringes on any
of these patents EchoStar may be subject to substantial damages, and/or an
injunction that could require EchoStar to materially modify certain user
friendly electronic programming guide and related features it currently offers
to consumers. It is too early to make an assessment of the probable outcome of
either suit.
EchoStar is subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect EchoStar's financial position or results of operations.
Meteoroid Events
In November 1998 and 1999, certain meteoroid events occurred as the
Earth's orbit passed through the particulate trail of Comet 55P (Tempel-Tuttle).
Similar meteoroid events are expected to occur again in November 2000. These
meteoroid events pose a potential threat to all in-orbit geosynchronous
satellites including our DBS satellites. While the probability that our
satellites will be damaged by space debris is very small, that probability will
increase by several orders of magnitude during these meteoroid events.
Solar Storms
Due to the current peak in the 11-year solar cycle, increased solar
activity is likely for the next 1 1/2 years. Some of these solar storms pose a
potential threat to all in-orbit geosynchronous satellites including our DBS
satellites. While the probability that the effects from the storms will damage
our satellites or cause service interruptions is generally very small, that
probability will increase by several orders of magnitude during this solar cycle
peak.
7. LONG-TERM DEBT
Debt Redemption
Effective July 14, 2000, EDBS redeemed all of its remaining outstanding
12 7/8% Senior Secured Discount Notes Due 2004 (the "1994 Notes"), 13 1/8%
Senior Secured Discount Notes due 2004 (the "1996 Notes"), 12 1/2% Senior
Secured Notes due 2002 (the "1997 Notes") and 12 1/8% Senior Exchange Notes Due
2004 (the "Exchange Notes") totaling approximately $2.6 million. Aggregate
premium charges of approximately $122,000 related to the redemption of the 1994
Notes, 1996 Notes, 1997 Notes and Exchange Notes were accrued at June 30, 2000.
F-41
<PAGE> 177
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- see Note 1)
(Unaudited)
10 3/8% Seven Year Notes
On September 25, 2000, we sold $1 billion principal amount of 10 3/8%
Senior Notes due 2007 (the "10 3/8% Seven Year Notes"). Interest accrues at an
annual rate of 10 3/8% on the 10 3/8% Seven Year Notes and is payable
semi-annually in cash, in arrears on April 1 and October 1 of each year,
commencing April 1, 2001. The proceeds of the 10 3/8% Seven Year Notes will be
used primarily by us and our subsidiaries for the construction and launch of
additional satellites, strategic acquisitions and other general working capital
purposes.
The indenture related to the 10 3/8% Seven Year Notes (the "10 3/8%
Seven Year Notes Indenture") contains certain restrictive covenants that
generally do not impose material limitations on us. Subject to certain
limitations, the 10 3/8% Seven Year Notes Indenture permits us to incur
additional indebtedness, including secured and unsecured indebtedness that ranks
on parity with the 10 3/8% Seven Year Notes. Any secured indebtedness will, as
to the collateral securing such indebtedness, be effectively senior to the 10
3/8% Seven Year Notes to the extent of such collateral.
The 10 3/8% Seven Year Notes are:
o general unsecured obligations of us;
o ranked equally in right of payment with all of our existing
and future senior debt;
o ranked senior in right of payment to all of our other existing
and future subordinated debt; and
o ranked effectively junior to (i) all liabilities (including
trade payables) of our subsidiaries and (ii) all of our
secured obligations, to the extent of the collateral securing
such obligations, including any borrowings under any of our
future secured credit facilities, if any.
Except under certain circumstances requiring prepayment premiums, and
in other limited circumstances, the 10 3/8% Seven Year Notes are not redeemable
at our option prior to October 1, 2004. Thereafter, the 10 3/8% Seven Year Notes
will be subject to redemption, at our option, in whole or in part, at redemption
prices decreasing from 105.188% during the year commencing October 1, 2004 to
100% on or after October 1, 2006, together with accrued and unpaid interest
thereon to the redemption date.
In the event of a change of control, as defined in the 10 3/8% Seven
Year Notes Indenture, we will be required to make an offer to repurchase all or
any part of a holder's 10 3/8% Seven 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.
