AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 11, 1996
REGISTRATION NO. 333-3584
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 5064 88-0336997
(State of Registrant's (Registrant's Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification No.)
------------------------
DAVID K. MOSKOWITZ, ESQ.
90 INVERNESS CIRCLE EAST SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
ENGLEWOOD, COLORADO 80112 ECHOSTAR COMMUNICATIONS CORPORATION
(303) 799-8222 90 INVERNESS CIRCLE EAST
(Address, Including Zip Code, and ENGLEWOOD, COLORADO 80112
Telephone Number, including Area Code, (303) 799-8222 EXT. 5323
of Registrant's Principal Executive Office) (Name, Address, Including Zip Code, and
Telephone Number of Agent for Service)
COPIES TO:
WILLIAM APPLETON, ESQ. ROBERT N. HICKEY, ESQ.
BAKER & HOSTETLER SULLIVAN & WORCESTER LLP
3200 NATIONAL CITY CENTER 1025 CONNECTICUT AVENUE, N.W.
1900 E. 9TH STREET WASHINGTON, D.C. 20036
CLEVELAND, OHIO 44114-3485 (202) 775-8190
(216) 621-0200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon the
Effective Time of the Merger, as defined in the Information Statement --
Prospectus included herein.
If any of 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. / /
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.
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ECHOSTAR COMMUNICATIONS CORPORATION
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
FORM S-4 ITEM HEADING OR LOCATION IN
NUMBER AND CAPTION INFORMATION STATEMENT -- PROSPECTUS
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A. Information about the Transaction
1. Forepart of Registration Statement and Outside
Front Cover Page of Information Statement --
Prospectus....................................... Outside Front Cover Page of Information Statement
-- Prospectus
2. Inside Front and Outside Back Cover Pages of
Information Statement -- Prospectus.............. Inside Front Cover Page of Information Statement
-- Prospectus; Available Information; Table of
Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information............................ Summary of Information Statement -- Prospectus;
Selected Financial Information; Special
Considerations
4. Terms of the Transaction.......................... Summary of Information Statement -- Prospectus;
The Merger; Comparison of Shareholder Rights;
EchoStar Communications Corporation - Description
of Capital Stock
5. Pro Forma Financial Information................... *
6. Material Contracts with Company Being Acquired.... Summary of the Exchange and Merger; the Merger;
Special Considerations
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters.... *
8. Interests of Named Experts and Counsel............ *
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... *
B. Information About the Registrant
10. Information With Respect to S-3 Registrants....... *
11. Incorporation of Certain Information by
Reference........................................ *
12. Information With Respect to S-2 or S-3
Registrants...................................... *
13. Incorporation of Certain Information by
Reference........................................ *
14. Information With Respect to Registrants Other Than
S-2 or S-3 Registrants........................... Available Information; Summary of Information
Statement -- Prospectus; Selected Financial Data
EchoStar Communications Corporation; Index to
Financial Statements of EchoStar Communications
Corporation
C. Information About Company Being Acquired
15. Information With Respect to S-3 Companies......... *
16. Information With Respect to S-2 or S-3
Companies........................................ *
17. Information With Respect to Companies Other Than
S-2 or S-3 Companies............................. Summary of Information Statement -- Prospectus;
Direct Broadcasting Satellite Corporation; Index
to Financial Statements of Direct Broadcasting
Satellite Corporation
D. Voting and Management Information
18. Information if Proxies, Consents or Authorizations
are to be Solicited.............................. *
19. Information if Proxies, Consents or Authorizations
are not to be Solicited in an Exchange Offer..... Outside Front Cover Page of Information Statement
-- Prospectus; Summary of Information Statement
-- Prospectus; Rights of Dissenting Shareholders;
The Merger
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* Answer is negative or item is not applicable.
[DBSC LETTERHEAD]
DIRECT BROADCASTING SATELLITE CORPORATION
, 1996
To the Shareholders of Direct Broadcasting Satellite Corporation
On December 21, 1995, EchoStar Communications Corporation, a Nevada
corporation ("EchoStar"), and Direct Broadcasting Satellite Corporation, a
Delaware corporation ("DBSC"), entered into a Plan and Agreement of Merger,
approved by the Board of Directors of each company and by the written consent of
DBSC shareholders ("DBSC Shareholders") owning a majority of the voting
securities of DBSC, pursuant to which DBSC will be merged with Direct
Broadcasting Satellite Corporation, a Colorado corporation and a subsidiary of
EchoStar ("MergerCo"), resulting in DBSC becoming a wholly owned subsidiary of
EchoStar (the "Merger"). This Information Statement -- Prospectus relates to
your right to elect to receive, at your option, either cash or shares of Class A
Common Stock of EchoStar in exchange for your shares of Common Stock of DBSC. We
are not asking you for a proxy and you are requested not to send us a proxy.
As a result of the Merger, each share of Common Stock of DBSC will be
converted into and exchanged for the right to receive, at the election of each
DBSC Shareholder, either $7.99 in cash or .67417 shares of Class A Common Stock
of EchoStar, subject to certain limitations and adjustments as set forth in the
Plan and Agreement of Merger and as set forth in the enclosed Information
Statement -- Prospectus. DBSC Shareholders electing to receive shares of Class A
Common Stock of EchoStar in connection with the Merger will not be entitled to
sell such shares for a period of 90 days following the effective date of the
Merger. Since the date that DBSC executed the Plan and Agreement of Merger
described in the Information Statement -- Prospectus, the price of each share of
EchoStar Class A Common Stock has increased from $19.12 per share to $27.50 per
share as of July 8, 1996, which represents the closing price of a share of Class
A Common Stock of EchoStar as reported on the Nasdaq's National Market System.
The consummation of the Merger is conditioned upon, among other things,
approval by the Federal Communications Commission.
Management of EchoStar and DBSC believe that the proposed Merger will
provide shareholders of DBSC with the opportunity to participate in the enhanced
growth and other opportunities of EchoStar resulting from the Merger. EchoStar
recently launched its first direct broadcast satellite ("DBS"), EchoStar I, in
December 1995 and, on March 4, 1996, began broadcasting its "DISH Network-SM-"
programming to the entire continental United States.
The Plan and Agreement of Merger is included as Annex I to the enclosed
Information Statement -- Prospectus. The Information Statement -- Prospectus
describes the Merger in detail and contains important information about DBSC and
EchoStar including financial statements and other financial information. The
Information Statement -- Prospectus also describes each shareholder's right to
seek appraisal of his shares of DBSC Common Stock as a result of the Merger. The
Board of Directors believes that the Merger is in the best interest of DBSC
Shareholders.
Sincerely,
HARLEY W. RADIN
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 11, 1996
ECHOSTAR COMMUNICATIONS CORPORATION
PROSPECTUS
DIRECT BROADCASTING SATELLITE CORPORATION
INFORMATION STATEMENT
This Information Statement -- Prospectus is being furnished to shareholders
of Direct Broadcasting Satellite Corporation, a Delaware corporation ("DBSC"),
in connection with the proposed merger (the "Merger") of DBSC with Direct
Broadcasting Satellite Corporation, a Colorado corporation ("MergerCo"), and a
wholly owned subsidiary of EchoStar Communications Corporation, a Nevada
Corporation ("EchoStar"). MergerCo is a newly formed corporation that was
organized by EchoStar for purposes of the Merger. On the effective date of the
Merger, each share of Common Stock of DBSC, $0.01 par value ("DBSC Common
Stock"), other than shares held by EchoStar and those for which Appraisal Rights
have been perfected, as set forth below, will be converted into and exchanged
for the right to receive, at the election of each shareholder of DBSC (together,
"DBSC Shareholders"), either $7.99 in cash (the "Cash Value") or .67417 shares
of Class A Common Stock, $0.01 par value, of EchoStar ("EchoStar Common Stock")
(collectively, the "Merger Consideration"), subject to the conditions set forth
in this Information Statement -- Prospectus and in the accompanying Election
Form (the "Offer"). DBSC Shareholders who reject the Offer may have the value of
their shares of DBSC Common Stock appraised pursuant to Delaware General
Corporation Law (the "DGCL"), and thereby receive the cash value of their shares
of DBSC Common Stock as determined by the Delaware Court of Chancery ("Appraisal
Rights"). DBSC Shareholders not returning the Election Form will be deemed to
have accepted the Offer and shall receive the Merger Consideration in the form
of EchoStar Common Stock. See "Rights of Dissenting Shareholders."
The Merger Consideration is subject to certain limitations and adjustments,
a detailed discussion of which is set forth in the Plan and Agreement of Merger
set forth as Annex I to this Information Statement -- Prospectus and described
below under "The Merger -- Description of the Merger Agreement -- Adjustments to
Merger Consideration" (the "Merger Agreement"). No fractional shares of EchoStar
Common Stock will be issued in the Merger and cash will be paid to each DBSC
Shareholder in lieu of any fractional shares in an amount equal to such
fractional interest multiplied by the value of a share of EchoStar Common Stock
at the Effective Time (as defined herein). See "Rights of Dissenting
Shareholders." Except for (i) cash payments in lieu of fractional shares, (ii)
DBSC Shareholders who make elections to receive all or part of their Merger
Consideration in cash or (iii) DBSC Shareholders who reject the Offer and elect
to exercise their Appraisal Rights (collectively, "Cash Elections"), the Merger
Consideration will be paid in EchoStar Common Stock. See "The Merger --
Description of the Merger Agreement." Based upon the best information available,
the final per share Merger Consideration offered for each share of DBSC Common
Stock exchanged in the Merger will be either $7.99 cash or, assuming all DBSC
Shareholders elect to receive EchoStar Common Stock, .67417 shares of EchoStar
Common Stock valued at approximately $18.54 based on the market closing price of
the EchoStar Common Stock of $27.50 on July 8, 1996. If the final per share
Merger Consideration materially differs from this estimate, this Information
Statement -- Prospectus will be recirculated and DBSC Shareholders will be
provided with an adequate period to consider alternatives, including Appraisal
Rights.
The Merger and related transactions described herein are complex
transactions. The above matters are discussed in detail in this Information
Statement -- Prospectus. DBSC Shareholders are urged to carefully read and
consider this Information Statement -- Prospectus in its entirety.
EchoStar has filed a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
covering 658,000 shares of EchoStar Common Stock that may be issued in
connection with the Merger. This Information Statement -- Prospectus constitutes
the Prospectus of EchoStar under the Securities Act in connection with the offer
and proposed sale of EchoStar Common Stock pursuant to the Merger, and the
Information Statement of DBSC. The financial statements and other information
contained herein with respect to DBSC have been provided by DBSC, and all other
information has been provided by EchoStar. This Information Statement --
Prospectus does not cover resales of EchoStar Common Stock that may be issued in
the Merger, and no person is authorized to use this Information Statement --
Prospectus in connection with any such resale.
EchoStar Common Stock is presently quoted on the Nasdaq National Market
under the symbol "DISH". The EchoStar Common Stock that may be issued in
connection with the Merger will be designated for inclusion for trading on the
Nasdaq National Market upon official notice of issuance. DBSC Shareholders
electing to receive shares of EchoStar Common Stock in connection with the
Merger will not be entitled to sell such shares for a period of 90 days
following the effective date of the Merger. See "The Merger -- Description of
the Merger Agreement -- Restrictions on Resale."
The DBSC Common Stock is not publicly traded and no other ready market
exists for valuation purposes.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
DBSC SHAREHOLDERS SHOULD CAREFULLY CONSIDER THIS INFORMATION STATEMENT --
PROSPECTUS IN ITS ENTIRETY, PARTICULARLY THE FACTORS DISCUSSED UNDER THE HEADING
"SPECIAL CONSIDERATIONS."
--------------------------
THE SHARES OF ECHOSTAR COMMON STOCK THAT MAY BE ISSUED IN THE MERGER HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION
STATEMENT -- PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
THE DATE OF THIS INFORMATION STATEMENT -- PROSPECTUS IS , 1996.
TABLE OF CONTENTS
PAGE
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AVAILABLE INFORMATION...................................................................................... 3
SUMMARY.................................................................................................... 4
THE PARTIES................................................................................................ 4
SUMMARY OF SPECIAL CONSIDERATIONS.......................................................................... 5
THE EXCHANGE AND MERGER.................................................................................... 6
SELECTED FINANCIAL DATA.................................................................................... 10
THE ECHOSTAR ORGANIZATION.................................................................................. 12
COMPARATIVE PER SHARE DATA................................................................................. 14
SPECIAL CONSIDERATIONS..................................................................................... 15
RIGHTS OF DISSENTING SHAREHOLDERS.......................................................................... 29
THE MERGER................................................................................................. 31
COMPARISON OF SHAREHOLDER RIGHTS........................................................................... 40
PRICE RANGE OF ECHOSTAR CLASS A COMMON STOCK............................................................... 43
DIVIDEND POLICY............................................................................................ 43
CAPITALIZATION............................................................................................. 44
ECHOSTAR COMMUNICATIONS CORPORATION........................................................................ 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 46
BUSINESS................................................................................................... 59
MANAGEMENT................................................................................................. 90
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................. 94
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. 96
DESCRIPTION OF CAPITAL STOCK............................................................................... 98
DESCRIPTION OF CERTAIN INDEBTEDNESS........................................................................ 101
DIRECT BROADCASTING SATELLITE CORPORATION.................................................................. 103
BUSINESS................................................................................................... 103
MANAGEMENT................................................................................................. 104
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................. 105
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. 106
DESCRIPTION OF CAPITAL STOCK............................................................................... 107
LEGAL MATTERS.............................................................................................. 107
EXPERTS.................................................................................................... 107
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
ANNEX I -- PLAN AND AGREEMENT OF MERGER.................................................................... A-1
ANNEX II -- MERGER TRIGGER AGREEMENT....................................................................... B-1
ANNEX III -- DELAWARE GENERAL CORPORATION LAW SECTION 262.................................................. C-1
2
AVAILABLE INFORMATION
EchoStar is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington D.C. 20549-1004, and at the following
Regional Offices of the Commission: Chicago Regional Office, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661 and the New York
Regional Office, 7 World Trade Center, New York, New York 10048. Copies of such
materials may also be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549-1004 at prescribed
rates.
DBSC is not required to file any reports or other information with the
Commission under the Securities Act or the Exchange Act.
This Information Statement -- Prospectus, which constitutes a part of the
Registration Statement filed by Echostar with the Commission under the
Securities Act, omits certain information contained in the Registration
Statement, and reference is hereby made to the Registration Statement and to the
exhibits relating thereto for further information with respect to EchoStar and
the EchoStar Common Stock offered hereby. Statements contained herein concerning
provisions of any document set forth all material elements of the documents, are
not necessarily complete, and each statement is qualified in its entirety by
reference to the copy of such document included herewith or filed with the
Commission.
No person is authorized to give any information or to make any
representations with respect to the matters described in this Information
Statement -- Prospectus other than those contained herein. Any information or
representations with respect to such matters not contained herein must not be
relied upon as having been authorized by EchoStar or DBSC. This Information
Statement -- Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities other than the registered securities in any
jurisdiction. Neither the delivery of this Information Statement -- Prospectus
nor any sale made hereunder shall, under any circumstances, create any
implication that there has been no change in the affairs of EchoStar or DBSC
since the date hereof or that the information in this Information Statement --
Prospectus is correct as of any time subsequent to the date hereof.
3
SUMMARY
The following is a summary of all material elements of certain information
contained in this Information Statement -- Prospectus. This summary is not
intended to be complete and is qualified in all respects by reference to the
detailed information appearing elsewhere in this Information Statement --
Prospectus and the Annexes hereto. All DBSC Shareholders are urged to review
carefully the entire Information Statement -- Prospectus and the Annexes. Unless
otherwise defined herein, capitalized terms shall have the meaning ascribed to
them in the Plan and Agreement of Merger set forth as Annex I to this
Information Statement -- Prospectus.
THE PARTIES
ECHOSTAR COMMUNICATIONS CORPORATION
EchoStar, which successfully launched its first direct broadcast satellite
("DBS"), EchoStar I, in December 1995, is one of only two companies with United
States licensed operational capacity sufficient to provide comprehensive
nationwide DBS programming service in 1996. Currently, EchoStar offers over 100
channels of high quality digital video and audio programming. Additionally, on
March 1, 1996, EchoStar received short-term authority from the Federal
Communications Commission ("FCC") to operate approximately 30 additional video
channels on EchoStar I for approximately 180 days (the "STA"). The STA expires
August 31, 1996 unless extended. EchoStar's DBS service (the "DISH Network-SM-")
is expected to expand to approximately 200 digital video and audio channels
following the successful launch of a second DBS satellite this fall. However,
there can be no assurance that the launch of EchoStar's second DBS satellite
this fall will be successful. See "Special Considerations -- Risk of Satellite
Defect, Loss or Reduced Performance." Absent significant additional capital,
EchoStar will be unable to retain all of its assigned frequencies and orbital
slots.
EchoStar was incorporated under the laws of the State of Nevada in April
1995 for purposes of facilitating the consummation of a public offering of its
Class A Common Stock, which occurred in June 1995. The principal executive
offices of EchoStar are located at 90 Inverness Circle East, Englewood, Colorado
80112, and its telephone number is (303) 799-8222. As used in this Information
Statement -- Prospectus, unless otherwise stated or the context otherwise
requires, "EchoStar" refers to EchoStar Communications Corporation and its
direct and indirect subsidiaries.
DIRECT BROADCASTING SATELLITE CORPORATION, A DELAWARE CORPORATION
DBSC, organized under Delaware law in 1981, has received authority from the
Federal Communications Commission ("FCC") to build two direct broadcast
satellites to transmit television and other signals throughout the continental
United States, Alaska and Hawaii. The FCC has awarded DBSC specific orbital slot
assignments with respect to 11 DBS frequencies located at 61.5 DEG. WL and 11
DBS frequencies located at 175 DEG. WL. DBSC has filed an application with the
FCC and intends to seek permission from certain national communications
authorities to permit DBSC to transmit programming to parts of Western Europe,
North Africa and Asia, as well as Central and South America, from its
satellites. Subject to receipt of requisite approval and consent from relevant
national authorities, the FCC has agreed to the provision of international or
foreign-domestic DBS service by DBSC. DBSC has entered into, and made a series
of progress payments under, a contract with Martin Marietta Corporation ("Martin
Marietta") for the construction of two direct broadcast satellites (the "DBSC
Satellite Contract"), the first of which is anticipated to be completed and
launched in 1997, assuming DBSC has adequate financial resources to complete
construction. EchoStar currently owns approximately 40% of the outstanding stock
of DBSC. The principal executive offices of DBSC are located at 1155 Connecticut
Avenue, N.W., 4th Floor, Washington, D.C. 20036, and its telephone number is
(202) 966-5800.
DIRECT BROADCASTING SATELLITE CORPORATION, A COLORADO CORPORATION
MergerCo is a Colorado corporation and a wholly owned subsidiary of
EchoStar. MergerCo was recently formed to effect the Merger. See "The Merger."
4
SUMMARY OF SPECIAL CONSIDERATIONS
The deployment and operation of the EchoStar DBS System is highly complex
and involves substantial risks. These risks include the competition from DBS and
other satellite system operators and cable television, EchoStar's ability to
integrate advanced and unproven technologies, the potential loss or damage to
EchoStar's satellites during launch or while in orbit, the potential for
impaired commercial operation resulting from incorrect orbital placement, effect
on cash flow resulting from subscriber acquisition costs, EchoStar's ability to
obtain insurance on favorable terms, the potential for delay and cost overruns
and effects of government regulation on the communications industry generally.
The inability of EchoStar to successfully deploy the EchoStar DBS System would
adversely affect EchoStar's operations. Risks related to EchoStar include the
fact that EchoStar is highly leveraged, which leverage makes EchoStar vulnerable
to adverse changes in the economy generally which could adversely affect
EchoStar. These and certain other risks are described in more detail under
"Special Considerations" commencing on page 14.
5
THE EXCHANGE AND MERGER
APPROVAL OF THE MERGER
The Plan and Agreement of Merger, dated December 21, 1995, among EchoStar,
MergerCo and DBSC (the "Merger Agreement"), was approved by written consent of
DBSC Shareholders owning approximately 83% of the issued and outstanding DBSC
Common Stock on December 21, 1995. Pursuant to the Merger Agreement, among other
things, DBSC will be merged with MergerCo, resulting in DBSC becoming a wholly
owned subsidiary of EchoStar.
THE OFFER
The Merger Agreement provides that each issued and outstanding share of DBSC
Common Stock, other than shares held by EchoStar and those for which Appraisal
Rights have been perfected, will be converted into and exchanged for either
$7.99 in cash or .67417 shares of EchoStar Common Stock subject to certain
limitations and adjustments as set forth in the Merger Agreement attached as
Annex I to this Information Statement -- Prospectus and as described below under
"The Merger -- Description of the Merger Agreement." To elect to receive either
the Cash Value or the EchoStar Common Stock, each DBSC Shareholder should
complete the Election Form accompanying this Information Statement -- Prospectus
and return it by 5:00 p.m. on , 1996, to American Securities
Transfer, Inc. (the "Exchange Agent"). The mailing address of the Exchange Agent
is 1825 Lawrence Street, Suite 444, Denver, Colorado 80202. No fractional shares
will be issued in connection with the Merger, and each DBSC Shareholder electing
to receive EchoStar Common Stock will receive cash in lieu of any fractional
share in an amount equal to such fractional interest multiplied by the value of
a share of EchoStar Common Stock as of the effective time of the Merger (the
"Effective Time").
Since the date that DBSC executed the Merger Agreement, the price of each
share of EchoStar Common Stock has increased from $19.12 per share to $27.50 per
share as of July 8, 1996, which represents the closing price of a share of
EchoStar Common Stock as reported on the Nasdaq National Market System.
RIGHTS OF DISSENTING SHAREHOLDERS
Under the DGCL, DBSC Shareholders who comply with the applicable procedures
for dissenting from the Merger are entitled to Appraisal Rights. For more
information regarding such Appraisal Rights, see "Rights of Dissenting
Shareholders."
BACKGROUND OF THE MERGER
On November 15, 1994, EchoStar and DBSC entered into a Stock Purchase
Agreement pursuant to which EchoStar purchased 583,250 shares of DBSC Common
Stock in consideration for: (i) the payment by EchoStar to DBSC of $2,960,000;
(ii) the dismissal by EchoStar with prejudice of a lawsuit brought by EchoStar
against DBSC; and (iii) the cancellation and termination by EchoStar of: (x) all
of the issued and outstanding convertible notes of DBSC held by EchoStar (the
"DBSC Notes"); (y) all accounts receivable of DBSC owned by EchoStar; and (z)
all other debts of DBSC owned by EchoStar. DBSC also granted EchoStar the right
and option, under certain circumstances and subject to certain conditions, to
purchase additional shares of DBSC Common Stock thereby providing EchoStar with
certain rights even if the Merger had not occurred (the "Option Shares"). The
issuance of the Option Shares was conditioned upon the receipt from the FCC of
any required approvals for issuance of the Option Shares. Under the terms of the
Stock Purchase Agreement, each of DBSC and EchoStar were given the right to
require the execution by the parties of the Merger Agreement, subject to certain
conditions, including approval of the Merger by the FCC ("FCC Approval") and by
the DBSC Shareholders. Harley W. Radin, Chairman of the Board and Chief
Executive Officer of DBSC, personally executed the Stock Purchase Agreement with
respect to certain covenants regarding the non-transferability of his DBSC
Common Stock prior to consummation of the Merger. See "The Merger -- Background
and Reasons for the Merger."
6
Contemporaneously with execution of the Merger Agreement, DBSC, EchoStar and
MergerCo entered into a Merger Trigger Agreement (the "Merger Trigger
Agreement") pursuant to which the parties agreed to, among other things, execute
and consummate the transactions contemplated by the Merger Agreement and to
enter into a Note Purchase Agreement and Security Agreement (together, the "Loan
Agreements"), pursuant to which EchoStar agreed to purchase from DBSC $16.0
million in principal amount of promissory notes of DBSC and, in EchoStar's sole
and absolute discretion, up to an additional $134.0 million principal amount of
promissory notes, the proceeds from which are to be used by DBSC to make certain
payments to Martin Marietta under the DBSC Satellite Contract and to make
deposits towards launch reservations. As of the date of this Information
Statement -- Prospectus, EchoStar has loaned DBSC $31.0 million pursuant to the
Loan Agreements. See "The Merger -- The Merger Trigger Agreement".
In the event the Merger is not consummated for any reason, the parties also
agreed to structure a transaction or series of transactions that would have the
effect of providing to the parties, as nearly as is possible, the benefits which
would have accrued to the parties had the Merger been consummated, as more
particularly described in this Information Statement -- Prospectus under "The
Merger -- The Merger Trigger Agreement" (the "Substitute DBSC Transaction"). The
Merger Trigger Agreement also sets forth the acknowledgement of the parties that
certain DBSC Shareholders owning a majority of the issued and outstanding shares
of DBSC Common Stock had, by written consent, approved the Merger. A copy of the
Merger Trigger Agreement is attached hereto as Annex II.
REASONS FOR THE MERGER
The DBSC Board believes that the Merger is in the best interests of DBSC and
is fair to and in the best interests of DBSC Shareholders. The Merger will
enable the DBSC Shareholders to participate in the DBS industry as owners of
EchoStar, which recently began broadcasting its DISH Network-SM- programming to
the entire continental United States. See "The Merger -- Background and Reasons
for the Merger" and "EchoStar Communications Corporation -- Business."
DBSC has been an applicant for a full DBS license since 1982. As a
development stage company with no operations, DBSC has found it extremely
difficult to attract necessary financing to continuously comply with the
requirements imposed by the FCC to maintain its DBS authorizations ("Due
Diligence Requirements"), as well as to satisfy its other obligations. By late
summer of 1994, the construction of DBSC's satellite by Martin Marietta was not
sufficiently advanced to permit DBSC to begin operation of its first satellite
by August 1995, and substantial working capital was needed to accelerate the
construction phase of the DBSC Satellite Contract. In addition, the specific
orbital locations assigned by the FCC to DBSC were not those widely considered
among the most desirable, making it even more difficult for DBSC to attract
partners, investors or programmers.
The launch of DBS service in mid-1994 by DirecTV, Inc., a subsidiary of
Hughes Communications, Inc. ("DirecTV"), and United States Satellite
Broadcasting, Inc. ("USSB"), and the prospect of a further competitive entry by
EchoStar in late 1995, raised the possibility that if DBSC were not able to
accelerate progress on its own DBS system, it would be unable to attract
necessary working capital to continue progress payments under the DBSC Satellite
Contract.
The Merger with EchoStar provides DBSC with the financial resources to build
and launch its DBS satellites, thereby providing DBSC Shareholders with the
opportunity to participate in the growth and other opportunities resulting from
the DBS system presently under construction by DBSC as well as EchoStar's DBS
system (together, the "EchoStar DBS System").
DESCRIPTION OF THE MERGER AGREEMENT
The Merger Agreement provides that, at the Effective Time, DBSC will be
merged with MergerCo, which shall be the surviving corporation. The Effective
Time of the Merger is expected to be as soon as practicable after the later of
FCC Approval is obtained or the effective date of the Registration Statement,
subject to satisfaction or waiver of the conditions precedent to the Merger as
set forth in the Merger Agreement and Merger Trigger Agreement. See "The Merger
- -- Effective
7
Time." At the Effective Time of the Merger, the separate corporate existence of
DBSC will cease, and DBSC Shareholders accepting the Offer, other than EchoStar,
will receive or become entitled to receive either $7.99 in cash or .67417 shares
of EchoStar Common Stock for each share of DBSC Common Stock owned as of the
Effective Time of the Merger, payable, at the election of each DBSC Shareholder
and subject to certain limitations and adjustments, a detailed discussion of
which is described below under "The Merger -- Description of the Merger --
Adjustments to Merger Consideration"; provided, however, the Cash Value of the
Merger Consideration cannot exceed 50%. DBSC Shareholders not returning the
Election Form will be deemed to have accepted the Offer and will receive shares
of EchoStar Common Stock for their shares of DBSC Common Stock. DBSC
Shareholders receiving shares of EchoStar Common Stock in connection with the
Merger will not be entitled to sell such shares for a period of 90 days
following the effective date of the Merger. See "The Merger -- Description of
the Merger Agreement -- Restrictions on Resale." DBSC Shareholders who reject
this Offer may have the value of their shares of DBSC Common Stock appraised
pursuant to the DGCL. See "Rights of Dissenting Shareholders."
The Merger Consideration may be decreased according to a specific formula
set forth in the Merger Agreement to reflect, among other things described in
"The Merger -- Description of the Merger" below, certain liabilities of DBSC not
disclosed in the Merger Agreement, the exact amount of which may not be
precisely determined until the Effective Time of the Merger. Based upon the best
information available, the final per share Merger Consideration offered for each
share of DBSC Common Stock exchanged in the Merger will be either $7.99 in cash
or, assuming all DBSC Shareholders elect to receive EchoStar Common Stock,
.67417 shares of EchoStar Common Stock valued at approximately $18.54 based on
the market closing price of the EchoStar Common Stock of $27.50 on July 8, 1996.
If the final per share Merger Consideration materially differs from this
estimate, this Information Statement -- Prospectus will be recirculated and DBSC
Shareholders will be provided with an adequate period to consider alternatives,
including Appraisal Rights.
The Merger Agreement contains representations and warranties made by DBSC to
EchoStar and MergerCo (together, the "EchoStar Companies"), and representations
and warranties made by the EchoStar Companies to DBSC, which are described in
"The Merger -- Representations and Warranties." Such representations and
warranties are made as of December 21, 1995, when the Merger Agreement was
signed, and as of the Effective Time of the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Harley W. Radin, the Chairman of the Board and Chief Executive Officer of
DBSC, owns approximately 18.4% of the issued and outstanding shares of DBSC
Common Stock and has previously voted his DBSC Common Shares to approve the
Merger. Mr. Radin may continue in some capacity, to be determined, with DBSC
after consummation of the Merger. In addition, DBS Industries, Inc. ("DBSI")
owns 24.7% of DBSC Common Stock. Fred W. Thompson, a director of DBSC, is the
President and Chief Executive Officer of DBSI, as well as a significant
shareholder of DBSI. See "Special Considerations -- Factors Concerning the
Merger -- Interests of Certain Persons in the Merger."
REGULATORY APPROVALS
Under the rules and regulations of the FCC, the Merger may not be
consummated until FCC Approval has been obtained. See "The Merger -- Federal
Communications Commission Approval."
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method for accounting
and financial reporting purposes. See "The Merger -- Accounting Treatment."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Merger constitute a "reorganization" within the
meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code
of 1986, as amended (the "Code").
8
Sullivan & Worcester LLP, counsel to DBSC, has advised DBSC that, based in part
on certain representations made by EchoStar and by DBSC and certain of the DBSC
Shareholders, under current law and assuming that: (i) the Merger will be
consummated as described in the Merger Agreement; and (ii) the representations
made by EchoStar remain true as of the date of consummation of the Merger, no
gain or loss will be recognized for Federal income tax purposes by any DBSC
Shareholder upon the receipt of EchoStar Common Stock exchanged for DBSC Common
Stock. The Federal income tax treatment of a DBSC Shareholder who receives cash
in the Merger in exchange for part or all of his DBSC Common Stock, including
cash received in lieu of fractional shares, will depend upon such DBSC
Stockholder's particular circumstances. See "The Merger -- Certain Federal
Income Tax Consequences."
COMPARISON OF SHAREHOLDER RIGHTS
If the Merger is consummated, DBSC Shareholders who elect to receive shares
of EchoStar Common Stock will become owners of EchoStar, a Nevada corporation
formed in April 1995. For a comparison of Nevada and Delaware laws and charter
and bylaw provisions of EchoStar and DBSC governing the rights of Delaware and
Nevada shareholders, see "Comparison of Shareholder Rights."
MECHANICS OF EXCHANGE OF CERTIFICATES
Each DBSC Shareholder shall make an election whether to receive the Cash
Value or shares of EchoStar Common Stock (the "Share Value"), on the "Election
By DBSC Shareholder" form delivered herewith (the "Election Form"). The Election
Form must be returned to the Exchange Agent at its principal offices located at
1825 Lawrence Street, Suite 444, Denver, Colorado 80202 by 5:00 p.m. on or
before , 1996. As soon as practicable after the Effective
Time of the Merger, the Exchange Agent will mail to DBSC Shareholders
instructions for surrendering their stock certificates in exchange for the
Merger Consideration. Except for cash payments in lieu of fractional shares and
to the extent DBSC Shareholders make Cash Elections, the Merger Consideration
will be paid in shares of EchoStar Common Stock.
Upon surrender of certificates, EchoStar will promptly cause to be paid to
the persons entitled thereto the Merger Consideration. No interest will be paid
or will accrue on any amount payable upon the surrender of any certificate.
After the Effective Time of the Merger, certificates which previously
represented issued and outstanding shares of DBSC Common Stock will represent
solely the right to receive the Merger Consideration multiplied by the number of
shares of DBSC Common Stock previously represented thereby.
MECHANICS OF PERFECTING APPRAISAL RIGHTS
Any DBSC Shareholder who dissents from the Merger and who follows certain
procedures is entitled to receive in cash the "fair value" of their DBSC Common
Stock. Within 10 days after the Merger is effected, EchoStar will send notice to
each DBSC Shareholder who has the right of appraisal. Within 20 days of the date
of the mailing of such notice, a dissenting DBSC Shareholder must send a written
demand for appraisal to Direct Broadcasting Satellite Corporation, a Colorado
corporation, 90 Inverness Circle East, Englewood, Colorado 80112 in order to
perfect these appraisal rights under Delaware law.
Within 120 days after the Effective Time of the Merger, a dissenting DBSC
Shareholder who has complied with Delaware law may file a petition in the
Delaware Court of Chancery demanding a determination of the fair value of his
DBSC Common Stock. After determining which DBSC Shareholders have complied with
Delaware law regarding appraisal rights, the court will establish a fair value
of the DBSC Common Stock and direct payment to entitled DBSC Shareholders. See
"Rights of Dissenting Shareholders."
9
SELECTED FINANCIAL DATA
The following selected financial data as of and for each of the five years
in the period ended December 31, 1995 are derived from the financial statements
of EchoStar, and the predecessor entities of EchoStar, audited by Arthur
Andersen LLP, independent public accountants. The following selected financial
data for the three months ended March 31, 1995 and 1996 are derived from the
unaudited financial statements of EchoStar and, in the opinion of EchoStar,
include all adjustments necessary for a fair presentation of such information.
Operating results for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be achieved for the year ended December 31,
1996. The data set forth in this table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," EchoStar's Combined and Consolidated Financial Statements and the
Notes thereto and the other financial information included elsewhere in this
Information Statement -- Prospectus.
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
----------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA, RATIOS AND SATELLITE RECEIVERS SOLD)
STATEMENT OF INCOME DATA:
Revenue:
DTH products:
Domestic.......................... $ 103,510 $ 122,433 $ 152,818 $ 111,815 $ 87,274 $ 20,548 $ 23,968
International..................... 31,605 35,040 53,493 60,938 59,578 15,729 12,773
Programming......................... 3,890 6,436 10,770 14,540 15,096 3,871 3,913
Loan origination and participation
income............................. 608 1,179 3,860 3,690 1,942 265 813
----------- --------- --------- --------- --------- --------- ---------
Total revenue................... 139,613 165,088 220,941 190,983 163,890 40,413 41,467
----------- --------- --------- --------- --------- --------- ---------
Expenses:
DTH products...................... 102,810 120,826 161,447 133,635 120,178 29,445 32,750
Programming....................... 3,549 6,225 9,378 11,670 13,610 3,432 3,283
Selling, general and
administrative................... 26,736 25,708 30,235 30,219 35,015 7,871 10,733
Depreciation and amortization..... 1,112 1,043 1,677 2,243 3,058 363 3,330
----------- --------- --------- --------- --------- --------- ---------
Total expenses.................. 134,207 153,802 202,737 177,767 171,861 41,111 50,096
----------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............... 5,406 11,286 18,204 13,216 (7,971) (698) (8,629)
Net income (loss) (8)................. $ 6,192 $ 10,833 $ 20,118 $ 90 $ (11,486) $ (2,240) $ (7,221)
----------- --------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- --------- ---------
Net income (loss) attributable to
common shares........................ $ 6,192 $ 10,833 $ 20,118 $ (848) $ (12,691) $ (2,541) $ (7,522)
----------- --------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- --------- ---------
Weighted average common shares
outstanding.......................... 32,442 35,562 33,544 40,376
--------- --------- --------- ---------
--------- --------- --------- ---------
Net (loss) per share.................. $ (0.03) $ (0.36) $ (0.08) $ (0.19)
--------- --------- --------- ---------
--------- --------- --------- ---------
Ratio of earnings to fixed charges
(1).................................. 4.36x 7.32x 9.63x 1.02x 0.66x 0.70x 0.21x
Pro forma (unaudited):
Pro forma net income (2)............ $ 4,468 $ 7,529 $ 12,272
Pro forma net income per share
(2)(3)............................. 0.14 0.23 0.38
Weighted average shares outstanding
(3)................................ 32,221 32,221 32,221
Dividends per share (7)............. $ 0.33 $ 0.09 $ 0.06
----------- --------- ---------
----------- --------- ---------
OTHER DATA:
EBITDA (4)............................ $ 12,818(5) $ 12,329 $ 19,881 $ 15,459 $ (4,913) $ (335) $ (5,299)
Satellite receivers sold (in units):
Domestic............................ 113,000 116,000 132,000 114,000 131,000 27,000 45,000
International....................... 45,000 85,000 203,000 289,000 331,000 85,000 76,000
----------- --------- --------- --------- --------- --------- ---------
Total........................... 158,000 201,000 335,000 403,000 462,000 112,000 121,000
----------- --------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- --------- ---------
10
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- ----------- -----------
AT MARCH
31, 1996
-----------
(IN THOUSANDS) (UNAUDITED)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
investment securities........................ $ 20,359 $ 22,031 $ 27,232 $ 245,375(6) $ 137,115(6) $ 440,512(6)
Working capital............................... 38,597 44,268 35,563 52,711 52,999 193,772
Total assets.................................. 72,547 88,529 106,476 472,492 623,091 964,671
Long-term obligations (less current portion):
1994 Notes, net............................. -- -- -- 334,206 382,218 395,333
1996 Notes, net............................. -- -- -- -- -- 350,890
Notes payable to stockholder................ 234 2,274 14,725 -- -- --
Other long-term debt........................ 5,028 4,876 4,702 5,393 33,444 32,421
- ------------------------------
(1) For purposes of the ratio of earnings to fixed charges, earnings consist of
earnings from continuing operations before income taxes, plus fixed
charges. Fixed charges consist of interest incurred on all indebtedness and
rental expense under non-cancelable operating leases.
(2) EchoStar's subsidiaries operated under Subchapter S of the Code and
comparable provisions of applicable state income tax laws until December
31, 1993. The amounts shown reflect net income as if EchoStar had been
subject to corporate federal and state income taxes during such periods.
See Notes 2 and 7 of Notes to EchoStar's Combined and Consolidated
Financial Statements as of December 31, 1995 included elsewhere in this
Information Statement -- Prospectus.
(3) Earnings per share has been calculated and presented on a pro forma basis
as if the shares of EchoStar issued to reflect the December 31, 1993
reorganization were outstanding for all periods presented. See Notes 1 and
7 of EchoStar's Notes to Combined and Consolidated Financial Statements as
of December 31, 1995 included elsewhere in this Information Statement --
Prospectus.
(4) EBITDA represents earnings before interest income, interest expense, net of
other income and expenses, income taxes, depreciation and amortization.
EBITDA is commonly used in the telecommunications industry to analyze
companies on the basis of operating performance, leverage and liquidity.
EBITDA is not intended to represent cash flows for the period, nor has it
been presented as an alternative to operating income as an indicator of
operating performance and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles. See EchoStar's Combined and
Consolidated Statements of Cash Flows in EchoStar's Combined and
Consolidated Financial Statements contained elsewhere in this Information
Statement -- Prospectus.
(5) Excludes $6.3 million in non-recurring charges.
(6) Includes Restricted Cash and Marketable Investment Securities.
(7) Dividends per share have been adjusted for dividends declared to pay S
corporation stockholder tax payments and dividends which were reinvested in
EchoStar for the EchoStar DBS System.
(8) Since the December 31, 1993 corporate reorganization, EchoStar has not paid
any dividends on common stock. See Notes 1 and 7 of EchoStar's Notes to
Combined and Consolidated Financial Statements as of December 31, 1995
included elsewhere in this Information Statement -- Prospectus.
11
THE ECHOSTAR ORGANIZATION
The following chart illustrates where significant DBS assets and rights are,
or are expected to be, held:
[CHART]
The Old Notes are, and the Exchange Notes will be, secured by:
- A pledge of the capital stock of EchoStar DBS Corporation (which pledge
will be released following consummation of the Merger) and Dish, Ltd. and
in the event the Merger is not consummated, a substitute transaction which
provides similar benefits to EchoStar (the "Substitute DBSC Transaction").
- A pledge of the stock of DBSC held by EchoStar.
- A pledge of certain notes of DBSC held by EchoStar.
- A first priority security interest in the Escrow Account.
Additionally, following consummation of the Merger, the Notes will be
secured by:
- A first priority security interest, when launched, in EchoStar III.
12
- A collateral assignment of certain construction, launch and insurance
contracts relating to EchoStar III.
- A pledge of all of the issued and outstanding capital stock of DBSC.
In the event that the Merger is not consummated, following consummation of
the Substitute DBSC Transaction, the Notes will be secured by:
- A collateral assignment of all contracts and agreements relating to the
Substitute DBSC Transaction.
- ------------------------
* Subject to FCC approvals and findings.
** EchoStar has also received an STA for the remaining five frequencies on
EchoStar I for approximately 180 days. There can be no assurance that the STA
will be extended.
13
COMPARATIVE PER SHARE DATA
The following table summarizes certain unaudited selected financial
information on a pro forma and pro forma equivalent per share basis and is
derived from, should be read in conjunction with, and is qualified in its
entirety by reference to, the historical financial statements of EchoStar and
DBSC which are included elsewhere in this Information Statement -- Prospectus.
The information presented in this table is for informational purposes only and
is not necessarily indicative of future combined earnings or financial position
or of combined earnings or financial position that would have been reported had
the Merger been completed at the beginning of the period or as of the date for
which such unaudited pro forma information is presented.
COMPARISON OF HISTORICAL AND EQUIVALENT STOCK VALUES
ECHOSTAR AND DBSC
(UNAUDITED)
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1995 1996
------------- ---------------
ECHOSTAR (1):
Historical net loss per common share, primary and fully diluted................... $ 0.36 $ 0.19
Pro forma combined loss from continuing operations per common share, primary and
fully diluted (2)(3)............................................................. 0.36 0.18
Historical book value per common share, primary and fully diluted................. 3.46 3.26
Pro forma combined book value per common share, primary and fully diluted
(2)(4)........................................................................... 3.91 3.72
DBSC (1):
Historical net loss per common share, primary and fully diluted................... $ 0.19 $ 0.04
Equivalent pro forma loss from continuing operations per common share, primary and
fully diluted (5)................................................................ 0.24 0.12
Historical book value per common share, primary and fully diluted................. 1.01 0.96
Equivalent pro forma book value per common share, primary and fully diluted (5)... 2.64 2.51
- ------------------------
(1) EchoStar and DBSC have not paid cash dividends on common shares during the
year ended December 31, 1995, or the three months ended March 31, 1996.
(2) Pro forma book value per common share reflects the issuance of approximately
658,000 shares of EchoStar Class A Common Stock assumed to be issued in
connection with the Merger.
(3) Pro forma combined loss from continuing operations includes a pro forma
income tax benefit of approximately $100,000 and $29,000 for DBSC for the
year ended December 31, 1995, and the three months ended March 31, 1996,
respectively.
(4) Pro forma combined book value per common share was computed by adding
658,000 shares of EchoStar Class A Common Stock assumed to be issued in
connection with the Merger multiplied by the assumed stock price of $31.63,
which is the 30-day average closing price of EchoStar's Class A Common Stock
as of July 5, 1996.
(5) Equivalent pro forma data for DBSC were computed by multiplying the pro
forma combined per share data of EchoStar by the .67417 Exchange Ratio. The
equivalent pro forma per share information can be used for a comparison with
the historical per share data of DBSC.
14
SPECIAL CONSIDERATIONS
THE FOLLOWING FACTORS RELATING TO ECHOSTAR AND THE MERGER SHOULD BE
CONSIDERED CAREFULLY BY DBSC SHAREHOLDERS IN MAKING AN ELECTION WITH RESPECT TO
THE MERGER CONSIDERATION.
FACTORS CONCERNING ECHOSTAR
COMPETITION FROM DBS AND OTHER SATELLITE SYSTEM OPERATORS. The pay
television provider industry is highly competitive. EchoStar faces competition
from companies offering video, audio, data, programming and entertainment
services. Many of these competitors have substantially greater financial and
marketing resources than EchoStar. See "EchoStar Communications Corporation --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
EchoStar competes with companies offering programming through various
satellite broadcasting systems. One competitor, DirecTv, has launched three DBS
satellites. DirecTv and USSB, which owns five transponders on one of DirecTv's
satellites, currently offer over 150 channels of combined DBS video programming.
As of December 31, 1995, DirecTv had approximately 1.2 million subscribers,
approximately one-half of which also subscribed to USSB programming, and expects
to have 2.5 million subscribers by the end of 1996. EchoStar's first DBS
satellite, which was launched in December 1995, has the capacity to provide
approximately 100 channels of video programming. However, EchoStar's authority
to provide 30 of those channels expires approximately August 31, 1996 unless the
FCC extends EchoStar's short-term authority (the "STA") to operate the
additional channels, of which there can be no assurance. As a result, EchoStar
is currently at a competitive disadvantage to DirecTv and USSB with regard to
market entry, programming and, possibly, volume discounts for programming
offerings. In addition, in the event desirable pay-per-view or other popular
programming is secured by competitors of EchoStar on an exclusive basis, it will
be unavailable to EchoStar's DISH Network-SM-. Currently, DirecTv offers
subscribers the NFL Sunday Ticket-TM- and USSB offers Flix-TM-, both of which
are available to those service providers on an exclusive basis. There may be
additional sports and other programming offered by other pay television
providers that will not be available on the DISH Network-SM-. See "EchoStar
Communications Corporation -- Business -- Competition -- DBS Industry -- Other
DBS Operators."
AT&T Corporation ("AT&T") and DirecTv have an exclusive agreement for AT&T
to market and distribute DirecTv's DBS service and related equipment to AT&T's
customer base. As part of the agreement, AT&T made an initial investment of
approximately $137.5 million to acquire 2.5% of the equity of DirecTv with an
option to increase its investment to up to 30% over five years. This agreement
provides a significant base of potential customers for the DirecTv DBS system
and allows AT&T and DirecTv to offer customers a package of entertainment and
communications services. As a result, EchoStar is at a competitive disadvantage
marketing to these customers. AT&T and DirecTv also announced plans to jointly
develop new multi-media services for DirecTv under the agreement. The AT&T and
DirecTv agreement will increase the competition EchoStar encounters in the
overall market for pay television customers.
At a public auction of DBS satellite frequencies held by the FCC in January
1996 (the " FCC Auction"), MCI Communications Corporation ("MCI") entered the
winning bid of $682.5 million to acquire the permit for 28 of 32 frequencies at
the 110 DEG. WL orbital slot. MCI and News Corp. ("News") have formed a joint
venture to build and operate a DBS system at the 110 DEG. WL orbital location
offering television programming and business communications services. The
license will give MCI and News the capacity to offer over 200 channels of
digital video programming. MCI and News reportedly expect that building and
launching the satellites for their system will cost approximately an additional
$1 billion and that DBS services will be offered to consumers and businesses in
approximately two years. However, if MCI and News acquire satellites which have
already been constructed, service could begin sooner. MCI and News have
substantially greater resources than EchoStar and their joint venture will
increase the competition EchoStar encounters in the market for pay television
customers.
15
PrimeStar Partners ("PrimeStar"), owned by a consortium of several cable
companies, including Tele-Communications, Inc. ("TCI"), currently offers medium
power Ku-band programming service to customers using dishes which are generally
three feet in diameter. PrimeStar's earlier entry into the market, its
relationship with cable programmers and its substantial resources provide
PrimeStar with certain competitive advantages. PrimeStar currently has
approximately one million subscribers and is expected to offer medium power
programming services to customers using smaller dishes (approximately two feet
in diameter) upon the successful launch of a GE American Communications Inc.
("GE Americom") satellite later this year. TCI, which is the largest cable
television company in the United States, owns two satellites that will be ready
for launch in 1996. A TCI subsidiary has a DBS construction permit for 11
frequencies at each of 119 DEG. WL and 166 DEG. WL. PrimeStar has the right to
offer DBS programming services from these satellites. If PrimeStar does not
exercise its right, it is expected that TCI will use these satellites to
directly enter the DBS programming business, and may launch satellites capable
of providing service to the continental United States during 1996. EchoStar is
at a competitive disadvantage to PrimeStar with regard to market entry,
programming and, possibly, volume discounts for programming offerings,
particularly if PrimeStar aggregates its DBS and cable affiliates' customers for
volume discounts.
During March 1996, Tee-Comm Electronics, Inc. ("Tee-Comm"), a Canadian
company, through an affiliate, began offering digital video and audio DTH
programming in the United States on a limited basis, and intends to expand to
120 channels later this year, and 200 channels by the end of 1997. The medium
power Ku-band satellite on which Tee-Comm is leasing transponders requires that
customers use dishes approximately 24 to 36 inches in diameter. See "EchoStar
Communications Corporation -- Business -- Competition -- DBS Industry -- Other
DBS Operators."
Certain of EchoStar's DBS competitors subsidize the price of their DBS
receiver systems to increase subscriber penetration. In connection with certain
special promotions currently offered by EchoStar in a limited number of test
markets, EchoStar is currently test marketing a special promotion in a limited
number of markets pursuant to which customers are able to purchase a discounted
package, including an 18-inch satellite dish, a digital satellite receiver, a
user-friendly remote control and related components (an "EchoStar Receiver
System") and annual programming package, for as low as $499, which is
approximately $300 below the suggested retail price. If EchoStar elects to
expand the promotion nationwide, subscriber acquisition costs will increase
substantially. EchoStar will therefore incur significant additional costs in
order to compete effectively.
There are a number of additional methods by which programming can be
delivered, including low power C-band satellite services, Ka-band, Ku-band and
high power extended Ku-band satellite services, wireless cable and fiber optic
cable and digital compression over existing telephone lines. Certain wireless
cable companies may become more competitive as a result of recently announced
affiliations with telephone companies. These developments, among others, will
provide additional competition to EchoStar. See "EchoStar Communications
Corporation -- Business -- Competition."
The FCC has indicated that it intends to apply to the International
Telecommunication Union ("ITU"), which allocates spectrum worldwide, for the
allocation to the United States of additional orbital locations from which DBS
service could be provided to the entire continental United States. Further,
Canada, Mexico and other countries hold the rights to DBS orbital slots which
are capable of providing service to the United States. If the FCC moves forward
with this initiative, or if other countries authorize DBS providers to utilize
their orbital slots to serve the United States and the FCC authorizes such
service to be received in the United States (which is likely to occur),
additional competition could be created, and EchoStar's frequencies could become
less valuable. TeleQuest, Inc., a joint venture including NYNEX and Bell
Atlantic have applied to the FCC for authority to provide DBS service to the
United States from a Canadian DBS orbital location at 91 DEG. WL. TCI has made a
similar application to the FCC to provide DBS service to the United States from
the Canadian 82 DEG. WL orbital location. Both locations are capable of
providing DBS service to the entire continental United States. TCI has completed
construction of two DBS satellites which it intends to use to provide DBS
service to the United States from the 82 DEG. WL orbital slot. One of the
satellites is expected to be
16
launched in November 1996 and the other is expected to be launched early next
year. The FCC has not acted on either of TCI's or TeleQuest's applications but a
decision could be made in the near future. See "EchoStar Communications
Corporation -- Business -- Competition -- DBS Industry -- Other DBS Operators."
COMPETITION FROM CABLE TELEVISION. The EchoStar DBS System will also
encounter substantial competition in the overall market for pay television
households, including cable television. Cable television operators have a large,
established customer base, and many cable operators have significant investments
in, and access to, programming. Cable television service is currently available
to approximately 90% of the approximately 96 million U.S. television households,
and approximately 64% of total television households currently subscribed to
cable. EchoStar's programming will not be available to households lacking a
clear line of sight to EchoStar's current orbital location, or to households in
apartment complexes or other multiple dwelling units that do not facilitate or
allow the installation of EchoStar Receiver Systems. In addition, subscribers to
the DISH Network-SM- will not have access to certain local broadcast channels
which are otherwise generally available from cable operators. DISH Network-SM-
subscribers desiring to access local broadcast channels may be required to
receive such channels via off-air antenna, the quality of which may be inferior
to the reception provided by cable operators. There can be no assurance that
EchoStar will be able to establish a substantial subscriber base. See "EchoStar
Communications Corporation -- Business -- Competition -- DBS Industry -- Cable
Television."
LIMITATIONS ON INSURANCE AND WARRANTIES. Pursuant to satellite construction
contracts between Martin Marietta Corporation ("Martin Marietta") and each of
EchoStar, DirectSat Corporation ("DirectSat") and DBSC, (collectively the
"Satellite Contracts"), and EchoStar's launch services contracts (the "Launch
Contracts"), EchoStar, DirectSat and DBSC are the beneficiaries of certain
limited warranties on their satellites and launch vehicles. However, the limited
contractual warranties do not cover a substantial portion of the risk inherent
in satellite launches or satellite operations.
Although EchoStar has obtained launch insurance for DirectSat I ("EchoStar
II"), it is also required under the indenture pursuant to which a subsidiary of
EchoStar, Dish, Ltd., issued its 12 7/8 Senior Secured Discount Notes due 2004
(the "1994 Notes") (the "1994 Indenture"), to obtain in-orbit insurance for
EchoStar I and EchoStar II, and is required under the indenture pursuant to
which another subsidiary, EchoStar Satellite Broadcasting Corporation ("ESB"),
issued its 13 1/8 Senior Secured Discount Notes due 2004 (the "1996 Notes") (the
"1996 Indenture"), to obtain launch and in-orbit insurance for DBSC I ("EchoStar
III"). There can be no assurance that EchoStar will be able to obtain launch and
in-orbit insurance on terms favorable to EchoStar. The launch insurance policies
contain (or are expected to contain), and the insurance policies with respect to
in-orbit operation are expected to contain, standard commercial satellite
insurance provisions, including a material change condition, which, if
successfully invoked, will give carriers the ability to increase the cost of the
insurance (potentially to a commercially impracticable level), require
exclusions from coverage which would leave the risks uninsured, or rescind their
coverage commitment entirely. See "EchoStar Communications Corporation --
Business -- Operation of the EchoStar DBS System -- Insurance."
If the launch of any EchoStar satellite is a full or partial failure or if,
following launch, any EchoStar satellite does not perform to specifications,
there may be circumstances in which insurance will not fully reimburse EchoStar
for its expenditures. In addition, insurance will not reimburse EchoStar for
business interruption, loss of business and similar losses which might arise
from delay in the launch of any EchoStar satellite. See "EchoStar Communications
Corporation -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
RISK OF SIGNAL THEFT. The delivery of subscription programming requires the
use of encryption technology. Historically, signal theft or "piracy" in the
C-band DTH, cable television and European DBS industries has been widely
reported. Recent published reports indicate that the DirecTv and
17
USSB encryption systems have been compromised. There can be no assurance that
continued theft of DirecTv programming will not adversely affect EchoStar's
operations. Although EchoStar has contracted with a vendor to provide an
encryption system, there can be no assurance that the encryption technology to
be utilized in connection with the EchoStar DBS System will be totally
effective. If EchoStar's encryption technology is compromised in a manner which
is not promptly corrected, EchoStar's revenue and its ability to contract for
video and audio services provided by programmers would be adversely affected.
EXPECTED OPERATING AND NET LOSSES. Due to the substantial expenditures
required to complete development, construction and deployment of the EchoStar
DBS System and the introduction of its DISH Network-SM- service to consumers,
EchoStar experienced operating and net losses in 1995 and anticipates that it
will experience operating and net losses through at least 1997. There can be no
assurance that losses will not continue or that EchoStar's operations will
generate sufficient cash flows to pay its obligations, including its obligations
on the 1994 Notes and the 1996 Notes. In addition, EchoStar recently began test
marketing a special promotion in a limited number of markets pursuant to which
customers are able to purchase a discounted package, including an EchoStar
Receiver System and annual programming package, for as low as $499, which is
currently approximately $300 below the suggested retail price. If EchoStar
elects to expand the promotion nationwide for an extended period, or if market
conditions force it to do so, EchoStar may experience additional losses and its
cash flow may similarly be affected. See "EchoStar Communications Corporation --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
RISK OF SATELLITE DEFECT, LOSS OR REDUCED PERFORMANCE. Satellites are
subject to significant risks, including satellite defects, launch failure,
destruction and damage that may result in incorrect orbital placement or prevent
proper commercial operation. Approximately 15% of all commercial geosynchronous
satellite launches have resulted in a total or constructive total loss. The
failure rate varies by launch vehicle and manufacturer.
Launch delays could result from weather conditions or technical problems
with any EchoStar satellite or any launch vehicle utilized by the launch
providers for EchoStar II, EchoStar III, or EchoStar IV, or from other factors
beyond EchoStar's control.
EchoStar II will be launched on an Ariane-4 launch vehicle. This launch
vehicle has a success rate of over 90%. The first experimental launch of
Arianespace's new Ariane-5 launch vehicle, on June 4, 1996, was not successful.
The unsuccessful launch was the first experimental launch of the Ariane-5 launch
vehicle. The Ariane-5 launch vehicle is significantly different than the
Ariane-4 launch vehicle. The specific cause of the Ariane-5 launch failure has
not been determined. If the failure is determined to be potentially common to
Ariane-4 and Ariane-5 vehicles, the launch of EchoStar II could be delayed.
However, any significant delay in the launch of EchoStar II would have an
adverse effect on EchoStar. In the event of a launch failure involving EchoStar
II, EchoStar would be required to use the proceeds from any launch insurance
claims to make an offer to repurchase approximately one-half of the accreted
value of the 1994 Notes from the holders thereof. In the event that a
substantial number of holders of 1994 Notes accepted that offer, EchoStar's plan
of operations, including its liquidity, would be adversely affected and it would
not be possible to construct and launch a replacement satellite without
obtaining additional financing. See "EchoStar Communications Corporation --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." In the event of a launch failure
of EchoStar III, under the 1996 Indenture EchoStar would be required to use the
proceeds from any launch insurance to purchase satellites or, at the ESB's
option, to make an offer to repurchase the maximum amount of 1996 Notes that can
be purchased with those proceeds.
18
In addition, a number of satellites constructed by Martin Marietta over the
past three years have experienced defects resulting in total or partial loss
following launch. The type of failures experienced have varied widely. Martin
Marietta is constructing EchoStar II and EchoStar III. No assurances can be
given that EchoStar I, EchoStar II or EchoStar III will perform according to
specifications.
FCC AUCTION RISKS. There can be no assurance that petitions to deny the
grant to EchoStar of the 148 DEG. WL orbital slot permit will not be filed with
the FCC during the period allowed by law or that such petitions to deny will not
delay or prevent the issuance of the FCC permit for this slot to EchoStar. Even
if the FCC grants a permit to EchoStar, there can be no assurance that
reconsideration or further FCC review will not be sought or that an appeal will
not be filed in the courts seeking to overturn the FCC's grant. There can be no
assurance that the FCC would not grant reconsideration or further review or that
the FCC would prevail in the event of an appeal. Further, appeals are currently
pending of the FCC's decision to revoke the construction permit of a former DBS
permittee which resulted in channels becoming available for auction. The FCC's
decision to auction those reclaimed channels has also been appealed by EchoStar,
DirectSat, DBSC and DirecTv. There can be no assurance that the FCC will prevail
in those court actions. If the FCC's actions are overturned, EchoStar's purchase
of channels at 148 DEG. WL would be voided.
RESTRICTIONS ON EXPORT OF TECHNOLOGY AFFECTING LAUNCH OF ECHOSTAR'S
SATELLITES. Martin Marietta must obtain from the United States government a
technical data exchange license and a satellite export license necessary for the
launch of EchoStar II by Arianespace from Korou, French Guiana. In addition,
EchoStar has contracted with Lockheed-Khrunichev-Energia International, Inc.
("LKE") for the launch of a fourth satellite. LKE is a joint venture between
Martin Marietta and two Russian Federation state owned enterprises. The proposed
launch site is located in the Kazakh Republic in the former Soviet Union. In
order for EchoStar satellites to be launched from Kazakhstan, the satellite
contractor will similarly need to obtain a technical data exchange license and a
satellite export license from the United States government. In order to timely
launch EchoStar II from French Guiana, technical data exchange and hardware
export licenses will need to be obtained on an expedited basis. There can be no
assurance those licenses can be obtained in a timely manner to avoid a launch
delay.
Given the potential instability of political, economic and social conditions
in the Russian Federation and Kazakhstan, and in light of certain demands by the
United States regarding human rights and arms proliferation, there can be no
assurance that the United States government will not at some future date impose
sanctions against Russia or Kazakhstan that would prevent issuance, or result in
revocation, of the technical data license and/or the export license with respect
to EchoStar IV. Any such action would prevent EchoStar from launching its
satellites as and when intended, resulting in significant delays that would
adversely affect expected operating results for the EchoStar DBS System. See
"EchoStar Communications Corporation -- Business -- Government Regulation --
Export Regulation."
RISKS OF ADVERSE EFFECTS OF GOVERNMENT REGULATION. EchoStar is subject to
the regulatory authority of the United States government and the national
communications authorities of the countries in which it operates. The business
prospects of EchoStar could be adversely affected by the adoption of new laws,
policies or regulations, or changes in the interpretation or application of
existing laws, policies and regulations, that modify the present regulatory
environment.
The FCC authorizations for all of EchoStar's satellites (including for
purposes of this paragraph, the satellites for which EchoStar Satellite
Corporation ("ESC"), DirectSat, EchoStar DBS Corporation ("EchoStar DBS") and
DBSC hold or are expected to hold authorizations) require EchoStar to comply
with all applicable Communications Act of 1934, as amended (the "Communication
Act"), requirements and FCC regulations including, specifically, compliance with
construction and launch milestones and periodic filing of progress reports. In
the event EchoStar at any time fails to comply with applicable Communications
Act requirements and FCC regulations, including FCC Due Diligence Requirements,
the FCC has the authority to revoke, condition or decline to extend or renew the
authorizations for that and any subsequent satellites and, in connection with
that action, could
19
exercise its authority to rescind these authorizations. The FCC has granted
EchoStar conditional authority to use C-band frequencies for telemetry, tracking
and control ("TT&C") functions for EchoStar I, stating that the required
coordination process with Canada and Mexico had been completed. However, the FCC
subsequently received a communication from an official of the Ministry of
Communications and Transportation of Mexico stating that EchoStar I's TT&C
operations could cause unacceptable interference to Mexican satellites. There
can be no assurance that such objections will not subsequently require EchoStar
to relinquish the use of such C-band frequencies for TT&C purposes. The
inability to control the satellite would result in a total loss of the
satellite. Further, EchoStar has filed a request with the FCC to change the
control frequency for TT&C of EchoStar II, and this request, which is pending,
has been opposed. If the FCC does not grant this request, EchoStar will incur
additional costs in obtaining TT&C services, and substantial delays in
completion of construction and launch of EchoStar II would result. In addition,
EchoStar will require further FCC authorization to operate, or launch and
operate, all of EchoStar's satellites. Certain of EchoStar's pending and future
requests to the FCC for extensions, waivers and approvals have been, and are
expected to continue to be, opposed by third parties. There can be no assurance
that EchoStar's requests will be granted or, if granted, that they will be
granted on a timely basis or on terms favorable to EchoStar. The loss of any of
EchoStar's FCC authorizations, the failure to obtain requested extensions or
waivers or the imposition of conditions would adversely affect EchoStar's plan
of operations, and its current business plan could not be fully implemented. See
"EchoStar Communications Corporation -- Business -- Government Regulation -- FCC
Permits and Licenses."
The FCC Due Diligence Requirements require that DBS permittees proceed with
diligence to construct satellites and commence operations at their assigned
orbital locations. The FCC has indicated it may revoke DBS permits if there are
delays in the satellite construction schedule submitted by the permittee to the
FCC. The schedule submitted by DBSC calls for the completion of construction at
61.5 DEG. WL of EchoStar III by July 31, 1997, and a satellite at 175 DEG. WL by
July 31, 1998. Any delay in this schedule may cause total or partial revocation
of DBSC's permits. Likewise, DirectSat may risk loss of its permit for channels
at 175 DEG. WL if its satellite is not completed by mid-1998. Further, the FCC
has not yet completed its review to determine whether EchoStar's contract for
the construction of the western satellite of its system meets the FCC's Due
Diligence Requirements. Therefore, the FCC has not yet assigned to EchoStar
frequencies for that satellite. While it is possible that DBSC, DirectSat and
EchoStar may construct a satellite for joint use by all three at 175 DEG. WL
(provided that ESC is found to have a firm contract and receives frequency
assignments at 175 DEG. WL), EchoStar will still be required to construct and
launch two or more satellites in addition to EchoStar I, EchoStar II and
EchoStar III in order to preserve all of its DBS permits (plus additional
satellites for the single frequencies at each of the 110 DEG. WL and 166 DEG. WL
orbital slots in order to avoid loss of those frequencies). Finally, with
respect to the 24 orbital assignments at the 148 DEG. WL orbital slot, provided
that the FCC approves EchoStar's request for a one-satellite system at that slot
(as opposed to the two-satellite system currently contemplated by international
regulations), EchoStar must complete contracting for a satellite within one year
of receiving the permit, must complete construction within four years of
receiving the permit and must launch and operate a satellite within six years of
receiving the permit. Absent infusion of additional significant capital,
EchoStar will not be able to retain all of its assigned frequencies and orbital
slots. There can be no assurance that EchoStar will be able to comply with the
FCC's Due Diligence Requirements or that the FCC will determine that EchoStar
has complied with such Due Diligence Requirements.
OPPOSITION TO, AND RISK OF LOSS OF, DIRECTSAT AUTHORIZATIONS. In connection
with the merger of DirectSat with a subsidiary of EchoStar (which was approved
by the FCC in November 1994), DirectSat's authorization to utilize ten
frequencies at 119 DEG. WL, the same orbital location for which EchoStar has
received authorization, became integral to the EchoStar DBS System. DirectSat's
first satellite, EchoStar II, will be positioned at that location. Dominion
Video Satellite, Inc. ("Dominion"), the original permittee of DirectSat's
frequencies at 119 DEG. WL, has filed a petition with the FCC contesting the
revocation of Dominion's orbital slot assignment at 119 DEG. WL and the granting
of DirectSat's authorizations at the same location. Dominion and several other
parties have challenged
20
DirectSat's diligence in meeting its required construction schedule. Dominion
has also challenged the merger of DirectSat and EchoStar at the FCC, and has
filed objections to the FCC's approval of the merger. The FCC rejected
Dominion's petition for reconsideration of that revocation, and Dominion has
appealed to the U.S. Court of Appeals for the District of Columbia Circuit. If
Dominion were to prevail in its appeal, and in any subsequent FCC action on
remand EchoStar believes that DirectSat's easterly orbital slot assignment would
most likely be moved from 119 DEG. WL to 61.5 DEG. WL, which would have an
adverse effect on EchoStar's proposed DBS operations. By order released January
11, 1996, the FCC's International Bureau extended the DBS permit of DirectSat to
1999, subject to the condition that the FCC may reconsider the extension and
modify or cancel it, in whole or in part, if DirectSat fails to make progress
toward construction and operation of its DBS system substantially in compliance
with its promised timetable, or with any more expedited timetable ordered by the
FCC. In the same order the FCC denied reconsideration of its earlier decision to
assign channels and orbital locations to DirectSat at 119 DEG. WL and 175 DEG.
WL for its DBS system. PrimeStar has applied for full FCC review of this order
and other parties may seek reconsideration, full FCC review, and/or judicial
review of the FCC order. In addition, in the event that EchoStar loses the
DirectSat frequencies at 119 DEG. WL, EchoStar would be required to offer to
repurchase one-half of the 1994 Notes and the 1996 Notes. In the event that a
substantial number of holders of the 1994 Notes or the 1996 Notes accepted that
offer, EchoStar's plan of operations, including its liquidity, would be
adversely affected and it might not be possible to implement EchoStar's current
business plan without obtaining additional financing. See "EchoStar
Communications Corporation -- Business -- Legal Proceedings."
OPPOSITION TO, AND RISK OF LOSS OF, DBSC AUTHORIZATIONS. DBSC's
authorization to construct and operate two DBS spacecraft initially expired on
August 15, 1995. Prior to that date, DBSC applied for an extension of time,
based upon a variety of factors, including its initiation of the construction
period for its first spacecraft in May 1995. DBSC indicated that it had signed
an amendment to the DBSC Satellite Contract, by which DBSC ordered a 32
transponder spacecraft in lieu of the previously contracted for 16 transponder
satellite. DBSC filed an application for FCC approval of this minor modification
in spacecraft design. In December 1995, the FCC staff approved DBSC's request
for an extension of time, giving it until 1998 to complete construction of its
satellites subject to continued compliance with the FCC's Due Diligence
Requirements. PrimeStar has sought full FCC review of this decision. The FCC has
not yet ruled on PrimeStar's petition and no assurances can be given that the
FCC will sustain the staff's determination. The FCC's staff has declined to rule
on DBSC's request for minor modification of its authorization pending the
submission to the FCC of interference data based on the proposed new spacecraft
design. DBSC has not prepared such data and there can be no assurance that upon
the submission of such data the FCC will grant the modification application.
POLITICAL RISKS PERTAINING TO LAUNCH PROVIDERS. EchoStar has contracted
with LKE for a 1998 launch. LKE launches occur in the Kazakh Republic and
require coordination with the governments of Russia and Kazakhstan. Any
political or social instability, such as that currently being experienced in the
former Soviet block countries, could affect the cost, timing and overall
advisability of utilizing LKE as launch provider for EchoStar's satellites. See
"EchoStar Communications Corporation -- Business -- Operation of the EchoStar
DBS System -- Satellite Launches."
POTENTIAL FOR DELAY AND COST OVERRUNS. Significant expenditures are
required to complete construction and deployment of the EchoStar DBS System.
Funds, in addition to existing cash balances, will be required in the event of
delays, cost overruns, increased costs associated with certain potential change
orders under the Satellite Contracts or the Launch Contracts, a change in launch
provider, material increases in estimated levels of operating cash requirements,
if increases in subscriber acquisition costs occur above current and anticipated
levels, or to meet other unanticipated expenses. There can be no assurance that
such financing will be available or that, if available, it will be available on
terms favorable to EchoStar. See "EchoStar Communications Corporation --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
21
A significant delay in the delivery or launch of any EchoStar satellite
would adversely affect EchoStar's operations and may result in the cancellation
of any of the permits of ESC, DirectSat, EchoStar DBS and DBSC by the FCC. See
"Risk of Satellite Defect, Loss or Reduced Performance." In addition, any
material delay in the delivery of EchoStar's DBS receivers or related components
would negatively affect EchoStar's financial condition and results of
operations. See "EchoStar Communications Corporation -- Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DEPENDENCE ON SINGLE MANUFACTURER. To date, only one of EchoStar's
manufacturers has produced a receiver acceptable to EchoStar. No assurances can
be given that EchoStar's other current manufacturer will be able to produce an
acceptable receiver in the future. Until the other manufacturer produces a
receiver acceptable to EchoStar, EchoStar is dependent on one manufacturing
source for its receivers. To date, EchoStar has paid the nonperforming
manufacturer $10.0 million and has an additional $15.0 million in an escrow
account as security for EchoStar's payment obligations under that contract. If
that manufacturer does not produce an acceptable receiver in the near future,
EchoStar may terminate that contract, which would cause longer term dependence
on a single manufacturing source. If EchoStar's sole manufacturer is unable for
any reason to produce receivers in a quantity sufficient to meet demand,
EchoStar's liquidity and results of operations may be adversely affected. If the
contract with EchoStar's other manufacturer is terminated, there can be no
assurance EchoStar would be able to recover all amounts paid the manufacturer or
otherwise held in escrow.
SUBSTANTIAL LEVERAGE. A subsidiary of EchoStar, Dish, Ltd., is highly
leveraged, and EchoStar Satellite Broadcasting Corporation, a wholly owned
subsidiary of EchoStar ("ESB"), as a result of the issuance of the 1996 Notes,
is also highly leveraged. This degree of leverage could make EchoStar vulnerable
to changes in general economic conditions. Substantially all of the assets of
Dish, Ltd. and its subsidiaries are pledged as collateral for the 1994 Notes,
and a substantial portion of the assets of EchoStar's direct subsidiaries are
pledged as collateral for the 1996 Notes. Thus it is, and will continue to be,
difficult to obtain additional debt if required or desired in order to implement
EchoStar's business strategy. Dish, Ltd. and certain of its subsidiaries are
also parties to several agreements (in addition to the 1994 Indenture) that
severely restrict their ability to obtain additional debt financing for working
capital, capital expenditures, and general corporate purposes. As security for
the performance of its obligations under these agreements, certain subsidiaries
of Dish, Ltd. have pledged substantial assets as collateral. ESB, including
Dish, Ltd., had outstanding approximately $783.4 million of long-term debt
(including both the current and long-term portion) (including the 1996 Notes,
the 1994 Notes, deferred satellite contract payments on EchoStar I and mortgage
debt) as of March 31, 1996 (excluding approximately $28.0 million of deferred
satellite contract payments to be incurred in connection with the manufacture of
EchoStar II). In addition, because interest on the 1994 Notes currently is not
payable in cash but accretes through June 1, 1999, liability with respect to the
1994 Notes will increase by approximately $241.8 million through that date to
$624.0 million. Similarly, interest on the 1996 Notes accretes through March 15,
2000, at which time liability with respect to those notes will increase to
$580.0 million. Additional debt may be incurred by Dish, Ltd. or ESB (subject to
limitations contained in the 1994 Indenture and 1996 Indenture, respectively) if
unanticipated costs or delays are experienced in the construction and completion
of the EchoStar DBS System. The ability of Dish, Ltd. and ESB to meet their
respective debt obligations will depend on the success of EchoStar's business
strategy, the success of which is subject to uncertainties and contingencies
beyond EchoStar's control.
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION. As of March 31, 1996,
the liabilities of EchoStar and its subsidiaries aggregated approximately $815.3
million. Since all of ESB's and Dish, Ltd.'s operations are conducted through
subsidiaries, the cash flow of ESB and Dish, Ltd. and their ability to service
debt, including the 1994 Notes and the 1996 Notes, are dependent upon the
earnings of their subsidiaries and the payment of funds by those subsidiaries to
Dish, Ltd. and ESB in the form of loans, dividends or other payments. The 1994
Indenture contains restrictions on the ability of Dish,
22
Ltd. to pay dividends to ESB. See "EchoStar Communications Corporation --
Description of Certain Indebtedness -- 1994 Notes." Dish, Ltd. and its
subsidiaries have no current obligations, contingent or otherwise, to pay any
amounts due pursuant to the 1996 Notes or to make any funds available therefor,
whether by dividends, loans or other payments, other than the possible guarantee
of the 1996 Notes by Dish, Ltd. which will become effective when and if
permitted by the 1994 Indenture. The cash flow generated by Dish, Ltd.'s
subsidiaries will only be available to satisfy ESB's obligations on the 1996
Notes after payment of all amounts then due and payable under the 1994 Notes and
then only if and to the extent that the 1994 Indenture permits Dish, Ltd. to
make such cash available to ESB in the form of dividends, loans or other
payments. In addition, Dish, Ltd. generally may pay dividends on its equity
securities only if: (i) no default exits under the 1994 Indenture; and (ii)
after giving effect to such dividends, Dish, Ltd.'s ratio of total indebtedness
to cash flow would not exceed 4.0 to 1. Moreover, the aggregate amount of such
dividends generally may not exceed the sum of 50% of Dish, Ltd.'s consolidated
net income from the date of the 1994 Indenture, plus 100% of the aggregate net
proceeds to Dish, Ltd. from the sale and issuance of certain equity interests of
Dish, Ltd. If available cash flows of Dish Ltd.'s subsidiaries are not
sufficient to service the 1996 Notes, ESB would be required to obtain cash from
other sources, such as sales of assets or equity or debt securities by EchoStar
or capital contributions or loans made by EchoStar from proceeds thereof or cash
otherwise available to EchoStar or its other direct subsidiaries. There can be
no assurance that those alternative sources would be sufficient to service the
1996 Notes.
UNCERTAINTY OF SPRINGING GUARANTEES. Initially, ESB's payment obligations
under the 1996 Notes are only guaranteed (on a subordinated basis) by EchoStar.
On and after the earliest to occur of: (i) the date upon which Dish, Ltd. is
permitted, pursuant to the terms of the 1994 Indenture to guarantee ESB's total
payment obligations made on all of the then outstanding 1996 Notes; or (ii) the
first date upon which the 1994 Notes are no longer outstanding or have been
defeased (the "Dish Guarantee Date"), ESB's payment obligations under the 1996
Notes will be guaranteed (on a PARI PASSU basis with all senior unsecured debt
of Dish, Ltd.) by Dish, Ltd. (the "Dish Guarantee"). Dish, Ltd. may not incur or
guarantee debt, subject to certain limited exceptions, unless, giving effect to
such debt or guarantee, its Indebtedness to Cash Flow Ratio would be less than
5.0 to 1 (if prior to June 1, 1998) or 4.0 to 1 (if on or after June 1, 1998).
For the year ended December 31, 1995, Dish, Ltd. had negative cash flow.
Therefore, there can be no assurance that the Dish Guarantee will be effected at
any time. In addition, upon consummation of the Merger, ESB's payment
obligations under the 1996 Notes will be guaranteed (on a PARI PASSU basis with
all senior unsecured debt of DBSC) by DBSC. If the Merger is not consummated,
DBSC will not guarantee the 1996 Notes. There can be no assurance that FCC
Approval of the Merger will be obtained or that the Merger will be consummated.
CONTINGENT COLLATERAL. The 1996 Notes are secured by certain collateral
relating to DBSC and EchoStar III. Following consummation of the Merger the 1996
Notes will be secured by: (i) a first priority security interest, when launched,
in EchoStar III; (ii) a collateral assignment of all contracts relating to
construction, launch (other than the Launch Contract with Great Wall Industry
Corporation ("Great Wall"), insurance and TT&C of EchoStar III; and (iii) a
pledge of all of the issued and outstanding capital stock of MergerCo. In the
event that the Merger is not consummated but the Substitute DBSC Transaction is
consummated, the 1996 Notes will be secured by a collateral assignment of all
contracts and agreements relating to the Substitute DBSC Transaction. In the
event neither the Merger nor the Substitute DBSC Transaction is consummated, no
additional collateral will be provided to secure the 1996 Notes, and ESB will be
required to make an offer to each holder of 1996 Notes to repurchase a portion
of the holder's 1996 Notes. There can be no assurance that FCC Approval of the
Merger will be obtained or that the Merger or the Substitute DBSC Transaction
will be consummated.
NEED FOR ADDITIONAL CAPITAL. EchoStar will require additional funds for the
construction and launch of a third, fourth and fifth DBS satellite. In addition,
it will require additional funds for EchoStar Receiver System rebates and
subscriber acquisition costs which may be necessary to competitively market
programming packages offered on the DISH Network-SM-. Further, EchoStar has an
23
application pending with the FCC for a two satellite Ku-band system, a two
satellite extended Ku-band system and a six satellite low earth orbit ("LEO")
satellite system, and has been granted a conditional license for a two-satellite
fixed satellite service ("FSS") Ka-band system. EchoStar will need to raise
additional funds for the foregoing purposes. See "EchoStar Communications
Corporation -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
RESTRICTIVE COVENANTS. The 1996 Indenture contains restrictive covenants
that, among other things, limit the ability of ESB and its subsidiaries to: (i)
incur additional indebtedness; (ii) issue preferred stock; (iii) sell assets;
(iv) create, incur or assume liens; (v) create dividend and other repayment
restrictions with respect to ESB's subsidiaries; (vi) merge, consolidate or sell
assets; (vii) incur subordinated or junior debt; (viii) enter into transactions
with affiliates; and (ix) pay dividends. The 1994 Indenture contains restrictive
covenants that, among other things, limit the ability of Dish, Ltd. and its
subsidiaries to: (i) incur additional indebtedness; (ii) issue preferred stock;
(iii) sell assets; (iv) create, incur or assume liens; (v) create dividend and
other repayment restrictions with respect to Dish, Ltd.'s subsidiaries; (vi)
merge, consolidate or sell assets; (vii) incur subordinated or junior debt;
(viii) enter into transactions with affiliates; and (ix) pay dividends. These
restrictions may inhibit EchoStar's ability to manage its business and to react
to changing market conditions. EchoStar does not intend to pay any dividends in
the near future. See "EchoStar Communications Corporation -- Description of
Certain Indebtedness -- 1994 Notes" and "-- 1996 Notes."
RESTRICTIONS IMPOSED BY AND EXPIRATION OF CREDIT FACILITY. Certain of Dish,
Ltd.'s operating subsidiaries entered into a credit facility which contains a
number of negative covenants that limit the ability of those subsidiaries to,
among other things: (i) incur indebtedness; (ii) create liens on assets; (iii)
provide guarantees; (iv) enter into merger or consolidation transactions; or (v)
dispose of any assets outside of the ordinary course of business. In addition,
except in certain circumstances, those subsidiaries are prohibited from paying
dividends to Dish, Ltd. in an amount exceeding 50% of excess cash flow. The
credit facility expired in May 1996 and EchoStar does not currently intend to
arrange a replacement credit facility. Instead, EchoStar is using available cash
to collateralize its letter of credit obligations, which historically was the
only significant use of the credit facility. At May 31, 1996, EchoStar had cash
collateralized $15.5 million of certain standby letters of credit for trade
purchases.
DECLINE IN DOMESTIC C-BAND DTH PRODUCT SALES. Historically, EchoStar has
sold C-band direct-to-home ("DTH") products in the United States. The recent
growth of DBS service and equipment sales has and will continue to have a
material negative impact on EchoStar's domestic sales of C-band DTH products.
The significant growth of DBS is at least partially attributable to the lower
cost to the consumer of DBS systems compared to that for C-band DTH systems and
the smaller size of the DBS dish compared to the C-band dish. There can be no
assurance that EchoStar will not have to sell C-band DTH inventory at prices
below cost.
LIMITED LIFE OF SATELLITES. Each EchoStar satellite will have a limited
useful life. A number of factors will affect the useful lives of the satellites,
including the quality of their construction, the durability of their component
parts, the longevity of their orbits and the launch vehicle used. The minimum
design life of each of EchoStar I, EchoStar II and EchoStar III is 12 years.
There can be no assurance, however, as to the useful life of the satellites.
EchoStar's operating results would be adversely affected in the event the useful
life of any of these satellites were significantly shorter than 12 years. The
Satellite Contracts contain no warranties in the event of a failure of EchoStar
I, EchoStar II or EchoStar III following launch. See "EchoStar Communications
Corporation -- Business -- Operation of the EchoStar DBS System -- The
Satellites."
DEPENDENCE ON SATELLITES AND SINGLE DIGITAL BROADCAST CENTER. Prior to the
end of the anticipated useful lives of EchoStar satellites, EchoStar will need
to obtain replacement satellites. There can be no assurance that those
replacements will be available when required or, if available, that they
24
will be available on terms acceptable to EchoStar. Various FCC approvals would
be required with respect to replacement satellites, including but not limited
to, renewal of EchoStar's ten year license. There is no assurance that the FCC
will grant the approvals.
EchoStar also relies upon a single digital broadcast center, in Cheyenne,
Wyoming, for key operations such as reception of programming signals, encryption
and compression. If a natural or other disaster damaged the digital broadcast
center, there can be no assurance that EchoStar would be able to continue to
provide programming services to its customers.
RISKS OF FAILURE OF COMPLEX TECHNOLOGY. The EchoStar DBS System is highly
complex. Final development, manufacture and integration of technologically
diverse and advanced components is not yet complete. New applications and
adaptations of existing and new technology (including compression, conditional
access, on screen guides and other matters), and significant software
development, are integral to the EchoStar DBS System. As a result, the EchoStar
DBS System may not function as expected.
Technology in the satellite television industry is in a rapid and continuing
state of change as new technologies develop. Although the digital compression
technology utilized in connection with the EchoStar DBS System is the world
standard, the integration and implementation of that technology is also
undergoing rapid change. There can be no assurance that EchoStar and its
suppliers will be able to keep pace with technological developments. In
addition, delays in the delivery of components or other unforeseen problems in
the EchoStar DBS System may occur that could adversely affect performance, cost
or timely deployment and operation of the EchoStar DBS System and could have an
adverse effect on EchoStar. Further, in the event that a competitive satellite
receiver technology becomes commonly accepted as the standard for satellite
receivers in the United States, EchoStar would be at a significant technological
disadvantage. See "EchoStar Communications Corporation -- Business -- Operation
of the EchoStar DBS System."
EFFECT OF LOSS OF KEY PERSONNEL. EchoStar believes that its future success
will depend to a significant extent upon the performance of certain individuals,
particularly Charles W. Ergen, Chairman, Chief Executive Officer and President
of EchoStar, R. Scott Zimmer, President of EIC, James DeFranco, President of HTS
and EAC, and Carl E. Vogel, EchoStar's Executive Vice President and Chief
Operating Officer and the President of ESC. The loss of any of these four
individuals could have an adverse effect on EchoStar's business. EchoStar does
not maintain "key man" insurance with respect to any such individuals and, other
than Mr. Vogel, it has not negotiated employment agreements with such
individuals.
CONTROL OF ECHOSTAR BY PRINCIPAL STOCKHOLDER. Although Charles W. Ergen,
the Chairman, Chief Executive Officer and President of EchoStar, currently owns
73.6% of the total equity securities of EchoStar (assuming exercise of employee
stock options), he currently possesses approximately 96.1% of the total voting
power. Thus, Mr. Ergen has, and after the Merger will continue to have, the
ability to elect a majority of the directors of EchoStar and to control all
other matters requiring the approval of EchoStar's stockholders. See "EchoStar
Communications Corporation -- Security Ownership of Certain Beneficial Owners
and Management." For Mr. Ergen's total voting power in EchoStar to be reduced to
below 51%, his percentage ownership of the equity securities of EchoStar would
have to be reduced to below 10%.
DEPENDENCE ON THIRD PARTY PROGRAMMERS. EchoStar is dependent on third
parties to provide EchoStar with programming. EchoStar's programming agreements
have remaining terms ranging from one to ten years and contain various renewal
and cancellation provisions. There can be no assurance that any of these
agreements will be renewed or will not be cancelled prior to expiration of their
original term. In the event that any such agreements are not renewed or are
cancelled, there is no assurance that EchoStar would be able to obtain or
develop substitute programming, or that such substitute programming would be
comparable in quality or cost to EchoStar's existing programming. EchoStar's
competitors currently offer substantially the same programming as EchoStar. The
ability of EchoStar to compete successfully will depend on EchoStar's ability to
continue to obtain desirable
25
programming and attractively package it to its customers at competitive prices.
See "EchoStar Communications Corporation -- Business -- Products and Services --
DBS and Related Services -- Programming."
Pursuant to the Cable Television Consumer Protection and Competition Act of
1992 (the "Cable Act"), programming developed by vertically integrated
cable-affiliated programmers generally must be offered to all potential buyers
on fair and reasonable terms. EchoStar anticipates purchasing a substantial
percentage of its programming from cable-affiliated programmers. Certain of the
restrictions on cable-affiliated programmers will expire in 2002 unless the FCC
extends them. As a result, any expiration of, amendment to, or interpretation
of, the Cable Act that permits the cable industry to discriminate in the sale of
programming against competing businesses, such as that of EchoStar, could
adversely affect EchoStar's ability to acquire programming or acquire
programming on a cost-effective basis. Regulation and the need to obtain certain
retransmission consents and copyright licenses may limit the ability of EchoStar
to implement a local programming strategy in multiple markets.
RISK OF INABILITY TO MANAGE RAPIDLY EXPANDING OPERATIONS. EchoStar must
expand its operations rapidly to achieve its business objectives. Several of
EchoStar's key activities, including satellite in-orbit control, satellite
receiver manufacturing, billing and subscriber management are out-sourced to
third party vendors. To manage its growth effectively, EchoStar must continue to
develop, install and improve its operating and information systems and
coordinate efforts with its third party vendors. EchoStar will also need to
continue to expand, train and manage its employee base, and its management
personnel will be required to assume even greater levels of responsibility. If
EchoStar is unable to manage its growth effectively, EchoStar's business and
results of operations could be materially adversely affected.
RISKS OF INFRINGEMENT OF PATENTS AND PROPRIETARY RIGHTS. EchoStar does not
believe that patents and other intellectual property rights are material to its
business, although many of EchoStar's competitors have obtained, and may be
expected to obtain in the future, patents that cover or affect products or
services directly or indirectly related to those offered by EchoStar. There can
be no assurance that EchoStar is aware of all patents that may potentially be
infringed by its products. In addition, patent applications in the United States
are confidential until a patent is issued and, accordingly, EchoStar cannot
evaluate the extent to which its products may infringe claims contained in
pending patent applications. EchoStar has been notified that certain features of
the EchoStar Receiver System allegedly infringe on patents held by others, and
that royalties are therefore required to be paid. If it were determined that the
features at issue or any other of EchoStar's products infringe on patents held
by others, EchoStar would be required to cease developing or marketing those
products, to obtain licenses to develop and market those products from the
holders of the patents or to redesign those products in such a way as to avoid
infringing the patent claims. The extent to which EchoStar may be required in
the future to obtain licenses with respect to patents held by others and the
availability and cost of any such licenses is currently unknown. There can be no
assurance that EchoStar would be able to obtain such licenses on commercially
reasonable terms or, if it were unable to obtain such licenses, that it would be
able to redesign its products to avoid infringement. In the event EchoStar was
not able to obtain such licenses on commercially reasonable terms, or if it was
unable to obtain such licenses and it could not otherwise redesign its products
to avoid infringement, EchoStar's business and results of operations could be
materially adversely affected.
RISK OF SATELLITE DAMAGE OR LOSS FROM ACTS OF WAR, ELECTROSTATIC STORM AND
SPACE DEBRIS. The loss, damage or destruction of any EchoStar satellites as a
result of military actions or acts of war, anti-satellite devices, electrostatic
storm or collision with space debris would have a material adverse effect on
EchoStar. EchoStar's insurance policies include customary exclusions including:
(i) military or similar actions; (ii) laser, directed energy or nuclear
anti-satellite devices; and (iii) insurrection and similar acts or governmental
action.
RISK THAT INITIAL CAPITAL COSTS WILL LIMIT DEMAND OF DISH NETWORK-SM-
PROGRAMMING. The suggested retail price of an EchoStar Receiver System is
currently between approximately $499 and
26
$599, depending on the model selected by the customer, among other factors.
Dealer incentives and EchoStar sponsored promotions may reduce the actual cost
of an EchoStar Receiver System below the suggested retail price. The initial
capital cost required to receive DISH Network-SM- programming may reduce the
demand for EchoStar Receiver Systems, since EchoStar Receiver Systems must be
purchased, while cable and certain of EchoStar's satellite competitors lease
their equipment to the consumer with little if any initial hardware payment
required. EchoStar is currently test marketing a special promotion in a limited
number of markets pursuant to which customers are able to purchase a discounted
package, including an annual programming package for $300 (which is comparable
to the price for a similar package of cable programming), and an EchoStar
Receiver System for $199. If EchoStar elects to expand the promotion nationwide
for an extended period, or if market conditions force it to do so, the initial
capital investment relative to cable will be greatly reduced. In this event,
EchoStar's subscriber acquisition costs will increase substantially, potentially
resulting in a significant negative impact on EchoStar's liquidity and net
income.