Under the terms of the 10 3/8% Seven Year Notes Indenture, we have
agreed to cause EDBS, our wholly-owned subsidiary, to make an offer to exchange
(the "EDBS Exchange Offer") all of the outstanding 10 3/8% Seven Year Notes for
a new class of notes issued by EDBS as soon as practical following the first
date (as reflected in EDBS' most recent quarterly or annual financial
statements) on which EDBS is permitted to incur indebtedness in an amount equal
to the outstanding principal balance of the 10 3/8% Seven Year Notes under the
"Indebtedness to Cash Flow Ratio" test contained in the indentures (the "EDBS
Indentures") governing EDBS' 9 1/4% Senior Notes due 2006 ("Seven Year Notes")
and 9 3/8% Senior Notes due 2009 ("Ten Year Notes") (collectively the "Seven and
Ten Year Notes"), and such incurrence of indebtedness would not otherwise cause
any breach or violation of, or result in a default under, the terms of the EDBS
Indentures.
On October 25, 2000, as contemplated by the terms of the EBC Indenture,
EDBS amended the terms of the EDBS Indentures to provide that the recording of
some or all of the indebtedness represented by the 10 3/8% Seven Year Notes on
EDBS' balance sheet as a result of the application of generally accepted
accounting principles and related rules prior to the completion of the EDBS
Exchange Offer would not be deemed to constitute an incurrence of indebtedness
for certain purposes under the EDBS Indentures. These amendments were approved
by more than a majority in principal amount of each issue of the Seven and Ten
Year Notes. The cost of obtaining these consents was immaterial to us.
F-42
<PAGE> 178
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(After Corporate Reorganization -- See Note 1)
(Unaudited)
8. SEGMENT REPORTING
Financial Data by Business Unit (in thousands)
Statement of Financial Accounting Standard No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("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. Operating segments are components of an
enterprise about which separate financial information is available and regularly
evaluated by the chief operating decision maker(s) of an enterprise. Under this
definition, we are currently operating as three separate business units.
<TABLE>
<CAPTION>
ECHOSTAR ECHOSTAR OTHER ECHOSTAR
DISH TECHNOLOGIES SATELLITE ELIMINATIONS CONSOLIDATED ECHOSTAR BROADBAND
NETWORK CORPORATION SERVICES AND OTHER TOTAL ACTIVITY CORPORATION
----------- ------------ ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue ............... $ 949,225 $ 186,887 $ 33,244 $ (81,383) $ 1,087,973 $ 4,066 $ 1,092,039
Net income (loss)
before
extraordinary
charges ............ (327,210) 15,715 19,508 (11,875) (303,862) (33,190) (337,052)
NINE MONTHS ENDED
SEPTEMBER 30, 2000
Revenue ............... $ 1,690,435 $ 141,403 $ 47,448 $ 30,536 $ 1,909,822 $ (5,338) $ 1,904,484
Net income (loss) ..... (480,496) (2,935) 33,890 658 (448,883) (9,183) (458,066)
</TABLE>
9. SUBSEQUENT EVENTS
EchoStar VI
On October 13, 2000, we announced that EchoStar VI, our sixth direct
broadcast satellite which launched successfully on July 14, 2000, from Cape
Canaveral, Florida, has reached its final orbital location at 119 degrees West
Longitude as assigned under a special temporary authority by the FCC. It now is
broadcasting satellite TV channels to over 4.8 million DISH Network customers
nationwide, including Alaska and Hawaii. To date, all systems on the satellite
are operating normally.
DirecTV
We have previously publicly expressed our desire to negotiate with
General Motors if they decide to spin off all or a portion of their GMH
subsidiary. We believe the enormous synergies that would be created by the
combination of EchoStar and DirecTv would significantly enhance shareholder
value for both companies. However, we were recently informed by DirecTv that GM
is not willing to include EchoStar in future discussions.