FACTORS CONCERNING THE MERGER
ABSENCE OF FAIRNESS OPINION. In approving the Merger Agreement and the
transactions contemplated thereby, DBSC's Board of Directors (the "DBSC Board")
did not obtain, and did not seek, an opinion regarding the fairness of the
Merger from an independent financial advisor. See "The Merger -- Reasons for the
Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER. Harley W. Radin, the Chairman
of the Board and Chief Executive Officer of DBSC, owns approximately 18.4% of
the issued and outstanding shares of DBSC Common Stock and has previously voted
his DBSC Common Shares to approve the Merger. Mr. Radin may continue in some
capacity, to be determined, with MergerCo after consummation of the Merger. In
addition, DBSI owns 24.8% of DBSC Common Stock. Fred W. Thompson, a director of
DBSC, is the President and Chief Executive Officer of DBSI, as well as a
significant shareholder of DBSI.
OPPOSITION TO, AND RISK OF REJECTION OF, MERGER APPLICATION. In February
1996, DBSC, EchoStar and MergerCo filed an application with the FCC for approval
of the Merger. A timely objection to the Merger was filed by the Consumer
Project on Technology ("CPT"). CPT contended in its objection that the Merger
would permit EchoStar to acquire a dominant and anticompetitive position in the
DBS marketplace by aggregating an excessive number of DBS channels. A letter
objecting to the Merger was also filed subsequently by the CPT and another
public interest group. This letter raises the same issues as the CPT's earlier
objection. No assurance can be given that the FCC will reject these objections
and grant the Merger application. However, EchoStar believes that the FCC has
previously considered and rejected issues similar to the arguments made in
opposition and that the filing of the CPT opposition does not materially
decrease the likelihood that the FCC will approve the Merger. If the Merger
application is granted, CPT may seek reconsideration, full FCC review or
judicial review of the grant of the Merger application.
RISK OF ANTITRUST CHALLENGES TO MERGER. Under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 ("HSR Act") and the rules that have been
promulgated thereunder by the Federal Trade Commission (the "FTC"), certain
acquisition transactions may not be consummated unless certain information has
been furnished to the Antitrust Division of the Department of Justice (the
"Antitrust Division") and the FTC and certain waiting period requirements have
been satisfied. The acquisition of DBSC Common Stock by EchoStar in connection
with the Merger is subject to such requirements. On June 7, 1996 EchoStar and
DBSC each filed a Notification and Report Form with the Antitrust Division and
the FTC. On June 28, 1996, EchoStar and DBSC received early termination of the
waiting period requirements under the HSR Act.
Although both EchoStar and DBSC have received early termination of the
waiting period requirements under the HSR Act, the FTC and the Antitrust
Division may still scrutinize the legality under the antitrust laws of
transactions such as the Merger. At any time before or after EchoStar's
acquisition of DBSC Common Stock either the Antitrust Division or the FTC could
take such action under
27
the antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the acquisition of DBSC Common Stock or otherwise
seeking divestiture of DBSC Common Stock acquired by EchoStar or divestiture of
substantial assets of EchoStar or its subsidiaries. Private parties and state
attorneys general may also bring legal action under the antitrust laws under
certain circumstances. Nevertheless, there can be no assurance that a challenge
to the Merger or other acquisition of DBSC Common Stock by EchoStar on antitrust
grounds will not be made, or, if such a challenge is made, of the result.
28
RIGHTS OF DISSENTING SHAREHOLDERS
Section 262 of the DGCL, which is reprinted as Annex III to this Information
Statement -- Prospectus, entitles any DBSC Shareholder who dissents from the
Merger and who follows the procedures set forth therein to receive in cash the
"fair value" of their DBSC Common Stock, which fair value shall be determined
exclusive of any appreciation or depreciation in anticipation of the Merger, in
lieu of the Merger Consideration.
The following discussion is a summary of the procedures that a DBSC
Shareholder must follow to exercise dissenters' rights under the DGCL. This
summary sets forth all material elements of Section 262, but does not purport to
be a complete statement of Section 262, and it is qualified in its entirety by
reference to such Section of the DGCL (see Annex III) and to any amendments to
such Section adopted after the date of this Information Statement -- Prospectus.
A DBSC Shareholder who makes the demand described below with respect to such
shares, who continuously is the record holder of such shares through the
Effective Time and who otherwise complies with the statutory requirements of
Section 262 will be entitled to an appraisal by the Delaware Court of Chancery
(the "Court") of the fair value of his DBSC Common Stock.
EchoStar must, within 10 days after the Merger is effected, send by
certified or registered mail to such DBSC Shareholder written notice of the
Effective Date and that appraisal rights are available. To properly exercise
dissenters' rights, a written demand for appraisal must be delivered within 20
days after the date of mailing of such notice to MergerCo (Direct Broadcasting
Satellite Corporation, a Colorado corporation) at its principal executive
offices at 90 Inverness Circle East, Englewood, Colorado 80112 prior to
, 1996, setting forth the DBSC Shareholder's name and address, the
number of shares of DBSC Common Stock owned and a statement that he intends to
demand the appraisal of his shares.
A demand for appraisal must be executed by or on behalf of the holder of
record, fully and correctly, as such DBSC Shareholder's name appears on the
certificate or certificates representing DBSC Common Stock. A person having a
beneficial interest in DBSC Common Stock that is of record in the name of
another person such as a broker, fiduciary or other nominee, must act promptly
to cause the record holder to follow the steps summarized herein properly and in
a timely manner to perfect whatever Appraisal Rights are available. If DBSC
Common Stock is owned of record by a person other than the beneficial owner,
including a broker, fiduciary (such as a trustee, guardian or custodian) or
other nominee, such demand must be executed by or for the record owner. If DBSC
Common Stock is owned of record by more than one person, as in a joint tenancy
or tenancy in common, such demand must be executed by or for all joint owners.
An authorized agent, including an agent for two or more joint owners, may
execute the demand for appraisal for a stockholder of record; however, the agent
must identify the record owner and expressly disclose the fact that, in
exercising the demand, such person is acting as agent for the record owner.
A record owner, such as a broker, fiduciary or other nominee, who holds DBSC
Common Stock as a nominee for others, may exercise Appraisal Rights with respect
to the shares held for all or less than all beneficial owners of shares as to
which such person is the record owner. In such case, the written demand must set
forth the number of shares covered by such demand. Where the number of shares is
not expressly stated, the demand will be presumed to cover all DBSC Common Stock
outstanding in the name of such record owner.
Within 120 days after the Effective Time of the Merger, MergerCo or a
dissenting DBSC Shareholder who has complied with the DGCL and who is otherwise
entitled to appraisal rights, may file a petition in the Court demanding a
determination of the fair value of the DBSC Common Stock. Notwithstanding the
foregoing, at any time within 60 days after the Effective Time of the Merger,
any DBSC Shareholder shall have the right to withdraw his demand for appraisal
and to accept the Merger Consideration. Within 120 days after the Effective Time
of the Merger, any DBSC Shareholder who
29
has complied with DGCL shall, upon written request, be entitled to receive from
MergerCo a statement setting forth that aggregate number of shares not voted in
favor of the Merger with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. Such statement
shall be mailed to such DBSC Shareholder within 10 days after his written
request for the statement is received by MergerCo or within 10 days after the
expiration of the period for delivery of demands for appraisal.
Upon the filing of the petition with the Court, service of a copy shall be
made upon MergerCo which shall within 20 days after such service file in the
office of the Register of Chancery a duly verified list of those DBSC
Shareholders demanding appraisal. The Register of Chancery shall give notice of
the time and place fixed for the hearing of such petition by registered or
certified mail to the DBSC Shareholders demanding appraisal and to MergerCo.
Notice shall also be given by at least one publication at least one week before
the day of the hearing. At the hearing, the Court will determine the DBSC
Shareholders who have complied with the DGCL and who have become entitled to
appraisal rights. After determining the DBSC Shareholders entitled to an
appraisal, the Court will appraise the DBSC Common Stock, determining its fair
value exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with the fair rate of interest, if any, to
be paid upon the amount determined to be fair value. In determining such fair
value, the Court will take into consideration all relevant factors. The Court
will direct the payment of the fair value of the shares together with any
interest to the DBSC Shareholders entitled thereto. The costs of any appraisal
proceeding may be determined by the Court and assessed to the parties as the
Court deems equitable in the circumstances.
A DBSC Shareholder who has exercised his appraisal rights will not be
entitled to vote, to receive dividends or to exercise any other rights of a DBSC
Shareholder, other than the right to receive payment for his DBSC Common Stock
under the DGCL, and his DBSC Common Stock shall not be considered issued and
outstanding for the purposes of any subsequent vote of DBSC Shareholders. If the
surviving corporation complies with the requirements of the DGCL, any DBSC
Shareholder who fails to comply with the requirements of the DGCL will not be
entitled to bring suit for the recovery of the value of his shares or money
damages.
The right of any dissenting DBSC Shareholder to be paid the fair value of
his DBSC Common Stock will cease and his status as a DBSC Shareholder will be
restored if: (i) a written withdrawal by the dissenting DBSC Shareholder is sent
to MergerCo at any time within 60 days after the Effective Time of the Merger;
or (ii) a court of competent jurisdiction determines that the DBSC Shareholder
is not entitled to exercise dissenters' rights. After the consummation of the
Merger, if the right of the DBSC Shareholder to be paid the fair value of his
shares of DBSC Common Stock has ceased and his rights as a DBSC Shareholder have
been restored, such rights will consist solely of the right to receive the Cash
Value of the Merger Consideration or the cash payments in lieu of fractional
shares to be paid the DBSC Shareholders pursuant to the terms of the Merger
Agreement.
30
THE MERGER
THE PLAN AND AGREEMENT OF MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY
ARE SUMMARIZED BELOW. THIS SUMMARY SETS FORTH ALL MATERIAL ELEMENTS OF THE PLAN
AND AGREEMENT OF MERGER AND SUCH TRANSACTIONS BUT DOES NOT PURPORT TO BE
COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPLETE TEXT OF
THE MERGER AGREEMENT, REPRINTED WITH SELECTED EXHIBITS AS ANNEX I TO THIS
INFORMATION STATEMENT -- PROSPECTUS. ALL CAPITALIZED TERMS USED HEREIN, UNLESS
OTHERWISE DEFINED HEREIN, SHALL HAVE THE DEFINITIONS ASCRIBED TO THEM IN THE
MERGER AGREEMENT.
BACKGROUND AND REASONS FOR THE MERGER
The cost to develop, construct and launch a commercial DBS business requires
a substantial capital commitment. DBSC Management's principal goal since DBSC's
incorporation in 1981 has been to attract one or more suitable investors or
partners to provide such working capital. However, DBSC's attempts to raise
capital have been extremely difficult, principally because of widespread
skepticism about the viability of DBS as an industry and uncertainty about how
many participants, if any, could reasonably anticipate profitable operations
from DBS. Management of DBSC has sought investment from industry participants,
various cable companies, programmers, high-tech companies, investment banks,
private citizens, international media firms, venture capitalists and others.
Management's search for strategic or other investors has been time-consuming,
expensive and only moderately successful. In part these difficulties are
attributable to FCC delays in processing DBSC's filings. Prior to DBSC's
agreements with EchoStar, DBSC had been successful in obtaining financing, or
commitments to provide financing, for only approximately $2.5 million,
substantially below DBSC's long-term capital requirements of $500 to $600
million.
In April 1990, DBSC entered into the DBSC Satellite Contract with Martin
Marietta and began making periodic progress payments under the Contract. As of
October 1994 these payments totalled approximately $314,000. In order for DBSC
to maintain its DBS authorizations, the FCC required that the first DBSC
satellite be launched no later than August 1995, and the DBSC Satellite Contract
required delivery of a completed satellite for launch prior to that date. DBSC's
liabilities during this period continued to increase, representing long overdue
notes, bills for legal and accounting services and other expenses. As of March
31, 1994, DBSC had total liabilities of approximately $2.9 million and available
cash of approximately $34,000.
EchoStar and DBSC initially explored common business interests in early
1994. However, EchoStar did not pursue the contact at that time. Thereafter,
EchoStar entered into an agreement to acquire DirectSat Corporation
("DirectSat") through a merger (the "DirectSat Merger"), and successfully
completed the 1994 Notes offering. During late 1994, DirecTV and USSB launched
their DBS service and public interest in DBS accelerated sharply. At the same
time, DBSC's financial position was further deteriorating. In connection with
the transaction with DirectSat, EchoStar had purchased many of DBSC's
liabilities from SSE Telecom, Inc. ("SSET"), the parent of DirectSat, and was
demanding immediate payment from DBSC of in excess of $3.0 million. When early
negotiations to settle this claim were unsuccessful, EchoStar filed suit against
DBSC. While DBSC believed it had substantial defenses to the suit, it had no
cash or other resources to pay its existing or future legal expenses. In
addition, DBSC was unable to pay even minor administrative expenses.
The DBSC Board was therefore faced with a major lawsuit involving potential
damages in excess of $3.0 million, plus significant capital expenditures
representing other immediate obligations, including a scheduled progress payment
to Martin Marietta under the DBSC Satellite Contract. However, DBSC did not have
existing cash or other resources adequate to satisfy these obligations. In
addition, due to delays at the FCC, and resulting delays in entering the
construction phase of the DBSC Satellite Contract, DBSC was no longer in a
position to launch its first satellite by August 1995, and was facing the
necessity of seeking FCC permission to extend the launch deadline, a request
that would have required the renegotiation of the DBSC Satellite Contract to
substantially extend the delivery date. As a result, DBSC believed it would be
desirable to have sufficient cash resources to assure that the
31
renegotiated contract would provide for acceleration of the construction phase
of the DBSC Satellite Contract so that the delay in completion could be coupled
with an immediate and significant boost in DBSC's financial commitment to the
construction of the satellite.
During the late summer of 1994, EchoStar renewed its interest in DBSC,
discussing with DBSC's Management the strategic synergies that might exist
between the two companies. EchoStar expressed its willingness to consider a wide
variety of potential arrangements with DBSC, including a merger. At the time of
EchoStar's discussions with DBSC, DBSC had no immediate prospects for obtaining
necessary short-term financing other than a proposed private equity offering.
However, DBSC was unable to obtain a commitment to attempt to raise more than
approximately $1.0 million and there were no assurances regarding when the
offering would be commenced, and if commenced, whether the offering could be
successfully consummated. At the DBSC Board's direction, Management pursued
certain earlier preliminary discussions with potential investors to determine
whether there were any other serious and imminent prospects for obtaining
necessary working capital and, as in prior instances, found that the level of
interest in entering into a transaction with DBSC was low.
The DBSC Board and EchoStar therefore explored a range of options that
contemplated an investment by EchoStar in DBSC. The DBSC Board considered that a
relatively modest infusion of working capital from EchoStar, while it might
solve certain short-term capital requirements, was not an attractive long-term
solution for DBSC because the necessity for a meaningful commitment to construct
its satellites could not be postponed and such construction typically requires
substantial cash payments. Moreover, the DBSC Board felt that EchoStar was a
highly desirable investor because of its demonstrated commitment to the DBS
industry and prior record of success in the DTH business. After considering its
alternatives, and taking into consideration the factors set forth above, the
DBSC Board concluded that a merger with EchoStar was in the best interests of
DBSC Shareholders, by allowing such Shareholders to participate in the potential
substantial opportunities presented by EchoStar resulting from the Merger.
The Merger Consideration was determined by taking into consideration a
number of factors. With respect to EchoStar, such factors included the August
1994 public offering of EchoStar Common Stock to employees of Donaldson, Lufkin
& Jenrette Securities Corporation for approximately $11.82 (as adjusted as a
result of a reorganization of EchoStar in June 1995) a share. With respect to
DBSC, such factors included: (i) the fact that the most recent sales of DBSC
Common Stock were at prices ranging from $2.00 to $4.00 per share; (ii) the
valuation of DirectSat in connection with the DirectSat Merger was approximately
$10.0 million before deducting liabilities, and while DirectSat and DBSC were
substantially comparable in terms of the development of their respective DBS
businesses the 21 channels assigned to DirectSat at 119 DEG. WL were
substantially more valuable than the 22 channels assigned to DBSC at 61.5 DEG.
WL; and (iii) the substantial amount of DBSC's liabilities. DBSC did not retain
an investment banker to render a fairness opinion or otherwise advise the DBSC
Board as to the fairness of the Merger Consideration to the DBSC Shareholders.
The failure to obtain such an opinion was based principally on the fact that
DBSC lacked the financial resources to retain an investment banker. Nonetheless,
in the view of the DBSC Board and based on the factors listed above, the Merger
Consideration was fair to DBSC Shareholders.
After extensive negotiation, DBSC and EchoStar entered into a Stock Purchase
Agreement in November 1994 whereby EchoStar purchased 500,000 shares of DBSC
Common Stock for $2.96 million. The purpose of this purchase was to provide DBSC
with sufficient funds to pay its current liabilities, to make substantial
payments under the DBSC Satellite Contract and to provide necessary funds for
future operations. The Stock Purchase Agreement also provided for the settlement
of EchoStar's lawsuit against DBSC by the issuance to EchoStar of 83,250 shares
of DBSC Common Stock. As a result of these issuances, EchoStar currently owns
644,990 shares of DBSC Common Stock, representing approximately 39.8% of the
issued and outstanding shares of DBSC Common Stock.
32
Pursuant to the Stock Purchase Agreement, EchoStar was also granted an
option, exercisable under certain circumstances and subject to certain
conditions, to purchase additional shares of DBSC Common Stock, thereby
providing EchoStar with certain rights even if the Merger had not occurred.
The Stock Purchase Agreement also included as an exhibit the form of Merger
Agreement. Upon the occurrence of certain events set forth in the Stock Purchase
Agreement, either EchoStar or DBSC could have required execution of the Merger
Agreement. EchoStar agreed to the initial investment in DBSC only if it could be
assured, if it so desired, that it could cause DBSC to execute the Merger
Agreement, thereby affecting the consummation of the Merger (subject to FCC
Approval and approval of the Merger by the holders of a majority of the DBSC
Shareholders). DBSC determined that it also needed the right to require the
execution of the Merger Agreement, and the Stock Purchase Agreement provided
DBSC with such right, exercisable by DBSC following FCC approval of the
DirectSat Merger.
Since the date that DBSC executed the Merger Agreement, the price of each
share of EchoStar Common Stock has increased from $19.12 per share to $27.50 per
share as of the date hereof, which represents the closing price of a share of
EchoStar Common Stock as reported on the Nasdaq National Market System.
DESCRIPTION OF THE MERGER AGREEMENT
The Merger Agreement provides that, at the Effective Time of the Merger DBSC
will be merged with MergerCo in accordance with the DGCL. At that time: (i) the
separate corporate existence of DBSC will cease; (ii) each share of the issued
and outstanding DBSC Common Stock, other than shares held by EchoStar and those
to which Appraisal Rights have been perfected, will be converted into, at the
election of each DBSC Shareholder, either the Share Value or the Cash Value
("Cash Elections"); and (iii) MergerCo, as the surviving corporation, will
remain in existence as a wholly owned subsidiary of EchoStar. In the event that
the number of shares of DBSC Common Stock to be exchanged for cash, together
with the number of shares of DBSC Common Stock with respect to which appraisal
rights have been reserved and any cash required to be paid in settlement of any
fractional shares, exceed 50% of the total number of shares of DBSC Common Stock
issued and outstanding (other than those owned by EchoStar), then each Cash
Election shall be reduced pro rata so that the total cash paid in connection
with the Merger will not exceed 50% of the aggregate Merger Consideration, and
the stock portion of the Merger Consideration payable to each affected DBSC
Shareholder will be correspondingly increased.
ADJUSTMENTS TO MERGER CONSIDERATION. In the event that, at the Effective
Time of the Merger: (i) DBSC's liabilities exceed Permitted Liabilities, as
defined in the Merger Agreement, and EchoStar elects to proceed with the Merger
notwithstanding such excess; (ii) any liabilities are asserted against DBSC
which are alleged to have arisen on or before March 31, 1995, but which are not
shown in DBSC's financial statements for the fiscal year ended March 31, 1994
(the "Financial Statements"); or (iii) any rights are asserted pursuant to which
the holder thereof is entitled to acquire shares of DBSC Common Stock ("Existing
Equity Rights"), which rights are not disclosed in a schedule to the Stock
Purchase Agreement ("Additional Equity Rights"), the Cash Value or the Share
Value, as applicable, shall be reduced (in the event an adjustment is necessary
as a result of clauses (i) or (ii) above) by the percentage obtained from the
quotient of "x" divided by $7,785,184, where "x" is equal to the amount by which
DBSC's liabilities exceed Permitted Liabilities, plus the amount (not to exceed
$5.0 million) of any liabilities set forth in clause (ii) above. In the event
the liabilities set forth in clause (ii) above exceed $7.0 million, EchoStar
may, at its option, either consummate the Merger and assume such liabilities, or
terminate the Merger Agreement. In the event an adjustment is necessary as the
result of clause (iii) above, the Share Value or the Cash Value, as applicable,
shall be reduced by the percentage obtained from the quotient of "x"/"y" where
"x" is the total number of shares of DBSC Common Stock which would be issued
pursuant to all Additional Equity Rights in the aggregate and "y" is the total
number of shares of DBSC Common Stock issued and outstanding, excluding shares
of DBSC Common Stock held by EchoStar.
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Based upon the best information available, the final per share Merger
Consideration offered for each share of DBSC Common Stock exchanged in the
Merger will be either $7.99 in cash or, assuming all DBSC Shareholders elect to
receive EchoStar Common Stock, .67417 shares of EchoStar Common Stock valued at
approximately $18.54 based on the market closing price of the EchoStar Common
Stock of $27.50 on July 8, 1996. If the final per share Merger Consideration
materially differs from this estimate, this Information Statement -- Prospectus
will be recirculated and DBSC Shareholders will be provided with an adequate
period to consider alternatives, including Appraisal Rights.
RESTRICTIONS ON RESALE. Shares of EchoStar Common Stock received by DBSC
Shareholders in connection with the Merger will not be eligible for resale,
transfer or disposal until 90 days after the effective date of the Merger.
Certificates representing such shares will bear a restrictive legend setting
forth the restrictions prohibiting such sale, transfer or disposal during the 90
day period. In the event the Merger is determined to be a taxable transaction to
DBSC Shareholders, the 90 day resale restrictions will lapse with respect to 50%
of the shares of EchoStar's Common Stock received by DBSC shareholders. In
addition, in order to preserve the intended tax-free treatment of the Merger to
DBSC shareholders, Harley W. Radin, the President and Chief Executive Officer of
DBSC, DBSI and Kingswood, Inc., both significant DBSC Shareholders, have agreed
not to sell, transfer or otherwise dispose of more than approximately 44% of
their shares of EchoStar Common Stock received in connection with the Merger for
a period of two years. However, these DBSC Shareholders may sell, transfer or
otherwise dispose of their shares prior to the expiration of such two year
period upon the delivery to the parties to the agreement of an opinion of
counsel to the effect that the sale of such DBSC Shareholder's shares will not
have an adverse effect on the tax-free status of the Merger.
TREATMENT OF FRACTIONAL SHARES. No fractional shares of EchoStar Common
Stock will be issued in connection with the Merger. If as a result of a DBSC
Shareholder's election to receive the Share Value in lieu of the Cash Value, a
fractional share would otherwise be issued, cash shall be paid to the holder of
such interest in lieu of a fractional share. The cash paid in lieu of such
fractional share shall be equal to such fractional interest multiplied by the
value of a share of EchoStar Common Stock as of the Effective Time. Any cash
required to be paid to a DBSC Shareholder in lieu of fractional shares shall be
paid promptly following the Effective Time of the Merger upon surrender of the
certificate or certificates representing the shares of DBSC Common Stock held by
the DBSC Shareholder.
REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains
representations and warranties made by DBSC to EchoStar and MergerCo (the
"EchoStar Companies"), and representations and warranties made by the EchoStar
Companies to DBSC, which are typical of agreements of this type. Such
representations and warranties are made as of December 21, 1995, when the Merger
Agreement was signed, and will be deemed to have been made as of the Effective
Time of the Merger.
DBSC represents and warrants the number of shares of each class of its
capital stock which are authorized and which are issued and outstanding, the due
organization, good standing and corporate power of DBSC, the due authorization
and execution of the Merger Agreement and the fact that the execution, delivery
and performance of that agreement will not violate any of the charter documents,
contracts or other types of obligations of DBSC. DBSC further represents and
warrants that its execution of the Merger Agreement and consummation of the
Merger will not violate any law, require any consent or approval, except FCC
Approval and approval of the DBSC Shareholders, or result in the acceleration of
any of its obligations or the creation of any lien on its assets, except as
disclosed in the schedules to the Merger Agreement. It also represents and
warrants that its Financial Statements are a fair representation of its
financial position as of the date thereof and were prepared in accordance with
generally accepted accounting principles on a basis consistent with prior
periods, and that, other than approximately $300,000 in liabilities, since the
date of the Financial Statements, DBSC has incurred no liabilities other than
Permitted Liabilities.
DBSC also represents and warrants that it has paid all taxes which are
payable by it, has properly reserved on its Financial Statements for taxes
expected to be payable by it, has filed all required tax returns and has
received no notices of any tax deficiencies. DBSC further represents and
warrants
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that, since the date of the Financial Statements, DBSC has not suffered any
adverse change in working capital, financial condition, assets, liabilities or
in the business or prospects of DBSC other than approximately $300,000 of
liabilities in the aggregate and Permitted Liabilities. DBSC also represents
that it has been awarded by the FCC a conditional construction permit and
specific orbital slot assignments with respect to 11 DBS frequencies located at
61.5 DEG. WL, and 11 DBS frequencies located at 175 DEG. WL (the "DBS Rights").
DBSC further represents that it is in full compliance with all FCC Due Diligence
Requirements to the best of its knowledge. DBSC also makes other representations
and warranties which are typical of transactions such as that contemplated by
the Merger Agreement.
The Merger Agreement provides for the EchoStar Companies to make similar
representations and warranties to DBSC with respect to the due organization and
existence of such corporations, their capitalization, their power and authority
to conduct their business, the authorization and valid and binding nature, with
respect to each of them, of the Merger Agreement. The EchoStar Companies also
represent to DBSC that no defaults have occurred under the 1994 Indenture which
entitle the holders thereof to accelerate the 1994 Notes. The EchoStar Companies
also make other representations and warranties which are typical of transactions
such as that contemplated by the Merger Agreement.
COVENANTS. The Merger Agreement contains certain covenants of DBSC and the
EchoStar Companies which are typical of agreements of this type. DBSC covenants
that, through the Effective Time of the Merger, it will carry on its business
diligently and in the ordinary course. It also covenants that it will maintain
its DBS Rights free and clear of all liens, charges or encumbrances. DBSC
further covenants to satisfy (provided it has available funds) each and every
liability which accrued subsequent to August 3, 1987 (other than Permitted
Liabilities so that at the Effective Time of the Merger there shall exist
absolutely no liabilities of DBSC other than Permitted Liabilities). In the
event that DBSC liabilities exceed Permitted Liabilities at the Effective Time
of the Merger, EchoStar may elect to satisfy such liabilities by adjusting the
Merger Consideration. See "The Merger -- Description of the Merger." Prior to
the Effective Time of the Merger, DBSC is also prohibited from: (i) issuing any
shares of DBSC Common Stock, or any securities convertible into such shares,
other than pursuant to Existing Equity Rights; (ii) selling or otherwise
transferring or encumbering any of its material assets, including the DBS
Rights; (iii) incurring any obligation or liability, other than Permitted
Liabilities; (iv) entering into any agreements with third parties relating to
certain transactions; (v) paying any dividends; or (vi) conducting any business
other than as required pursuant to certain contracts and as is otherwise
necessary in the ordinary course of business. DBSC is further required to use
its best efforts to comply with all FCC Due Diligence Requirements, and to take
certain actions, and to refrain from taking certain actions, which are typical
of transactions such as that contemplated by the Merger Agreement.
EchoStar is prohibited in the Merger Agreement from negotiating with any
DBSC Shareholders to purchase their DBSC Common Stock; provided, however, that,
under certain circumstances, EchoStar is not prohibited from accepting a pledge
of DBSC Common Stock from any DBSC Shareholder as security for the repayment of
obligations of such DBSC Shareholder to EchoStar. EchoStar is also required to
take certain actions, and to refrain from taking certain actions, which are
typical of transactions such as that contemplated by the Merger Agreement.
CONDITIONS OF THE MERGER. The Merger Agreement specifies that the
obligations of each of the parties to consummate the Merger are contingent upon
the occurrence of certain conditions precedent. However, the Merger Trigger
Agreement, which was executed by DBSC, EchoStar and MergerCo contemporaneously
with the execution of the Merger Agreement, specifies that the only remaining
conditions to the consummation of the Merger are that FCC Approval must be
received and the Merger must be approved by DBSC Shareholders. DBSC Shareholders
owning in excess of 82% of the issued and outstanding DBSC Common Stock approved
the Merger by written consent on December 21, 1995, therefore satisfying the
shareholder approval requirement. Pursuant to the Merger
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Trigger Agreement, however, any party may refuse to consummate the Merger if any
party willfully and in bad faith acts, or fails to act, in a manner that
materially impedes the consummation of the Merger in material compliance with
the terms agreed to by the parties.
TERMINATION. Subject to the Merger Trigger Agreement, the Merger Agreement
may be terminated at any time prior to the Effective Time of the Merger upon the
mutual consent of DBSC and the EchoStar Companies. The Closing of the Merger is
to occur as soon as is practicable when all requisite clearances, approvals,
authorizations and consents have been obtained and the conditions to the
obligation of each of the parties to close have been met, but is to occur in no
event later than December 31, 1997, unless extended by mutual agreement of the
parties.
EFFECTIVE TIME. On the Closing Date, which is to occur as soon as
practicable following FCC Approval, the parties will file a Certificate of
Merger with the Secretary of State of the States of Colorado and Delaware to
consummate the Merger. Upon the filing and acceptance of such Certificates of
Merger, the Merger shall become effective.
THE MERGER TRIGGER AGREEMENT
Contemporaneous with execution of the Merger Agreement, the parties executed
the Merger Trigger Agreement. Pursuant to the Merger Trigger Agreement, the
parties agreed, among other things: (i) to execute the Merger Agreement; (ii) to
consummate the Merger without preconditions other than FCC Approval and approval
by DBSC Shareholders, which approval was obtained on December 21, 1995 by
written consent of DBSC Shareholders owning in excess of 82% of DBSC Common
Stock issued and outstanding; (iii) to enter into the Loan Agreements; and (iv)
that, in the event the Merger is not completed for any reason, the parties would
enter into the Substitute DBSC Transaction, as more particularly described
below. Under the terms of the Loan Agreements, EchoStar agreed to purchase $16.0
million in principal amount of promissory notes of DBSC and, in EchoStar's sole
and absolute discretion, up to an additional $134.0 million principal amount of
promissory notes, the proceeds from which are to be used by DBSC to make
required payments to Martin Marietta under the DBSC Satellite Contract and to
make deposits for launch reservations. As security for repayment of all
obligations of DBSC to EchoStar under the Loan Agreements, DBSC granted EchoStar
a first priority security interest in all assets of DBSC, whether then existing
or thereafter acquired, including by way of example, and not by limitation, the
DBS Rights and DBSC's satellites under construction by Martin Marietta. EchoStar
purchased $16.0 million principal amount of promissory notes on December 21,
1995, and an additional $2.5 million on each of February 20, 1996, March 11,
1996, March 27, 1996, May 1, 1996, June 3, 1996 and July 8, 1996. Each of the
promissory notes accrues interest at a rate, per annum, equal to the prime rate
of interest charged by Chase Manhattan Bank on the date the applicable
promissory note was executed, plus three percent.
For purposes of the Merger Trigger Agreement, a "Substitute DBSC
Transaction" is a transaction or series of transactions that will have the
effect of providing to DBSC Shareholders, as nearly as is possible, the cash
amount or number of shares of EchoStar Common Stock they would have received if
the Merger had been consummated, and which provides EchoStar, as nearly as is
possible, the benefits that would have accrued to EchoStar had the Merger been
completed, for as nearly as is possible, the total Cash Value or Share Value
that EchoStar would have provided to the DBSC Shareholders had the Merger been
completed. EchoStar intends to seek FCC approval of any Substitute DBSC
Transaction, if FCC approval is required. However, there are no assurances that
EchoStar could obtain FCC approval of a Substitute DBSC Transaction.
In order to carry out the intent of the parties in the event the Merger is
not consummated, the Merger Trigger Agreement further provides that: (i)
EchoStar shall have the right to convert any amounts owed it by DBSC pursuant to
the Loan Agreements to the right to receive from DBSC, in perpetuity, profits of
DBSC in accordance with formula "x/(x + $12,945,104)", where "x" is equal to the
aggregate amount, including accrued but unpaid interest, due to EchoStar under
the Loan Agreements at the time of conversion; and (ii) the parties will enter
into a Capacity Lease Agreement to provide EchoStar with, subject to certain
limitations, including compliance with FCC rules and
36
regulations and, if required, FCC Approval, the full and unfettered use of
DBSC's satellites, including its communications capacity, TT&C, uplink
arrangements and auxiliary or related functions or activities.
FEDERAL COMMUNICATIONS COMMISSION APPROVAL
The Merger is subject to receipt of FCC Approval. DBSC filed an application
for assignment of authorization with the FCC on February 6, 1996. On March 15,
1996, one opposition to the Merger was filed at the FCC by The Consumer Project
on Technology ("CPT"), a public interest advocacy group. CPT contended in its
objection that the Merger would permit EchoStar to acquire a dominant and
anticompetitive position in the DBS marketplace by aggregating an excessive
number of DBS channels. A letter objecting to the Merger was also filed
subsequently by the CPT and another public interest group. This letter raises
the same issues as the CPT's earlier objection. No assurance can be given that
the FCC will reject these objections and grant the Merger application. However,
EchoStar believes that the FCC has previously considered and rejected issues
similar to the arguments made in opposition and that the filing of the CPT
opposition does not materially decrease the likelihood that the FCC will approve
the Merger. Assuming the issues raised by the CPT are rejected, FCC approval of
the Merger is expected shortly. If the Merger application is granted, CPT may
seek reconsideration, full FCC review or judicial review of the grant of the
Merger application.
MECHANICS OF EXCHANGE OF CERTIFICATES
Each DBSC Shareholder shall make an election whether to receive the Cash
Value or the Share Value on the Election Form delivered herewith. The Election
Form must be returned to the Exchange Agent at its principal offices at 1825
Lawrence Street, Suite 444, Denver, Colorado 80202, by 5:00 p.m. on
, 1996. As soon as practicable after the Effective Time of the
Merger, the Exchange Agent will mail to DBSC Shareholders instructions for
surrendering their stock certificates in exchange for the Merger Consideration.
Except for cash payments in lieu of fractional shares and to the extent DBSC
Shareholders make Cash Elections, the Merger Consideration will be paid in
EchoStar Common Stock.
Upon the surrender of certificates, EchoStar will promptly cause to be paid
to the persons entitled thereto the Merger Consideration. No interest will be
paid or will accrue on any amount payable upon the surrender of any certificate.
After the Effective Time of the Merger, certificates which previously
represented issued and outstanding shares of DBSC Common Stock will represent
solely the right to receive the Merger Consideration multiplied by the number of
shares previously represented thereby. Prior to the surrender of certificates,
EchoStar may, at its option, refuse to pay any dividends or other distributions
with respect to EchoStar Common Stock; provided, however, that upon surrender of
such certificate, there shall be paid to the DBSC Shareholders electing to
receive the Share Value the amount, without interest, of dividends and other
distributions payable with respect to EchoStar Common Stock, if any, which have
become payable with respect to the EchoStar Common Stock and which have not
previously been paid.
To be eligible to qualify as a tax-free reorganization for federal income
tax purposes, no more than 50% of the aggregate Merger Consideration may be paid
in cash. Accordingly, if the amount of cash payable in order to give full effect
to all Cash Elections, to satisfy the exercise of any dissenters' rights and in
settlement of fractional shares, would exceed 50% of the aggregate Merger
Consideration, then each Cash Election will be reduced pro rata so that the
total cash paid will not exceed 50% of the aggregate Merger Consideration, and
the stock portion of the Merger Consideration payable to each affected DBSC
Shareholder will be correspondingly increased.
ACCOUNTING TREATMENT
The Merger will be accounted for by EchoStar under the "purchase" method of
accounting in accordance with generally accepted accounting principles.
Therefore, the aggregate consideration paid by EchoStar in connection with the
Merger will be allocated to DBSC's assets based on their fair values, and the
results of operations of DBSC will be included in the results of operations of
EchoStar only for periods subsequent to the Effective Time of the Merger.
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FEDERAL INCOME TAX CONSEQUENCES
THE MERGER. The following discussion describes the principal federal income
tax consequences that are expected to result from the Merger and certain
transactions associated therewith.
DBSC and EchoStar expect the Merger to be a tax-free reorganization for
federal income tax purposes so that no gain or loss will be recognized by DBSC
Shareholders upon the exchange of DBSC Common Stock for EchoStar Common Stock in
the Merger, except with respect to cash received in lieu of fractional shares of
EchoStar Common Stock. Sullivan & Worcester LLP, counsel to DBSC, has advised
DBSC as follows:
(i) the Merger will constitute a "reorganization" within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code; and
(ii) the exchange in the Merger of DBSC Common Stock for EchoStar Common
Stock will not result in the recognition of gain or loss to the DBSC
Shareholders with respect to such exchange.
Revenue Procedure 86-42 sets forth the representations required by the
Internal Revenue Service in connection with a request for a ruling that a
transaction will constitute a "reorganization" within the meaning of Section 368
of the Code. It is assumed that DBSC, EchoStar and MergerCo can make the
representations required by the Internal Revenue Service in connection with a
request for a ruling that the Merger would constitute a "reorganization" within
the meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code. Some of the
more significant of such assumptions include:
(i) There is no plan or intention by the DBSC Shareholders to sell,
exchange, or otherwise dispose of a number of shares of EchoStar Common Stock
received in the Merger that would reduce the DBSC Shareholders' ownership of
EchoStar Common Stock to a number of shares having a value as of the date of the
Merger, of less than 50 percent of the value of all of the formerly outstanding
DBSC Common Stock as of the same date (including, for this purpose, shares of
DBSC Common Stock exchanged for cash or other property, or exchanged for cash in
lieu of fractional shares of EchoStar Common Stock);
(ii) The Merger will be effected pursuant to the Colorado Business
Corporation Act;
(iii) MergerCo will acquire at least 90% of the fair market value of the net
assets and at least 70% of the fair market value of the gross assets held by
DBSC immediately prior to the transaction. For purposes of this assumption,
amounts paid by DBSC to dissenters, amounts paid by DBSC to shareholders who
receive cash or other property, DBSC's assets used to pay its reorganization
expenses, and all redemptions and distributions (except for regular, normal
dividends) made by DBSC immediately preceding the transfer, will be included as
assets of DBSC held immediately prior to the transaction;
(iv) EchoStar has no present plan or intention to liquidate MergerCo; to
merge MergerCo into another corporation; to sell or otherwise dispose of the
stock of MergerCo; or to cause MergerCo to sell or otherwise dispose of any of
the assets of DBSC, except for dispositions in the ordinary course of business
or transfers permitted by Section 368(a)(2)(C) of the Code, and except for
transfers not now contemplated which are caused by material changes in
EchoStar's business; and
(v) Following the Merger, MergerCo will continue the historic business of
DBSC or use a significant portion of DBSC's assets in a business, unless DBSC
loses its direct broadcast satellite authorization.
If any of the factual assumptions to be made become inaccurate, EchoStar
will take such steps as it deems reasonable and appropriate to notify recipients
of this Information Statement -- Prospectus of such inaccuracy. In addition, the
risk that the Merger would be held taxable increases and Sullivan & Worcester
LLP may have to modify or withdraw its opinion as to the federal tax
consequences of the Merger.
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No ruling from the Internal Revenue Service concerning the tax consequences
of the Merger has been requested. If the Merger is consummated, but does not
qualify as a tax-free reorganization under the Code, each DBSC Shareholder would
recognize taxable gain or loss in the Merger equal to the difference between the
Merger Consideration, including the fair market value of the EchoStar Common
Stock, that he received and his tax basis in his DBSC Common Stock. If the
Internal Revenue Service determines that the Merger does not qualify as a
tax-free reorganization, presumably the Internal Revenue Service will notify
DBSC Shareholders of such determination. However, when and if EchoStar is
apprised of a successful challenge by the Internal Revenue Service of the
treatment by a DBSC Shareholder of the Merger as a "reorganization," EchoStar
will take such steps as it deems reasonable and appropriate to notify all of the
recipients of EchoStar Common Stock pursuant to the Merger of such
determination.
If the Merger qualifies as a tax-free reorganization, the tax basis of the
EchoStar Common Stock received in the Merger by a DBSC Shareholder who receives
solely EchoStar Common Stock (including any fractional share of EchoStar Common
Stock that any such DBSC Shareholder may be deemed to receive) in the Merger
will be the same as the tax basis of such DBSC Shareholder in the DBSC Common
Stock exchanged for such EchoStar Common Stock. The tax basis of the EchoStar
Common Stock received by a DBSC Shareholder who receives both EchoStar Common
Stock and cash (other than cash in lieu of a fractional share of EchoStar Common
Stock) will equal the tax basis of such DBSC Shareholder in the DBSC Common
Stock exchanged, decreased by the amount of cash received and increased by the
amount of gain recognized in the exchange. Cash received in the Merger by a DBSC
Shareholder in lieu of a fractional share of EchoStar Common Stock will be
treated under Section 302 of the Code as having been received in exchange for
such fractional share, and the DBSC Shareholder generally will recognize capital
gain or loss in such exchange equal to the difference between the cash received
and the DBSC Shareholder's tax basis allocable to the fractional share exchanged
for cash.
The federal income tax treatment of a DBSC Shareholder who elects under the
Merger Agreement and receives cash for his DBSC Common Stock will depend upon
such DBSC Shareholder's particular circumstances. Under the position taken by
the Internal Revenue Service in published rulings, cash received by a DBSC
Shareholder who receives solely cash in the Merger will be treated as having
been received by such DBSC Shareholder in a redemption of his DBSC Common Stock
subject to Section 302 of the Code. It is likely that such DBSC Shareholder will
recognize capital gain or loss equal to the difference between the amount of
cash received and such DBSC Shareholder's tax basis in his DBSC Common Stock.
In connection with the intended tax-free treatment of the Merger, DBSC
Shareholders who own approximately 90% of DBSC Common Stock (excluding DBSC
Common Stock owned by EchoStar) have entered into an agreement, whereby each
DBSC Shareholder will not, for a period of two years, sell more than
approximately 44% of the EchoStar Shares received in connection with the Merger
by DBSC Shareholder.
A DBSC Shareholder who exchanges his DBSC Common Stock for a combination of
EchoStar Common Stock and cash (other than cash received in lieu of a fractional
share of EchoStar Common Stock) will realize gain equal to the excess, if any,
of the fair market value of the EchoStar Common Stock and cash received over
such DBSC Shareholder's tax basis in his DBSC Common Stock. This realized gain
will be recognized, however, only in an amount that does not exceed the amount
of cash received. It is likely that this recognized gain will be taxable to such
DBSC Shareholder as capital gain, although it is possible that this recognized
gain will be taxable as dividend income if such DBSC Shareholder's Cash Election
does not result in a "meaningful reduction" in the percentage ownership of
EchoStar Common Stock that such DBSC Shareholder otherwise would have received
(taking into account both his actual ownership and constructive ownership under
the constructive ownership rules of Section 318 of the Code). No loss realized
by a DBSC Shareholder who receives both EchoStar Common Stock and cash in the
Merger will be recognized.
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THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY. DBSC SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS
AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO THEM, INCLUDING INCOME TAX
RETURN REPORTING REQUIREMENTS AND THE APPLICABILITY AND EFFECT OF STATE, LOCAL
AND OTHER TAX LAWS.
COMPARISON OF SHAREHOLDER RIGHTS
If the Merger is consummated, DBSC Shareholders will become stockholders of
EchoStar, which is a Nevada corporation, and their rights as such stockholders
will be governed by applicable Nevada corporation law ("NCL"), and by the
Articles of Incorporation and the By-Laws of EchoStar (the "EchoStar Articles "
and the "EchoStar By-Laws", respectively). Although it is not practical to
compare all of the differences between DGCL and the NCL, and between the
EchoStar Articles and the EchoStar By-Laws and the Certificate of Incorporation
and By-Laws of DBSC (the "DBSC Certificate" and the DBSC By-Laws",
respectively), the following is a summary of the material differences between
the rights of DBSC Shareholders and the rights of holders of EchoStar Common
Stock.
BUSINESS COMBINATION LEGISLATION
Under the DGCL, except under certain circumstances, a Delaware corporation
is prohibited from entering into specified business combinations with an
"Interested Stockholder" for the period of three years after such person becomes
an "Interested Stockholder." The DGCL defines an Interested Stockholder to be a
person or entity who has beneficial ownership of 15% or more of the outstanding
voting stock of a Delaware corporation. This provision encourages a potential
acquiror to negotiate with a company's board of directors, and makes more
difficult an acquisition of a Delaware corporation that is not approved by its
board of directors.
The NCL contains provisions relating to business combinations with an
"Interested Stockholder" similar to the DGCL except that under the NCL, an
"Interested Stockholder" is defined as a person or entity who has beneficial
ownership of 10% or more of the outstanding voting stock of the corporation. See
"Description of Capital Stock -- Nevada Law and Limitations on Changes in
Control."
APPRAISAL/DISSENTERS' RIGHTS
Stockholders of a Delaware corporation generally have appraisal rights with
respect to a merger or consolidation. Such appraisal rights are not available
(i) when a corporation is to be the surviving corporation and no vote of its
stockholders is required for the Merger or (ii) for shares of stock which, on
the record date fixed to determine the stockholders entitled to receive notice
of and vote on the agreement of merger, are listed on a national securities
exchange, designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc., or
held of record by more than 2,000 stockholders, unless, in case of clauses (i)
or (ii) above, such stockholders are required by the terms of the merger to
accept consideration other than shares of stock of the surviving corporation,
shares of stock of another corporation that are so listed, designated or held by
such number of record holders, cash in lieu of fractional shares of such stock,
or any combination thereof. A Delaware corporation may provide in its
certificate of incorporation for appraisal rights in connection with
transactions other than mergers and consolidations.
The NCL provides appraisal rights with respect to mergers under
circumstances similar to those provided for in the DGCL, except that the NCL
specifies that the merger be one for which stockholder approval is required by
NCL Section 92A.120 to 92A.160 or by the articles of incorporation, and that the
dissenting stockholder is entitled to vote on the merger or if the corporation
is a subsidiary and is merged with its parent under NCL Section 92A.180.
In addition, the NCL provides that shareholders may exercise their right to
dissent from and obtain payment for shares in the event of: a share exchange, if
the corporation is the party whose
40
shares will be acquired, and if the dissenting shareholder is entitled to vote
on the exchange; any corporate action taken pursuant to a shareholder vote,
where appraisal rights are provided to voting or nonvoting shareholders in the
articles of incorporation, the bylaws, or a resolution of the board of
directors; and a proposal to increase or decrease the number of authorized
shares of stock, if certain shareholders otherwise entitled to receive a
fraction of a share must instead accept money or scrip.
For a description of the procedures for asserting appraisal rights of
dissenting DBSC Shareholders under the DGCL, see "Rights of Dissenting
Shareholders."
SPECIAL MEETINGS OF STOCKHOLDERS; NOTICE PROVISIONS
The EchoStar By-Laws provide that special meetings of stockholders of
EchoStar may be called by the Board of Directors, the President, or the holders
of at least one-third of all shares entitled to vote at the meeting. Notice of
the special meeting and the business to be conducted thereat is to be given to
each stockholder entitled to vote at such meeting not less than ten nor more
than sixty days before the meeting.
The DBSC By-Laws provide that special meetings of DBSC Shareholders may be
called by the Board of Directors or the Chairman, and must be called by the
Chairman or the Secretary on the written request of the holders of at least ten
percent of the outstanding stock entitled to vote at the meeting. Notice of
DBSC's special meetings and the business to be conducted thereat is to be given
to each DBSC Shareholder entitled to vote at such meeting not less than ten days
before the meeting. The DBSC By-Laws could be amended under the DGCL to provide
for not less than ten nor more than sixty days notice comparable to the DGCL and
the NCL. Under the EchoStar By-Laws, at least thirty days notice must be given
for a meeting to increase authorized capital stock. The DBSC By-Laws have no
comparable provision.
ACTION BY WRITTEN CONSENT
Under the DGCL, stockholders may take action without a meeting, provided a
written consent setting forth the action so taken is signed by the holders of
the minimum number of shares required to take such action at a meeting.
The EchoStar Bylaws provide that Shareholders may take action without a
meeting if such action is set forth in a written consent. However, such consent
must be signed by all of EchoStar's shareholders entitled to vote with respect
to the subject matter.
DIRECTORS: NUMBER, FILLING VACANCIES, REMOVAL
The EchoStar By-Laws provide that the number of directors constituting the
Board of Directors shall be not less than three nor more than nine, which number
shall be fixed by resolution of the Board or stockholders. Any director or the
entire Board may be removed from office at a meeting called for the express
purpose of removing directors, with or without cause, by the affirmative vote of
the holders of a majority of the shares entitled to vote at an election of
directors. Any vacancy occurring in the EchoStar's Board of Directors may be
filled by vote of a majority of the remaining directors, except that a
directorship to be filled due to an increase in the number of directors is to be
filled by the vote of a majority of the directors then in office or by election
at an annual meeting, or a special shareholders' meeting.
The DBSC By-Laws provide that the number of directors constituting the Board
shall be five. Under the DBSC By-Laws, any director may be removed, with or
without cause, at a meeting specifically called for that purpose by the
affirmative vote of the holders of a majority of the outstanding shares entitled
to vote at an election of directors. Any vacancy occurring in DBSC's Board may
be filled by the affirmative vote of a majority of the remaining directors.
LOANS TO AND GUARANTEES OF OBLIGATIONS OF OFFICERS AND EMPLOYEES
Under the DGCL, a loan to, guarantee of an obligation of, or other
assistance to an officer or employee of the corporation, including any officer
or employee who is a director, requires the determination of the Board of
Directors of the corporation that the loan, guarantee or assistance may
41
reasonably be expected to benefit the corporation. The NCL contains no
comparable provision, although it provides that directors exercising their
powers may consider, INTER ALIA, the interests of the employees and the
long-term as well as the short-term interests of the corporation and its
stockholders. Under the EchoStar By-Laws, a loan to, guarantee of an obligation
of, or other assistance to a director, officer or employee of the corporation
must comply with the NCL and be authorized by resolution of the Board of
Directors.
Under the DGCL, any contract or transaction (including a loan or guarantee)
between the corporation and any of its officers or directors, or between the
corporation and any other organization in which the corporation's directors or
officers are also directors or officers, or have a financial interest, is
voidable unless approved by a majority of the disinterested directors or the
shareholders after full disclosure of the material facts or if the transaction
is fair to the corporation at the time it is approved. The NCL has a similar
requirement except that such transactions may be approved by the majority vote
of stockholders holding a majority of the voting power, and such transactions
are also permissible if the fact of the common directorship, office or financial
interest is not disclosed or known to the director or officer when the
transaction is brought before the board for action.
AUTHORIZED CAPITAL STOCK
The authorized capital stock of EchoStar is substantially different from
that of DBSC. The Common Stock of EchoStar is divided into Class A Common Stock,
Class B Common Stock and Class C Common Stock. Each holder of Class A Common
Stock is entitled to one vote per share and votes together with Class B and
Class C Common Stock, as well as with the Preferred Stock. Each holder of Class
B Common Stock is entitled to ten votes per share. Each holder of Class C Common
Stock is entitled to one vote per share. Upon a Change in Control (as defined
herein), each holder of Class C Common Stock is entitled to ten votes per share.
Each share of Class B and Class C Common Stock is convertible, at the option of
the holder, into one share of Class A Common Stock. Currently, there are no
shares of Class C Common Stock outstanding. All shares of DBSC Common Stock are
identical and have one vote. Neither EchoStar nor DBSC has granted any
preemptive rights to its shareholders. In addition, the number of EchoStar's
authorized but unissued shares of Class A, Class B and Class C Common Stock and
Preferred Stock is substantially greater than the number of shares already
issued. EchoStar could issue shares of its capital stock in an amount which
would substantially dilute the voting power of EchoStar's shareholders without
obtaining shareholder approval of such issuances. See "Description of Capital
Stock."
DIVIDENDS
The DGCL permits corporations to pay dividends out of surplus, or if there
is no surplus, out of net profits for the fiscal year in which the dividend is
declared, or out of the net profits for the preceding fiscal year. Under the NCL
distributions are conditioned on a two-tier test: the equity solvency test and
the net value test. These tests prohibit a distribution if, after making the
distribution, (1) the corporation would not be able to pay its debts as they
become due in the usual course of business, or (2) the corporation's total
assets would be less than the sum of its total liabilities plus the amount that
would be needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution.
42
PRICE RANGE OF ECHOSTAR CLASS A COMMON STOCK
The EchoStar Class A Common Stock has been quoted on the NASDAQ/National
Market System under the symbol "DISH" since June 20, 1995. The following table
sets forth, for the indicated fiscal periods, the high and low bid information
for the EchoStar Class A Common Stock as reported by NASDAQ.
HIGH LOW
---------- ----------
Fiscal Year Ended December 31, 1995
First quarter............................................................... N/A N/A
Second quarter.............................................................. $ 18 $ 14 1/4
Third quarter............................................................... 17 12
Fourth quarter.............................................................. 25 3/4 12 1/4
Fiscal Year Ended December 31, 1996
First quarter............................................................... 40 1/2 20
Second quarter.............................................................. 36 1/2 27 3/4
On July 5, 1996, the high and low bid information for the EchoStar Class A
Common Stock as reported by NASDAQ/National Market System was $28 and $27 1/2
per share, respectively. As of such date, there were approximately 682 holders
of record of the EchoStar Class A Common Stock.
DIVIDEND POLICY
Since the December 31, 1993 corporate reorganization, EchoStar has not paid
any dividends on common stock. EchoStar presently intends to retain future
earnings to support the growth of its business and therefore does not intend to
pay any dividends in the near future. The payment of any dividends will be
determined by the Board of Directors in light of conditions then existing,
including EchoStar's earnings, financial requirements and other factors.
EchoStar's ability to pay dividends is dependent upon results of operations. In
addition, the 1994 Indenture restricts the amount available for dividends on the
capital stock of Dish, Ltd. as well as the ability of Dish, Ltd. to loan or
otherwise distribute funds to EchoStar. In addition, the 1996 Indenture
restricts the ability of EchoStar to pay dividends. See "Description of Certain
Indebtedness -- 1994 Notes" and "-- 1996 Notes."
Since its inception, DBSC has had no earnings and has paid no dividends.
43
CAPITALIZATION
The following table sets forth as of March 31, 1996: (i) the unaudited
consolidated capitalization of EchoStar on a historical basis; (ii) the
unaudited consolidated capitalization of DBSC on a historical basis; and (iii)
the unaudited pro-forma consolidated capitalization of EchoStar after giving
effect to the proposed merger of EchoStar and DBSC. The historical EchoStar
information in this table is derived from the supplemental unaudited
Consolidated Financial Statements of EchoStar for the three month period ended
March 31, 1996, and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and EchoStar's
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Information Statement -- Prospectus. The historical DBSC information in
this table is derived from the supplemental unaudited Financial Statements of
DBSC for the three month period ended March 31, 1996, and should be read in
conjunction with DBSC's Financial Statements and the Notes thereto included
elsewhere in this Information Statement -- Prospectus (in thousands).
AT MARCH 31, 1996
-----------------------------
ECHOSTAR DBSC AS ADJUSTED
ACTUAL ACTUAL FOR MERGER
-------------- ------------- --------------
(UNAUDITED) (UNAUDITED)
Cash, cash equivalents and marketable investment securities........ $ 440,512(1) $ 2,735 $ 443,247
-------------- ------------- --------------
-------------- ------------- --------------
Long-term obligations (excluding current portion):
Long-term deferred programming revenue........................... $ 3,790 $ -- $ 3,790
Mortgages and note payable....................................... 32,421 23,500(2) 32,421
1994 Notes, net.................................................. 395,333 -- 395,333
1996 Notes, net.................................................. 350,890 -- 350,890
Accrued interest................................................. -- 524(3) --
-------------- ------------- --------------
Total long-term obligations.................................... 782,434 24,024 782,434
Stockholders' equity:
Preferred Stock, 20,000,000 shares authorized, 1,616,681 shares
of Series A Cumulative Preferred Stock issued and outstanding,
including accrued dividends of $2,444,000....................... 17,496 -- 17,496
Common Stock, $0.01 par value, 3,000,000 shares authorized,
1,620,138 shares issued and outstanding......................... -- 16 --
Class A Common Stock, $0.01 par value, 200,000,000 shares
authorized, 10,621,116 shares issued and outstanding............ 106 -- 112(5)
Class B Common Stock, $0.01 par value, 100,000,000 shares
authorized, 29,804,401 shares issued and outstanding............ 298 -- 298
Common Stock Purchase Warrants (4)............................... 20 -- 20
Class C Common Stock, 100,000,000 shares authorized, none
outstanding..................................................... -- -- --
Additional paid-in capital....................................... 152,487 5,724 173,293(5)
Unrealized holding gains on available-for-sale securities, net of
deferred taxes.................................................. 21 -- 21
Retained earnings (deficit)...................................... (21,061) (4,183) (21,061)
-------------- ------------- --------------
Total stockholders' equity..................................... 149,367 1,557 170,179
-------------- ------------- --------------
Total capitalization........................................... $ 931,801 $ 25,581 $ 952,613
-------------- ------------- --------------
-------------- ------------- --------------
- ------------------------
(1) Includes $245.0 million of cash restricted under the 1994 and 1996
Indentures pursuant to which EchoStar issued its 1994 Notes and 1996 Notes,
respectively. Also included is $15.0 million and
44
$15.5 million of restricted cash in escrow accounts related to the
manufacture of EchoStar Receiver Systems and for the purpose of cash
collateralizing certain standby letters of credit, respectively.
(2) Represents DBSC's $23.5 million note payable to EchoStar.
(3) Represents accrued interest on DBSC's $23.5 million note payable to
EchoStar.
(4) Represents the value assigned to the Warrants issued on June 7, 1994 for
those Warrants outstanding at March 31, 1996.
(5) Reflects the fair value of 658,000 shares of EchoStar Class A Common Stock
to be issued in connection with the Merger, based on the 30-day average
closing price of EchoStar Class A Common Stock as of July 5, 1996 of $31.63.
45
ECHOSTAR COMMUNICATIONS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS RELATES TO THE CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF ECHOSTAR COMMUNICATIONS CORPORATION, AND
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO
INCLUDED ELSEWHERE IN THIS INFORMATION STATEMENT -- PROSPECTUS.
OVERVIEW
EchoStar currently operates four related businesses: (i) operation of the
DISH Network-SM- and continued development of the EchoStar DBS System; (ii)
design, manufacture, marketing, installation and distribution of DTH products
worldwide; (iii) domestic distribution of DTH programming; and (iv) consumer
financing of EchoStar's domestic products and services. The growth of DBS
service and equipment sales has had and will continue to have a material
negative impact on EchoStar's international DTH products and domestic C-band DTH
products sales. On March 4, 1996 EchoStar began broadcasting and selling
programming packages available on the DISH Network-SM- service. EchoStar expects
to derive its revenue principally from monthly fees from subscribers for DISH
Network-SM- programming and, to a lesser extent, from the sale of EchoStar
Receiver Systems. As sales of EchoStar DBS programming and receivers increase,
EchoStar expects the decline in its sales of domestic C-band DTH products to
continue at an accelerated rate.
EchoStar will generally bill for DISH Network-SM- programming periodically
in advance and will recognize revenue as service is provided. Revenue will be a
function of the number of subscribers, the mix of programming packages selected
and the rates charged, and transaction fees for ancillary programming and
transponder leasing activities. From time to time EchoStar may engage in
promotional activities that include discounted rates for limited periods, which
will result in lower average revenue per subscriber for the applicable periods.
EchoStar is currently test marketing a special promotion in a limited number of
markets pursuant to which customers are able to purchase a discounted package,
including an EchoStar Receiver System and annual programming package, for as low
as $499, which is approximately $300 below the suggested retail price. DBS
programming costs will generally be based upon the number of subscribers to each
programming offering. Since the DISH Network-SM- did not commence operations
until March 1996, its operating activities had a minimal effect on EchoStar's
results of operations for the three month period ended March 31, 1996.
46
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain revenue and expense items in EchoStar's
Statements of Income.
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
STATEMENT OF INCOME DATA:
Revenue:
DTH products:
Domestic.......................................................... 69% 58% 54% 51% 58%
International..................................................... 24 32 36 39 31
Programming......................................................... 5 8 9 9 9
Loan origination and participation income........................... 2 2 1 1 2
--- --- --- --- ---
Total revenue................................................... 100 100 100 100 100
--- --- --- --- ---
--- --- --- --- ---
Expenses:
DTH products........................................................ 73 70 73 73 79
Programming......................................................... 4 6 8 9 8
Selling, general and administrative................................. 14 16 22 19 26
Depreciation........................................................ 1 1 2 1 8
--- --- --- --- ---
Total expenses.................................................. 92 93 105 102 121
--- --- --- --- ---
--- --- --- --- ---
Operating income (loss)............................................... 8% 7% (5)% (2)% (21)%
Net income (loss)..................................................... 9% 0% (7)% (6)% (17)%
OTHER DATA:
EBITDA................................................................ 9% 8% (3)% (1)% (13)%
THREE MONTH PERIOD ENDED MARCH 31, 1996 COMPARED TO
THREE MONTH PERIOD ENDED MARCH 31, 1995
REVENUE. Total revenue for the three month period ended March 31, 1996 was
$41.5 million, an increase of $1.1 million, or 3%, as compared to the same
period in 1995 of $40.4 million. Revenue from domestic sales of DTH products for
the three month period ended March 31, 1996 was $24.0 million, an increase of
$3.4 million, or 17%, as compared to the same period in 1995. The increase in
domestic revenue was primarily due to $8.2 million in revenue from the sale of
EchoStar Receiver Systems during the three month period ended March 31, 1996.
There were no EchoStar Receiver System sales during the comparable period in
1995. Approximately $922,000 of the increase in domestic revenue for the three
month period ended March 31, 1996 was due to an increase in the number of
satellite receivers sold for a competitor's DBS system ("Competitor DBS
Receivers"). Revenue from Competitor DBS Receiver sales was $7.7 million for the
three month period ended March 31, 1996, as compared to $6.8 million for the
same period in 1995. The increases in domestic revenue were principally offset
by a decrease of $4.7 million, or 47%, in revenue from sales of C-band satellite
receivers and related accessories, during the three month period ended March 31,
1996, as compared to the same period in 1995. The increases in domestic revenue
were also partially offset by a decrease of $1.2 million, or 42%, in revenue
from sales of non-proprietary descrambler modules, during the three month period
ended March 31, 1996, as compared to the same period in 1995. The domestic
market for C-band DTH products continued to decline during the three month
period ended March 31, 1996, and this decline will continue with the growth of
DBS service and equipment sales. This decline had been expected by EchoStar as
described below.
Domestically, EchoStar sold approximately 45,000 satellite receivers in the
three month period ended March 31, 1996, an increase of 67% as compared to
approximately 27,000 receivers for the same period in 1995. Although there was
an increase in the number of satellite receivers sold in 1996 as
47
compared to 1995, overall revenue did not increase proportionately as a result
of a substantial shift in product mix to lower priced DBS receivers and related
accessories, and an approximate 23% reduction in the average selling price of
C-band receivers. Included in the number of satellite receivers sold for the
three month period ended March 31, 1996 are approximately 17,000 EchoStar
Receiver Systems. EchoStar Receiver System revenue represented approximately 20%
of total revenue for the three month period ended March 31, 1996.
Also included in the number of satellite receivers sold for the three month
period ended March 31, 1996 are approximately 18,000 Competitor DBS Receivers as
compared to 11,000 for the same period in 1995. During the three month period
ended March 31, 1996, the Competitor DBS Receivers were sold at an approximate
30% reduction in the average selling price as compared to the same period in
1995. Competitor DBS Receiver revenue was 19% of total revenue for the three
month period ended March 31, 1996. EchoStar's agreement to distribute Competitor
DBS Receiver systems terminated on December 31, 1995 and during the first
quarter of 1996, EchoStar sold the majority of its existing inventory of
Competitor DBS Receivers. The elimination of Competitor DBS Receiver inventory
will be offset by a substantial increase in inventory of EchoStar Receiver
Systems and related components, the sale of which is expected to offset the
elimination of revenue derived from the sale of Competitor DBS Receivers.
EchoStar markets its current C-band DTH products by offering competitive
pricing and consumer financing in order to minimize the decline in domestic
C-band DTH sales resulting from the increased popularity of DBS equipment and
programming. Additionally, during all of 1995 and through the first quarter of
1996, EchoStar sold Competitor DBS Receivers which partially offset the decline
in domestic C-band sales in 1995. During the three month period ended March 31,
1996 the decline in sales of C-band DTH products was more than offset by sales
of Competitor DBS Receivers and EchoStar Receiver Systems. With the elimination
of Competitor DBS Receiver inventory, domestic DTH product revenue in subsequent
quarters will be substantially derived from the sale of EchoStar Receiver
Systems which, although no assurances can be given, should accelerate in the
second quarter as demand for DISH Network-SM- programming increases as a result
of heightened advertising and marketing efforts.
Loan origination and participation income for the three month period ended
March 31, 1996 was $813,000, an increase of $548,000, or 207%, compared to the
same period in 1995. The increase in loan origination and participation income
for the three month period ended March 31, 1996 was primarily due to increased
finance volume, including the financing of EchoStar Receiver Systems.
Additionally, subsequent to the first quarter of 1995 EchoStar entered into
agreements with two national finance groups permitting EchoStar to offer more
comprehensive financing terms.
Programming revenue for the three month period ended March 31, 1996 was $3.9
million, an increase of $42,000, or 1%, as compared to the same period in 1995.
The increase was primarily due to DISH Network-SM- consumer and commercial
programming revenue of $464,000 generated during the three month period ended
March 31, 1996. The increase in revenue derived from the sale of DISH
Network-SM- programming was offset by a decrease in C-band DTH programming
revenue. The industry-wide decline in domestic C-band equipment sales has
resulted, and is expected to continue to result, in a decline in C-band DTH
programming revenue. EchoStar believes that the expected decline in C-band DTH
programming revenue in 1996 will be more than offset by sales of DISH
Network-SM- programming.
Revenue from international sales of DTH products for the three month period
ended March 31, 1996 was $12.8 million, a decrease of $3.0 million, or 19%, as
compared to the same period in 1995. This decrease during the three month period
ended March 31, 1996, resulted principally from reduced sales to the Middle East
where EchoStar's largest international DTH customer is based, and an approximate
20% reduction in the average selling price of analog satellite receivers. This
decline was partially offset by increased sales in Africa. Revenue from sales of
DTH products in the Middle East suffered beginning in August 1995 as a result of
restrictions against imports, and may not return to
48
historic analog levels even as import restrictions are eased. Historic analog
sales levels may not be reached because of new digital service planned for the
Middle East which is currently expected to begin in the third quarter of 1996.
Overall, EchoStar's international markets for analog DTH products declined
during the three month period ended March 31, 1996 as anticipation for new
digital services increased. Also, the decrease discussed above was partially
offset by an increase in other DTH product revenue. Internationally, EchoStar
sold approximately 76,000 analog satellite receivers during the three month
period ended March 31, 1996, a decrease of 11%, compared to approximately 85,000
units sold during the same period in 1995. The decrease was principally due to
international anticipation of new digital services as discussed above. EchoStar
is currently negotiating with digital service providers to distribute their
proprietary receivers in EchoStar's international markets.
OPERATING EXPENSES. Costs of DTH products sold were $32.8 million for the
three month period ended March 31, 1996, an increase of $3.3 million, or 11%, as
compared to the same period in 1995. The increase in DTH operating expenses for
1996 resulted primarily from the increase in sales of DTH products. Operating
expenses for DTH products as a percentage of DTH product revenue were 89% and
81% for the three month period ended March 31, 1996 and 1995, respectively. The
increase was principally the result of declining sales prices of C-band DTH
products and Competitor DBS Receivers as described above, during the three month
period ended March 31, 1996 as compared to the same period in 1995.
Operating expenses for programming were $3.3 million for the three month
period ended March 31, 1996, a decrease of $149,000, or 4%, as compared to the
same period in 1995. Operating expenses for programming as a percentage of
programming revenue for the three month period ended March 31, 1996 were 84% as
compared to 89% for the same period in 1995. The decrease in operating expenses
for programming as a percentage of programming revenue for the three month
period ended March 31, 1996 was primarily a result of higher margins earned on
DISH Network-SM- programming partially offset by declining margins on C-band
programming.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $10.7 million for the three month period ended
March 31, 1996, an increase of $2.9 million, or 36%, as compared to the same
period in 1995. Selling, general and administrative expenses as a percentage of
total revenue increased to 26% for the three month period ended March 31, 1996
as compared to 19% for the same period in 1995. This increase was principally
due to: (i) marketing and advertising prior to and in conjunction with the
introduction of DISH Network-SM- service; (ii) increased personnel in all areas
of the organization to support the DISH Network-SM-; and (iii) costs related to
the Digital Broadcast Center, which commenced operations in the third quarter of
1995.
Research and development costs totaled $1.2 million for the three month
period ended March 31, 1996, as compared to $1.3 million for the same period in
1995. The decrease was principally due to the reduction in research necessary to
provide C-band receivers to domestic and international markets, partially offset
by increased research and development costs related to digital DBS satellite
receivers.
EBITDA. EBITDA for the three month period ended March 31, 1996 was a
negative $5.3 million, a decrease of $5.0 million compared to the same period in
1995. The decrease resulted from the factors affecting revenue and expenses
discussed above. EBITDA represents earnings before interest income, interest
expense net of other income, income taxes, depreciation and amortization. EBITDA
is commonly used in the telecommunications industry to analyze companies on the
basis of operating performance, leverage and liquidity. EBITDA is not intended
to represent cash flows for the period, nor has it been presented as an
alternative to operating income as an indicator of operating performance and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
DEPRECIATION. Depreciation for the three month period ended March 31, 1996
was $3.3 million, an increase of $3.0 million, or 817%, as compared to the same
period in 1995. The overall increase primarily resulted from depreciation on the
Digital Broadcast Center and EchoStar I which were placed in service during the
fourth quarter of 1995 and the first quarter of 1996, respectively.
49
OTHER INCOME AND EXPENSE. Other expense for the three month period ended
March 31, 1996 was $3.4 million, an increase of $486,000, or 17% as compared to
the same period in 1995. The increase in other expense for the three month
period ending March 31, 1996 resulted primarily from a reduction in interest
income due to an overall decrease for the period in the 1994 Notes Escrow
Account, cash and marketable investment securities. This was partially offset by
a decrease in interest expense resulting from additional capitalized interest in
1996 as compared to the same period in 1995.
PROVISION FOR INCOME TAXES. Income tax benefit for the three month period
ended March 31, 1996 was $4.8 million compared to $1.4 million during the same
period in 1995. This increase is principally the result of changes in components
of income and expenses discussed above during the three month period ended March
31, 1996. EchoStar's deferred tax assets (approximately $15.4 million at March
31, 1996) relate principally to temporary differences for amortization of
original issue discount on the 1994 and 1996 Notes and various accrued expenses
which are not deductible until paid. No valuation allowance has been provided
because EchoStar currently believes it is more likely than not that these
deferred assets will ultimately be realized. If future operating results differ
materially and adversely from EchoStar's current expectations, its judgment
regarding the need for a valuation allowance may change.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUE. Total revenue for 1995 was $163.9 million, a decrease of $27.1
million, or 14%, as compared to total revenue for 1994 of $191.0 million.
Revenue from domestic sales of DTH products for 1995 was $87.3 million, a
decrease of $24.5 million, or 22%, as compared to 1994. This decrease in
domestic revenues was primarily due to an expected decline of $26.9 million, or
24%, in revenue from sales of satellite receivers and related accessories,
during 1995, as compared to 1994. The decrease in domestic revenues for 1995 was
partially offset by $12.5 million in sales of non-proprietary descrambler
modules compared to $11.0 million in 1994. The domestic market for C-band DTH
products continued to decline during 1995 and this decline is expected to
continue. The decline had been expected by EchoStar as described below. EchoStar
also decreased its emphasis on relatively high cost, low margin descrambler
modules beginning in the second quarter of 1994.
Domestically, EchoStar sold approximately 131,000 satellite receivers in
1995, an increase of 15% as compared to approximately 114,000 receivers sold in
1994. Although there was an increase in the number of satellite receivers sold
in 1995 as compared to 1994, overall revenues declined as a result of a change
in product mix resulting from the introduction of lower priced DBS receivers and
related accessories, and an approximate 23% reduction in the average selling
price of C-band receivers. Included in the number of satellite receivers sold
are those sold for a competitor's DBS system ("Competitor DBS Receivers")
manufactured and supplied by a third party manufacturer ("Competing DBS
Manufacturer") which totaled approximately 67,000 for 1995, as compared to
21,000 for 1994. Competitor DBS Receiver revenues were $34.0 million for 1995,
as compared to $15.0 million for 1994. Competitor DBS Receiver revenues were 21%
of total revenues for 1995.
In the second half of 1994 and throughout 1995, an increasing percentage of
domestic DTH satellite retailers relied on attractive financing packages to
generate sales. During most of 1994, certain of EchoStar's competitors offered
consumer financing that retailers considered more attractive than financing
offered by EchoStar. This competitive financing advantage resulted in retailers
selling competing products rather than EchoStar products and was partially
responsible for the decline in C-band DTH unit sales and revenue. EchoStar has
entered into agreements with two national consumer finance groups permitting
EchoStar to offer what it currently believes to be competitive financing terms.
However, once a retailer chooses an alternative financing source, it is
difficult to recapture that business. While volume and participation payments
increased throughout 1995, loan origination and participation payments are not
expected to reach historic levels in the short term.
Commencing in 1995, EchoStar stopped receiving monthly participation
payments from Household Retail Services, Inc. ("HRSI") on its loan portfolio,
contributing to a decrease in loan origination
50
and participation income from 1994. Loan origination and participation income
for 1995 was $1.9 million, a decrease of $1.7 million, or 47%, compared to 1994.
EchoStar has filed suit against HRSI for nonpayment of participation revenue,
among other things.
EchoStar aggressively markets its current offering of C-band DTH products by
offering competitive pricing and financing in order to minimize the decline in
domestic C-band DTH sales resulting from the increased popularity of "small
dish" equipment. Additionally, EchoStar currently sells Competitor DBS Receivers
for reception of programming offered by other service providers. Competitor DBS
Receiver sales partially offset the decline in domestic C-band sales in 1995.
The decline is also expected to be offset by sales of EchoStar's proprietary DBS
products commencing in 1996. EchoStar's agreement to distribute Competitor DBS
Receivers terminated on December 31, 1995.
Programming revenue for 1995 was $15.1 million, an increase of $556,000, or
4%, as compared to 1994. The increase was primarily due to additional sales of
programming packages through retailers and, to a lesser extent, the renewal and
retention of existing customers as a result of more attractive pricing and more
effective marketing. While EchoStar began to more aggressively market its
services in the second quarter of 1995, the industry-wide decline in domestic
C-band equipment sales is expected to result in a decline in C-band DTH
programming revenues as well over time. EchoStar believes that the decline in
C-band DTH programming revenues will be fully offset by sales of EchoStar DBS
programming in 1996.
Revenue from international sales of DTH products for 1995 was $59.6 million,
a decrease of $1.4 million, or 2%, as compared to 1994. The decrease for 1995
resulted principally from reduced sales to the Middle East where EchoStar's
largest international DTH customer is based. This decline was partially offset
by increased sales in Africa. Revenue from sales of DTH products in the Middle
East suffered beginning in August 1995 as a result of recently implemented
restrictions against imports, and may not return to historic levels even after
import regulations are lifted, the timing of which cannot be predicted. Historic
sales levels may not be reached because of new digital service planned for the
Middle East beginning in the first quarter of 1996. Internationally, EchoStar
sold approximately 331,000 satellite receivers in 1995, an increase of 15%,
compared to approximately 289,000 units sold during 1994. The increase was
primarily due to a continued emphasis by EchoStar on lower priced products in
1995 to meet marketplace demands. For 1995, the effects of volume increases were
offset by a 17% decrease in the average selling price as compared to 1994.
OPERATING EXPENSES. Costs of DTH products sold were $120.2 million for
1995, a decrease of $13.5 million, or 10%, as compared to 1994. The decrease in
DTH operating expenses for 1995 resulted primarily from the decrease in sales of
DTH products. Operating expenses for DTH products as a percentage of DTH product
revenue were 82% for 1995, as compared to 77% for 1994. The increase was
principally the result of declining sales prices of C-band DTH products as
described above, during 1995 as compared to 1994 and the cost of promotional
campaigns.
Operating expenses for programming were $13.6 million for 1995, an increase
of $1.9 million, or 17%, as compared to 1994. Operating expenses for programming
as a percentage of programming revenue were 90% for 1995 as compared to 80% for
1994. Programming expenses increased at a greater rate than revenues from
programming principally because the prior periods included the flow through of
certain volume discounts. Additionally, the C-band program packaging business is
extremely competitive, which restricts the ability to pass on contracted
affiliation agreement cost increases to consumers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $35.0 million for 1995, an increase of $4.8
million, or 16%, as compared to 1994. Selling, general and administrative
expenses as a percentage of total revenue increased to 22% for 1995 as compared
to 16% for 1994. The change was principally the result of the reduction of
revenues from domestic sales of DTH products and increased costs to support,
among other things, expansion of the EchoStar DTH
51
product installation network and administrative costs associated with
development of the DISH Network-SM-. In addition, $1.1 million of compensation
expense was recorded with regard to 55,000 shares of Class A Common Stock
contributed by EchoStar to EchoStar's 401(k) plan.
Research and development costs totaled $5.0 million for 1995 as compared to
$5.9 million for 1994. The decrease was principally due to the reduction in
research necessary to provide C-band receivers to domestic and international
markets, partially offset by increased research and development costs related to
digital DBS satellite receivers.
EBITDA. EBITDA for 1995 was a negative $4.9 million, a decrease of $20.4
million, or 132%, as compared to 1994. The decrease resulted from the factors
affecting revenue and expenses discussed above. EBITDA represents earnings
before interest income, interest expense net of other income, income taxes,
depreciation and amortization. EBITDA is commonly used in the communications
industry to analyze companies on the basis of operating performance, leverage
and liquidity. EBITDA is not intended to represent cash flows for the period,
nor has it been presented as an alternative to operating income as an indicator
of operating performance and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles.
DEPRECIATION. Depreciation for 1995 was $3.1 million, an increase of
$815,000, or 36%, as compared to 1994. The overall increase primarily resulted
from depreciation on assets placed in service during the third and fourth
quarters of 1995.
OTHER INCOME AND EXPENSE. Other expense for 1995 was $9.3 million, a
decrease of $3.5 million, or 27%, as compared to 1994. The difference in other
income and expense for 1995 compared to 1994 resulted primarily from the
amortization of original issue discount and deferred debt issuance costs of
$23.5 million, in 1995, and $20.7 million, in 1994, net of capitalized interest,
on the 1994 Notes, which were issued on June 7, 1994. Other expense has been
reduced by investment income on monies deposited in an escrow account (the "1994
Escrow Account") of $8.8 million for 1995, and $6.5 million for 1994. Interest
capitalized relating to development of the EchoStar DBS System for 1995 was
$25.8 million as compared to $5.7 million for 1994.
PROVISION FOR INCOME TAXES. Income tax benefit for 1995 was $5.7 million as
compared to the income tax provision for 1994 of $399,000. This change is
principally the result of changes in components of income and expenses discussed
above during 1995 and 1994, respectively. EchoStar's deferred tax assets
(approximately $13.9 million at December 31, 1995) relate principally to
temporary differences for amortization of original issue discount on the 1994
Notes and various accrued expenses which are not deductible until paid. No
valuation allowance has been provided because EchoStar currently believes it is
more likely than not that these assets will be realized. If future operating
results differ materially and adversely from EchoStar's current expectations,
its judgment regarding the need for a valuation allowance may change.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
REVENUE. Total revenue in 1994 was $191.0 million, a decrease of $30.0
million, or 14%, as compared to total revenue in 1993 of $221.0 million. Revenue
from domestic sales of DTH products in 1994 was $111.8 million, a decrease of
$41.0 million, or 27%, as compared to 1993. Approximately $22.8 million, or 56%,
of the decrease was due to a decline in the number of satellite receivers sold,
reduced sales of equipment and accessories typically sold in conjunction with
receivers and lower selling prices for that equipment. EchoStar also experienced
a decrease of $18.2 million in non-proprietary descrambler module sales during
1994, as compared to 1993. This decrease in 1994 reflects the impact of higher
than normal bulk sales of modules to customers during 1993. EchoStar decreased
its emphasis on sales of these high cost, low margin products during 1994.
52
Domestically, EchoStar sold 114,000 receivers in 1994, a decline of 14%, as
compared to 1993. Two of the most important factors responsible for the decline
in EchoStar's satellite receiver sales were the unavailability of competitive
financing and a reduction in inventory as a result of EchoStar's expectation of
a decrease in DTH product sales resulting from the introduction of DBS.
In 1994, an increasing percentage of domestic DTH satellite retailers relied
on attractive financing packages to generate sales. During most of 1994, certain
of EchoStar's competitors offered consumer financing that satellite retailers
considered more attractive than financing offered by EchoStar. This competitive
financing advantage resulted in satellite retailers selling competing products
to their customers rather than EchoStar products. EchoStar has entered into
agreements with two national banks permitting EchoStar to offer what it
presently believes to be competitive financing terms.
Loan origination and participation income for 1994 was $3.7 million, a
decrease of $170,000, or 4%, as compared to 1993. The decrease resulted from a
decline in loan originations due to EchoStar's competitors offering retailers
financing considered more attractive than financing offered through EchoStar
prior to the new financing agreements entered into by EchoStar. The decline was
partially offset by revenue received from participation in outstanding balances
of EchoStar's financing portfolio during all of 1994. Commencing in 1995,
EchoStar stopped receiving monthly participation payments on the loan portfolio.
See "Business -- Legal Proceedings." Although EchoStar believes that it has
entered into competitive financing arrangements, EchoStar expects loan
origination and participation income to be substantially reduced in the near
term.
EchoStar intends to aggressively market its current offering of C-band DTH
products by offering competitive pricing and financing in order to minimize the
decline in domestic C-band DTH sales. Although no assurances can be given,
EchoStar expects to offset the decline in domestic C-band sales with sales of
its proprietary DBS products upon commencement of its DBS service in early 1996.
Programming revenue for 1994 was $14.5 million, an increase of $3.7 million,
or 34%, as compared to 1993. The increase was primarily due to increased sales
of programming packages through satellite retailers and, to a lesser extent, the
renewal and retention of existing customers as a result of more attractive
pricing and more effective marketing.
Revenue from international DTH products for 1994 was $60.9 million, an
increase of $7.4 million, or 14%, as compared to 1993. Such increases were
primarily the result of an increase in international consumer demand for DTH
products, especially in the Middle East and the Pacific Rim, in response to
growth in available satellite television programming. EchoStar sold 289,000
satellite receivers internationally during 1994, an increase of 43%, as compared
to 1993. The effects of volume increases were partially offset by a 17% decrease
in the average selling price, as compared to 1993, due to an emphasis by
EchoStar on lower priced products in 1994 to meet marketplace demands.
Although comparative revenues from domestic sales of DTH products declined
in 1994, fourth quarter 1994 total DTH revenues increased approximately $3.3
million, or 7%, over third quarter 1994 revenues, which were $6.0 million, or
16% higher than second quarter revenues. As a result of sales of Competitor DBS
Receivers and increased international sales, fourth quarter DTH revenues of
$47.6 million were higher than any other quarter during 1994. This increase is
primarily due to an increase in domestic receiver sales to 66,000 in the second
half of 1994 compared to 48,000 in the first half of 1994, which reflects the
typically higher sales volumes during the fall season and increased sales of
Competitor DBS Receivers.
OPERATING EXPENSES. Costs of DTH products sold were $133.6 million for
1994, a decrease of $27.8 million, or 17%, as compared to 1993. Operating
expenses for DTH products as a percentage of DTH product revenue were 77% and
78% for 1994 and 1993, respectively. The decrease in DTH operating expenses in
1994 resulted primarily from the 42% decrease in non-proprietary descrambler
module sales, which sell at relatively low gross margins.
53
Operating expenses for programming were $11.7 million for 1994, an increase
of $2.3 million, or 25%, as compared to 1993. Operating expenses for programming
as a percentage of programming revenue in 1994 were 80% as compared to 87% in
1993. Programming revenue increased at a greater rate than operating expenses
for programming principally because of discounts available on wholesale
programming prices as a result of the increased number of subscribers and better
pricing as a result of more favorable programming contracts entered into during
1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $30.2 million in 1994 and 1993. Selling, general
and administrative expenses as a percentage of total revenue increased to 16%
for 1994 compared to 14% for 1993. The increase as a percent of total revenue is
principally the result of the reduction of domestic sales of DTH products.
Research and development costs totaled $5.9 million for 1994, as compared to
$5.1 million in 1993. The increase is principally due to additional research
necessary to provide receivers to more international markets and the initial
development of EchoStar DBS receivers. EchoStar expenses research and
development costs as incurred and includes such costs in selling, general and
administrative expenses.
EBITDA. EBITDA for 1994 was $15.5 million, a decrease of $4.4 million, or
22%, compared to 1993. EBITDA was 8% of total revenue for 1994, as compared to
9% of total revenue for 1993. Such decrease resulted from the factors affecting
revenue and expenses discussed above.
DEPRECIATION. Depreciation in 1994 was $2.2 million, an increase of
$566,000, or 34%, as compared to 1993. The increase primarily resulted from
purchases of manufacturing equipment and tooling during 1994 and a full year's
depreciation on equipment and tooling purchased throughout 1993.
OTHER INCOME AND EXPENSE. Other expense in 1994 was $12.7 million, an
increase of $13.3 million, as compared to 1993. The difference in other income
and expense compared to 1993 resulted primarily from the amortization of
original issue discount and deferred debt issuance costs which totaled $26.4
million on the 1994 Notes which were issued on June 7, 1994. This amount was
partially offset by $6.5 million of investment income in the Escrow Account and
capitalized interest of $5.7 million relating to the development of the EchoStar
DBS System.
PROVISION FOR INCOME TAXES. Provision for income taxes for 1994 was
$399,000, an increase of $1.8 million, as compared to 1993. This increase is
principally the result of EchoStar's subsidiaries (other than ESC) terminating
their Subchapter S corporation status effective December 31, 1993. This change
in tax status was recognized by establishing a net deferred tax asset of $1.9
million on that date for temporary differences between tax basis and amounts
reported in EchoStar's Financial Statements. The 1994 increase in the current
and long term deferred tax asset was $7.3 million, which relates principally to
the deferred deductibility of interest related to the 1994 Notes. ESC terminated
its Subchapter S corporation status effective January 1, 1994. This change in
tax status resulted in EchoStar recognizing federal and state corporate income
taxes for all of 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operations were $7.8 million for the three month
period ended March 31, 1996 as compared to $3.8 million used by operations for
the same period in 1995. Cash provided by operations for the three month period
ended March 31, 1996 was mainly a result of deferred programming revenue
received related to the DISH Network-SM- and the sale of the majority of
Competitor DBS Receiver inventory. EchoStar expects any declines in inventory to
be offset by substantial increases in EchoStar Receiver System inventory and
related components. The anticipated increase in inventory is expected to
negatively affect cash flow in the short term. However, as EchoStar builds its
DISH Network-SM- subscriber base, the negative effect on cash flow should be
offset by an increase in revenue attributable to sales of EchoStar Receiver
Systems and DISH Network-SM- programming. In the event subscriptions to DISH
Network-SM- programming do not meet anticipated levels, the negative effect on
cash flow will continue.
54
Cash flows used by operations were $20.3 million for 1995. Cash flows were
used primarily for purchases of inventory and a $10.0 million DBS inventory
deposit. The increase of approximately $19.7 million in inventory during 1995
principally represents: (i) purchase of integral components for EchoStar
Receiver Systems; (ii) a planned increase in inventory of Competitor DBS
Receivers; and (iii) an increase in international inventory to support expected
international demand. Funds necessary to increase these inventories came from
cash reserves.
Cash flows provided by operations were $24.2 million and $30.2 million for
1994 and 1993, respectively. Cash flows were mainly expended for purchases of
property and equipment in 1994 and 1993, principally in connection with
development of the EchoStar DBS System and for distributions to stockholders of
EchoStar's subsidiaries in 1993. Distributions to stockholders of EchoStar's
subsidiaries were made to pay taxes on S corporation taxable income in 1993.
EchoStar is prohibited from making further dividend payments by the terms of its
debt agreements, except in certain limited circumstances. Cash flows provided by
operations in 1994 were invested in short-term interest-bearing marketable
securities or segregated as restricted cash and marketable securities.
Certain subsidiaries of EchoStar were parties to a credit facility (the
"Credit Facility") with Bank of America Illinois. The Credit Facility expired in
May 1996 and EchoStar does not currently intend to arrange a replacement credit
facility. Instead, EchoStar is using available cash to collateralize its letter
of credit obligations, which historically was the only significant use of the
Credit Facility. At March 31, 1996, EchoStar had cash collateralized $15.5
million of certain standby letters of credit for trade purchases which is
included in restricted cash and marketable securities in the accompanying
supplemental quarterly financial information of EchoStar included elsewhere in
this Information Statement -- Prospectus.
During June 1994, EchoStar issued 624,000 units consisting of $624.0 million
principal amount of the 1994 Notes and 3,744,000 Warrants (representing
2,808,000 shares of EchoStar Class A Common Stock) for aggregate net proceeds of
approximately $323.3 million, which were placed in the 1994 Escrow Account.
Through March 31, 1996, $276.8 million had been withdrawn from the 1994 Escrow
Account. Of that amount, $28.3 million was to reimburse EchoStar for monies
expended for the construction and launch of EchoStar I and EchoStar II prior to
June 7, 1994, and will be reinvested in development of the EchoStar DBS System.
At March 31, 1996, approximately $251.9 million of these proceeds had been
applied to development and construction of the EchoStar DBS System and
approximately $24.9 million had been applied to other permitted uses. As of
March 31, 1996, approximately $63.6 million remained in the 1994 Escrow Account,
which included investment earnings.
In March 1996, ESB consummated a private placement of the 1996 Notes. ESB
was formed in January 1996 for the purpose of the 1996 Notes Offering. EchoStar
has contributed all of the outstanding capital stock of its wholly owned
subsidiary, Dish, Ltd., to ESB. ESB issued 580,000 notes consisting of $580.0
million principal amount of the 1996 Notes for aggregate net proceeds of
approximately $337.0 million of which $177.3 million was placed in the 1996
Escrow Account and the remaining $159.7 million is included in cash and cash
equivalents in the supplemental quarterly financial information as of March 31,
1996, included elsewhere in this Information Statement -- Prospectus. Through
March 31, 1996, $7.5 million had been withdrawn from the 1996 Escrow Account for
development and construction of the EchoStar DBS System. As of March 31, 1996,
approximately $170.0 million remained in the 1996 Escrow Account, which included
investment earnings. Total cash on hand and marketable investment securities at
March 31, 1996 were approximately $165.0 million.