F-43
<PAGE> 179
================================================================================
____________________, 2001 CONFIDENTIAL
ECHOSTAR BROADBAND CORPORATION
$1,000,000,000
10 3/8% SENIOR NOTES DUE 2007
----------
PROSPECTUS
----------
--------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE
YOU WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS
TO MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR
SOLICITATION OF YOUR OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE THAT
WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALES MADE HEREUNDER AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR OUR AFFAIRS HAVE NOT
CHANGED SINCE THE DATE HEREOF.
--------------------------------------------------------------------------------
<PAGE> 180
PART II
INFORMATION NOT REQUIRED IN 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 of 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 or 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 not
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
(d) Officers of the Company will be indemnified to the same
extent as directors as described in (a), (b), and (c) above.
II-1
<PAGE> 181
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT NO. DESCRIPTION
3.1(a)* Articles of Incorporation of the Company
3.1(b)* Bylaws of the Company
4.1* Indenture relating to the notes, dated as of September 25,
2000, by and among the Company and U.S. Bank Trust National
Association, as trustee
4.2* Form of note (included in Exhibit 4.1)
4.3* Registration rights agreement relating to the notes by and
among EchoStar Broadband Corporation and the parties named
therein
5.1* Opinion of Friedlob Sanderson 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,
Astrospace 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 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. 33-76450)
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.
33-76450)
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)
II-2
<PAGE> 182
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 Retain
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)
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)
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<PAGE> 183
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 to 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
quarter 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 quarter 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 quarter
ended June 30, 1997, Commission File No. 0-26176)
II-4
<PAGE> 184
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 quarter 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 the quarter 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 the quarter 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 regarding computation of ratios
21* Subsidiaries of the Company
23.1* Consent of Friedlob Sanderson Raskin Paulson & Tourtillott,
LLC (included in Exhibit 5.1)
23.2* 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
99.1* Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery
----------
*Filed herewith
II-5
<PAGE> 185
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 approximate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporating documents by first class mail or
other equally prompt means. This includes information contained in the documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act.
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement.
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the Registration statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
II-6
<PAGE> 186
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Littleton, State of Colorado on December 26, 2000.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ David K. Moskowitz
----------------------------------------
David K. Moskowitz
Senior Vice President, General Counsel,
Secretary and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Charles W. Ergen, Steven B. Schaver and
David K. Moskowitz, and each of them, his attorney-in-fact, for him in any and
all capacities, to sign any amendments to this registration statement, and any
related registration statement filed pursuant to Rule 462(b), and to file the
same, with exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Charles W. Ergen Chief Executive Officer, President and Director December 26, 2000
---------------------- (Principal Executive Officer)
Charles W. Ergen
/s/Michael McDonnell Chief Financial Officer December 26, 2000
---------------------- (Principal Financial Officer)
Michael McDonnell
/s/James DeFranco Director December 26, 2000
----------------------
James DeFranco
/s/ David K. Moskowitz Director December 26, 2000
----------------------
David K. Moskowitz
</TABLE>
II-7
<PAGE> 187
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1(a)* Articles of Incorporation of the Company
3.1(b)* Bylaws of the Company
4.1* Indenture relating to the notes, dated as of September 25,
2000, by and among the Company and U.S. Bank Trust National
Association, as trustee
4.2* Form of note (included in Exhibit 4.1)
4.3* Registration rights agreement relating to the notes by and
among EchoStar Broadband Corporation and the parties named
therein
5.1* Opinion of Friedlob Sanderson 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,
Astrospace 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 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. 33-76450)
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.
33-76450)
</TABLE>
<PAGE> 188
<TABLE>
<S> <C>
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 Retain
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)
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)
</TABLE>
<PAGE> 189
<TABLE>
<S> <C>
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 to 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
quarter 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 quarter ended
June 30, 1997, Commission File No. 0-26176)
</TABLE>
<PAGE> 190
<TABLE>
<S> <C>
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 quarter
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 quarter 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 the quarter 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 the quarter 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 regarding computation of ratios
21* Subsidiaries of the Company
23.1* Consent of Friedlob Sanderson Raskin Paulson & Tourtillott,
LLC (included in Exhibit 5.1)
23.2* 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
99.1* Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery
</TABLE>
----------
*Filed herewith