Based upon existing cash resources and expected revenue and expenses,
exclusive of DISH Network-SM- marketing expenses, EchoStar anticipates requiring
an additional $40.0 million in working capital in 1996 related to operations and
the development of the EchoStar DBS System. This cash requirement could increase
if subscribers are not added as planned or expenses, including subscriber
acquisition costs, exceed present levels and estimates. Additionally, in 1996,
EchoStar has expended or expects to expend: (i) approximately $125.3 million in
connection with the launch of EchoStar II and
55
EchoStar III; (ii) approximately $46.7 million for launch insurance on EchoStar
II and EchoStar III; (iii) approximately $52.5 million for construction of
EchoStar III and EchoStar IV; (iv) approximately $8.0 million for in-orbit
payments to Martin Marietta on EchoStar I and EchoStar II; (v) approximately
$52.3 million for the purchase of DBS frequencies at 148 DEG. WL; (vi) $10.4
million for other 1994 Escrow related expenditures related to development of the
EchoStar DBS System; and (vii) up to $95.0 million for the introduction, product
marketing and other operating expenses for the DISH Network-SM-. Funds for these
expenditures, as well as proposed expenditures beyond 1996 related to costs
expected to be incurred in connection with the construction and launch of
EchoStar's first four satellites, in an approximate amount of $235.0 million,
are expected to come from the 1996 Notes Escrow Account, the 1994 Notes Escrow
Account and available cash and marketable investment securities. However, in
order to continue development of the third and fourth satellites beyond the
second quarter in 1997, additional capital will be required. There are no
assurances that additional capital will be available, or, if available, that it
will be available on terms favorable to EchoStar.
In addition to the commitments described above, EchoStar has entered into
agreements to purchase DBS satellite receivers and related components for the
EchoStar DBS System. As of March 31, 1996 those purchase order commitments
totaled as much as $622.2 million. At March 31, 1996, the total of all
outstanding purchase order commitments with domestic and foreign suppliers was
as much as $641.3 million. All but approximately $85.9 million of the purchases
related to these commitments are expected to be made during 1996 and the
remainder is expected to be made during 1997. EchoStar expects to finance these
commitments from available cash, marketable investment securities and sales of
inventory, including the sale of EchoStar Receiver Systems and related products.
In the event price and marketing competition intensifies among DBS and other
"small dish" operators, EchoStar may be at a competitive disadvantage as a
result of its limited financial resources. EchoStar is currently test marketing
a special promotion in a limited number of markets pursuant to which customers
are able to purchase a discounted package, including an EchoStar Receiver System
and annual programming package, for below the suggested retail price. If
EchoStar elects to expand the promotion nationwide for an extended period, or if
market conditions force it to do so, EchoStar's subscriber acquisition costs
will increase substantially resulting in a significant negative impact on
EchoStar's liquidity and net income. EchoStar may therefore be required to raise
additional capital during 1996. There can be no assurance that EchoStar will be
successful raising additional capital, or whether such capital can be raised on
terms favorable to EchoStar.
EchoStar had outstanding $415.7 million and $778.6 million of long-term debt
(including the 1994 and 1996 Notes, deferred satellite contract payments on
EchoStar I and mortgage debt) as of December 31, 1995 and March 31, 1996,
respectively. In addition, because interest on the 1994 Notes is not payable
currently in cash but accretes through June 1, 1999, the 1994 Notes will
increase by $241.8 million through that date. Also, because interest on the 1996
Notes is not payable in cash but accretes through March 15, 2000, the 1996 Notes
will increase by $230.0 million through that date. Contractor financing of $28.0
million is available for EchoStar II. Interest on the contractor financing is at
the prime rate and principal payments are payable in equal monthly installments
over five years following the launch of the satellite.
AVAILABILITY OF OPERATING CASH FLOW TO ECHOSTAR
The 1996 Indenture, the 1994 Indenture and EchoStar's short-term credit
facility impose various restrictions on the transfer of funds among EchoStar and
its subsidiaries. Subject to these restrictions, EchoStar intends to cause its
subsidiaries to execute various intercompany agreements to effect the sharing of
personnel and assets, including satellites and license rights, that form an
integral part of the EchoStar DBS System. These agreements are expected to take
the form of management agreements (for use of personnel) and lease agreements
(for use of assets) which will have a principal objective of effecting an
equitable allocation of revenues and costs associated with operating the DISH
Network-SM-.
56
Although the 1996 Notes are collateralized by the stock of Dish, Ltd., the
stock of a direct subsidiary of EchoStar, various assets expected to form an
integral part of the EchoStar DBS System (and not otherwise encumbered by the
1994 Indenture), and guarantees of EchoStar and certain of its other
subsidiaries, ESB's ability to fund interest and principal payments on the 1996
Notes will depend on successful operation of the DISH Network-SM- and ESB having
access to available cash flows generated by the DISH Network-SM-. If cash
available to ESB is not sufficient to service the 1996 Notes, EchoStar would be
required to obtain cash from other sources such as asset sales, issuance of
equity securities, or new borrowings. There can be no assurance that those
alternative sources would be available, or available on favorable terms, or
sufficient to meet debt service requirements on the 1996 Notes.
ASSETS OF PRINCIPAL GUARANTORS
EchoStar guarantees the 1996 Notes on a subordinated basis. EchoStar's
initial public offering of Class A Common Stock in June 1995 resulted in net
proceeds of approximately $63.0 million. EchoStar's assets at March 31, 1996
included assets purchased with those proceeds and cash remaining from the Equity
Offering. Substantially all of the proceeds from the Equity Offering were used:
(i) to secure launches for a third and fourth satellite; (ii) to support,
through loans to DBSC, construction of a third satellite; (iii) to purchase, for
$4.0 million, convertible subordinated secured debentures from DBS Industries,
Inc.; and (iv) for general corporate purposes, including the down payment, for
DBS frequencies purchased at 148 DEG. WL at the FCC Auction in January 1996,
which will be reimbursed with the proceeds of the 1996 Notes Offering.
OTHER
1994 AND 1996 NOTES
EchoStar I was successfully launched by Great Wall in December 1995. In the
event of a launch failure of EchoStar II, Dish, Ltd. would first be required
under the 1994 Notes Indenture to make an offer to repurchase one-half of the
then accreted value of the 1994 Notes. In the event that EchoStar does not have
the right to use orbital slot authorizations granted by the FCC covering a
minimum of 21 transponders at a single full CONUS orbital slot, ESB and Dish,
Ltd. will be required to make an offer to repurchase all or a portion of the
outstanding 1996 Notes and 1994 Notes, respectively. Additionally, in the event
that EchoStar DBS Corporation, a wholly owned subsidiary of EchoStar, fails to
obtain authorization from the FCC for frequencies purchased at the FCC Auction
in January 1996, or in the event that such authorization is revoked or
rescinded, ESB will be required under the 1996 Notes Indenture to repurchase the
maximum principal amount of the 1996 Notes that may be purchased with the
proceeds of any refund received from the FCC.
If the DBSC Merger or similar transaction does not occur on or before March
1, 1997, ESB will be required to repurchase at least $83.0 million principal
amount of the 1996 Notes. Further, in the event that EchoStar incurs more than
$7.8 million in expenses (as defined in the 1996 Notes Indenture) in connection
with the DBSC Merger, ESB will be required to apply an amount equal to such
expenses minus $7.8 million to an offer to repurchase the maximum principal
amount of the 1996 Notes that may be purchased out of such proceeds.
If any of the above described events were to occur, EchoStar's plan of
operations, including its liquidity, would be adversely affected and its current
business plan could not be fully implemented. Further, EchoStar's short-term
liquidity would be adversely affected in the event of: (i) significant delay in
the delivery of certain products and equipment necessary for operation of the
EchoStar DBS System; (ii) shortfalls in estimated levels of operating cash
flows; or (iii) unanticipated expenses in connection with development of the
EchoStar DBS System.
RECEIVER MANUFACTURERS
EchoStar has agreements with two manufacturers to supply DBS receivers for
EchoStar. To date, only one of the manufacturers has produced a receiver
acceptable to EchoStar. That manufacturer is presently manufacturing receivers
in quantities sufficient to meet expected demand. No assurances
57
can be given that EchoStar's other manufacturer will be able to produce an
acceptable receiver in the future. Until the other manufacturer produces a
receiver acceptable to EchoStar, EchoStar is dependent on one manufacturing
source for its receivers. To date, EchoStar has paid the nonperforming
manufacturer $10.0 million and has an additional $15.0 million in an escrow
account as security for EchoStar's payment obligations under that contract. If
that manufacturer does not produce an acceptable receiver in the near future,
EchoStar may terminate that contract, which would cause longer term dependence
on a single manufacturing source. If EchoStar's sole manufacturer is unable for
any reason to produce receivers in a quantity sufficient to meet demand,
EchoStar's liquidity and results of operations may be adversely affected. If the
contract with EchoStar's other manufacturer is terminated, there can be no
assurance EchoStar would be able to recover all amounts paid the manufacturer.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment Of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). EchoStar
has adopted SFAS No. 121 in the first quarter of 1996 and its adoption has not
had a material impact on EchoStar's financial position, results of operations or
cash flows.
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), issued by FASB in October 1995 and
effective for fiscal years beginning after December 15, 1995, encourages, but
does not require, a fair value based method of accounting for employee stock
options or similar equity instruments. It also allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), but requires
pro forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. EchoStar has adopted SFAS No. 123
in the first quarter of 1996 and has elected to continue to measure compensation
cost under APB No. 25 and to comply with the pro forma disclosure requirements.
Therefore, this statement has had no impact on EchoStar's results of operations.
IMPACT OF INFLATION; BACKLOG
Inflation has not materially affected EchoStar's operations during the past
three years. EchoStar believes that its ability to increase charges for products
and services in future periods will depend primarily on competitive pressures.
EchoStar does not have any material backlog of its products.
58
ECHOSTAR COMMUNICATIONS CORPORATION
BUSINESS
GENERAL
EchoStar was incorporated in Nevada during 1995 in connection with a
reorganization of a group of businesses under common control, the first of
which, Echosphere, was incorporated in 1980. Since its incorporation, Echosphere
Corporation, directly or indirectly, has been engaged in the design,
manufacture, distribution and installation of DTH products, domestic
distribution of DTH programming and consumer financing of EchoStar's domestic
DTH products and services. A subsidiary of EchoStar was granted a conditional
satellite construction permit, a specific orbital slot assignment and frequency
assignments by the FCC in 1989 to provide DBS service.
EchoStar successfully launched its first DBS satellite, EchoStar I, in
December 1995. EchoStar is one of only two companies with United States licensed
operational capacity sufficient to provide comprehensive nationwide DBS
programming service in 1996. Currently, EchoStar offers over 100 channels of
high quality digital video and audio programming to the entire continental
United States. EchoStar's DISH Network-SM- service is expected to expand to
approximately 200 digital video and audio channels following the successful
launch of its second DBS satellite this fall.
EchoStar will target approximately 110 million potential subscribers in the
continental United States, including approximately 96 million television
households. DISH Network-SM- subscribers can choose from a variety of
programming packages which EchoStar believes will have a better price-to-value
relationship than packages currently offered by most pay television providers.
For example, the entry level programming package America's Top 40-SM- is priced
at $19.99 per month and consists of 40 of the top "expanded basic cable"
channels, including a conventional premium service, The Disney
Channel-Registered Trademark-. EchoStar will also offer various regional sports
networks numerous premium services, pay-per-view programming and, following the
launch of a second satellite, additional premium services and expanded
pay-per-view offerings. EchoStar has negotiated affiliation agreements with
major content providers, giving it the right to broadcast substantially all of
the most popular programming, including ESPN-Registered Trademark-,
MTV-Registered Trademark-, Nickelodeon-Registered Trademark-, VH-1-Registered
Trademark-, Showtime Network-Registered Trademark-, The Disney
Channel-Registered Trademark-, USA Network-Registered Trademark-, CNN-Registered
Trademark-, Headline News-Registered Trademark-, TNT-SM-, CNN International-SM-,
Turner Classic Movies-Registered Trademark-, The Discovery Channel-Registered
Trademark-, A&E-SM-, HBO-Registered Trademark-, Cinemax-Registered Trademark-,
Lifetime Television-SM-, The Family Channel-Registered Trademark-,
C-Span-Registered Trademark-, CNBC-Registered Trademark-, and many other
programming services. EchoStar also provides a user-friendly on screen
programming guide, or navigator, facilitating the management of current and
future program offerings by consumers.
EchoStar believes that it will have access to more U.S. licensed DBS
frequencies than any of its competitors. EchoStar controls, or will control
(subject to certain FCC approvals and findings) as many as 90 such frequencies,
including 21 frequencies at one of the three U.S. licensed orbital slots
currently capable of providing nationwide DBS service. See "-- Industry Overview
- -- DBS Industry." EchoStar believes that access to this substantial amount of
DBS spectrum will enable it to achieve higher subscriber penetration and higher
revenue per subscriber than would otherwise be possible. EchoStar currently
plans to use this spectrum to offer a substantial number of additional video
channels, including alternate time zone feeds of popular expanded basic cable
programming, multiplexed premium movie services, frequent start pay-per-view,
local programming for the largest local U.S. television markets, niche and
foreign language programming, professional and college sporting events, HDTV,
business and educational programming and high-speed transmission of Internet
data.
The introduction of DBS receivers is widely regarded as the most successful
introduction of a consumer electronics product in U.S. history, surpassing the
rollout of color televisions, VCRs and compact disc players. During the 18
months ended December 31, 1995, approximately 2.2 million U.S. households
subscribed to DTH satellite service. According to an industry study performed
during late 1995, 85% of all consumers are satisfied with DBS picture quality,
compared to a consumer satisfaction level of approximately 47% for cable.
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Of the approximately 96 million television households in the United States,
it is estimated that approximately 60 million subscribers pay an average of $33
per month for multichannel programming services. EchoStar believes that there is
significant unsatisfied demand for high quality, reasonably priced television
programming. Although primary markets for the EchoStar DBS System are likely to
include the approximately 11.0 million households not passed by cable television
systems and the approximately 20.4 million households currently passed by cable
television systems with relatively limited channel capacity, EchoStar also
expects to target cable subscribers in urban and suburban areas who are
dissatisfied with the quality or price of their cable programming.
DISH Network-SM- programming is available to any subscriber who purchases or
leases an EchoStar receiver system, which includes an 18-inch satellite dish, a
digital satellite receiver, a user-friendly remote control and related
components (an "EchoStar Receiver System"). The suggested retail price of an
EchoStar Receiver System is currently between approximately $499 and $599,
depending on the model selected by the customer, among other factors. Dealer
incentives and EchoStar sponsored promotions may reduce the actual cost of an
EchoStar Receiver System below the suggested retail price. The initial capital
cost required to receive DISH Network-SM- programming may reduce the demand for
EchoStar Receiver Systems, since EchoStar Receiver Systems must be purchased,
while cable and certain of EchoStar's satellite competitors lease their
equipment to the consumer, with little if any initial hardware payment required.
EchoStar is currently test marketing a special promotion in a limited number of
markets pursuant to which customers are able to purchase a discounted package,
including an annual programming package for $300 (which is comparable to the
price for a similar package of cable programming), and an EchoStar Receiver
System for $199. If EchoStar elects to expand the promotion nationwide for an
extended period, or if market conditions force it to do so, the initial capital
investment relative to cable will be greatly reduced. In this event, EchoStar's
subscriber acquisition costs will increase substantially, potentially resulting
in a significant negative impact on EchoStar's liquidity and net income.
The EchoStar Receiver System is fully compatible with MPEG-2, the world
digital standard for computers and consumer electronics products, and provides
image and sound quality superior to current analog cable or MMDS television
services. EchoStar intends to market EchoStar Receiver Systems through its
nationwide network of approximately 3,000 independent distributors and
retailers. EchoStar is also currently engaged in discussions with brand name
consumer electronics equipment manufacturers for the production and distribution
of EchoStar Receiver Systems through national consumer electronics retailer
networks. EchoStar is also negotiating with a number of mass merchandisers,
direct sales organizations and consumer electronics retailers for other
distribution paths for EchoStar Receiver Systems.
STRATEGY
EchoStar's primary objective is to become one of the leading providers of
pay television services in the United States. EchoStar's strategy to achieve
this objective is to:
- Provide subscribers with more quality programming at lower price points
than other pay television providers.
- Utilize its large and established independent retail network to obtain
substantial market share in rural areas and areas served by cable systems
with relatively limited channel capacity.
- Employ world standard MPEG-2 digital technology to achieve lower
manufacturing costs and assure superior product capability, including
compatibility with other consumer electronics products.
- Expand consumer electronics retail distribution through relationships with
major retailers or through licensing arrangements with brand name consumer
electronics manufacturers.
- Provide superior customer service by furnishing a single source to
purchase DISH Network-SM- hardware and programming and to obtain
financing, installation and customer care.
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- Deploy satellites at additional DBS orbital slots to expand EchoStar's
product offerings with complementary video, data and interactive products.
DBS is the most efficient, least capital intensive means of reaching the
largest number of U.S. television households. EchoStar's first two satellites
will transmit high quality, digital television to the entire continental United
States for a capital cost of less than $500 million, or approximately $5 per
television household, permitting profitability with relatively low market
penetration. EchoStar believes that its strategy, together with the ability to
exploit the more favorable cost structure and the lower invested capital
requirements of DBS relative to other pay television providers, will enable
EchoStar to achieve its objectives.
In addition to the DBS business, EchoStar is engaged in the design,
manufacture, distribution and installation of DTH products, domestic
distribution of DTH programming and consumer financing of EchoStar's domestic
DTH products and services. During the six years ended December 31, 1995,
EchoStar sold over 1.7 million DTH receivers worldwide.
The elements of EchoStar's strategy are discussed below.
LOWER PRICED PROGRAMMING PACKAGES
As a result of the generally lower invested capital required of digital DBS
operators relative to cable television operators, EchoStar believes it is
currently one of the lowest cost providers of nationwide pay television
programming. Unlike cable television, DBS does not require access to public
rights-of-way, multiple origination facilities (commonly known as head-ends) or
ground construction to install, maintain or upgrade services, thus eliminating a
major portion of the significant capital required to operate a technologically
advanced cable television system. Cable industry trade groups and research
associations report that significant capital expenditures would be necessary to
upgrade existing analog coaxial cable television systems to digital fiber optic
technology. These expenditures are estimated to exceed $900 per subscriber. As a
result, EchoStar believes that DISH Network-SM- services are generally less
expensive than cable television subscriptions, while providing better video
quality, access to more channels and greater choice in programming packages.
EchoStar believes that cable companies generally will be unable or unwilling to
lower their prices to subscribers given the higher implicit cost of the
infrastructure necessary to deliver programming to their customers as compared
to DBS programming.
While wireless cable operators currently provide an analog signal, with
limited capacity and inferior image and sound quality compared to DBS, it is
expected that most large market operators backed by local telephone companies
will upgrade to digital technology over the next several years. In order to
implement this upgrade those operators will be required to install digital
decoders in each customer's home at a cost comparable to the cost of an EchoStar
DBS receiver and make certain modifications to their transmission facilities.
The cost of this digital upgrade will be significant and will have to be
amortized over a smaller base of potential customers.
EchoStar's low cost infrastructure and high channel capacity due to digital
compression enables the DISH Network-SM- to offer a wide variety of programming
packages at attractive price points. The DISH Network-SM- offers a variety of
programming packages including popular cable television networks. The America's
Top 40-SM- programming package, which includes a conventional premium service,
The Disney Channel-Registered Trademark-, is priced at $19.99 per month. This
package includes a diverse range of programming including news, sports, general
entertainment, movies, and family programming and will represent a competitive
value. The America's Top 40 Premium Plus-SM- package, priced at $29.99 per
month, and the America's Top 40 Deluxe Plus-SM- package, priced at $39.99 per
month, includes the America's Top 40-SM- package combined with one and two
multiplexed premium services, respectively, including HBO-Registered Trademark-,
Cinemax-Registered Trademark- and Showtime-Registered Trademark-. According to
industry reports and trade press, multiplexed premium services, which include
three to five channels per service for the same retail price as one service,
have proven to be popular with consumers. Additional packages and combinations
are expected, including superstations, network programming and regional sports
offerings. The DISH
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Network-SM- offers pay-per-view movies and niche services on an "a la carte"
basis. EchoStar plans to package its EchoStar Receiver System and programming
and offer discounts to customers who purchase packages during certain
promotions. EchoStar's pay-per-view strategy focuses on the premier movie titles
which generate substantial viewer interest and, consequently, higher revenues
and margins.
ESTABLISHED INDEPENDENT RETAIL NETWORK
EchoStar has an established nationwide network of approximately 3,000
independent full-service distributors and retailers of DTH and DBS satellite
products and services that has been developed over the past 15 years. Based on
its relationships with these retailers and its knowledge of distribution
channels from marketing DTH products and competitor's DBS products, EchoStar
believes that it has a competitive advantage over other DBS providers in
marketing the DISH Network-SM-. EchoStar offers a commission program based on
sales of hardware and programming that it believes is competitive with
commissions programs offered by other DTH operators. In addition to utilizing
this retailer network, EchoStar will target other distribution channels,
including national consumer electronic outlets, direct sales organizations and
mass merchandisers.
ADOPT SECOND GENERATION DIGITAL TECHNOLOGY
The EchoStar DBS System is fully compatible with MPEG-2 digital compression
technology, the world standard for computers and digital consumer electronics
and products. MPEG-2 compatibility gives EchoStar the advantage of seamlessly
interfacing with future digital consumer electronics and computer products. This
compatibility will generally result in lower costs to consumers as more
manufacturers use common components to design their products.
DEVELOP CONSUMER ELECTRONICS RETAIL DISTRIBUTION
EchoStar is currently in discussions with large brand name consumer
electronics companies to manufacture and provide greater retail distribution of
EchoStar Receiver Systems. EchoStar believes that these companies are interested
in manufacturing EchoStar DBS compatible equipment because of the opportunity to
package the receiver with an array of new digital consumer electronics products,
including HDTV, audio and video playback equipment and personal computers. These
manufacturers may also augment EchoStar's distribution through channels such as
consumer electronics outlets and mass merchandisers.
EchoStar is also actively pursuing, and has entered into several agreements,
with mass merchants, discount clubs and certain major retailers to distribute
EchoStar Receiver Systems and DISH Network-SM- programming. From these
discussions, EchoStar believes that these retailers have an interest in
retailing EchoStar Receiver Systems due to its differentiated program offerings.
EchoStar currently has agreements with SCI Systems, Inc. ("SCI") (the world's
largest electronics contract manufacturer) and Sagem Group ("Sagem") (a major
European consumer electronics equipment manufacturer) to manufacture DBS
receivers to be distributed through its retail network. To date, only SCI has
produced a receiver acceptable to EchoStar, and SCI is presently manufacturing
receivers in sufficient quantities to meet expected demand. No assurance can be
given that Sagem will be able to produce an acceptable receiver in the future.
Until Sagem produces a receiver acceptable to EchoStar, EchoStar is dependent on
one manufacturing source for its receivers. If SCI is unable for any reason to
produce receivers in a quantity sufficient to meet demand, EchoStar's liquidity
and results of operations may be adversely affected.
INTEGRATED CUSTOMER SERVICE
EchoStar provides customer service competitive with other DTH operators by
offering integrated customer care through a single point of contact. By calling
1-800-333-DISH, customers can purchase hardware and programming, schedule
installation, obtain technical support, make inquiries regarding their accounts
and receive information about the DISH Network-SM-. In order to maximize its
customer service, EchoStar will maintain its own call center and has also
contracted with industry leader Electronic Data Systems Inc. ("EDS"), to provide
call center services. In contrast, DirecTv and
62
USSB subscribers must make two separate telephone calls to subscribe to typical
popular programming combinations (one for DirecTv programming and one for USSB
programming), and a separate call for hardware customer service.
DEPLOY SATELLITES TO EXPAND PRODUCT OFFERINGS
EchoStar expects to utilize its substantial DBS capacity to offer expanded
product offerings to its customers, including video, data, and interactive
products. EchoStar currently plans to launch three additional satellites,
EchoStar II, EchoStar III, and EchoStar IV, by 1998. EchoStar currently plans to
use this capacity to offer a substantial number of additional video channels,
including basic and premium cable, frequent start pay-per-view, local
programming to the largest U.S. television markets, niche and foreign language
programming, extensive professional and college sports events, HDTV, business
and educational programming and high-speed transmission of Internet data.
INDUSTRY OVERVIEW
DBS INDUSTRY
DBS, as used in this Information Statement -- Prospectus, describes a high
power satellite broadcast service in the Ku frequency band which by
international agreement has been assigned unique nine degree orbital spacing
permitting higher powered transmissions which can be received on an 18-inch
satellite dish. Other DTH services include FSS, which describes low power
(C-band) and medium power (Ku-band) satellite services. Small dish size
generally increases consumer acceptance and provides a substantial competitive
advantage over other DTH services.
Although the concept of DBS was introduced in 1982, it did not become
commercially viable until the last several years because available satellite
technology did not allow for the power required to transmit to small dishes and
digital compression technology had not been adequately developed. Today, DBS
provides the most cost efficient national point to multi-point transport of
video, audio and data services. The advent of high powered satellites allows for
18-inch dishes and digital compression technology permits the broadcast of up to
ten channels of programming per transponder.
Eight DBS orbital slots, each with 32 frequencies, have been or will be
allocated by the FCC for use by domestic DBS providers. The FCC has indicated
its belief that only the 101 DEG. WL, 110 DEG. WL and 119 DEG. WL slots provide
full CONUS coverage and, therefore, these three slots are considered the most
strategic. With respect to a fourth orbital position, 61.5 DEG. WL, difficulties
with "look angles," among other factors, may make full CONUS DBS service from
that orbital position commercially impractical.
The FCC has issued or is expected to issue licenses or construction permits
for DBS orbital locations as follows.
FREQUENCY ALLOCATIONS FOR U.S. DBS ORBITAL SLOTS
TOTAL ---------------------------------------------------------------
FREQUENCIES 61.5 DEG. 101 DEG. 110 DEG. 119 DEG. 148 DEG.
--------------- ----- --- --- --- ---
EchoStar (1)................................... 90 11 1 21 24
DirecTv........................................ 54 27
MCI............................................ 28 28
Continental.................................... 22 11
Tempo.......................................... 22 11
Dominion (2)................................... 16 8
USSB........................................... 16 5 3 8
Unassigned..................................... 8 2
-- -- -- -- --
---
Totals..................................... 256 32 32 32 32 32
-- -- -- -- --
-- -- -- -- --
---
---
157 DEG. 166 DEG. 175 DEG.
--- --- ---
EchoStar (1)................................... 1 32
DirecTv........................................ 27
MCI............................................
Continental.................................... 11
Tempo.......................................... 11
Dominion (2)................................... 8
USSB...........................................
Unassigned..................................... 5 1
-- -- --
Totals..................................... 32 32 32
-- -- --
-- -- --
- ------------------------
(1) Includes one frequency at 110 DEG. WL, 10 frequencies at 119 DEG. WL and 11
frequencies at 175 DEG. WL as a result of EchoStar's December 1994 merger
with DirectSat. Excludes the five frequencies at 119 DEG. WL for which
EchoStar has an STA. Also includes 11 frequencies at 61.5 DEG. WL and 11
frequencies at 175 DEG. WL controlled by DBSC. EchoStar has filed an
application requesting FCC approval for
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the merger of DBSC with a subsidiary of EchoStar. In January 1996, EchoStar
entered the winning bid in the FCC Auction for 24 frequencies at 148 DEG.
WL. EchoStar believes it will be assigned an additional 10 frequencies at
175 DEG. WL and one frequency at 166 DEG. WL, if the FCC finds that EchoStar
has a firm satellite construction contract, but there is no assurance in
this regard. EchoStar has not yet developed a business plan for the 175 DEG.
WL orbital slot, which has limited utility for service to the continental
U.S.
(2) Dominion has appealed the FCC's decision refusing to reconsider the
cancellation of Dominion's claim to eight frequencies at the 119 DEG. WL
orbital slot. In the event Dominion's FCC appeal is successful, Dominion
would forego any rights to frequencies at 61.5 DEG. WL.
In the event EchoStar is unable to raise substantial additional capital,
EchoStar may not be able to retain all of the licenses or construction permits
granted to it by the FCC. There can be no assurances that additional capital
will be available, or if available that it will be available on terms favorable
to EchoStar.
As of the date of this Information Statement -- Prospectus, only EchoStar
and DirecTv have authorizations for more than 11 frequencies in the strategic
U.S. licensed orbital slots which provide for full CONUS coverage. In the FCC
Auction, MCI entered the winning bid to acquire the permit for 28 of 32
frequencies at the 110 DEG. WL orbital slot. Issuance of the permit is subject
to FCC approval. EchoStar presently expects that MCI will be able to offer DBS
services from this slot within approximately two years or possibly sooner. See
"Risk Factors -- Competitive Nature of the Industry" and "-- Competition -- DBS
Industry -- Other DBS Operators."
Programming for DBS is generally available from the majority of programmers
on the same terms as are offered to cable operators. The Cable Act, subject to
certain exceptions, requires programmers controlled by integrated cable
companies to offer programming to all potential buyers on fair and reasonable
terms. Additionally, although not required by law, in EchoStar's experience,
substantially all unaffiliated programmers have made their programming available
on fair and reasonable terms. Pay-per-view programming has also generally been
made available to DBS providers on substantially the same terms and conditions
as are available to cable operators. See "Risk Factors -- Risks of Adverse
Effects of Government Regulation."
As of July 4, 1996, EchoStar had approximately 79,000 subscribers to DISH
Network-SM- programming.
C-BAND/DTH INDUSTRY
The DTH industry provides satellite television products and services,
including hardware and software for the reception and decryption of satellite
television programming. Currently, the majority of satellite programming is
transmitted at the C-band radio frequency, which typically requires dish sizes
ranging from six to 12 feet in diameter, depending upon geographic location.
This large dish compensates for a relatively low (under 20 Watts per
transponder) power signal. As of December 31, 1995, approximately 4.2 million
C-band systems had been sold in the United States at an average price of over
$2,000.
THE MARKET
GENERAL
EchoStar believes that there is a significant unsatisfied demand for high
quality, reasonably priced television programming and that the domestic and
international markets for satellite products and services are growing as a
result of the following continuing fundamental characteristics: (i) cable
infrastructure is either weak or non-existent in many domestic and international
areas; (ii) a high percentage of current pay television subscribers are
dissatisfied with their current programming choices, service or pricing; (iii)
distribution of television programming to national, regional and international
audiences is increasing; and (iv) technological advancements, such as higher
powered satellites and digital compression, have continued. Although many cable
operators are expected to
64
commit significant capital to upgrade their systems to a competitive digital
configuration, EchoStar believes that cable operators will focus upgrades on the
nation's top twenty to fifty television markets and will largely ignore the
rural areas which are among EchoStar's primary target markets. Although EchoStar
believes major upgrade programs will occur in the top television markets, many
of those markets have a divergent group of cable operators with varying
strategic initiatives. EchoStar believes this fragmentation will work in
EchoStar's favor as it attempts to gain market share in these areas.
Additionally, to match the digital offerings expected by EchoStar, cable
operators or customers must make an investment in a digital receiver similar to
the receiver to be offered by EchoStar.
EchoStar believes that the demand for satellite television services in the
U.S. has grown and will continue to grow and that the DISH Network-SM- provides
the most attractive alternative to cable. While the high-power DBS share of the
U.S. television market is currently small compared to cable, it has been
steadily increasing. Industry studies indicate that a substantial number of
consumers are dissatisfied with cable television, that former cable subscribers
who subscribe to a DBS system are more satisfied with it than cable. This
research also indicates that the most likely DBS customers are homeowners with
families who currently have or have had cable, subscribed to the premium cable
channels and consider television a significant component of their entertainment
activities. EchoStar believes, based on this research, that the following
factors will contribute to the market growth of the DISH Network-SM-.
DEMAND FOR MORE CHOICE IN TELEVISION PROGRAMMING AND BETTER QUALITY PICTURE
AND SOUND. Prior to the growth of cable television services, television viewers
were offered a relatively limited number of channels. As the number of channels
increased, consumer demand for more programming choices also increased. EchoStar
expects this trend will continue and that consumers will desire even more
programming choices than are available through cable. EchoStar believes
consumers are also increasingly demanding improved picture quality compared to
what has historically been offered by over-the-air VHF and UHF broadcasters and
by cable. EchoStar believes that the EchoStar DBS System is well-positioned to
benefit from these growing demands.
WEAK CABLE INFRASTRUCTURE. There are many rural areas of the United States
with either limited capacity of less than 39 channels or no cable television
availability. Of the approximately 11,000 cable systems in the United States,
many are located in rural areas outside significant population centers. The cost
to upgrade these systems would be significant and, in many cases, economically
unfeasible in a competitive environment. Since DTH satellite is the most
economical way to deliver programming, EchoStar believes that rural areas
provide a prime market for its satellite television products and services.
DISSATISFIED CABLE SUBSCRIBERS. EchoStar believes that a substantial number
of current cable subscribers are dissatisfied with the quality of picture and
sound, limited channel capability, complicated multi-tier packaging, cost of
service, and level of customer service provided by their cable systems. Industry
research has indicated that the number of cable subscribers dissatisfied with
cable television is significant. EchoStar believes that those cable subscribers
represent a substantial market opportunity and will potentially be attracted to
its DBS service.
INCREASED DISTRIBUTION OF TELEVISION PROGRAMMING. The global television
market is experiencing significant growth, both in terms of the number of
broadcasters creating programming and the number of channels available to
viewers. Within the United States, the number of television programming
providers grew from three in 1970 to in excess of 200 currently. Similarly,
deregulation in other countries has fostered the entry into the market of
additional television broadcasters. The number of television channels and
viewing alternatives available to United States and international audiences is
expected to continue to grow dramatically.
EchoStar believes that national broadcasters and other service providers
will expand their use of satellites to distribute programming to national,
regional and international audiences. Major United States programmers are
undertaking efforts to transition from their current limited international
65
roles to global entertainment providers. In addition, EchoStar believes that
international broadcasters will expand their use of satellites to distribute
programming to domestic audiences of similar ethnic, linguistic or cultural
heritage, a cornerstone of EchoStar's niche programming strategy. This
programming is provided more economically by utilizing satellite television
systems rather than local cable and other programming delivery systems.
Likewise, consumer demand for additional programming choices has increased
as the availability of channels has increased. EchoStar believes that this trend
will continue and consumers will demand more programming choices than those
offered by their cable systems.
CONTINUING TECHNOLOGICAL ADVANCEMENTS. Recent technological advancements,
such as the advent of high powered satellites (which made possible the reduction
in the size of satellite dishes) and the development of digital compression
technology, have increased signal transmission capacity and lowered costs.
THE MARKET FOR DBS
EchoStar believes that the potential United States DBS market includes the
approximately 96 million households with television sets, together with
approximately 8.0 million businesses, 4.8 million commercial trucks, 3.0 million
recreational vehicles and 200,000 schools, libraries and other institutions that
desire access to high quality video, audio and data programming. Based upon
recent statistics approximately 64% of the 96 million United States households
with television sets currently pay for programming. Given the anticipated
relative low cost and greater programming choices of EchoStar's DBS service
compared to cable, EchoStar believes that it will be able to successfully
penetrate its target markets.
EchoStar also believes that, as a result of the large base of potential
customers, the EchoStar DBS System will be commercially viable even if only low
market penetration levels are achieved in any particular target market. EchoStar
has identified the following specific market segments as primary targets for
DBS:
NON-PASSED HOUSEHOLDS. One of the primary targets for EchoStar's DBS
services will be United States households with television sets that are not
presently passed by cable -- a total of approximately 11 million homes. Of
these, in excess of 2 million are former cable subscribers who have relocated
and do not currently subscribe because cable is unavailable to them at their new
residences. The subscribers who are unserved by cable are generally located in
sparsely populated rural and remote areas beyond the economic reach of cable
systems. These households also include second homes. This market presents an
opportunity for DBS providers because, unlike cable service, the economics of
delivering DBS service are not affected by population density or remoteness, and
the same service can be provided to subscribers in such areas on the same basis
as provided in densely populated urban areas. Although C-band satellite
television services are available throughout the country, EchoStar believes that
many non-passed households settle for local broadcasting due to the size and
cost of C-band satellite dishes. EchoStar believes that non-passed households
will respond favorably to the availability of programming services, especially
to economically priced DBS services and reception equipment.
HOUSEHOLDS PASSED BY CABLE. EchoStar also intends to target the 85 million
households that are passed by cable television, including the 20.4 million
households that are passed by cable systems offering limited channel capacity
(less than 39 channels). Although programming offerings of cable systems in
major metropolitan areas are significant, most cable systems have a typical
analog capacity of 30 to 80 channels. In order to expand their capacity to that
to be offered by the DISH Network-SM-, EchoStar believes that cable systems
would have to upgrade their analog networks to fiber-based digital service.
Fiber upgrade implementation is in progress in a few cable systems in select
metropolitan markets, with a resultant increase of channel capacity anticipated
to be available in five to ten years. Due to the substantial capital investment
required for widescale deployment of fiber-based services, several cable
companies have pushed back originally-announced deployment schedules.
66
EchoStar believes that consumers will continue to demand the improved audio and
video quality, and expanded programming offerings, that are currently available
with DBS technology, but not available from over-the-air VHF and UHF
broadcasters or from cable.
INTERNATIONAL AND CULTURAL MARKETS. There are approximately 8.0 million
households headed by persons of foreign nationality living in the United States,
encompassing 22.6 million foreign born persons living in the United States.
Generally, it is not cost effective for traditional broadcasters or cable
companies to provide targeted programming to these households due to the
generally low number of such niche customers in any particular local market.
These customers, along with other customers interested in receiving
international and other cultural programming, will be an important target market
for EchoStar. EchoStar's incremental cost to provide multicultural programming
is relatively insignificant given the ability of digital DBS service to utilize
a national delivery system for all mainstream and multicultural programming.
EchoStar believes that, by directly marketing international programming to these
customers, it will also sell more of its most popular programming.
MOBILE, COMMERCIAL AND INSTITUTIONAL MARKETS. Other target markets for DBS
services include mobile, commercial and institutional markets. Already, many
recreational vehicle owners have purchased C-band satellite dishes. Management
believes that lower equipment prices and the smaller dish size will attract many
more recreational vehicle owners to DBS service, similar to the current
experience in Europe. EchoStar also believes that businesses, hotels,
restaurants, schools, libraries, apartment buildings and other commercial and
institutional organizations will purchase EchoStar's DBS programming and
equipment in order to receive educational, foreign language and niche video and
audio programming. EchoStar also intends to market its DBS service to the marine
and other mobile markets requiring actuated systems.
BUSINESS COMMUNICATION NETWORKS. EchoStar also intends to target
professional and related business groups as potential markets for its
programming services. Such groups include multi-level marketing organizations
and legal, medical, accounting and real estate professionals, among others.
CURRENT EXPERIENCE OF DIGITAL DTH OPERATORS
The digital DTH satellite business in the United States has experienced
tremendous consumer acceptance. The introduction of DBS receivers is widely
regarded as the most successful introduction of a consumer electronics product
in U.S. history, surpassing the roll out of color televisions, VCRs and compact
disc players. During the 18 month period ended December 31, 1995, approximately
2.2 million U.S. households subscribed to digital DTH satellite service. DBS
providers have been successful penetrating households both passed and not passed
by traditional cable operators. According to one DBS service provider,
approximately 50% of its subscribers are passed by traditional cable operators.
Approximately 50% of those were actually subscribing to cable at the time they
chose to subscribe. EchoStar has also been encouraged by the willingness of
early DBS subscribers to pay relatively high monthly programming fees.
Subscribers are currently paying an average of approximately $50 per month for
DBS programming, as compared to approximately $33 per month for the average
cable subscription. According to an industry study performed during late 1995,
85% of all consumers are satisfied with DBS picture quality compared to a
consumer acceptance rate of approximately 47% for cable.
DBS AND RELATED SERVICES
PROGRAMMING
EchoStar currently offers over 100 channels of digital video and audio
programming directly to its subscriber base including, but not limited to, the
following:
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EXPANDED BASIC CABLE CHANNELS
USA................................. Original series, movies, high profile sports and
animated children's programming.
TBS................................. Movies, documentaries, comedies, children's shows and
sports, including the NBA and Atlanta Braves
baseball.
TNT................................. Classic and original movies, NFL and comprehensive NBA
schedule.
ESPN................................ Wide variety of sports programming including the NFL,
NHL and MLB.
CARTOON NETWORK..................... Programming from the Hanna Barbera cartoon library.
NICKELODEON......................... Top rated children's programming.
A&E................................. Cultural and entertainment programming.
LIFETIME............................ Movies, specials and feature films targeted to women.
CNN................................. In-depth news and commentary.
THE DISCOVERY CHANNEL............... Non-fiction entertainment and documentaries.
THE FAMILY CHANNEL.................. Family-oriented entertainment.
MTV................................. Music video and entertainment network.
SCI-FI CHANNEL...................... Science fiction, fantasy, classic horror and factual
science programming.
THE LEARNING CHANNEL................ Diverse mix of how-to, cooking, science, history and
educational shows.
CNBC................................ Late breaking market news and personal finance
information.
COURT TV............................ News from courtrooms around the world.
C-SPAN.............................. Coverage of U.S. congressional events and public
affairs.
ESPN2............................... Differentiated sports programming targeting younger
viewers, including the NHL.
HEADLINE NEWS....................... Concise, fast-paced 30 minute news updates.
CNN FN.............................. Comprehensive business and financial news.
CNN INTERNATIONAL................... International news, sports and weather.
TURNER CLASSIC MOVIES............... Movies, special features and entertainment.
E!.................................. Programming from the world of celebrities and
entertainment.
THE WEATHER CHANNEL................. Local, national and international weather.
THE TRAVEL CHANNEL.................. Video visits and travel information and advice.
VH-1................................ Music videos for adults and cultural programming.
COUNTRY MUSIC TELEVISION............ Contemporary country music hits.
EWTN................................ Continuous family-oriented and religious programming.
PREMIUM CHANNELS
DISNEY CHANNEL*..................... Animated Disney classics, original series,
entertainment specials and movies.
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HBO................................. Five channels of first run movies including award
winning originals, high profile sports and special
events and concerts.
CINEMAX............................. Three channels of popular movies.
SHOWTIME............................ Three channels of first run and original movies.
THE MOVIE CHANNEL................... Two channels of first run movies.
- ------------------------
*Included in all DISH Network-SM- programming packages which include America's
Top 40-SM-.
EchoStar offers a variety of value oriented programming packages. EchoStar's
America's Top 40-SM- programming package is priced at $19.99 per month. This
service level will include news, sports, general entertainment, movies, and
family programming, including The Disney Channel-Registered Trademark-, and is
attractively priced in relation to its competition. For price points ranging
from $29.99 to $39.99 per month, EchoStar offers its America's Top 40-SM-
package with one or more multiplexed premium services such as HBO-Registered
Trademark-, Cinemax-Registered Trademark-, The Movie Channel-Registered
Trademark- and Showtime-Registered Trademark-. Additional packages and
combinations include superstations, network programming and regional sports
offerings. EchoStar plans to package its EchoStar Receiver System and
programming and offer discounts to customers who purchase packages during
certain promotions.
To subscribe to the full complement of services offered by current DBS
service providers, including DirecTv and USSB, a consumer would be required to
pay approximately $65 per month. DirecTv predominately markets a package of
services available at a price point of $29.95 per month, although other packages
are available, including a more limited selection of "basic cable" channels for
$19.95. USSB predominately markets a tier of popular basic services for $7.95
per month and premium service packages ranging from $10.95 to $34.95 per month.
EchoStar's America's Top 40-SM- programming package includes the best of
DirecTv's and USSB's basic programming, plus The Disney Channel-Registered
Trademark-, for less than $20 per month. EchoStar offers comparable programming
for less than $50 per month. In addition, DISH Network-SM- subscribers receive a
single bill for all programming services while subscribers to DirecTv and USSB
receive two bills. Currently, DirecTv offers subscribers the NFL Sunday
Ticket-TM- and USSB offers Flix-TM-, both channels which are available to those
service providers on an exclusive basis. The suggested retail price to the
consumer of satellite receiver systems offered by EchoStar and DirecTv generally
are comparable. See "-- EchoStar Receiver Systems."
EchoStar's program offerings also include additional channels with regional
sports, niche programming, educational and cultural programming, shopping
services, pay-per-view options and certain subscriber selected programming. In
addition to these offerings, The DISH Network-SM- service includes: (i)
"Superstations," such as KTLA, WGN and WPIX; and (ii) network feeds of ABC, NBC
and CBS from various time zones plus Fox and PBS. With the launch of EchoStar
II, EchoStar expects to further expand its DISH Network-SM- program offerings to
include: (i) additional multiplexed premium services; (ii) additional regional
sports services; (iii) expanded pay-per-view options; (iv) out-of-market
professional and college sports programming; (v) international programs; and
(vi) niche programming, including business programming. EchoStar is finalizing
agreements with major production studios, including Disney, Paramount, Warner
Brothers, Columbia TriStar, Sony and Universal Studios, to provide pay-per-view
movies and events. EchoStar has dedicated six channels for pay-per-view movies
on EchoStar I, and expects to expand to 20 to 40 channels upon the successful
deployment of EchoStar II. Pay-per-view options may include first run movies,
live sporting and entertainment events. These video offerings are complemented
with compact disc quality audio programming provided by Muzak as well as library
and other data services, such as financial and weather information.
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ECHOSTAR RECEIVER SYSTEMS
DISH Network-SM- programming is available to any subscriber who purchases or
leases an EchoStar Receiver System. A typical EchoStar Receiver System includes
an 18-inch satellite receiver dish, a receiver, which processes and descrambles
signals for television viewing, a remote control and related components. The
EchoStar Receiver System is also fully compatible with local broadcast signals.
Households can receive local broadcast signals, either through a standard
television antenna (a traditional rooftop or set-top antenna) or by subscribing
to basic cable and can also switch between DBS signals and local programming
signals using the remote control. According to the industry research,
approximately 76% of DBS households currently receive local programming signals
from standard television antennas. Following the launch of EchoStar II, EchoStar
also expects to make available a system that will permit subscribers to watch
different channels on multiple televisions simultaneously. The suggested retail
price for an EchoStar Receiver System is currently between and $499 and $599,
depending on the model selected, among other factors. Dealer incentives and
EchoStar sponsored promotions may reduce the actual cost of an EchoStar Receiver
System below the suggested retail price. The initial capital cost required to
receive DISH Network-SM- programming may reduce the demand for EchoStar Receiver
Systems, since EchoStar Receiver Systems must be purchased, while cable and
certain of EchoStar's satellite competitors lease their equipment to the
consumer with little or any initial hardware payment required. EchoStar is
currently test marketing a special promotion in a limited number of markets
pursuant to which customers are able to purchase a discounted package, including
an annual programming package for $300, (which is comparable to the price for a
similar package of cable programming), and a EchoStar Receiver System for $199.
EchoStar believes the suggested retail price of a DSS-TM- satellite receiver
system for DirecTv programming is currently between approximately $499 and $799,
although special dealer incentives and promotions may decrease the cost to the
customer. Both service providers currently offer system financing to the
consumer.
Authorization information for subscription programming is expected to be
stored on microchips placed on a credit card-sized access, or smart card. The
smart card, which can easily be updated or replaced periodically at low cost,
provides a simple and effective method to authorize and deauthorize subscription
programming. If the receiver's smart card is authorized for a particular
channel, the data is decrypted and passed on for audio and video decompression.
After decompression, the digital audio and video are reconstructed into analog
format for display on a standard television set.
The EchoStar DBS System integrates a number of technological advances,
including digital audio and video compression. The combination of these elements
in the EchoStar DBS System is intended to provide the consumer with affordable
access to a broad spectrum of entertainment and informational products, home
shopping and similar services, educational services and databases.
EchoStar does not manufacture EchoStar Receiver Systems directly. Instead
EchoStar has contracted for the manufacture of EchoStar Receiver Systems with
high-volume contract electronics manufacturers. EchoStar has entered into
agreements with SCI and Sagem to manufacture MPEG-2 DBS receivers in quantities
which EchoStar believes will be adequate to meet anticipated demand during 1996.
EchoStar is also in negotiations with several brand name consumer electronics
manufacturers to produce receivers for use with the DISH Network-SM-.
EchoStar also acted as an agent for the sale of DBS programming offered by a
current DBS competitor through the end of 1995. EchoStar will continue to
distribute satellite receivers manufactured for that competitor's DBS system
("Competitor DBS Receivers") in 18 states until all current inventory is sold or
returned.
FINANCING
EchoStar offers consumers the opportunity to lease or finance their EchoStar
Receiver Systems, including installation costs and certain programming packages,
on competitive terms. EchoStar has agreements with major consumer finance groups
to make consumer credit available to EchoStar
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customers. All EchoStar financing is provided by third parties and is generally
non-recourse to EchoStar. Under EchoStar's revolving charge plan, customers are
issued a DISH-TM- private label credit card allowing them to increase service
levels at any time.
INSTALLATION
During 1994, EchoStar began increasing its presence in the DTH and
commercial satellite receiver installation business. Approximately 35 employees
were hired during 1995, and more are expected to be hired during 1996 if
anticipated demand for dependable high volume DTH and commercial satellite
installations materializes, and the number of experienced satellite retailers
continues to decline. By offering local satellite retailers the opportunity to
become associated with a nationwide installation group, EchoStar intends to make
installation business available to retailers that they would not otherwise have
the ability to obtain. Similarly, based on its industry strength, EchoStar
expects that businesses with nationwide installation needs will select EchoStar
for installation services.
OTHER COMPONENTS
SUBSCRIBER MANAGEMENT. EchoStar has entered into an agreement with Cable
Services Group, Inc. ("CSG") to provide subscriber management, billing and
remittance services for Dish Network-SM- subscribers. Under the terms of the
agreement, EchoStar is also provided with access to a subscriber management
system maintained by CSG which facilitates the authorization of particular
programming and the issuance of updated access cards, and coordinates billing
and renewal functions.
CUSTOMER CARE CALL CENTER. EchoStar has entered into an agreement with EDS
to provide customer call center operations. These operations complement those
currently managed by EchoStar, while greatly expanding service capacity.
Potential and existing subscribers can call a single phone number to receive
assistance for hardware, programming, installation or service.
DIGITAL BROADCAST CENTER. The first step in the delivery of satellite
programming to the customer is the uplink of that programming to the satellite.
Uplink is the process by which signals are received from either the programming
originator or distributor and transmitted to a satellite. EchoStar recently
constructed a digital broadcast center in Cheyenne, Wyoming that uplinks
programming to EchoStar's satellites. The digital broadcast center contains
fiber optic lines and downlink antennas to receive programming and other data at
the center, as well as a number of large uplink antennas and other equipment
necessary to modulate and demodulate the programming and data signals. The
compression and encryption of the programming signals will also be done at this
center.
The real estate underlying the digital broadcast center was deeded to a
subsidiary of EchoStar by a quasi-governmental economic development entity for
nominal consideration.
CONDITIONAL ACCESS SYSTEM. EchoStar has contracted with Nagra Plus, SA to
provide access control systems, as well as smart cards used with each EchoStar
Receiver System necessary to receive the authorization code. The access control
system is central to the security network that prevents unauthorized viewing of
programming. In the event the equipment or access control systems fail to
perform as intended, EchoStar's plan of operations would be adversely affected.
EchoStar believes the vendor it has chosen is highly qualified, and has
confidence that the access control system will adequately prevent unauthorized
access to programming. Further, the receiver has been designed with the
flexibility to completely change the access control system in the event of a
security breach. However, the technology is still relatively new and success is
not an absolute certainty. In the event that such systems or products fail to
operate as intended, EchoStar's business would be adversely affected if the
vendors could not rapidly implement corrective measures.
COMPRESSION SYSTEM. EchoStar has entered into an agreement with DiviCom,
Inc. to provide the necessary equipment to digitize, compress and encrypt the
analog signals transmitted by programmers to EchoStar's digital broadcast
center. Digitized signals are then multiplexed and modulated into
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an MPEG-2 transport stream for transmission to EchoStar's satellites. Once a
customer has ordered programming from EchoStar, an authorization code is
transmitted to the customer's satellite receiver, allowing the customer to
receive the programming within seconds after placing the order.
TRACKING, TELEMETRY AND CONTROL OF SATELLITES AFTER LAUNCH. Once a
satellite is placed at its orbital location, ground stations control it until
the end of its in-orbit lifetime. EchoStar has entered into an agreement with
AT&T to provide TT&C services with respect to EchoStar I and EchoStar II,
including orbital analysis and satellite engineering. The agreement terminates
upon the later to occur of December 31, 2005 or the end of the useful life of
EchoStar II. The agreement limits the liability of AT&T in the event it
negligently performs its services under the agreement or otherwise terminates
the agreement prior to the expiration of its term. It is expected that such
risks will be covered by in-orbit insurance; however, no assurances can be given
that such insurance can be obtained on commercially reasonable terms.
While TT&C services have not yet been procured for EchoStar III or EchoStar
IV, EchoStar believes that these services can be timely obtained from a number
of vendors.
DBS AND OTHER PERMITS
EchoStar's subsidiaries have been assigned 21 DBS frequencies at 119 DEG.
WL, one of the three U.S. licensed orbital slots that provide full CONUS
coverage. Of these frequencies, eleven are held by EchoStar Satellite
Corporation ("ESC"). Eleven of the 16 transponders on EchoStar I will be
utilized to operate those frequencies. Ten frequencies were acquired as a result
of a merger between DirectSat and a subsidiary of EchoStar, which was
consummated in December 1994. Ten of the sixteen transponders on EchoStar II
will be utilized to operate these frequencies. In addition, EchoStar has
received an STA from the FCC to operate the remaining five frequencies
(approximately 30 additional video channels for a total of approximately 100
video channels) on EchoStar I. The STA expires August 31, 1996 unless extended.
There can be no assurance that EchoStar will be permitted to operate the
additional five transponders after that period.
In addition to its frequencies at 119 DEG. WL, DirectSat has been assigned
11 frequencies at 175 DEG. WL, and EchoStar expects to be assigned an additional
ten frequencies at 175 DEG. WL provided the FCC finds that ESC has a firm
contract for the construction of a satellite at this orbital slot, but there can
be no assurance in this regard. While a firm business plan has not yet been
finalized, these frequencies could be used to provide a high power DBS service
to the Western continental U.S., Hawaii and Alaska, and could also be
potentially valuable as a link for the provision of programming between the
United States and the Pacific Rim, if FCC and ITU coordination can be arranged.
EchoStar currently owns approximately 40% of the outstanding common stock of
DBSC, which holds a conditional satellite construction permit and specific
orbital slot assignments for eleven DBS frequencies at each of 61.5 DEG. WL and
175 DEG. WL. EchoStar expects to acquire 100% of DBSC pursuant to the Merger.
The Merger has been approved by DBSC's shareholders. FCC Approval of the Merger
is also required, and has been applied for. The deadline for filing oppositions
to the Merger with the FCC was March 15, 1996. A timely objection to the Merger
was filed by the Consumer Project on Technology ("CPT"). CPT contended in its
objection that the Merger would permit EchoStar to acquire a dominant and
anticompetitive position in the DBS marketplace by aggregating an excessive
number of DBS channels. A letter objecting to the Merger was also filed
subsequently by the CPT and another public interest group. This letter raises
the same issues as the CPT's earlier objection. EchoStar believes that the FCC
has previously considered and rejected issues similar to the arguments raised by
CPT and that the filing of the CPT opposition does not materially decrease the
likelihood that the FCC will approve the Merger.
Assuming FCC approval and consummation of the Merger, EchoStar will hold,
through its DBSC subsidiary, the construction permit and slot assignments for
these frequencies. In connection with the Merger, EchoStar expects to issue
approximately 658,000 shares of its Class A Common Stock to DBSC shareholders in
exchange for all of the DBSC stock that it does not already own.
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ESC's, DirectSat's and DBSC's permits are subject to continuing due
diligence requirements imposed by the FCC. See "-- Governmental Regulation --
FCC Permits and Licenses." Each company's applications to extend their DBS
permits have been conditionally approved by the FCC and are subject to further
FCC and appellate review, but there can be no assurance that the FCC will
determine in the future that ESC, DirectSat or DBSC have complied with the due
diligence requirements. Failure to comply with due diligence requirements could
result in the revocation of DBS permits.
During January 1996, the FCC held an auction for 28 frequencies at the
110 DEG. WL orbital slot and 24 DEG. frequencies at the 148 DEG. WL orbital
slot. At the FCC Auction, EchoStar entered the high bid of $52.3 million to
acquire a DBS construction permit for the use of 24 frequencies at the 148 DEG.
WL orbital slot. To participate in the FCC Auction, EchoStar deposited $12
million with FCC. If the construction permit is granted, EchoStar will be
required to pay the remainder of the purchase price for the 148 DEG. WL orbital
slot. EchoStar will be required to complete construction of that satellite
within four years of the permit grant, and the satellite must be in operation
within six years of the grant.
EchoStar has an application pending before the FCC for a two satellite U.S.
FSS Ka-band system and a two satellite extended Ku-band satellite system.
EchoStar has been granted a license for a two satellite FSS Ku-band system,
which is conditioned on EchoStar making an additional financial showing. There
can be no assurance the FCC will consider EchoStar's additional showing to be
adequate. If the pending applications are granted, and EchoStar successfully
constructs and launches FSS, extended Ku-band and Ka-band satellites, those
satellites might be used to complement EchoStar DBS System programming, or for a
variety of other uses. It is possible that the unique FSS Ku-band and Ka-band
orbital locations requested by EchoStar and others could permit construction of
satellites with sufficient power to allow dish sizes comparable to DBS. All of
these projects are in an early stage of development and there is no assurance
that EchoStar's applications will be granted by the FCC or that, if granted,
EchoStar will successfully exploit the resulting business opportunities. All of
these applications are currently being challenged by several companies with
interests adverse to EchoStar's.
An 80% owned subsidiary of EchoStar has applied for construction permits and
authorizations to operate a six satellite low earth orbit satellite system.
While primary applications for that system are unrelated to DBS, it is possible
that the system could serve as a path for wireless communication with EchoStar
DBS customers, particularly for periodic polling of units for pay-per-view
purchases and relative rapid feedback on viewer pay-per-view buy rates and
preferences. This project is in an early stage of development and there is no
assurance that EchoStar's application will be granted by the FCC or that, if
granted, EchoStar will successfully exploit the resulting business opportunity.
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THE SATELLITES
EchoStar I and EchoStar II are Martin Marietta Series 7000 satellites
equipped with 16 Ku-band transponders, each with 130 Watts of power,
approximately eight times the power of typical C-band transponders. EchoStar III
is a Marietta Series 2100AX satellite equipped with 3,840 Watts of power which
can be divided among 16 to 32 Ku-band transponders. Each transponder will be
capable of handling analog video channels or multiple digital video, audio and
data channels. The satellites have a minimum design life of 12 years and an
estimated orbital life of 15 years or more if optimally deployed. The Satellite
Contracts provide for the construction and delivery of multiple high powered DBS
satellites and related services.
All pre-launch payments due to Martin Marietta with respect to EchoStar I
and EchoStar II were made. The remainder of the aggregate purchase price for
each satellite is required to be paid, with interest at the prime rate, over a
period of five years after the delivery and launch of each satellite (the
"Deferred Payments"); provided, however, if EchoStar II is not launched within
180 days after delivery by Martin Marietta, EchoStar is required under the
Satellite Contracts to begin making the Deferred Payments. The majority of the
purchase price for EchoStar III is required to be paid in monthly payments
during construction. Deferred Payments in an amount approximately equal to 20%
of the aggregate Deferred Payments for EchoStar I and EchoStar II, are also
available for EchoStar III on similar terms.
The contracts for construction of EchoStar I and EchoStar II contain clauses
providing for penalties for late delivery by Martin Marietta of the satellites.
EchoStar is currently negotiating the contract provisions to determine what, if
any, penalties will be paid by Martin Marietta for any late delivery.
Except under limited circumstances, Martin Marietta generally owns each
satellite it constructs for EchoStar, and the components thereof, until the
launch of each satellite. As security for the portion of the Deferred Payments
due to Martin Marietta with respect to EchoStar I and EchoStar II, Dish, Ltd.
has: (i) granted to Martin Marietta a security interest in substantially all
assets of Dish, Ltd. and its subsidiaries, other than the stock of the
subsidiaries and proceeds derived from the sale of the 1994 Notes, subordinate
to the first security interest in the assets of ESC granted to the Trustee under
the 1994 Indenture, and to the liens granted to any commercial bank which
provides a revolving credit facility to Dish, Ltd., except that such security
interest ranks PARI PASSU with the security interest in the assets of ESC
granted for the benefit of the holders of the 1994 Notes with respect to $30.0
million of the Deferred Payments; and (ii) caused Dish, Ltd. and its
subsidiaries to guarantee payment in full of the Deferred Payments. Following
any default on the Deferred Payments, Martin Marietta is prohibited from
realizing on any of the collateral for a period of at least five years following
consummation of the 1994 Notes Offering, and in any event for 180 days following
such default. Martin Marietta also has a security interest in certain assets of
EchoStar's subsidiaries other than ESC, which lien ranks senior to the lien on
such assets granted for the benefit of the holders of the 1994 Notes.
Thirty days prior to launch, EchoStar will also be required to provide
Martin Marietta with adequate security for the EchoStar III Deferred Payments.
SATELLITE LAUNCHES
EchoStar has entered into a contract for Arianespace to launch EchoStar II
from Korou, French Guiana in September 1996 (the "Arianespace Contract"). The
Arianespace Contract also provides the potential for the EchoStar launch to
occur during August 1996 if earlier scheduled launches are accelerated or
delayed. The Arianespace Contract contains provisions entitling either party to
delay the launch in limited circumstances, subject to the payment of penalties
in some cases. Pursuant to the Arianespace Contract, as of July 8, 1996,
EchoStar has paid approximately $60.8 million to Arianespace.
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EchoStar has the right, in its sole discretion, to terminate the Arianespace
Contract at any time subject to forfeiture of certain amounts paid to
Arianespace. In addition, EchoStar has the right to terminate the Arianespace
Contract and receive a full refund of all amounts paid to Arianespace if the
total launch delays caused by Arianespace exceed certain periods specified in
the Arianespace Contract.
The launch is nominally scheduled to be performed on a dedicated Ariane-4
launch vehicle. Ariane is generally perceived by the international launch
insurance community as being among the most reliable launch providers today and
the success rate for Ariane-4 launches is higher than industry norms. This
launch vehicle has a success rate of over 90%. The launch of Arianespace's new
Ariane-5 launch vehicle, on June 4, 1996, was not successful. The Ariane-5
launch vehicle is significantly different than the Ariane-4 launch vehicle.
Although the specific cause of the Ariane-5 launch failure has not been
determined, if it is determined that the launch failure is unrelated to
Ariane-4, EchoStar does not believe that the launch failure of the Ariane-5
launch vehicle will delay the launch of EchoStar II. However, any significant
delay in the launch of EchoStar II would have an adverse effect on EchoStar.
EchoStar II was originally schedule to be launched by Great Wall. EchoStar I
was successfully launched by Great Wall in December 1995. The total price for
the Great Wall launch was approximately 60% of the Ariane launch price. Payments
will be due monthly, and in contrast to the Great Wall launch, all payments to
Ariane will be due prior to the launch date.
EchoStar notified Great Wall of its decision to terminate the launch of
EchoStar II with Great Wall. EchoStar applied $15.0 million previously paid
Great Wall in connection with this launch to the final $15.0 million owed Great
Wall related to the launch of EchoStar I. In May 1996, EchoStar received a
refund of the remaining $4.5 million previously paid Great Wall in connection
with the second launch.
EchoStar has entered into a contract for launch services with Lockheed for
the launch of EchoStar III from Cape Canaveral Air Station, Florida during the
period of September 1997 through November of 1997, subject to delay or
acceleration in certain circumstances (the "Lockheed Contract"). The Lockheed
Contract provides for launch of the satellite utilizing an Atlas IIAS launch
vehicle. As of June 30, 1996, EchoStar has made the initial payment of $5.0
million and the remaining price is payable in installments in accordance with
the payment schedule set forth in the Lockheed Contract. Under that schedule,
substantially all of the price is required to be paid before the launch.
EchoStar has the right, in its sole discretion, to terminate the Lockheed
Contract at any time subject to forfeiture of certain amounts paid to Lockheed.
In addition, EchoStar has a right to terminate the Lockheed Contract and receive
a full refund for all amounts paid to Lockheed if the total launch delays
(except certain excusable delays) caused by Lockheed exceed 12 months.
EchoStar has contracted with LKE for the launch of an additional satellite
during 1998 from the Kazakh Republic, a territory of the former Soviet Union,
utilizing a Proton launch vehicle. Either party may request a delay in the
relevant launch period, subject to the payment of penalties based on the length
of the delay and the proximity of the request to the launch date.
EchoStar has the right, in its sole discretion, to terminate the LKE
Contract at any time, subject to the forfeiture of certain amounts paid to LKE.
In addition, EchoStar has the right to terminate the LKE Contract and receive a
full refund of all amounts paid to LKE in certain circumstances, including: (i)
a launch delay caused by LKE which exceeds nine months from the last day of the
original launch period; (ii) an increase in the price or change in payment or
other terms necessitated by compliance with, or implementation of, the trade
agreement between the United States and Russia; (iii) EchoStar's inability to
obtain necessary export licenses; (iv) the failure of Proton launch vehicles;
and (v) EchoStar's inability to procure launch insurance on commercially
reasonable terms. In the
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event termination of the LKE Contract is caused by the failure of Proton launch
vehicles, however, LKE would be entitled to retain up to $15.0 million,
depending on the number and proximity of Proton failures to EchoStar's scheduled
launch.
EchoStar expects to launch on a Proton D-le four stage launch vehicle. Astra
1F, the first commercial launch on a Proton D-le, was successfully launched on
March 27, 1996. LKE currently has contracts providing for the launch of at least
five non-EchoStar western satellites through 1997.
INSURANCE
Under the terms of the Satellite Contracts, Martin Marietta bears the risk
of loss of the EchoStar satellites during the construction phase up to launch.
At launch, title and risk of loss pass to EchoStar, at which time the launch
insurance becomes operative. EchoStar contracted for launch insurance coverage
for each of EchoStar I and EchoStar II in the amount of $219.3 million and,
together with the cash segregated and reserved on its balance sheet, satisfied
its current insurance obligations under the 1994 Indenture. While there can be
no assurance, EchoStar believes its launch insurers will permit substitution of
Arianespace for Great Wall as the launch provider for EchoStar II.
Thirty days prior to the launch of EchoStar II, EchoStar is required to
certify to the Trustee under the 1994 Indenture that it has launch insurance,
cash and cash equivalents in an amount at least equal to one-half of the
accreted value of the 1994 Notes then outstanding plus the amount of Deferred
Payments with respect to the satellite.
The launch insurance policy covers the period between launch through
completion of testing and commencement of commercial operations. The policy
protects against losses resulting from the failure of a satellite to achieve its
proper orbit parameters or to perform in accordance with the satellite's
operational performance parameters. The 1994 Indenture also requires in-orbit
insurance to be kept in force for EchoStar I and EchoStar II in specified
amounts.
The launch insurance policy contains, and the insurance policy with respect
to in-orbit operation is expected to contain, standard commercial satellite
insurance provisions, including a material change condition, that would result
in the cancellation of insurance or alter the effective rate depending upon the
success or failure of other launches by Arianespace, and customary exclusions,
including for: (i) military or similar actions; (ii) laser, directed energy, or
nuclear anti-satellite devices; (iii) insurrection and similar acts; (iv)
governmental confiscation; (v) nuclear reaction or radiation contamination; (vi)
willful or intentional acts of EchoStar or its contractors; (vii) loss of
market, loss of revenue, extra expenses, incidental and consequential damages;
and (viii) third-party claims against EchoStar.
EchoStar has procured insurance for the launch of EchoStar III or EchoStar
IV. The 1996 Indenture requires EchoStar to obtain in-orbit insurance for
EchoStar III, in an amount equal to the cost to construct, launch and insure
EchoStar III (in the case of in-orbit insurance with a deductible no greater
than 20%).
OTHER PRODUCTS AND RELATED SERVICES
EchoStar currently offers a broad range of products, from approximately $250
DTH systems in Europe that can receive signals from only one or two co-located
satellites, to approximately $3,000 systems at retail that are capable of
receiving signals from 20 or more satellites. Principal product lines include
EchoStar-Registered Trademark-, HTS Premier-TM- and HTS Tracker-TM- name brands,
with good, better and best options typically available for each line and each
geographic reception area. EchoStar sold approximately 462,000 satellite
receivers worldwide in 1995. EchoStar's sales of DTH products are somewhat
seasonal, with higher domestic sales normally occurring in the late summer and
fall months in advance of increased consumer programming demand during the fall
and winter months.
DOMESTIC
Satellite retailers have historically sold large C-band satellite receiver
systems to consumers in rural areas through store fronts or small home-based
businesses. The decline in the number of
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conventional satellite retailers in the United States, which form the core of
EchoStar's distribution system, was significant during 1995 and is expected to
continue in 1996 as a result of competition from the sale of DBS systems through
consumer electronic outlets. Those satellite retailers which are not marketing
DBS systems may be particularly vulnerable. However, new satellite retailers
continue to enter the market, which partially offsets the decline.
INTERNATIONAL
EchoStar's international product line includes a broad range of DTH and
commercial satellite equipment and accessories, including satellite receivers,
integrated receiver decoders, antennas, actuators, feeds and LNBs. During 1995,
the equipment was distributed, primarily with the EchoStar-Registered Trademark-
brand name, through EchoStar's distribution centers. EchoStar's products are
tailored to each country's standard television formats. In addition, on-screen
instructions and pre-programmed channels are available in a variety of
languages. EchoStar's international receivers can process C-band and Ku-band
signals with both 110- and 240-volt power sources and have been designed to
withstand the fluctuating power sources often found in developing countries.
PROGRAMMING
Since 1986, EchoStar has acquired programming directly from top programmers,
and packaged and distributed that programming throughout the United States to
C-band system users through EchoStar's independent retailer network. EchoStar
has nonexclusive affiliation agreements for the distribution of most top
programming available from domestic satellites, including CNN-Registered
Trademark-, USA-Registered Trademark-, ESPN-Registered Trademark-, TBS-TM-, The
Discovery Channel-Registered Trademark-, TNT-TM-, HBO-Registered Trademark-,
Showtime-Registered Trademark-, MTV-Registered Trademark-, A&E-Registered
Trademark-, The Disney Channel-Registered Trademark-, national networks,
"Superstations" and other "best of cable" programming.
FINANCING
Through financing arranged by EchoStar, consumers are able to finance their
DTH-related product and service home entertainment purchases in a single
package. Credit approval is often granted while customers are still in a
dealer's showroom, and funds are customarily forwarded to dealers within 24
hours of receiving the original completed loan documents. EchoStar's consumer
financing arrangement allows "one-stop shopping" for equipment, programming and
installation services, while avoiding many of the risks inherent in financing
consumer receivables.
EchoStar also offers an option to lease DTH-related equipment for up to a
seventy-two month period, and to obtain programming during the lease term, for
one fixed monthly payment. The leases contain an annual purchase option allowing
the customer to purchase the equipment for a predetermined amount. The lease
program helps EchoStar compete more effectively and thereby increase sales and
customer loyalty.
SALES AND MARKETING
DBS
EchoStar has developed a comprehensive marketing strategy designed to
promote the EchoStar DBS System under the DISH Network-SM- brand name and
distinguish itself from cable and other DBS providers. The first phase of the
strategy is designed to build market awareness of the DISH Network-SM-,
reinforce EchoStar's historical presence in the satellite industry and focus the
market's attention on EchoStar's goal of "A Dish in Every Home."
EchoStar's marketing strategy includes national and regional broadcast and
print advertising, promoting the benefits of the DISH Network-SM-, to support
the initial nationwide product rollout. EchoStar has engaged a national
advertising agency to develop, produce and place all radio, television and print
advertising spots. The media campaign is expected to begin during mid-1996. In
addition, comprehensive dealer guides describing all aspects of the DISH
Network-SM- and its integrated product lines (programming, hardware, financing
and installation) will be delivered to distributors during nationwide
educational seminars. EchoStar will continue offering a high level of retail
support, and will provide comprehensive point of sale literature, product
displays, demonstration kiosks and signage for retail outlets. EchoStar also
provides a promotional channel as well as a programming
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subscription for in-store viewing. EchoStar's mobile sales and marketing team
will visit retail outlets on a regular basis to reinforce training and ensure
point-of-sale needs are quickly fulfilled. A DISH Network-SM- merchandise
catalogue will also be available for distributors to add to their promotional
materials.
EchoStar offers a commission program that it believes is competitive with
that offered by other DTH operators. The program pays qualified distributors and
retailers a percentage of programming revenues generated by subscribers to whom
they sell EchoStar Receiver Systems. Commissions will be earned by distributors
and retailers over an extended period and will be paid regularly.
Following the initial nationwide launch of service, EchoStar will continue
to place national and regional broadcast and print advertisements, provide
retail support, and offer co-operative marketing campaigns with distributors on
an ongoing basis. One channel of programming is provided on the DISH Network-SM-
to educate subscribers on additional services and promotions.
EchoStar intends to utilize its existing nationwide network of approximately
3,000 independent distributors and retailers to market and distribute EchoStar
Receiver Systems and programming services to its target markets. EchoStar also
intends to distribute EchoStar Receiver Systems through consumer electronics
outlets in conjunction with brand name consumer electronics manufacturers, or
under its own brand name. EchoStar also intends to expand into other, less
traditional distribution channels. Based on its knowledge of these distribution
channels from its marketing of C-band DTH products and services domestically
over the last 15 years and its marketing of DBS products in Europe and the
United States, EchoStar believes it will be able to optimize the marketing of
its DBS products and services to distinguish itself from other DBS suppliers.
Considerable consumer education was required to develop the market for DBS
service. The initial entrants into the DBS market have incurred the greatest
educational burden because they introduced DBS to consumers.
OTHER PRODUCTS AND SERVICES
EchoStar's DTH sales and marketing efforts are concentrated in three
geographic regions: the Americas, Europe and Asia. The corporate marketing
department, located at EchoStar's corporate headquarters in Englewood, Colorado,
supports regional efforts by coordinating research, strategy, promotion,
pricing, advertising and new product development. EchoStar focuses on marketing
and distributing its DTH products and services, programming services and
consumer financing services through its independent retailer network. EchoStar
also provides its independent retailer network with marketing support ranging
from cooperative advertising funds to customized advertising campaigns.
RESEARCH AND DEVELOPMENT AND MANUFACTURING
Satellite receivers designed by EchoStar's research and development group
have won numerous awards from dealers, retailers and industry trade
publications. EchoStar's research and development personnel focus on shaping the
EchoStar-Registered Trademark- and HTS-TM- product lines to meet specific
consumer needs and to compete effectively against products designed and
manufactured by larger consumer electronics companies. In addition to overseeing
the manufacture of its own products, EchoStar has also acted as the original
equipment manufacturer of satellite receivers for other large retailers and
manufacturers. EchoStar's quality assurance standards require all
EchoStar-Registered Trademark- product models to undergo extensive testing.
EchoStar also sets and enforces product design and quality assurance
requirements at non-EchoStar manufacturing facilities in the United States,
France, Hong Kong, Korea, China, Malaysia, India and the Philippines.
COMPETITION
Each of the businesses in which EchoStar operates is highly competitive.
EchoStar's existing and potential competitors comprise a broad range of
companies offering video, audio, data, programming and entertainment services.
EchoStar also faces competition from companies offering products and services
that perform similar functions, including companies that offer hardwire cable
television
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products and services, wireless cable products and services, DTH products and
services, as well as DBS programming and other satellite programming, and
companies developing new technologies. Many of EchoStar's competitors have
substantially greater financial and marketing resources than EchoStar. EchoStar
expects that quality and variety of programming, quality of picture and service
and cost will be the key bases of competition. See "Special Considerations --
Competitive Nature of the Industry."
DBS INDUSTRY
CABLE TELEVISION. Cable television service is currently available to
approximately 90% of the approximately 96 million U.S. television households.
The cable television industry in the United States currently serves
approximately 61 million subscribers, representing approximately 64% of U.S.
television households. As an established provider of programming, cable
television is a formidable competitor for many programming services, offering 30
to 80 channels at an average monthly subscription price of approximately $33.
While cable companies service a majority of the United States television
households today, EchoStar believes the cost to cable companies to upgrade their
coaxial systems to offer expanded digital video and audio programming similar to
that to be offered by DBS operators will be at least $500 per subscriber, or
approximately $30.5 billion nationwide. Upgrading those systems to fiber optic
technology could require a substantially greater investment. Such upgrades, if
undertaken, are expected to take five to ten years to complete industry-wide. As
a result, EchoStar believes that there will be a substantial delay before cable
systems can offer programming services equivalent to satellite television
providers on a national basis and that many cable systems may never be upgraded.
EchoStar intends to specifically target markets served by such systems.
The DISH Network-SM- will encounter a number of difficulties competing with
cable television technology and substantial competition is expected in the
overall market for television households. Cable television has an entrenched
position in the domestic consumer marketplace. EchoStar believes that
anticipated advances of cable television, such as interactivity and expanded
channel capacity, may not be widely available in the near term at a reasonable
cost to the consumer. If the substantial capital costs of those advances, when
available, are passed on to the consumer, it will ultimately enhance the
attractiveness of low cost DBS programming.
Up-front costs are also a potential disadvantage of a DBS system. Although
the initial retail price of an EchoStar Receiver System is currently between
approximately $499 and $599, depending on the features selected by the customer,
among other factors, EchoStar believes that technological advances and market
growth of DBS will eventually reduce the retail cost of DBS receiving equipment.
EchoStar intends to mitigate this disadvantage by offering lease and finance
options structured to produce minimum monthly payments competitive with cable
rates. In addition, dealer incentives and EchoStar sponsored promotions may
reduce the actual cost of an EchoStar Receiver System below the suggested retail
price. The initial cost required to receive Dish Network-SM- programming may
reduce the demand for EchoStar Receiver Systems, since EchoStar Receiver Systems
must be purchased, while cable and certain of EchoStar's satellite competitors
lease their equipment to the consumer with little if any initial hardware
payment required. EchoStar is currently test marketing a special promotion in a
limited number of markets pursuant to which customers are able to purchase a
discounted package, including an annual programming package for $300, (which is
comparable to the price for a similar package of cable programming), and an
EchoStar Receiver System for $199. If EchoStar elects to expand the promotion
nationwide for an extended period, or if market conditions force it to do so,
the initial capital investment relative to cable will be greatly reduced, but
EchoStar's subscriber acquisition costs will substantially increase.
Since reception of DBS signals requires line of sight to the satellite, it
may not be possible for some households served by cable to receive DBS signals.
In addition, the DISH Network-SM- will not be available to households in
apartment complexes, or other multiple dwelling units that do not facilitate or
allow the installation of the EchoStar Receiver System.
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Many of the largest cable systems in the United States have announced plans
to offer access to telephony services through their existing cable equipment,
and have entered into agreements with major telephony providers to further these
efforts. In some cases, certain cable systems have actually commenced trials. If
these trials are successful, many consumers may find cable service to be more
attractive than DBS for the reception of programming.
OTHER DBS OPERATORS. In addition to EchoStar, several other companies have
DBS authorizations and are positioned to compete with EchoStar for home
satellite subscribers. DirecTv has channel assignments at what is recognized as
a strategic orbital slot due to its position over the central United States.
DirecTv successfully launched its first DBS satellite in December 1993, its
second satellite in August 1994 and a third satellite in June 1995 as an
in-orbit spare. That satellite might also be operated by DirecTv to provide
additional capacity, thereby making DirecTv more attractive to potential
consumers. USSB owns five transponders on DirecTv's first satellite and offers a
programming service separate from DirecTv's service, with programming not
available from DirecTv. Affiliates of the National Rural Telecommunications
Cooperative have acquired territories in rural areas of the United States as
distributors of DirecTv programming.
AT&T and DirecTv have an exclusive agreement for AT&T to market and
distribute DirecTv's DBS service. As part of the agreement, AT&T made an initial
investment of approximately $137.5 million to acquire 2.5% of the equity of
DirecTv with an option to increase its investment to up to 30% over five years.
This agreement provides a significant base of potential customers for the
DirecTv DBS system and allows AT&T and DirecTv to offer customers a package of
digital entertainment and communications services. As a result, EchoStar is at a
competitive disadvantage marketing to these customers. AT&T and DirecTv also
announced plans to jointly develop new multi-media services for DirecTv under
the agreement. The AT&T and DirecTv agreement will increase the competition
EchoStar encounters in the overall market for pay television customers.
In the FCC Auction, MCI entered the winning bid of $682.5 million to acquire
the permit for 28 of 32 frequencies at the 110 DEG. WL orbital slot. MCI and
News announced that they have formed a joint venture to build and operate a DBS
system at 110 DEG. WL. The permit will give MCI and News the capacity to offer
over 200 channels of digital video programming. MCI is expected to take
responsibility for developing business communication services and News is
expected to be responsible for consumer services. MCI and News expect that
building and launching the satellites for their system will cost an additional
$1 billion and that DBS services will be offered to consumers and businesses in
approximately two years. However, if MCI and News acquire satellites which have
already been constructed, service could begin sooner. MCI and News have
substantially greater resources than EchoStar and their joint venture will
increase the competition EchoStar encounters in the overall market for pay
television customers.
PrimeStar currently offers medium power Ku-band programming service to
customers using dishes approximately three feet in diameter. In addition,
PrimeStar is believed to be the programming operator that will utilize existing
DBS authorizations of Tempo DBS, Inc. ("Tempo"). TCI, which is the largest cable
television company in the United States, is currently constructing two
satellites that will be ready for launch in 1996 and either of which could be
utilized to offer DBS service from Tempo's orbital slot at 119 DEG. WL.
PrimeStar has the right to offer DBS programming services from these satellites.
Alternatively, PrimeStar may offer FSS service via its satellites provided by GE
Americom or others. In mid-1994, TCI and Tempo entered into an agreement with
Advanced Communications Corporation ("Advanced") whereby Tempo would purchase
Advanced's FCC permit at 110 DEG. WL and lease the capacity available under the
permit to PrimeStar. In October 1995, however, the FCC revoked Advanced's permit
and announced its intention to auction Advanced's DBS channels in January 1996.
Appeals are currently pending relating to the FCC's action and EchoStar is
unable to predict the outcome of such litigation. It is possible Advanced or
other parties may prevail in their appeals challenging the FCC's decision to
reclaim Advanced's frequencies at 110 DEG. WL and 148 DEG. WL and, if they do,
any award of a construction permit by virtue of the FCC Auction may be
rescinded. If
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PrimeStar successfully launches a high-power DBS satellite, it will become a
more significant competitor, as it would have the ability to offer its
programming through a high-power DBS system similar to that to be offered by
EchoStar. If PrimeStar does not exercise its right, it is expected that TCI will
use these satellites to directly enter the DBS programming business, and may
launch satellites capable of providing service to the continental United States
during 1996. EchoStar is at a competitive disadvantage to PrimeStar with regard
to market entry, programming and, possibly, volume discounts for programming
offerings, particularly if programming vendors aggregate PrimeStar's DBS
customers and cable customers of the PrimeStar partners to obtain volume
discounts from programming vendors.
DirecTv, USSB and PrimeStar have instituted aggressive promotional campaigns
marketing their respective DBS and Ku-band service. Their marketing efforts have
focused on the breadth of popular programming and cost of service. In the case
of DirecTv and USSB, their marketing efforts have been joined by AT&T, RCA, Sony
Electronics, Inc. and other manufacturers which market DBS receivers and related
components. Several other manufacturers have begun or are expected to begin
manufacturing such equipment, including Uniden America Corp., Toshiba America
Consumer Products, Inc. and Hughes Network Systems, Inc. PrimeStar currently
offers a lease program whereby consumers can lease a PrimeStar system for as
little as approximately $1.00 per day (including approximately thirty channels
of programming). PrimeStar's lease program is widely credited for the recent
success of PrimeStar's Ku-band service. EchoStar currently expects to offer a
comparable program to finance or lease an EchoStar Receiver System.
DirecTv and USSB together offer over 150 channels of DBS video programming.
EchoStar currently has the capacity to provide approximately 100 channels of
video programming, increasing to at least 125 channels of video programming at
the time EchoStar II is fully operational. Due to their substantially greater
resources, earlier market entry, greater number of channels, manufacturing
alliances with low cost, high volume manufacturers with established retail
distribution, possible volume discounts for programming offerings, and, in the
case of PrimeStar, relationship with cable programmers, EchoStar is at a
competitive disadvantage to DirecTv, USSB and PrimeStar. EchoStar believes that
it can successfully compete with these companies given, among other things,
EchoStar's: (i) lower cost structure; (ii) programming strategy; (iii)
established dealer network; (iv) second generation digital technology, which
incorporates world standard full MPEG-2 technology; and (v) intent to license
the manufacture of EchoStar Receiver Systems to multiple manufacturers.
According to trade publications, as of December 31, 1995, DirecTv had
approximately 1.2 million subscribers, approximately one-half of whom subscribed
to USSB programming, and PrimeStar had approximately 1.0 million subscribers. As
a result of the success achieved by each of these programming providers,
EchoStar may find it difficult to successfully compete and attract sufficient
subscribers to achieve profitability.
During March 1996, AlphaStar Television Network which is owned by Tee-Comm,
began offering DTH programming in the United States on a limited basis, and
intends to expand to 120 channels later this year, and 200 channels by the end
of 1997. The service uses MPEG-2/DVB digital compression technology to receive
medium power Ku-band signals via 24 to 36 inch dishes. Although compliance with
certain regulatory requirements is necessary for the commencement of service by
a Canadian company, the entry of an additional programming provider will result
in additional competition for subscribers.
The FCC indicated that it intends to apply to the ITU for additional orbital
locations for use to provide DBS service to the United States. Canada, Mexico
and other countries hold the rights to DBS orbital slots which are capable of
providing service to the United States. If the FCC moves forward with this
initiative or if other countries authorize DBS providers to utilize their
orbital slots to serve the United States, additional competition could be
created, and EchoStar's spectrum could become less valuable. At this time,
EchoStar cannot predict whether the FCC will move forward with this
81
initiative, whether other countries will authorize DBS providers to utilize
their orbital slots to serve the United States or whether the FCC initiative or
authorizations by other countries will ultimately result in any additional
service to the United States.
The FCC on January 22, 1996, announced its decision to authorize U.S.
licensed FSS operators which currently operate internationally to provide wholly
domestic service in the United States. The FCC also announced its intention to
address at a later date issues relating to the provision of wholly domestic U.S.
service by signals originating in foreign countries, whether via U.S. or
non-U.S. satellites. In the event U.S. licensed FSS operators which currently
operate internationally decide to provide programming wholly in the United
States or that non-U.S. licensed operators are permitted to provide programming
to the United States, the number of competitors offering DTH service in the
United States may increase.
WIRELESS CABLE AND OTHER MICROWAVE SYSTEMS. There are approximately 180
wireless cable systems presently operating in the United States. Wireless cable
served approximately 710,000 subscribers at the end of 1995. Typically, these
systems offer 20 to 40 channels of programming, which may include local
programming; however, these systems will require large capital expenditures to
upgrade to digital compression technology to compete effectively with DBS.
Wireless cable also requires direct line of sight from the receiver to the
transmitter tower, which creates the potential for substantial interference from
terrain, buildings and foliage in the line of sight. Certain wireless cable
companies may become more competitive as a result of recently announced
affiliations with telephone companies. Bell Atlantic Corporation and NYNEX
Corporation have invested $100 million in CAI Wireless Systems, Inc. Also,
Pacific Telesis Group has purchased 100% of the equity of Cross Country
Wireless.
TELEPHONE COMPANIES. Certain regional telephone operating companies and
long distance telephone companies could become significant competitors in the
future, as they have expressed an interest in becoming subscription television
and information providers. The legislation recently passed by Congress permits
these local telephone companies to provide high-power DBS service, although any
telephone company desiring to become a high-power DBS broadcaster would still
need to obtain an FCC license for an available orbital location. Certain
telephone companies have received authorization to begin test marketing video
and other services to their customers in limited geographic areas using fiber
optic cable and digital compression over existing telephone lines. The
legislation recently passed by Congress removes barriers to entry which
previously inhibited, or made it more difficult, for telephone companies to
compete in the provision of video programming and information services. As more
telephone companies begin to provide cable programming and other information and
communications services to their customers, additional significant competition
for subscribers will develop. Among other things, telephone companies have an
existing relationship with substantially every household in their service area,
substantial economic resources, and an existing infrastructure and may be able
to subsidize the delivery of programming through their position as the sole
source of telephone service to the home.
VHF/UHF BROADCASTERS. Most areas of the United States are covered by
traditional terrestrial VHF/UHF broadcasts that typically offer three to ten
channels. These broadcasters are often low to medium power operators with a
limited coverage area and provide local, network and syndicated programming. The
local content nature of the programming may be important to the consumer, and
VHF/UHF programming is typically free of charge. Congress is expected to
consider the release of additional digital spectrum for use by these
broadcasters later this year.
DTH INDUSTRY
DTH PRODUCTS. EchoStar faces competition in the sale of satellite receivers
in North America from other manufacturers and from other distributors. The North
American market is dominated by EchoStar, General Instrument Corporation and
Uniden America Corp.
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Most major manufacturers of satellite receivers in North America offer a
variety of models, from relatively low priced units to more expensive receivers
with a greater number of features. There are few patented components in DTH
systems. Competition in the sale of DTH products occurs primarily on quality,
price, service, marketing and features. EchoStar believes that it generally
competes effectively in all of these areas. In recent years, EchoStar has
consistently been highly rated in most of these categories by polls conducted by
industry trade publications.
EchoStar also faces competition in the distribution of DTH systems from
approximately 30 distributors in North America. The large number of distributors
creates intense competition, primarily on price, marketing and service. EchoStar
responds to that competition by offering 24-hour turnaround time on repairs,
same day order fulfillment and what it believes to be one of the top satellite
retailer incentive programs in the industry.
In addition, EchoStar competes against DBS technology and medium power
Ku-band DTH systems. DBS and medium power Ku-band satellites use Ku-band
frequencies that can be received by significantly smaller dishes and less
expensive systems than C-band satellite systems. As a result of the smaller dish
size, DBS and medium power Ku-band systems are more widely accepted than C-band
systems, particularly in urban areas. DBS and medium power Ku-band competition
have negatively affected, and will continue to negatively affect, C-band sales.
However, EchoStar believes that many consumers may continue to choose to
purchase C-band systems for the next several years because of the remaining
orbital life of existing C-band satellites, the amount and quality of
programming available and the continuing marketing efforts by programmers and
others designed to attract and retain C-band subscribers, among other factors.
The decline in the number of C-band sales by EchoStar was partially offset in
1994 and 1995 by the sale of Competitor DBS Receivers, which EchoStar
distributed in 18 states.
Internationally, EchoStar competes against a variety of manufacturers and
distributors in different countries. In certain regions, EchoStar has a small
market share, while in others, such as Africa, EchoStar believes that it has a
larger market share than any of its competitors. In some markets, EchoStar
cannot effectively compete due to local restrictions on foreign companies and
due to the necessity of using proprietary products for which EchoStar does not
hold licenses.
DTH PROGRAMMING. EchoStar competes with many large DTH program packages,
some of whom are affiliated with well known, large program originators, and some
of whom are affiliated with cable operators. EchoStar competes by offering
promotional programming packages in conjunction with its sales of DTH systems.
Since a significant portion of EchoStar's programming sales are generated
through DTH retailers, EchoStar also competes for retailer relationships on the
basis of commission rates and quality of service offered to the retailer and its
customers. In addition, the programming market faces competition from cable
television as well as emerging technologies such as DBS services, multichannel,
multipoint distribution systems and others. The largest competitors of EchoStar
in programming distribution include NetLink Satellite USA, owned by TCI,
SuperStar Satellite Entertainment, National Programming Service, Turner Home
Satellite, Inc., HBO Direct, Inc. and Showtime Satellite Networks. These
competitors have substantially greater financial resources than EchoStar, have
substantially more subscribers, and are therefore able to obtain more favorable
pricing from programmers compared to EchoStar.
DTH FINANCING AND LEASING. EchoStar currently offers financing and leasing
options in conjunction with its DTH products and services. Other equipment
manufacturers and distributors also offer financing to consumers who purchase
their products and services. At times, certain of EchoStar's competitors have
offered consumers longer amortizations of their loans than EchoStar has offered.
Long amortizations are popular with DTH retailers, who can then offer the
consumer a lower monthly payment, or a more expensive system for the same
payment. EchoStar has experienced a decline in financing revenue due partially
to the longer loan amortizations offered by some of EchoStar's
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competitors. With its new financing arrangements with two national banks and a
leasing organization, EchoStar is able to make available financing which it
believes is competitive with that available from its competitors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
GOVERNMENT REGULATION
GENERAL
Authorizations and permits issued by the FCC and foreign regulatory agencies
performing similar functions are required for the operation of satellites and
other components of the EchoStar DBS System, and the sale of satellite receivers
and other EchoStar-Registered Trademark- products in the United States and
certain foreign countries. In addition, as the prospective operator of a
privately owned United States satellite system, EchoStar is subject to the
regulatory authority of the FCC and the International Radio Regulations
promulgated by the ITU. As a distributor of television programming, EchoStar is
also affected by numerous laws and regulations, including the Communications
Act. EchoStar believes that it remains free to set prices and serve customers
according to its business judgment, without rate regulation or the statutory
obligation under Title II of the Communications Act to avoid undue
discrimination among customers, but pursuant to the recently passed
telecommunications legislation, EchoStar may be classified as a
telecommunications carrier subject to Title II. While EchoStar believes that it
is unlikely that such reclassification would increase substantially the
regulatory burdens imposed on EchoStar or have an adverse impact on EchoStar's
DBS operations, there can be no assurance in this regard. EchoStar also requires
import and general destination export licenses issued by the United States
Department of Commerce for the delivery of its manufactured products to overseas
destinations. Finally, because EchoStar has engaged a foreign launch provider
for the EchoStar II satellite, and may engage a foreign launch provider for the
EchoStar III or EchoStar IV satellites, United States export regulations apply
to the delivery of the satellite and to providing related technical information
to the launch provider.
While EchoStar has generally been successful to date in connection with
regulatory compliance matters, there can be no assurance that EchoStar will
succeed in obtaining or maintaining all requisite regulatory approvals for its
operations, or that it will do so without the imposition of conditions or
restrictions on EchoStar.
FCC PERMITS AND LICENSES
As the operator of a DBS system, EchoStar is subject to FCC jurisdiction and
review primarily for: (i) authorization of individual satellites (i.e., meeting
minimum financial, legal and technical standards) and earth stations; (ii)
avoiding interference with other radio frequency emitters; (iii) complying with
rules the FCC has established specifically for holders of U.S. DBS satellite
authorizations and receivers; and (iv) complying with applicable provisions of
the Communications Act. The FCC has granted a conditional satellite construction
permit to EchoStar for two satellites. It has assigned eleven specified
frequencies for EchoStar I at an orbital slot at 119 DEG. WL. EchoStar's
subsidiary DirectSat, has a conditional permit for ten additional frequencies at
the same orbital location, one frequency at 110 DEG. WL and eleven frequencies
at 175 DEG. WL. These permits are conditioned on satisfaction of ongoing
construction and related obligations. There can be no assurance that EchoStar
and DirectSat will be able to comply with the FCC's due diligence obligations or
that the FCC will determine that they have complied with such due diligence
obligations. DirectSat's and EchoStar's permits and extension requests have been
and may continue to be contested in FCC proceedings and in court by Dominion,
PrimeStar, Advanced, Tempo, MCI, DirecTv and others.
In November 1994, the FCC approved a merger of DirectSat with a wholly owned
subsidiary of EchoStar. While Dominion filed what it styled as comments
objecting to the merger, the FCC issued an order approving the merger and
EchoStar believes that the likelihood of unfavorable reconsideration of the
order approving the merger is unlikely.
84
The FCC's DBS rules require, among other diligence obligations, that a DBS
permittee place its satellite system in operation within six years following the
initial grant of a construction permit (originally by August 15, 1995 in the
case of EchoStar and DirectSat). EchoStar and DirectSat timely filed requests
with the FCC for extensions of these authorizations to conform to EchoStar's and
DirectSat's anticipated launch schedules for EchoStar I and EchoStar II. There
can be no assurance that EchoStar and DirectSat will be able to comply with the
FCC's due diligence obligations or that the FCC will determine that they have
complied with such due diligence obligations.
By an Order released January 11, 1996 in File No. 129 -SAT-EXT-95, the
International Bureau of the FCC granted an extension of EchoStar's permit to
August 15, 1996 with respect to the 119 DEG. WL orbital location. It deferred
decision on EchoStar's request for an extension of time with respect to its
western satellite pending the FCC's analysis of EchoStar's 1992 due diligence
showing for that location. By separate Order released January 11, 1996, File No.
DBS-88-1, the FCC's International Bureau conditionally granted EchoStar launch
and positioning authority for EchoStar I. On February 12, 1996, EchoStar filed
an application for a license to operate EchoStar I. EchoStar certified that the
in-orbit operations of the satellite fully conform to the specifications set
forth in its application as modified and in the FCC launch authorization, with
only one exception: the satellite is currently located at 119.0 DEG. WL instead
of 119.2 DEG. WL. By order of the International Bureau released March 4, 1996,
EchoStar was granted special temporary authority to operate at that location
until the launch of EchoStar II or until August 31, 1996, whichever is earlier,
subject to the condition that it cause no harmful interference to other
satellites. By order of the International Bureau released on the same date,
EchoStar was also granted special temporary authority to operate all 16
transponders on EchoStar I, until August 31, 1996, subject to the same
non-interference condition. While the FCC has granted EchoStar conditional
authority to use C-band frequencies for TT&C functions for EchoStar I, stating
that the required coordination process with Canada and Mexico has been
completed, the FCC subsequently received a communication from an official of the
Ministry of Communications and Transportation of Mexico stating that EchoStar
I's TT&C operations could cause unacceptable interference to Mexican satellites.
While EchoStar believes that it is unlikely that the FCC will subsequently
require EchoStar to relinquish use of such C-band frequencies for TT&C purposes,
there can be no assurances that such objections will not subsequently require
EchoStar to relinquish the use of such C-band frequencies for TT&C purposes.
Among other regulatory requirements, the DBS systems of EchoStar and
DirectSat are required to conform to the ITU Region 2 Plan for the Broadcast
Satellite Service ("BSS Plan"). Any operations that are not consistent with the
BSS Plan (including, among other things, digital transmission), can only be
authorized on a non-interference basis pending successful modification of the
BSS Plan or the agreement of all affected administrations to the non-conforming
operations. Accordingly, unless and until the BSS Plan is modified to include
the technical parameters of a DBS applicant's operations, non-standard
satellites must not cause harmful electrical interference to, and are not
entitled to any protection from, interference caused by other assignments that
are in conformance with the BSS Plan.
By a separate Order released January 11, 1996 in File No. 131 -SAT-EXT-95,
the International Bureau extended the construction permit of DirectSat to August
15, 1999. This grant was subject to the condition that DirectSat make
significant progress toward construction and operation of its DBS system
substantially in compliance with the timetable submitted pursuant to Amendment
No. 7 of its satellite construction contract, dated June 17, 1995, or with a
more expedited timetable. The International Bureau also urged DirectSat to
expedite construction and launch of additional satellites for its DBS system.
PrimeStar has filed an application for review requesting that the FCC reverse
the International Bureau's decision to extend DirectSat's construction permit.
See "-- Operation of the EchoStar DBS System -- DBS and Other Permits" and "--
Legal Proceedings."
85
The FCC has also declared that it will carefully monitor the semi-annual
reports required to be filed by DBS permittees. Failure of EchoStar or DirectSat
to file adequate semi-annual reports or to demonstrate progress in the
construction of their DBS systems may result in cancellation of their permits.
With respect to DirectSat, a request for launch authority, as well as for a
minor modification to DirectSat's construction permit and removal of conditions,
was filed with the FCC prior to the merger with EchoStar and remains pending. An
application to change frequencies for TT&C services is also pending and has been
opposed by Advanced and Dominion. Additional technical amendments may also be
required to be filed with the FCC. While opposition to these applications have
been filed, and will be filed in the future in the event of further amendments,
EchoStar expects that the necessary approvals for EchoStar II will be timely
obtained. EchoStar also intends to file an application for a license to operate
EchoStar II in orbit once EchoStar II is launched successfully.
EchoStar currently owns approximately 40% of the outstanding common stock of
DBSC, which holds a conditional satellite construction permit and specific
orbital slot assignments for eleven DBS frequencies at each of 61.5 DEG. WL and
175 DEG. WL. EchoStar expects to acquire 100% of DBSC pursuant to the Merger.
The Merger has been approved by DBSC's shareholders. FCC Approval of the Merger
is also required, and has been applied for. The deadline for filing oppositions
to the Merger with the FCC was March 15, 1996. EchoStar believes that the FCC
has previously considered and rejected issues similar to the arguments raised by
CPT and that the filing of the CPT opposition does not materially decrease the
likelihood that the FCC will approve the Merger. EchoStar believes that the FCC
has previously considered and rejected issues similar to the arguments raised by
CPT and that the filing of the CPT opposition does not materially decrease the
likelihood that the FCC will approve the Merger. Assuming FCC approval and
consummation of the Merger, EchoStar will hold, through its DBSC subsidiary, the
construction permit and slot assignments for these frequencies. See "-- DBS and
Related Services -- DBS and Other Permits."
The licenses which the FCC issues for an operational DBS system to use
frequencies at a specified orbital location are for a term of ten years. At the
expiration of the initial license term, the FCC may renew the satellite
operator's license or authorize the operator to operate for a period of time on
special authority, but there is no assurance that the FCC will take such
actions. EchoStar also requires FCC authority to operate earth stations,
including the earth stations necessary to uplink programming to its satellites.
FCC AUCTION RULES
EchoStar submitted the winning bid for the 148 DEG. WL frequencies and has
paid the required $10.5 million down payment. EchoStar has also filed the
"long-form" application for a construction permit required of the winning
bidder. EchoStar's application was placed on public notice on March 6, 1996,
triggering a filing window of 30 days for members of the public, including
EchoStar's competitors, to file petitions to dismiss or deny the application. No
parties have objected to the application, but to date the FCC has not granted
the application. EchoStar must submit the balance of its bid within five
business days of the grant of its application by the FCC. If the FCC grants
EchoStar's application, parties may seek FCC review or reconsideration and/or
judicial review of the FCC's action.
The FCC has imposed stringent disclosure obligations on a winning bidder
that seeks to transfer a DBS license acquired through competitive bidding within
six years of the initial permit grant. Together with its application seeking
approval of such a transfer, the winning bidder must submit all contracts and
related documents and full information on all agreed-upon consideration
negotiated with the purchase.
DBS RULES
The FCC has also promulgated the following new rules:
- The term of DBS licenses has been extended from 5 to 10 years;
86
- In addition to the pre-existing construction and operation milestones,
holders of new permits must complete construction of the first satellite in
their system within four years of authorization and their entire systems
within six years;
- The holders of new authorizations must provide DBS service to Alaska and
Hawaii where such service is technically feasible from the acquired orbital
locations (service to Alaska and Hawaii from 148 DEG. WL is presumed
feasible);
- Those holding DBS permits as of the effective date of the rules must
either provide DBS service to Hawaii or Alaska from at least one of their
orbital locations or relinquish their western assignments; and
- A DBS licensee must begin DBS operations within five years of receipt of
its license, but may otherwise make unrestricted use of the spectrum for
non-DBS purposes during that time. After the first five years, the licensee
may continue to provide non-DBS service so long as at least half of its
total capacity at a given orbital location is used each day for DBS.
PENDING APPEALS
Several parties, including EchoStar, DBSC and DirectSat, have petitioned the
U.S. Court of Appeals for the D.C. Circuit to review on a variety of grounds the
FCC's Report & Order which determined to auction frequencies at 110 DEG. WL and
148 DEG. WL. Several other parties have also appealed a related Order where the
FCC reclaimed the channels that were auctioned from another DBS permittee,
Advanced, for failing to construct its satellites in a timely manner. Such
review may result in invalidation of the FCC Auction in whole or in part. In
such a case, the FCC may be compelled to conduct a new auction, rescind the
construction permits for the channels which were auctioned or consider
alternative means of assigning available DBS channels.
An opposition to the Merger was filed with the FCC by CPT on March 15, 1996,
the deadline for filing petitions and oppositions regarding approval by the FCC
of the Merger. EchoStar believes that the FCC has previously considered and
rejected issued similar to the arguments raised by CPT and that the filing of
the CPT opposition does not materially decrease the likelihood that the FCC will
approve the Merger. EchoStar believes that the FCC has previously considered and
rejected issues similar to the arguments made in the oppositions and that the
filing of the CPT opposition does not materially decrease the likelihood that
the FCC will approve the Merger. CPT and another public interest organization
subsequently filed a joint letter at the FCC challenging the Merger. This letter
raises the same issues as CPT's earlier objection.
THE CABLE ACT
In addition to regulating pricing practices and competition within the
franchise cable television industry, the Cable Act was intended to establish and
support existing and new multi-channel video services, such as "wireless" cable
and DBS, to provide television programming.
Although EchoStar can provide no assurance as to the impact of the Cable Act
and amendments thereto on its businesses, EchoStar believes that the overall
effects on its present operations and its proposed DBS operation will be
positive. EchoStar expects to benefit from the programming access provision of
the Cable Act in that it will be able to gain access to previously unavailable
programming services and may obtain reduced costs for certain programming
services. Any amendment to, or interpretation of, the Cable Act that permits the
cable companies or entities affiliated with cable companies to discriminate
against competitors such as EchoStar in making available programming could
adversely affect EchoStar's ability to acquire programming on a cost-effective
basis. Certain of the restrictions on cable affiliated programmers will expire
in 2002 unless the FCC extends them.
EXPORT REGULATION
From time to time, EchoStar requires import licenses and general destination
export licenses to receive and deliver components of DTH systems. Also, EchoStar
has contracted with Arianespace for the launch of EchoStar II, and with LKE for
the launch of a satellite from the Kazakh Republic, a
87
territory of the former Soviet Union. Export licenses will be required to be
obtained from the Department of Commerce for the transport of any satellites to
Korou, French Guiana and to the Kazakh Republic. Martin Marietta will be
required to obtain technical data exchange licenses from the Department of
Commerce permitting the exchange between Martin Marietta and Arianespace and
LKE, respectively, of certain information necessary to prepare the satellites
for launch. No assurances can be given that the data exchange or export licenses
will be granted, or that implementation of the Trade Agreement will not
negatively affect EchoStar's ability to launch EchoStar IV on a Proton launch
vehicle. LKE has advised EchoStar, however, that, while no assurances can be
given, it believes the necessary technical data and hardware export licenses can
be obtained in time for the first scheduled launch of an EchoStar satellite.
There can be no assurance those licenses can be obtained in a timely manner to
avoid a launch delay.
PATENTS AND TRADEMARKS
EchoStar uses a number of trademarks for its products and services,
including "EchoStar-Registered Trademark-," "DISH Network-Registered
Trademark-," "DISH Network-SM-," "America's Top 40-SM-," and others. Many of
these trademarks are registered by EchoStar, and those trademarks that are not
registered are generally protected by common law and state unfair competition
laws. Although EchoStar believes that these trademarks are not essential to
EchoStar's business, EchoStar has taken affirmative legal steps to protect its
trademarks in the past and intends to actively protect these trademarks in the
future.
EchoStar is the assignee of certain patents for products and product
components manufactured and sold by EchoStar, none of which EchoStar considers
to be significant to its continuing operations. In addition, EchoStar has
obtained and, although no assurances can be given, expects to obtain, licenses
for certain patents necessary to the manufacture and sale by EchoStar and others
of DBS receivers and related components. EchoStar has been notified that certain
features of the EchoStar Receiver System allegedly infringe on patents held by
others, and that royalties are therefore required to be paid. EchoStar has
rejected the allegations of infringement and intends to vigorously defend
against any suit filed by the parties.
EMPLOYEES
EchoStar had approximately 710 employees at March 31, 1996, approximately
620 of whom worked in EchoStar's domestic operations and approximately 90 of
whom worked in EchoStar's international operations. EchoStar is not a party to
any collective bargaining agreement and considers its relations with its
employees to be good. Additional personnel will be hired to manage and operate
the EchoStar DBS System.
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PROPERTIES
EchoStar owns its corporate headquarters, its uplink facility in Cheyenne,
Wyoming and three additional locations. The following table sets forth certain
information concerning EchoStar's properties.
APPROXIMATE
SQUARE OWNED OR
DESCRIPTION LOCATION FOOTAGE LEASED
- ------------------------------------------------------ ------------------------------ -------------- ---------
Corporate Headquarters and Warehouse Distribution
Center............................................... Englewood, Colorado 155,000 Owned
Office and Distribution Center........................ Sacramento, California 78,500 Owned
Digital Broadcast Center.............................. Cheyenne, Wyoming 55,000 Owned
European Headquarters and Warehouse................... Almelo, The Netherlands 53,800 Owned
Warehouse Facility.................................... Denver, Colorado 40,000 Owned
Office and Distribution Center........................ Bensenville, Illinois 19,000 Leased
Office and Distribution Center........................ Miami, Florida 16,500 Leased
Office and Distribution Center........................ Norcross, Georgia 16,000 Leased
Office and Distribution Center........................ Dallas, Texas 11,200 Leased
Office and Distribution Center........................ Columbia, Maryland 13,400 Leased
Office and Distribution Center........................ Phoenix, Arizona 10,000 Leased
Asian Distribution Center............................. Singapore 7,000 Leased
Office and Distribution Center........................ Anaheim, California 4,300 Leased
Office................................................ Madrid, Spain 2,100 Leased
Asian Headquarters.................................... Singapore 1,900 Leased
Office................................................ Bangalore, India 1,200 Leased
Office................................................ Beijing, China 1,000 Leased
LEGAL PROCEEDINGS
EchoStar is a party to certain legal proceedings arising in the ordinary
course of its business. EchoStar does not believe that any of these proceedings
will have a material adverse effect on EchoStar's financial position, results of
operations or liquidity.
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MANAGEMENT
The following sets forth the name, age and offices with EchoStar of each
present executive officer of EchoStar, the period during which each executive
officer has served as such and each executive officer's business experience
during the past five years:
NAME AGE POSITION
- ------------------------ --- ---------------------------------------------------------------
Charles W. Ergen 43 Chairman, Chief Executive Officer and President
James DeFranco 43 Executive Vice President and Director
R. Scott Zimmer 39 Vice President and Director
Carl E. Vogel 38 Chief Operating Officer and Executive Vice President
David K. Moskowitz 38 Senior Vice President, General Counsel and Secretary
Steven B. Schaver 42 Chief Financial Officer
J. Allen Fears 39 Vice President, Treasurer and Controller
CHARLES W. ERGEN. Mr. Ergen has been Chairman of the Board of Directors,
Chief Executive Officer and President of EchoStar since its formation and,
during the past five years, has held various positions with EchoStar's
subsidiaries, including President and Chief Executive Officer of Echosphere,
Echonet Business Network, Inc. ("EBN") and ESC, and Director of Echosphere,
Houston Tracker Systems, Inc. ("HTS"), EchoStar International Corporation
("EIC"), ESC and EBN. Mr. Ergen, along with his spouse and James DeFranco, was a
co-founder of EchoStar in 1980. Commencing in March 1995, Mr. Ergen also became
a director of SSE Telecom, Inc. ("SSET"), a company principally engaged in the
manufacture and sale of satellite telecommunications equipment.
JAMES DEFRANCO. Mr. DeFranco is an Executive Vice President of EchoStar and
has been a Vice President and a Director of EchoStar since its formation and,
during the past five years, has held various positions with EchoStar's
subsidiaries, including President of HTS, EAC and HT Ventures, Inc. ("HTV"),
Executive Vice President of ESC, Senior Vice President of Echosphere and EBN,
and Director of Satellite Source, Inc. ("SSI"), Echosphere, HTS, EAC, EBN and
HTV. Mr. DeFranco, along with Mr. Ergen and Mr. Ergen's spouse, was a co-founder
of EchoStar in 1980.
R. SCOTT ZIMMER. Mr. Zimmer has been a Vice President and a Director of
EchoStar since its formation. For the past five years, Mr. Zimmer has managed
the international operations of EchoStar and its subsidiaries.
CARL E. VOGEL. Mr. Vogel was named President of EchoStar Satellite in
November 1995 and has been EchoStar's Executive Vice President and Chief
Operating Officer, and the President of SSI, since April 1994. Prior to joining
EchoStar, Mr. Vogel served as the Chief Executive Officer of Jones Programming
Services, Inc., a company engaged principally in the acquisition and packaging
of cable programming services for distribution via cable television systems,
from January 1990 to April 1994, and the Group Vice President of Finance of
Jones International, Ltd. and certain of its subsidiaries, companies engaged
principally in the cable television industry, from February 1983 to April 1994.
DAVID K. MOSKOWITZ. Mr. Moskowitz is the Senior Vice President, Secretary
and General Counsel of EchoStar. Mr. Moskowitz joined EchoStar in March 1990.
Mr. Moskowitz is responsible for all legal affairs of EchoStar and its
subsidiaries.
STEVEN B. SCHAVER. Mr. Schaver was named the Chief Financial Officer of
EchoStar in February 1996. From November 1993 to February 1996, Mr. Schaver was
the Vice President of EchoStar's European and African operations. From July 1992
to November 1993, Mr. Schaver was the Director of Sales and Marketing for
EchoStar's largest Spanish customer, Internacional de Telecomunicaciones, S.A.
in Madrid, Spain. Prior to July 1992 and since joining EchoStar in 1984, he has
held various positions with subsidiaries of EchoStar, including Vice President
of European operations. Prior to joining EchoStar Mr. Schaver was a Banking
Officer with Continental Illinois National Bank.
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J. ALLEN FEARS. Mr. Fears has been the Vice President, Treasurer and
Controller of EchoStar since December 1992. Prior thereto Mr. Fears served as
Controller of all of EchoStar's subsidiaries from January 1988 to December 1992,
and as Assistant Controller of a subsidiary of EchoStar from October 1985 to
January 1988. Mr. Fears is responsible for the finance, accounting, tax and
budgeting systems of EchoStar and its subsidiaries.
There are no family relationships among the executive officers and directors
of EchoStar or arrangements or understandings between any executive officer and
any other person pursuant to which any executive officer was selected as such.
Pursuant to the Bylaws of EchoStar, executive officers serve at the pleasure of
the Board of Directors. Executive officers of EchoStar are elected annually to
serve until their respective successors are elected and qualified.
EXECUTIVE COMPENSATION
Executive officers are compensated by certain subsidiaries of EchoStar. The
following table sets forth the cash and non-cash compensation for the fiscal
years ended December 31, 1995, 1994 and 1993 of the Chief Executive Officer of
EchoStar and the next four most highly compensated executive officers of
EchoStar (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
NUMBER OF
OTHER ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) GRANTED COMPENSATION (2)
- ------------------------------------- --------- --------- --------- ----------------- ----------- -----------------
Charles W. Ergen..................... 1995 $ 190,000 $ -- $ -- 14,705 $ 15,158
Chairman, President, and 1994 177,578 -- -- 53,568 888
Chief Executive Officer 1993 156,000 -- -- -- 10,557
R. Scott Zimmer...................... 1995 160,000 -- 88,229 14,705 32,390
Vice President 1994 148,006 -- 74,396 42,855 18,990
1993 132,000 95,452 71,458 -- 19,195
James DeFranco....................... 1995 156,923 -- -- 11,764 15,158
Vice President 1994 154,461 -- -- 42,855 1,000
1993 144,000 55,778 -- -- 10,117
Carl E. Vogel........................ 1995 150,000 -- -- 21,641 11,346
Chief Operating Officer 1994 107,308 -- -- 375,776 500
and Executive Vice President 1993 -- -- -- -- --
David K. Moskowitz................... 1995 130,000 10,000 -- 28,048 13,270
Senior Vice President, 1994 125,384 -- -- 53,568 1,000
Secretary and General Counsel 1993 115,000 41,833 -- -- 6,497
- ------------------------------
(1) With respect to Mr. Zimmer, "Other Annual Compensation" includes housing
and car allowances related to Mr. Zimmer's overseas assignment. While each
Named Executive Officer enjoys certain other perquisites, such perquisites
do not exceed the lesser of $50,000 or 10% of each officer's salary and
bonus.
(2) "All Other Compensation" includes amounts contributed to EchoStar's 401(k)
plan and premiums paid on health insurance on behalf of the Named Executive
Officers. With respect to Mr. Zimmer "All Other Compensation" also includes
home leave and education allowances related to his overseas assignment.
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The following table provides information concerning grants of options to
purchase Class A Common Stock of EchoStar made in 1995 to the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED RATES
OF STOCK PRICE
NUMBER OF PERCENT OF TOTAL APPRECIATION FOR OPTION
SECURITIES OPTIONS GRANTED EXERCISE TERM
UNDERLYING TO EXECUTIVE IN PRICE PER EXPIRATION ------------------------
NAME OPTIONS GRANTED 1995 SHARE DATE 5% 10%
- -------------------------------------- ---------------- ----------------- ----------- ---------- ----------- -----------
Charles W. Ergen...................... 14,705(1) 3.2% $ 17.00 06-20-05 $ 407,199 $ 648,397
R. Scott Zimmer....................... 14,705(1) 3.2% 17.00 06-20-05 407,199 648,397
James DeFranco........................ 11,764(1) 2.6% 17.00 06-20-05 325,759 518,717
Carl E. Vogel......................... 11,764(1) 2.6% 17.00 06-20-05 325,759 518,717
Carl E. Vogel......................... 9,877(2) 2.2% 20.25 12-22-05 325,794 518,772
David K. Moskowitz.................... 13,234(1) 2.9% 17.00 06-20-05 366,466 583,535
David K. Moskowitz.................... 14,814(2) 3.3% 20.25 12-22-05 488,642 778,079
- ------------------------
(1) In June 1995, EchoStar granted options to the Named Executive Officers,
among other key employees, to purchase shares of Class A Common Stock. The
options vest 20% on June 20, 1996, and 20% thereafter on June 20, 1997,
1998, 1999 and 2000. See "-- Executive Compensation -- Stock Incentive
Plan." The options expire five years from the date on which each portion of
the option first becomes exercisable, subject to early termination in
certain circumstances.
(2) In December 1995, EchoStar granted options to the Named Executive Officers,
among other key employees, to purchase shares of Class A Common Stock. The
options vest 20% on December 22, 1996, and 20% thereafter on December 22,
1997, 1998, 1999 and 2000. See "-- Stock Incentive Plan." The options expire
five years from the date on which each portion of the option first becomes
exercisable, subject to early termination in certain circumstances.
The following table provides information as of December 31, 1995, concerning
unexercised options to purchase Class A Common Stock. None of the Named
Executive Officers exercised any stock options during 1995.
FISCAL YEAR END OPTION VALUES
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1995 AT DECEMBER 31, 1995 (1)
-------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------------- ----------- ------------- ------------- -------------
Charles W. Ergen........................................ 10,714 57,559 $ 159,821 $ 745,864
R. Scott Zimmer......................................... 8,571 48,989 127,854 618,025
James DeFranco.......................................... 8,571 46,048 127,854 596,703
Carl E. Vogel........................................... 332,922 64,495 6,973,231 764,050
David K. Moskowitz...................................... 10,714 70,902 159,821 794,455
- ------------------------
(1) The dollar value of each exercisable and unexercisable option was calculated
by multiplying the number of shares of Class A Common Stock underlying the
option by the difference between the exercise price of the option and the
closing price (as quoted in the Nasdaq National Market) of a share of Class
A Common Stock on December 31, 1995.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Prior to
October 1995, EchoStar did not have a Compensation Committee, and its Board of
Directors determined all matters concerning executive compensation.
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DIRECTOR COMPENSATION. Directors of EchoStar who are not also executive
officers of EchoStar receive $500 for each meeting of the Board of Directors
attended and are reimbursed for reasonable travel expenses related to attendance
at Board meetings. Directors of EchoStar are elected annually by the
stockholders of EchoStar. Directors of ESB are not compensated for their
services as directors. Directors of ESB are elected annually by EchoStar.
The Board of Directors of EchoStar has approved the Non-Employee Stock
Option Incentive Plan (the "Director Plan") pursuant to which directors who are
not also employees of EchoStar are granted options to acquire 1,000 shares of
Class A Common Stock of EchoStar upon election to the Board. The Director Plan
is being submitted to shareholders of EchoStar for approval at the 1996 Annual
Meeting of Shareholders. Subject to such approval, the Board approved issuance
of options to Messrs. Angelich and Friedlob as of December 22, 1995. These
options are 100% vested upon issuance with an exercise price of $20.25 and a
term of five years.
EMPLOYMENT AGREEMENT. In March 1994, EchoStar entered into an employment
agreement with Carl E. Vogel, pursuant to which Mr. Vogel acts as Executive Vice
President and Chief Operating Officer of EchoStar and receives an annual salary
of $150,000. EchoStar has no employment agreements with any of its executive
officers other than Mr. Vogel.
EchoStar may terminate Mr. Vogel's employment at any time, with or without
cause, but will be required to compensate Mr. Vogel a specified amount if
EchoStar terminates his employment prior to January 1, 1997. Such compensation
will depend on the duration of Mr. Vogel's employment with EchoStar. Similarly,
Mr. Vogel may voluntarily terminate his employment with EchoStar at any time and
receive severance compensation in an amount based on the duration of his
employment with EchoStar at the time of such termination. On or after January 1,
1997, Mr. Vogel will have no right to receive any compensation from EchoStar
upon termination. For a period of one year following termination of Mr. Vogel's
employment with EchoStar, Mr. Vogel may not compete against EchoStar by working,
or acting in any other capacity, for a company in the DBS industry. Mr. Vogel
may, however, work for an affiliate of a company in the DBS industry, in a role
unrelated to that industry. Mr. Vogel also has an option to purchase 222,208
shares of Class A Common Stock of EchoStar for $3.10 per share (the "Vogel
Option").
STOCK INCENTIVE PLAN. EchoStar has adopted a stock incentive plan (the
"Incentive Plan") to provide incentives to attract and retain officers and other
key employees. EchoStar's Executive Compensation Committee administers the
Incentive Plan. Key employees are eligible to receive awards under the Incentive
Plan, in the Committee's discretion.
Awards available under the Incentive Plan include: (i) common stock purchase
options; (ii) stock appreciation rights; (iii) restricted stock and restricted
stock units; (iv) performance awards; (v) dividend equivalents; and (vi) other
stock-based awards. EchoStar has reserved up to ten million shares of Class A
Common Stock for granting awards under the Incentive Plan. Under the terms of
the Incentive Plan, the Committee retains discretion, subject to plan limits, to
modify the terms of outstanding awards and to reprice awards.
EchoStar has granted to officers and other key employees options under the
Incentive Plan for a total of 1,164,357 shares of Class A Common Stock. The
options generally vest at the rate of 20% per year commencing one year from the
date of grant and 20% thereafter on each anniversary of the date of grant. The
exercise prices of these options range between $9.33 and $20.25 per share.
LAUNCH BONUS PLAN. Effective December 16, 1995, EchoStar granted a
performance award of 10 shares of Class A Common Stock to all full time
employees with more than 90 days service. The total number of shares granted was
approximately 4,870 shares.
401(K) PLAN. In 1983, EchoStar adopted a defined-contribution tax-qualified
401(k) plan. EchoStar employees become eligible for participation in the 401(k)
plan upon completing one-half year of service with EchoStar and reaching age 21.
The 401(k) plan participants may contribute an amount equal to not less than 1%
and not more than 15% of their compensation in each contribution period.
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EchoStar may make a 50% matching contribution up to a maximum of $1,000 per
participant per calendar year. EchoStar may also make an annual discretionary
profit sharing or employer stock contribution to the 401(k) plan with the
approval of the Board of Directors.
The 401(k) plan participants are immediately vested in their voluntary
contributions, plus actual earnings thereon. The balance of the vesting in the
401(k) plan participants' accounts is based on years of service. A participant
becomes 10% vested after one year of service, 20% vested after two years of
service, 30% vested after three years of service, 40% vested after four years of
service, 60% vested after five years of service, 80% vested after six years of
service and 100% vested after seven years of service.
Effective December 22, 1995, EchoStar contributed 55,000 shares of Class A
Common Stock to the 401(k) plan as a discretionary employer stock contribution.
EchoStar recognized expense, and an addition to its paid-in capital, for the
fair value (approximately $1.1 million) of the EchoStar shares contributed to
the Plan. No employee has voting or any other interest in the Class A Common
Stock unless still employed by EchoStar on December 31, 1996. Shares of the
Class A Common Stock have been allocated to the 401(k) accounts of the following
executive officers of EchoStar in accordance with the Plan: (i) Charles W.
Ergen, 699 shares; (ii) R. Scott Zimmer, 699 shares; (iii) James DeFranco, 699
shares; (iv) Carl E. Vogel, 511 shares; (v) David K. Moskowitz, 605 shares; and
(vi) all officers and directors as a group, 5,272 shares.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain subsidiaries of EchoStar have agreed to indemnify Charles W. Ergen,
Chief Executive Officer and President of EchoStar, James DeFranco, a Vice
President of EchoStar, R. Scott Zimmer, a Vice President of EchoStar, and Cantey
M. Ergen, a former Director of HTS and the spouse of Charles W. Ergen, for any
adjustments to such individuals' federal, state or local income taxes resulting
from adjustments to EchoStar's subsidiaries' taxable income or loss, tax credits
or tax credit recapture for years during which such individuals were
stockholders of such subsidiaries and such subsidiaries elected to be taxed as
Subchapter S corporations. This indemnity agreement also covers interest,
penalties and additions to tax, as well as fees and expenses, including
attorneys' and accountants' fees, if any.
Charles W. Ergen beneficially owns 10% of the stock of Wright Travel
Corporation ("Wright Travel"), a privately held travel agency which EchoStar
uses for its travel arrangements and which leases office space from EchoStar.
For the year ended December 31, 1995, EchoStar paid approximately $769,000 to
Wright Travel. These payments were primarily related to travel expenses, large
events and seminars that were contracted with Wright Travel at rates comparable
to those obtainable from independent third parties. In 1995, EchoStar earned
approximately $27,000 from the lease by Wright Travel of office space from
EchoStar, which amount was offset by approximately $10,000 required to be
credited by EchoStar to Wright Travel for the exclusive services of an employee
of Wright Travel.
EchoStar issued a long-term promissory note (the "Ergen Note") payable to
Charles W. Ergen in the principal amount of $14.7 million as of December 31,
1993. The proceeds of the Ergen Note were used to make payments toward the
construction and launch of EchoStar I. (see Note 6 of Notes to EchoStar's
Financial Statements). In connection with the 1994 Notes Offering, Dish, Ltd.
exchanged shares of its Series A Preferred Stock for the Ergen Note and accrued
interest thereon at the rate of 10% per annum. Subsequent to the exchange, Mr.
Ergen sold five percent of his Series A Preferred Stock of Dish, Ltd. to James
DeFranco for $753,000. In 1995, Series A Preferred Stock of EchoStar was issued
in exchange for Series A Preferred Stock of Dish, Ltd. Pursuant to the 1994
Indenture, dividends may be paid on the Series A Preferred Stock of EchoStar
only if certain conditions are satisfied. See "Description of Certain
Indebtedness -- 1994 Notes." As of December 31, 1995, dividends accrued but
unpaid on the Dish, Ltd. Series A Preferred Stock and the Series A Preferred
Stock of EchoStar to Mr. Ergen and Mr. DeFranco, respectively, aggregated $2.0
million and $107,000.
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Since March 1995, Mr. Ergen has served on the Board of Directors of SSET. In
1994, EchoStar provided SSET with $8.75 million of financing through the
issuance by SSET to EchoStar of its seven-year, 6.5% subordinated convertible
non-recourse debentures, which are convertible into approximately 12% of SSET's
outstanding common stock, based on the number of shares of SSET common stock
outstanding at December 31, 1995. As of December, 31, 1995, the total amount
owed by SSET to EchoStar under the convertible debentures was approximately $9.6
million, including accrued interest. EchoStar also purchased all of SSET's
minority interest in DBSC and certain notes and accounts payable by DBSC to SSET
for $1.25 million. In connection with these transactions, Mr. Ergen advanced
$4.0 million to EchoStar, all of which was used to purchase convertible
debentures and certain assets of SSET. These advances were represented by a
promissory note bearing interest at 8% per annum and were repaid in June 1994
from the proceeds of the 1994 Notes Offering.
In December 1994, DirectSat, a subsidiary of SSET, was merged with a wholly
owned subsidiary of EchoStar. As a result of this merger, SSET acquired 800,780
shares of EchoStar's Class A Common Stock. Daniel E. Moore, Secretary and a
Director of DBSC, is Vice President, Chief Financial Officer and a Director of
SSET. Mr. Moore became Secretary and a Director of DBSC in September 1995.
In 1995 and 1996 EchoStar purchased an aggregate of $4.0 million of DBSI's
convertible subordinated debentures due July 1, 1998. The debentures are secured
by 125,000 shares of DBSC Common Stock and 2,000 shares of common stock of E-SAT
Corporation which is currently owned 80% by EchoStar. Fred W. Thompson, a
director of DBSC, is President, a Director and a significant shareholder of
DBSI.
Pursuant to the Loan Agreements, EchoStar agreed to purchase from DBSC $16.0
million in principal amount of promissory notes of DBSC and, in EchoStar's sole
and absolute discretion, up to an additional $134.0 million principal amount of
promissory notes, the proceeds from which are to be used by DBSC to make certain
payments to Martin Marietta under the DBSC Satellite Contract and to make
deposits towards launch reservations. As of the date of this Information
Statement -- Prospectus, EchoStar has loaned DBSC $31.0 million pursuant to the
Loan Agreements.
EchoStar believes that each of the transactions described above between
EchoStar and its affiliates were on terms comparable to those which would have
been obtainable from unaffiliated third parties.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and the accompanying notes set forth information
concerning the beneficial ownership of EchoStar's equity securities as of June
30, 1996. The information is presented for: (i) each person known by EchoStar to
be the beneficial owner of more than five percent of any class of EchoStar's
capital stock; (ii) each director of EchoStar; (iii) each Named Executive
Officer; and (iv) all directors and executive officers as a group. Except as
otherwise indicated, each person listed in the following table has informed
EchoStar that such person has sole voting and investment power with respect to
such person's shares of capital stock.
PERCENTAGE
NAME (1) NUMBER OF SHARES OF CLASS
- ------------------------------------------------------------------------- ---------------------- ---------------
8% SERIES A CUMULATIVE PREFERRED STOCK
Charles W. Ergen....................................................... 1,535,847(2) 95.0%
James DeFranco......................................................... 80,834 5.0%
All Directors and Executive Officers as a Group (twelve persons)....... 1,616,681 100.0%
CLASS A COMMON STOCK
Charles W. Ergen....................................................... 31,425,449(3)(12) 73.6%(4)(5)
James DeFranco......................................................... 1,712,588(6)(12) 4.0%(4)
R. Scott Zimmer........................................................ 827,917(7)(12) 1.9%(4)
SSE Telecom, Inc....................................................... 912,717(8)(12) 2.1%(4)
Carl E. Vogel.......................................................... 346,245(9)(12) *
David K. Moskowitz..................................................... 28,692(10)(12) *
All Directors and Executive Officers as a Group (twelve persons)....... 34,405,683(11)(12) 80.5%(4)
CLASS B COMMON STOCK
Charles W. Ergen....................................................... 29,804,401 100.0%
All Directors and Executive Officers as a Group (twelve persons)....... 29,804,401 100.0%
- ------------------------
* Less than 1%
(1)Except as otherwise noted, the address of each such person is 90 Inverness
Circle East, Englewood, Colorado 80112.
(2)Includes 1,125,000 shares of Series A Preferred Stock held in trust for the
benefit of Mr. Ergen's minor children and other members of his family. Mr.
Ergen's spouse is the trustee for that trust. All of the Series A Preferred
Stock is pledged to Martin Marietta as security for the performance of
certain of ESC's obligations under the Satellite Contracts.
(3)Includes: (i) 24,368 shares of Class A Common Stock issuable to Mr. Ergen
upon exercise of employee stock options; (ii) 29,804,401 shares of Class A
Common Stock issuable upon conversion of Mr. Ergen's Class B Common Stock;
(iii) 410,847 shares of Class A Common Stock issuable upon conversion of Mr.
Ergen's Series A Preferred Stock; (iv) 1,125,000 shares of Class A Common
Stock issuable upon conversion of Series A Preferred Stock held in trust for
the benefit of Mr. Ergen's minor children and other members of his family;
and (v) 55,000 shares of Class A Common Stock held by the EchoStar
Communications Corporation 401(k) Plan, of which Mr. Ergen is a trustee.
(4)The beneficial ownership percentage was calculated assuming exercise or
conversion of all Class B Common Stock, Preferred Stock, Warrants and
employee stock options ("Derivative Securities") into Class A Common Stock
by all holders of such Derivative Securities. Assuming
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exercise or conversion of Derivative Securities by such person, and only by
such person, the beneficial ownership of Class A Common Stock would be as
follows: Mr. Ergen, 74.6%; Mr. DeFranco, 16.1%; Mr. Zimmer, 8.0%; Mr. Vogel,
3.3%; and all officers and directors as a group, 80.9%. SSE Telecom, Inc.
does not own any Derivative Securities. If none of the holders of Derivative
Securities exercise or convert such securities, SSE Telecom, Inc. would
beneficially own 8.5% of the outstanding Class A Common Stock.
(5) The percentage of total voting power held by Mr. Ergen is 96.1%, after
giving effect to the exercise of the Warrants and the employee stock
options.
(6) Includes: (i) 19,494 shares of Class A Common Stock issuable to Mr.
DeFranco upon exercise of employee stock options; (ii) 80,834 shares of
Class A Common Stock issuable upon conversion of Mr. DeFranco's Series A
Preferred Stock; (iii) 751 shares of Class A Common Stock held as custodian
for his minor children; and (iv) 375,000 shares of Class A Common Stock
controlled by Mr. DeFranco as general partner of a partnership.
(7) Includes: (i) 20,083 shares of Class A Common Stock issuable to Mr. Zimmer
upon exercise of employee stock options; (ii) 2,300 shares of Class A Common
Stock owned jointly with members of his family; and (iii) 100,000 shares of
Class A Common Stock held in trust for the benefit of Mr. Zimmer's children
and other members of his family. Mr. Zimmer's spouse is the trustee for that
trust.
(8) Includes 111,937 shares of Class A Common Stock owned by EchoSat
Corporation, a wholly owned subsidiary of SSE Telecom, Inc. The address of
SSE Telecom, Inc. is 8230 Leesburg Pike, Suite 710, Vienna, Virginia 22182.
(9) Includes: (i) 245,988 shares of Class A Common Stock issuable to Mr. Vogel
upon exercise of employee stock options; and (ii) 247 shares of Class A
Common Stock owned jointly with Mr. Vogel's spouse.
(10) Includes: (i) 24,074 shares of Class A Common Stock issuable to Mr.
Moskowitz upon exercise of employee stock options; (ii) 3,000 shares of
Class A Common Stock owned by Mr. Moskowitz's spouse; (iii) 166 shares of
Class A Common Stock held as custodian for his minor children; and (iv)
1,023 shares of Class A Common Stock held as trustee for Mr. Ergen's
children.
(11) Includes: (i) 176,334 shares of Class A Common Stock issuable upon exercise
of employee stock options; (ii) 55,000 shares held by the 401(k) plan; (iii)
375,000 shares of Class A Common Stock held in a partnership; (iv) 222,208
shares of Class A Common Stock issuable upon exercise of the Vogel Option;
(v) 1,616,681 shares of Class A Common Stock issuable upon conversion of
Series A Preferred Stock; (vi) 29,804,401 shares of Class A Common Stock
issuable upon conversion of Class B Common Stock; (vii) 101,941 shares of
Class A Common Stock held in the name of, or in trust for, minor children
and other family members; and (viii) 5,753 shares of Class A Common Stock
owned by or jointly with family members.
(12) Assuming the issuance of approximately 658,000 shares of Class A Common
Stock pursuant to the Merger, the beneficial ownership of Class A Common
Stock would be as follows: Mr. Ergen, 72.5%; Mr. DeFranco, 4.0%; Mr. Zimmer,
1.9%; SSE Telecom, Inc., 2.1%; and all officers and directors as a group,
79.2%.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Pursuant to EchoStar's Amended and Restated Articles of Incorporation, as in
effect on the date hereof, EchoStar's authorized capital stock consists of: (i)
400,000,000 shares of Common Stock, of which 200,000,000 shares are designated
"Class A Common Stock," 100,000,000 shares are designated "Class B Common
Stock," and 100,000,000 shares are designated "Class C Common Stock;" and (ii)
20,000,000 shares of Preferred Stock, par value $.01 per share. As of June 30,
1996, 10,750,667 shares of Class A Common Stock were issued and outstanding and
held of record by 681 stockholders, 29,804,401 shares of Class B Common Stock
were issued and outstanding and held of record by Charles W. Ergen, EchoStar's
President and Chief Executive Officer, and no shares of Class C Common Stock
were issued and outstanding. See "Security Ownership of Certain Beneficial
Owners and Management." All outstanding shares of the Class A Common Stock and
Class B Common Stock are fully paid and nonassessable. The designation and the
powers, preferences and rights of the shares of Common Stock and Preferred Stock
and the qualifications, limitations and restrictions thereof are as set forth
below.
The transfer agent for EchoStar's capital stock, including the Class A
Common Stock, is American Securities Transfer, Inc. ("AST"). AST's address is
1825 Lawrence Street, Suite 444, Denver, Colorado 80202.
CLASS A COMMON STOCK
Each holder of Class A Common Stock is entitled to one vote for each share
of Class A Common Stock owned of record on all matters submitted to a vote of
stockholders. Except as otherwise required by law, the Class A Common Stock
votes together with the Class B Common Stock, the Class C Common Stock and the
Preferred Stock on all matters submitted to a vote of stockholders. Subject to
the preferential rights of any outstanding series of Preferred Stock and to the
restrictions on payment of dividends imposed by the 1994 Notes and the 1996
Notes (see "Description of Certain Indebtedness -- 1994 Notes" and "-- 1996
Notes") and any other indebtedness of EchoStar, the holders of Class A Common
Stock are entitled to such dividends as may be declared from time to time by the
Board of Directors from funds legally available therefor, and, together with the
holders of the Class B Common Stock, are entitled, after payment of all prior
claims, to receive pro rata all assets of EchoStar upon the liquidation,
dissolution or winding up of EchoStar. Holders of Class A Common Stock have no
redemption, conversion or preemptive rights.
CLASS B COMMON STOCK
Each holder of Class B Common Stock is entitled to ten votes for each share
of Class B Common Stock on all matters submitted to a vote of stockholders.
Except as otherwise required by law, the Class B Common Stock votes together
with the Class A Common Stock, the Class C Common Stock and the Preferred Stock
on all matters submitted to a vote of the stockholders. Each share of Class B
Common Stock is convertible, at the option of the holder, into one share of
Class A Common Stock. The conversion ratio is subject to adjustment from time to
time upon the occurrence of certain events, including: (i) dividends or
distributions on Class A Common Stock payable in Class A Common Stock or certain
other capital stock; (ii) subdivisions, combinations or certain
reclassifications of Class A Common Stock; and (iii) issuances of Class A Common
Stock or rights, warrants or options to purchase Class A Common Stock at a price
per share less than the fair market value of the Class A Common Stock. Each
share of Class B Common Stock is entitled to receive dividends and distributions
upon liquidation on a basis equivalent to that of the Class A Common Stock.
CLASS C COMMON STOCK
Each holder of Class C Common Stock is entitled to one vote for each share
of Class C Common Stock on all matters submitted to a vote of stockholders.
Except with respect to transactions involving the issuance of capital stock
which negatively affect the rights of holders of Series A Preferred Stock, or as
otherwise required by law, the Class C Common Stock votes together with Class A
Common
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Stock, the Class B Common Stock and the Series A Preferred Stock on all matters
submitted to a vote of the stockholders. Each share of Class C Common Stock is
convertible into Class A Common Stock on the same terms as the Class B Common
Stock. Each share of Class C Common Stock is entitled to receive dividends and
distributions upon liquidation on a basis equivalent to that of the Class A
Common Stock. Upon a Change in Control of EchoStar, each holder of outstanding
shares of Class C Common Stock is entitled to cast ten votes for each share of
Class C Common Stock held by such holder. "Change in Control" has the same
meaning as set forth in the 1994 Indenture and the 1996 Indenture. See
"Description of Certain Indebtedness -- 1994 Notes" and "-- 1996 Notes."
EchoStar has no present intention to issue any shares of Class C Common Stock
and, under current NASD rules, will not be able to issue any so long as the
Class A Common Stock is quoted on the Nasdaq National Market.
PREFERRED STOCK
EchoStar's Board of Directors is authorized to divide the Preferred Stock
into series and, with respect to each series, to determine the preferences and
rights and the qualifications, limitations, or restrictions thereof, including
the dividend rights, conversion rights, voting rights, redemption rights and
terms, liquidation preferences, sinking fund provisions, the number of shares
constituting the series and the designation of such series. The Board of
Directors may, without stockholder approval, issue Preferred Stock with voting
and other rights that could adversely affect the voting power of the holders of
Common Stock and could have certain anti-takeover effects.
EchoStar has issued 1,616,681 shares of its 8% Series A Cumulative Preferred
Stock (the "Series A Preferred Stock"). Each share of Series A Preferred Stock
issued is convertible, at the option of the holder, into one share of Class A
Common Stock, subject to adjustment from time to time upon the occurrence of
certain events, including: (i) dividends or distributions on Class A Common
Stock payable in Class A Common Stock or certain other capital stock; (ii)
subdivisions, combinations or certain reclassifications of Class A Common Stock;
and (iii) issuances of Class A Common Stock or rights, warrants or options to
purchase Class A Common Stock at a price per share less than the liquidation
preference per share. The aggregate liquidation preference for all outstanding
shares of Series A Preferred Stock is limited to approximately $15.1 million
plus cumulative unpaid dividends. At May 31, 1996, accrued and unpaid dividends
of the Series A Preferred Stock totalled approximately $2.6 million.
Each share of Series A Preferred Stock is entitled to receive dividends
equal to eight percent per annum of the liquidation preference for such share.
EchoStar currently has no intention to begin paying dividends on the Series A
Preferred Stock.
Shares of Series A Preferred Stock automatically convert into shares of
Class A Common Stock in the event they are transferred to any person other than
permitted transferees. Each share of Series A Preferred Stock is entitled to the
equivalent of ten votes for each share of Class A Common Stock into which it is
convertible and, except with respect to transactions involving the issuance of
capital stock which negatively affects the rights of holders of Series A
Preferred Stock (as more particularly described in the Certificate of
Designations, Preferences and Rights for the Series A Preferred Stock) or as
otherwise required by law, votes together with the Class A Common Stock, Class B
Common Stock and Class C Common Stock as a single class on all matters submitted
to a vote of stockholders.
WARRANTS
On June 7, 1994, Dish, Ltd. consummated the 1994 Notes Offering, selling
624,000 Units, consisting of $624.0 million aggregate principal amount of 1994
Notes and warrants to purchase 2,807,998 shares of Class A Common Stock (the
"Warrants"). Each Unit consists of $1,000 principal amount of 1994 Notes and
Warrants to purchase 4.5 shares of Class A Common Stock. The 1994 Notes and
Warrants are separately transferable. The Warrants were issued under a Warrant
Agreement (the "Warrant Agreement") between Dish, Ltd. and First Trust National
Association, as Warrant Agent (the "Warrant Agent"), a copy of which is filed as
an exhibit to the Registration Statement.
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Each Warrant entitles the registered holder thereof (the "Holder"), subject
to and upon compliance with the provisions thereof and of the Warrant Agreement,
at such Holder's option, prior to 5:00 p.m., Eastern time, on June 1, 2004, to
purchase from Dish, Ltd. 0.75 shares (or such other number as may result from
adjustments as provided in the Warrant Agreement) of Class A Common Stock at a
purchase price of $0.01 per share (the "Exercise Price"). If Dish, Ltd. is a
party to a consolidation, merger or binding share exchange, or certain transfers
of all or substantially all of its assets occur, the right to exercise a Warrant
for Class A Common Stock will represent a right to receive the same securities,
cash or other assets of EchoStar or another person that a holder of Class A
Common Stock is entitled to receive upon such consolidation, merger, share
exchange or transfer (which securities, cash or other assets may not necessarily
be of equal value to the Class A Common Stock). The Warrants are obligations of
Dish, Ltd., but, in connection with the merger of Dish, Ltd. and a wholly-owned
subsidiary of EchoStar, the Warrants currently entitle the Holders to acquire an
aggregate of 2,807,998 shares of EchoStar Class A Common Stock. The exercise
price with respect to all of the Warrants has been paid. No additional amounts
are required to be paid upon exercise of the Warrants.
The number of shares of Class A Common Stock issuable upon exercise of a
Warrant (the "Exercise Rate") is subject to adjustment from time to time upon
the occurrence of certain events, including: (i) dividends or distributions on
common stock payable in common stock or certain other capital stock; (ii)
subdivisions, combinations or certain reclassifications of common stock; (iii)
distributions to all holders of common stock of rights, warrants or options to
purchase common stock at a price per share less than the current market value at
the time; and (iv) distributions to stockholders of assets, debt securities or
common stock of Dish, Ltd. or certain rights, warrants or options to purchase
securities of Dish, Ltd. (excluding cash dividends or other cash distributions
from current or retained earnings other than any Extraordinary Cash Dividend).
The Warrant Agreement permits Dish, Ltd. voluntarily to increase the Exercise
Rate, as defined therein, from time to time for a period of time not less than
20 business days.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Amended and Restated Articles of Incorporation provide that a director
of EchoStar will not be personally liable to EchoStar or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except in
certain cases where liability is mandated by the NCL. The provision has no
effect on any non-monetary remedies that may be available to EchoStar or its
stockholders, nor does it relieve EchoStar or its directors from compliance with
federal or state securities laws. The Amended and Restated Articles of
Incorporation and the By-Laws of EchoStar provide for indemnification, to the
fullest extent permitted by the NCL, of any person who is or was involved in any
manner in any investigation, claim or other proceeding by reason of the fact
that such person is or was a director or officer of EchoStar, or is or was
serving at the request of EchoStar as a director or officer of another
corporation, against all expenses and liabilities actually and reasonably
incurred by such person in connection with the investigation, claim or other
proceeding.
NEVADA LAW AND LIMITATIONS ON CHANGES IN CONTROL
The NCL prevents an "interested stockholder" (defined in Section 78.423 of
the NCL, generally, as a person owning 10% or more of a corporation's
outstanding voting stock) from engaging in a "combination" (as defined in
Section 78.416) with a publicly-held Nevada corporation for three years
following the date such person became an interested stockholder unless, before
such person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder became
an interested stockholder or approves the combination.
The provisions authorizing the Board of Directors to issue Preferred Stock
without stockholder approval and the provisions of the NCL relating to
combinations with interested stockholders could have the effect of delaying,
deferring or preventing a change in control of EchoStar or the removal of
existing management. The 1994 Indenture and the 1996 Indenture also contain
provisions with respect to a change of control of EchoStar. See "Description of
Certain Indebtedness -- 1994 Notes" and "-- 1996 Notes."
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Charles W. Ergen, President and Chief Executive Officer of EchoStar, owns
29,804,401 shares of Class B Common Stock, which constitute all of the
outstanding shares of such stock. These shares are transferable to other persons
subject to securities laws limitations. In the event Mr. Ergen transferred
approximately 50.8% or more of his shares of Class B Common Stock, a change in
control of EchoStar would result and Mr. Ergen would receive any premium paid
for control of EchoStar. In addition, any such change in control would result in
an obligation on the part of Dish, Ltd. to offer to purchase at a premium all
1994 Notes and ESB to offer to purchase at a premium all 1996 Notes. See
"Description of Certain Indebtedness -- 1994 Notes" and "-- 1996 Notes."
DESCRIPTION OF CERTAIN INDEBTEDNESS
Set forth below is a summary of certain indebtedness to which EchoStar is
subject. This summary describes all material elements of such indebtedness, but
does not purport to be complete, and it is qualified in its entirety by
reference to the applicable agreements filed as exhibits to the Registration
Statement of which this Information Statement -- Prospectus is a part.
1994 NOTES
In June 1994, Dish, Ltd. issued the 1994 Notes, which generated gross
proceeds of approximately $335.1 million. Interest on the 1994 Notes accrues at
the rate of 12 7/8% per annum, but is not payable in cash prior to June 1, 1999.
Thereafter, interest will accrue at the same rate and will be payable in cash
semi-annually on June 1 and December 1 of each year. Principal of the 1994 Notes
accretes to $624 million in 1999, and matures on June 1, 2004. The 1994 Notes
are secured by, among other things: (i) a pledge of all of the issued and
outstanding capital stock of certain of EchoStar's subsidiaries; (ii) a first
priority security interest in the assets of ESC (subject to the terms of an
intercreditor agreement with, among others, Martin Marietta and the Bank)
including a first priority security interest in EchoStar I and, when launched,
EchoStar II; (iii) a first priority security interest in the 1994 Escrow Account
and Dish, Ltd.'s customer lists and related rights with respect to EchoStar I
and EchoStar II; (iv) a collateral assignment, insofar as they relate to
EchoStar I and EchoStar II, of the Satellite Contracts, the Launch Contracts,
all programming contracts, all TT&C contracts and each other contract necessary
for the operation of EchoStar I and EchoStar II; and (v) a subordinate lien on
the assets of the Credit Agreement Borrowers.
Except as set forth below, the 1994 Notes are not redeemable at Dish, Ltd.'s
option prior to June 1, 1999. Thereafter, the 1994 Notes are subject to
redemption at the option of Dish, Ltd., in whole or in part, at the redemption
prices set forth in the 1994 Indenture. In addition, at any time prior to June
1, 1997, Dish, Ltd. may redeem the 1994 Notes at a redemption price equal to
111.5% of the accreted value thereof on the repurchase date with the net
proceeds of one public or private sale of certain equity interests of Dish,
Ltd., provided that: (i) at least two-thirds of the 1994 Notes remain
outstanding immediately after the occurrence of such redemption; and (ii) such
redemption occurs within 120 days of the date of the closing of any such sale.
On each of June 1, 2002 and June 1, 2003, Dish, Ltd. is required to redeem 25%
of the original aggregate principal amount of the 1994 Notes at a redemption
price equal to 100% of the principal amount thereof, together with accrued and
unpaid interest to the redemption date.
The 1994 Indenture provides that in the event of a "Change of Control,"
Dish, Ltd. is required to make an offer to purchase all 1994 Notes at 101% of
the accreted value thereof (if prior to June 1, 1999) or 101% of the principal
amount thereof (if on or after June 1, 1999), plus accrued and unpaid interest
to the date of payment. For purposes of the 1994 Indenture and the 1996
Indenture, certain terms are defined as follows: "Change of Control" means: (i)
any transaction or series of transactions, the result of which is that the
Principals and their Related Parties (as such terms are hereinafter defined), or
an entity controlled by the Principals and their Related Parties, cease to be
the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act) of at
least 30% of the total equity interests of Dish, Ltd. and to have the voting
power to elect at least a majority of the Board of Directors of Dish, Ltd.; or
(ii) the first day on which a majority of the members of the Board of Directors
of Dish, Ltd. are
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not Continuing Directors. "Principals" means Messrs. Ergen, DeFranco, Zimmer,
Vogel, Fears and Moskowitz. "Related Parties" means, with respect to any
Principal: (y) the spouse and each immediate family member of such Principal;
and (z) each trust, corporation, partnership or other entity of which such
Principal beneficially holds an 80% or more controlling interest. "Continuing
Director" means, with respect to the 1994 Notes, as of any date of
determination, any member of the Board of Directors of Dish, Ltd. who: (a) was a
member of such Board of Directors on the date of the 1994 Indenture; or (b) was
nominated for election or elected to such Board of Directors with the
affirmative vote of a majority of the Continuing Directors who were members of
such Board at the time of such nomination or election, and with respect to the
1996 Notes, "Continuing Director" means, as of any date of determination, any
member of the Board of Directors of EchoStar and ESB, as the case may be, who:
(a) was a member of such Board of Directors on the date of the 1996 Indenture;
or (b) was nominated for election or elected to such Board of Directors with the
affirmative vote of a majority of the Continuing Directors who were members of
such Board at the time of such nomination or election.
The 1994 Indenture contains restrictive covenants that, among other things,
impose limitations on Dish, Ltd. and its subsidiaries with respect to their
ability to: (i) incur additional indebtedness; (ii) issue preferred stock; (iii)
apply the proceeds of certain asset sales; (iv) create, incur or assume liens;
(v) create dividend and other payment restrictions with respect to Dish, Ltd.'s
subsidiaries; (vi) merge, consolidate or sell assets; (vii) incur subordinated
or junior debt; and (viii) enter into transactions with affiliates. In addition,
Dish, Ltd., may pay dividends on its equity securities only if: (y) no default
is continuing under the 1994 Indenture; and (z) after giving effect to such
dividend, Dish, Ltd.'s ratio of total indebtedness to cash flow (calculated in
accordance with the 1994 Indenture) would not exceed 4.0 to 1. Moreover, the
aggregate amount of such dividends generally may not exceed the sum of 50% of
Dish, Ltd.'s consolidated net income (calculated in accordance with the 1994
Indenture) from the date of issuance of the 1994 Notes, plus 100% of the
aggregate net proceeds to Dish, Ltd. from the issuance and sale of certain
equity interests of Dish, Ltd. (including common stock).
1996 NOTES
In March 1996, ESB issued $580 million aggregate principal amount of the
1996 Notes, which generated gross proceeds of approximately $350.0 million.
Interest on the 1996 Notes accrues at the rate of 13 1/8% per annum, but is not
payable in cash prior to September 15, 2000. Thereafter, interest will accrue at
the same rate and will be payable in cash semi-annually on March 15 and
September 15 of each year. The 1996 Notes mature March 15, 2004. Initially, the
Notes are secured by: (i) a pledge of all of the issued and outstanding capital
stock of EchoStar DBS Corporation (which pledge will be released following
consummation of the Merger or the Substitute DBSC Transaction) and Dish, Ltd.;
(ii) a pledge of all of the stock of MergerCo held by EchoStar; (iii) a pledge
of certain notes of DBSC held by EchoStar; and (iv) a first priority security
interest in the 1996 Escrow Account. In addition, upon consummation of the
Merger, the 1996 Notes will be secured by: (i) a first priority security
interest, when launched, in EchoStar III; (ii) a collateral assignment of all
contracts relating to the construction, launch (other than with Great Wall),
insurance and TT&C of EchoStar III; and (iii) a pledge of all of the issued and
outstanding capital stock of MergerCo. If the Merger is not consummated but the
Substitute DBSC Transaction is consummated, the 1996 Notes will be secured by a
collateral assignment of all contracts and agreements relating to the Substitute
DBSC Transaction.
Except as set forth below, the 1996 Notes are not redeemable at ESB's option
prior to March 15, 2000. Thereafter, the 1996 Notes are subject to redemption at
the option of ESB, in whole or in part, at the redemption prices set forth in
the 1996 Indenture. In addition, at any time prior to March 15, 1999, ESB may
redeem the 1996 Notes at a redemption price equal to 112.125% of the accreted
value thereof on the repurchase date with the net proceeds of one public or
private sale of certain equity interests of EchoStar, provided that: (i) at
least two-thirds of the 1996 Notes remain outstanding immediately after the
occurrence of such redemption; and (ii) such redemption occurs within 120 days
of the date of the closing of any such sale.
102
The 1996 Indenture provides that in the event of a "Change of Control," ESB
is required to make an offer to purchase all 1996 Notes at 101% of the accreted
value thereof (if prior to March 15, 2000) or 101% of the principal amount
thereof (if on or after March 15, 2000), plus accrued and unpaid interest to the
date of payment.
The 1996 Indenture restricts, among other things, the payment of dividends,
the repurchase of stock and subordinated indebtedness of ESB and the making of
certain other restricted payments, the incurrence of indebtedness and the
issuance of preferred stock, certain asset sales, the creation of certain liens,
certain mergers and consolidations, and transactions with affiliates.
DIRECT BROADCASTING SATELLITE CORPORATION
BUSINESS
DBSC was formed as a Delaware corporation in 1981, making it one of the
earliest entities to focus on DBS technology. DBSC filed its initial FCC
application in the same year in which it was founded and was first granted a
construction permit by the FCC in 1982. As a result of financing difficulties,
DBSC was not able to satisfy FCC Due Diligence Requirements and its initial
authorization therefore expired in 1985. A second construction permit was
granted to DBSC by the FCC in 1986. The present authorizations were granted in
1989.
By late summer of 1994, the construction of DBSC's satellite by Martin
Marietta was not sufficiently advanced to permit DBSC to begin operation of its
first satellite by August 1995, and substantial working capital was needed to
accelerate the construction phase of the DBSC Satellite Contract. However, by
order released December 8, 1995, the FCC found that DBSC had successfully
maintained its due diligence status as required by FCC rule and precedent and
extended DBSC's authorizations through November 1998. In the same order, the
FCC's staff denied reconsideration of its earlier grant of orbit/spectrum
resources to DBSC but declined to rule on DBSC's June 1995 application for minor
modification of authority to permit DBSC to shift from the Martin Marietta
Series 7000 16 transponder spacecraft to the more modern A2100 Series, featuring
32 transponders and other enhancements. On December 21, 1995, EchoStar and DBSC
entered into the Merger Trigger Agreement pursuant to which the parties agreed
to, among other things, execute and consummate the transactions contemplated by
the Merger Agreement and to enter into the Loan Agreements. See "The Merger --
The Merger Trigger Agreement."
Pursuant to the DBSC Satellite Contract with Martin Marietta, DBSC has been
making scheduled progress payments according to the Contract (as amended from
time to time) since April 1990. Effective May 31, 1995, DBSC and Martin Marietta
again amended the DBSC Satellite Contract. As amended, the DBSC Satellite
Contract calls for the construction of two spacecraft based on Martin Marietta's
A2100 bus, using the AX variant. These spacecraft, containing 32 transponders
each, are state-of-the-art. Martin Marietta is obligated to deliver the first
satellite, referred to as EchoStar III in this Information Statement --
Prospectus, by July 31, 1997. Martin Marietta is obligated to deliver the second
satellite, DBSC II, on July 31, 1998. In each case this constitutes an
acceleration of delivery and launch dates from such dates as set forth in the
DBSC Satellite Contract prior to the amendment. DBSC made a payment to Martin
Marietta in May 1995 of $500,000 and an additional payment of $1.0 million on
June 30, 1995. The next payment of $16.0 million was made on December 29, 1995.
Thereafter the balance for EchoStar III is due in monthly payments, most of
which are $2.5 million. As of the date of this Information Statement --
Prospectus, each monthly payment has been made. The DBSC Satellite Contract
imposes substantial termination liabilities on DBSC if it is not able to
continue to fund the DBSC Satellite Contract.
DBSC has entered into a Note Purchase Agreement (together with related
agreements) with EchoStar pursuant to which EchoStar agreed to purchase $16.0
million aggregate principal amount of promissory notes of DBSC and up to an
additional $134.0 million aggregate principal amount of promissory notes, the
proceeds from which are to be used by DBSC to make certain payments to Martin
Marietta and to make deposits toward the launch reservations. See "The Exchange
and
103
Merger -- Reasons for the Merger." The Note Purchase Agreement provides that
EchoStar may, in its sole discretion, advance DBSC funds to make the further
progress payments to Martin Marietta, but EchoStar is not obligated to do so.
However, EchoStar presently intends to continue to advance DBSC funds to make
such future progress payments or for other stated purposes.
DBSC believes that it is entitled to a proportionate share of the 28
channels at 110 WL recently forfeited by Advanced and auctioned by the FCC in
January 1996 because DBSC was awarded only 11 DBS channels as compared to the 16
it initially sought. DBSC, as well as EchoStar and DirectSat, have filed suit
against the FCC in the U.S. Court of Appeals for the D.C. Circuit contesting the
FCC's decision to auction the cancelled Advanced channels. While DBSC believes
that its case is meritorious there can be no assurance that the court will
reverse or remand the FCC's decision, or that if it does, the FCC or the court
would ultimately rule in DBSC's favor.
DBSC does not presently have a launch contract or option for launch of its
proposed DBS satellites. However, EchoStar has entered into a launch services
contract for the launch of EchoStar III, one of DBSC's satellites. See "EchoStar
Communications Corporation -- Business -- Satellite Launches."
As part of its contractual agreements with EchoStar, DBSC has committed to
utilize EchoStar's TT&C and uplink facility.
A DBS provider must have a customer service facility adequate to take
service orders and inquiries, process programming requests and provide for the
necessary implementation. DBSC expects that it will be able to contract with one
or more customer service organizations for the provision of such services at
costs considered to be competitive.
DBSC's current cash resources, which as of March 31, 1996 were approximately
$218,000 (excluding amounts dedicated to construction progress payments to
Martin Marietta as described above), are not sufficient to pay DBSC's ordinary
operating expenses. It is anticipated that the Effective Time of the Merger will
be in late July or early August of 1996. Therefore, DBSC will have to defer
paying a portion of its expenses or will have to seek additional funds for
ordinary operating expenses (which pursuant to the terms of the Merger Agreement
can only be in the form of debt financing) from its existing DBSC shareholders
or outside sources. No assurances can be given that such funds would be
available to DBSC.
In the event the Merger is not approved by the FCC, DBSC and EchoStar have
agreed on alternative arrangements designed to assure comparable economic
benefits to both parties. However, as of the date of this Information Statement
- -- Prospectus, unless the Merger is consummated, DBSC may not have sufficient
funds to meet its obligations under the DBSC Satellite Contract or to conduct
its business operations. Therefore, DBSC may be required to immediately seek
additional investors or strategic partners in order to continue its operations.
In any event, DBSC Shareholders would receive the Merger Consideration.
MANAGEMENT
The following table sets forth information concerning DBSC's Executive
Officers and Directors:
NAME AGE POSITION
- ---------------------- --- -----------------------------------------
Harley W. Radin 58 Chairman, Chief Executive Officer,
Treasurer and Director
Daniel E. Moore 42 Secretary and Director
Fred W. Thompson 53 Director
HARLEY W. RADIN. Mr. Radin has been Chairman and Chief Executive Officer of
DBSC since 1987. Mr. Radin has general management responsibility for the
day-to-day business of DBSC. He is responsible for developing DBSC's business
plan and seeking business partners and financing.
104
Mr. Radin spends a substantial majority of his time on DBSC's business. Mr.
Radin graduated from Rensselaer Polytechnic Institute in 1959 with a Bachelor of
Science degree in Electrical Engineering and received a Masters degree in
Electrical Engineering from New York University in 1961.
DANIEL E. MOORE. Mr. Moore has been a Director of DBSC since September
1995, and served as a Director of SSE Telecom, Inc. since April 1989. Mr. Moore
joined SSE Telecom, Inc. in 1994 as Executive Vice President and Chief Financial
Officer. Mr. Moore is a founder and principal of Venture America, a private
venture capital and entrepreneurial services firm. Previously, Mr. Moore was a
Senior Manager with Arthur Andersen & Co. Mr. Moore received his Master's Degree
in Business Administration from the University of Pittsburgh and his Bachelor's
degree from Lafayette College.
FRED W. THOMPSON. Mr. Thompson has been a Director of DBSC since July 1993.
Mr. Thompson is Chairman of the Board, President, Chief Executive Officer, and
Chief Financial Officer of DBS Industries, Inc. In early 1990 Mr. Thompson
founded and served as Chairman and President of DBS Network, Inc., a wholly
owned subsidiary of DBS Industries, Inc., until its dissolution in July 1995. He
has over thirty years' experience in the telecommunications industry. From 1986
to 1990, Mr. Thompson devoted his time to consulting on various
telecommunication matters as an independent contractor. Mr. Thompson received a
B.S. degree in Electrical Engineering from California Polytechnic in 1962.
EXECUTIVE COMPENSATION
Harley W. Radin, DBSC's Chairman of the Board of Directors and Chief
Executive Officer, performs services for DBSC as an independent contractor. Mr.
Radin entered into a consulting agreement with DBSC as of November 16, 1993.
Under the terms of the consulting agreement, Mr. Radin was paid $8,000 per month
by DBSC for consulting services from November 16, 1993 through March 31, 1994,
and $10,000 per month for such services beginning on April 1, 1994. Commencing
January 1, 1995, pursuant to the terms of a new consulting agreement, Mr. Radin
receives $12,000 per month for such services. Mr. Radin is also entitled to
reimbursement for certain reasonable out of pocket expenses related to DBSC's
business. The consulting agreement currently has a month-to-month term. As of
the date of this Information Statement -- Prospectus, Mr. Radin has received an
aggregate of $354,000 since November, 1993.
Directors of DBSC do not receive remuneration for their services as
directors. Charles A. Kase, a member of the DBSC Board until October, 1995, has
agreed to perform certain technical services for DBSC as requested from time to
time by DBSC. Under a consulting agreement dated April 28, 1994 and which
expired on December 31, 1994, Mr. Kase was paid at an hourly rate of $125 with
aggregate compensation not to exceed $36,000.
A new consulting agreement was entered into effective January 1, 1995
whereby Mr. Kase was to be paid an hourly rate of $125 with payments not to
exceed $8,000 per month. This consulting agreement expired on December 31, 1995.
Under both agreements, Mr. Kase received $34,125 for his services to DBSC.
In connection with the election of Daniel E. Moore to the DBSC Board, Mr.
Moore received 2,000 shares of DBSC Common Stock as compensation for services.
DBSC does not currently have any stock option plan or any officer or
director incentive arrangement.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two years, in addition to matters described in "Management
- -- Executive Compensation" and "Certain Relationships and Related Transactions"
and in "Business" (regarding the
105
loans to DBSC by EchoStar to fund the satellite construction contract), the
following transactions occurred between DBSC and certain of its officers,
directors, and five percent (5%) or greater stockholders:
Fred W. Thompson, a DBSC director since July 1993, is the President and
Chief Executive Officer of DBSI. Effective January 29, 1993, DBSC entered into a
Stockholder Line of Credit and Investment Agreement with DBS Network, Inc., a
wholly-owned subsidiary of DBSI ("DBSN") pursuant to which DBSN agreed to loan
DBSC up to a total of $200,000 in exchange for the issuance by DBSC of interest
bearing notes (the "DBSN Notes") convertible into DBSC Common Stock at a
conversion price of $1.00 per share. The DBSN Notes carried a five year term.
The terms of the DBSN Notes specified that DBSC may pay off the outstanding
balance at any time including interest accrued to the date of payment. The DBSN
Notes were convertible into DBSC Common Stock after approval was received from
the FCC for DBSN to take control of DBSC. Until the DBSN Notes were paid in
full, DBSC also had the right to elect to convert the principal amount of the
DBSN Notes into shares of DBSC Common Stock at the conversion price of $1.00 per
share. As of November 15, 1994, DBSC had borrowed a total of $152,500 in
principal and had accrued interest of approximately $20,710. The DBSN Notes plus
accrued interest thereon have been fully paid by DBSC.
In 1995 and 1996 EchoStar purchased an aggregate of $4 million of DBSI's
convertible subordinated debentures due July 1, 1998. The debentures are secured
by 125,000 shares of DBSC Common Stock and 2,000 shares of common stock of E-SAT
Corporation which is currently owned 80% by EchoStar. Fred W. Thompson, a
director of DBSC, is President, a director and a significant shareholder of
DBSI.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and accompanying notes set forth information concerning
the beneficial ownership of DBSC Common Stock as of the date of this Information
Statement -- Prospectus. Such information is presented for: (i) each Director of
DBSC who owns any such securities; (ii) each Executive Officer of DBSC who owns
any such securities; (iii) all Directors and Executive Officers as a group; and
(iv) any person beneficially owning more than 5% of the DBSC Common Stock. The
number of shares beneficially owned by each Director or Executive Officer is
determined according to the rules of the Securities and Exchange Commission and
the information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares as to
which the individual or entity has sole or shared voting power or investment
power. As a consequence, several persons may be deemed to be the "beneficial
owners" of the same shares. Except as noted below, each person listed in the
following table has informed DBSC that such person has sole voting power and
investment power with respect to such person's shares of DBSC Common Stock.
NUMBER OF PERCENTAGE
NAME SHARES OF CLASS
- -------------------------------------------------------------------------- ------------- ------------
Harley W. Radin (1)....................................................... 298,306 18.41%
Daniel E. Moore (2)....................................................... 2,000 0.12%
Fred W. Thompson (3)...................................................... 401,107(4) 24.76%
DBS Industries, Inc. (5).................................................. 401,107 24.76%
Kingswood, Inc. (6)....................................................... 175,000 10.80%
EchoStar Communications Corporation (7)................................... 644,990(8) 39.81%
All Directors and Executive Officers as a group (3 persons)............... 701,413 43.29%
- ------------------------
(1) Mr. Radin's address is 4401-A Connecticut Avenue, N.W., Suite 400,
Washington, D.C. 20081.
(2) Mr. Moore's address is 8230 Leesburg Pike, Suite 710, Vienna, VA 22182.
(3) Mr. Thompson's address is 495 Miller Avenue, Mill Valley, CA 94941.
106
(4) Consists of 401,107 shares of DBSC Common Stock owned by DBS Industries,
Inc. of which Mr. Thompson is President, a Director and a significant
shareholder.
(5) DBS Industries, Inc.'s address is 495 Miller Avenue, Mill Valley, CA 94941
(6) Kingswood, Inc.'s address is 5726 Corsa Avenue, Suite 202, Westlake Village,
CA 91362.
(7) EchoStar Communications Corporation's address is 90 Inverness Circle East,
Englewood, CO 80112.
(8) Excludes 333,333 shares of DBSC Common Stock issuable upon the option
granted to EchoStar pursuant to the Stock Purchase Agreement. See
"Background and Reasons for the Merger."
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
DBSC is authorized to issue up to 3,000,000 shares of DBSC Common Stock,
$.01 par value. Each holder of DBSC Common Stock is entitled to one vote for
each share held of record on each matter submitted to a vote of DBSC
Shareholders. Each holder of DBSC Common Stock is entitled to receive ratably
such dividends as may be declared by the DBSC Board out of funds legally
available therefor as well as any distributions to the DBSC Shareholders and, in
the event of the liquidation, dissolution or winding up of DBSC, is entitled to
share ratably in all assets of DBSC remaining after payment of liabilities.
Holders of DBSC Common Stock have no cumulative voting, conversion, redemption
or preemptive rights or other rights to subscribe for additional shares. As of
June 30, 1996, 1,620,138 shares of DBSC Common Stock were issued and outstanding
and held of record by 53 stockholders. The outstanding shares of DBSC Common
Stock are validly issued, fully paid and nonassessable.
LEGAL MATTERS
The validity of the EchoStar Common Stock will be passed upon for EchoStar
by David K. Moskowitz, Senior Vice President, General Counsel and Secretary of
EchoStar.
EXPERTS
The audited financial statements and schedules of EchoStar included in this
Information Statement -- Prospectus and elsewhere in the Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of such firm as experts in giving such reports.
The audited financial statements and schedules of DBSC included in this
Information Statement -- Prospectus and elsewhere in the Registration Statement
have been audited by Regardie, Brooks & Lewis, independent public accountants,
as indicated in their report with respect thereto, and are included herein in
reliance upon the authority of such firm as experts in giving such report.
107
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
ECHOSTAR COMMUNICATIONS CORPORATION
Report of Independent Public Accountants................................................................... F-2
Consolidated Balance Sheets at December 31, 1994 and 1995.................................................. F-3
Combined and Consolidated Statements of Income for the Years Ended December 31, 1993, 1994 and 1995........ F-4
Combined and Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1994
and 1995.................................................................................................. F-5
Combined and Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995.... F-6
Notes to Combined and Consolidated Financial Statements.................................................... F-8
DIRECT BROADCASTING SATELLITE CORPORATION
Report of Independent Public Accountants................................................................... F-35
Balance Sheets at March 31, 1995 and December 31, 1995..................................................... F-36
Statements of Income for the Years Ended March 31, 1994 and 1995, and the nine months ended December 31,
1995...................................................................................................... F-37
Statements of Stockholders' Equity for the Years Ended March 31, 1994 and 1995, and for the Nine Month
Period Ended December 31, 1995............................................................................ F-38
Statements of Cash Flows for the Years Ended March 31, 1994 and 1995, and and the nine months ended
December 31, 1995......................................................................................... F-39
Notes to Financial Statements.............................................................................. F-40
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION
ECHOSTAR COMMUNICATIONS CORPORATION
Consolidated Balance Sheets at December 31, 1995 and March 31, 1996 (Unaudited)............................ F-45
Consolidated Statements of income for the three months ended March 31, 1995 and 1996 (Unaudited)........... F-46
Consolidated Statement of Stockholders' Equity for the three months ended March 31, 1996 (Unaudited)....... F-47
Consolidated Statements of Cash Flow for the three months ended March 31, 1995 and 1996 (Unaudited)........ F-48
Condensed Notes to Consolidated Financial Statements (Unaudited)........................................... F-50
DIRECT BROADCASTING SATELLITE CORPORATION
Balance Sheets at December 31, 1995 and March 31, 1996 (Unaudited)......................................... F-60
Statements of Income for the three months ended March 31, 1995 and 1996 (Unaudited)........................ F-61
Statement of Stockholders' Equity for the three months ended March 31, 1996 (Unaudited).................... F-62
Statements of Cash Flow for the three months ended March 31, 1995 and 1996 (Unaudited)..................... F-63
Notes to Financial Statements.............................................................................. F-64
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EchoStar Communications Corporation:
We have audited the accompanying consolidated balance sheets of EchoStar
Communications Corporation (a Nevada corporation) and affiliates and
subsidiaries, as described in Note 1, as of December 31, 1994 and 1995, and the
related combined and consolidated statements of income, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Companies' management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Companies
as of December 31, 1994 and 1995, and the combined and consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 23, 1996.
F-2
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS)
ASSETS
1994 1995
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents................................................................. $ 17,506 $ 21,754
Marketable investment securities.......................................................... 31,038 15,670
Trade accounts receivable, net............................................................ 8,097 9,179
Inventories............................................................................... 20,327 38,769
Income tax receivable..................................................................... -- 3,554
Deferred tax assets....................................................................... 1,840 1,779
Other current assets...................................................................... 2,573 13,037
--------- ---------
Total current assets.................................................................. 81,381 103,742
RESTRICTED CASH AND MARKETABLE SECURITIES:
Escrow.................................................................................... 185,431 73,291
Other..................................................................................... 11,400 26,400
PROPERTY AND EQUIPMENT, net................................................................. 151,240 354,000
OTHER NONCURRENT ASSETS..................................................................... 43,040 65,658
--------- ---------
Total assets.......................................................................... $ 472,492 $ 623,091
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................................................................... $ 14,895 $ 19,063
Deferred programming revenue.............................................................. 6,572 5,563
Accrued expenses and other current liabilities............................................ 6,965 21,335
Notes payable and current portion of long-term debt....................................... 238 4,782
--------- ---------
Total current liabilities............................................................. 28,670 50,743
1994 NOTES, net............................................................................. 334,206 382,218
LONG-TERM MORTGAGE DEBT AND NOTE PAYABLE, excluding current portion......................... 5,393 33,444
OTHER LONG-TERM LIABILITIES................................................................. 415 --
--------- ---------
Total liabilities..................................................................... 368,684 466,405
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 11)
STOCKHOLDERS' EQUITY:
Preferred Stock, 20,000,000 shares authorized, 1,616,681 shares of Series A Cumulative
Preferred Stock issued and outstanding, including accrued dividends of $938,000 and
$2,143,000, respectively................................................................. 15,990 17,195
Class A Common Stock, $.01 par value, 200,000,000 shares authorized, 3,739,400 and
10,535,003 shares issued and outstanding, respectively................................... 38 105
Class B Common Stock, $.01 par value, 100,000,000 shares authorized, 29,804,401 shares
issued and outstanding................................................................... 298 298
Common Stock Purchase Warrants............................................................ 26,133 714
Class C Common Stock, 100,000,000 shares authorized, none outstanding..................... -- --
Additional paid-in capital................................................................ 62,197 151,674
Unrealized holding gains on available-for-sale securities, net of deferred taxes.......... -- 239
Retained earnings (deficit)............................................................... (848) (13,539)
--------- ---------
Total stockholders' equity............................................................ 103,808 156,686
--------- ---------
Total liabilities and stockholders' equity............................................ $ 472,492 $ 623,091
--------- ---------
--------- ---------
The accompanying notes to combined and consolidated financial
statements are an integral part of these balance sheets.
F-3
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
1993 1994 1995
--------- --------- ---------
REVENUE:
DTH products and technical services............................................ $ 206,311 $ 172,753 $ 146,852
Programming.................................................................... 10,770 14,540 15,096
Loan origination and participation income...................................... 3,860 3,690 1,942
--------- --------- ---------
Total revenue.............................................................. 220,941 190,983 163,890
--------- --------- ---------
EXPENSES:
DTH products and technical services............................................ 161,447 133,635 120,178
Programming.................................................................... 9,378 11,670 13,610
Selling, general and administrative............................................ 30,235 30,219 35,015
Depreciation................................................................... 1,677 2,243 3,058
--------- --------- ---------
Total expenses............................................................. 202,737 177,767 171,861
--------- --------- ---------
OPERATING INCOME (LOSS).......................................................... 18,204 13,216 (7,971)
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income................................................................ 1,173 8,420 14,059
Interest expense, net of amounts capitalized................................... (632) (21,408) (23,985)
Losses on investments in joint ventures........................................ (50) (492) --
Minority interest in loss of consolidated joint venture and other.............. 39 753 666
--------- --------- ---------
Total other income (expense)............................................... 530 (12,727) (9,260)
--------- --------- ---------
NET INCOME (LOSS) BEFORE INCOME TAXES............................................ 18,734 489 (17,231)
BENEFIT (PROVISION) FOR INCOME TAXES............................................. 1,384 (399) 5,745
--------- --------- ---------
NET INCOME (LOSS)................................................................ $ 20,118 $ 90 $ (11,486)
--------- --------- ---------
--------- --------- ---------
NET LOSS ATTRIBUTABLE TO COMMON SHARES........................................... $ (848) $ (12,691)
--------- ---------
--------- ---------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING....................................... 32,442 35,562
--------- ---------
--------- ---------
LOSS PER COMMON AND COMMON EQUIVALENT SHARE...................................... $ (0.03) $ (0.36)
--------- ---------
--------- ---------
PRO FORMA (UNAUDITED) NET INCOME (Note 7)
Historical net income before income taxes...................................... $ 18,734
Historical (provision) benefit for income taxes................................ 1,384
Pro forma income tax effects................................................... (7,846)
---------
Pro forma net income........................................................... $ 12,272
---------
---------
Pro forma common shares outstanding............................................ 32,221
---------
---------
Pro forma earnings per common share............................................ $ 0.38
---------
---------
The accompanying notes to combined and consolidated
financial statements are an integral part of these statements.
F-4
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
COMMON
STOCK OF
SUBSIDIARIES RETAINED
COMMON AND EARNINGS
STOCK ADDITIONAL (DEFICIT) TOTAL
PREFERRED COMMON PURCHASE PAID-IN AND UNREALIZED STOCKHOLDERS'
STOCK STOCK WARRANTS CAPITAL HOLDING GAINS EQUITY
----------- ----------- ----------- ----------- -------------- ------------
SHARES OF
COMMON
STOCK
OUTSTANDING
---------------
(NOTES 1 AND 9)
BALANCES, at December 31,
1992......................... $ 6,881 $ 45,447 $ 52,328
Cash contributions to
capital.................... 2,497 2,497
Dividends declared.......... (25,243) (25,243)
Net income.................. 20,118 20,118
Reorganization effective
December 31, 1993 -
Class A Common Stock...... 2,417 $ 24 (24) --
Class B Common Stock...... 29,804 298 (298) --
Termination of Subchapter S
Status of subsidiaries..... 40,322 (40,322) --
------- ----------- ----- ----------- ----------- -------------- ------------
BALANCES, at December 31,
1993......................... 32,221 -- 322 -- 49,378 -- 49,700
Issuance of Class A Common
Stock:
For acquisition of
DirectSat, Inc........... 999 11 8,989 9,000
For cash.................. 324 3 3,830 3,833
Issuance of 1,616,681 shares
of 8% Series A Cumulative
Preferred Stock............ $ 15,052 15,052
Issuance of Common Stock
Purchase Warrants.......... $ 26,133 26,133
Series A Cumulative
Preferred Stock
dividends.................. 938 (938) --
Net income.................. 90 90
------- ----------- ----- ----------- ----------- -------------- ------------
BALANCES, at December 31,
1994......................... 33,544 15,990 336 26,133 62,197 (848) 103,808
Series A Cumulative
Preferred Stock
dividends.................. 1,205 (1,205) --
Issuance of Class A Common
Stock...................... 4,004 40 62,893 62,933
Common Stock Purchase
Warrants exercised......... 2,731 26 (25,419) 25,393 --
Employee Savings Plan
Contribution and Launch
Bonuses Funded by Issuance
of Class A Common Stock.... 60 1 1,191 1,192
Unrealized holding gains on
available-for-sale
securities, net............ 239 239
Net loss.................... (11,486) (11,486)
------- ----------- ----- ----------- ----------- -------------- ------------
BALANCES, at December 31,
1995......................... 40,339 $ 17,195 $ 403 $ 714 $ 151,674 $ (13,300) $ 156,686
------- ----------- ----- ----------- ----------- -------------- ------------
------- ----------- ----- ----------- ----------- -------------- ------------
The accompanying notes to combined and consolidated
financial statements are an integral part of these statements.
F-5
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
1993 1994 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................................. $ 20,118 $ 90 $ (11,486)
Adjustments to reconcile net income (loss) to net cash flows from operating
activities--
Depreciation................................................................. 1,677 2,243 3,058
Provision for doubtful accounts.............................................. 254 (160) 920
Benefit for deferred taxes................................................... (1,941) (7,330) (4,763)
Amortization of deferred debt issuance costs................................. -- 719 1,279
Amortization of discount on 1994 Notes, net of amounts capitalized........... -- 19,943 22,249
Equity in losses in joint ventures........................................... -- 492 99
Employee benefits funded with Class A Common Stock........................... -- -- 1,192
Loss on dispositions of fixed assets......................................... -- 133 --
Change in reserve for excess and obsolete inventory.......................... (22) 502 1,212
Other, net................................................................... (30) (941) (528)
Changes in working capital items--
Trade accounts receivable.................................................. (3,439) 532 (2,002)
Inventories................................................................ 14,919 3,049 (19,654)
Income tax receivable...................................................... -- -- (3,554)
Other current assets....................................................... (1,659) (183) (10,464)
Liability under cash management program.................................... (4,018) (2,310) (57)
Trade accounts payable..................................................... 1,156 4,958 4,168
Deferred programming revenue............................................... 1,795 564 (1,009)
Accrued expenses........................................................... 1,637 611 (1,232)
Reserve for warranty costs................................................. (250) 50 (387)
Other current liabilities.................................................. 18 1,009 631
Other, net................................................................. -- 234 --
--------- --------- ---------
Net cash flows from operating activities................................. 30,215 24,205 (20,328)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities.................................. (18,227) (15,100) (25,230)
Sales of marketable investment securities...................................... 16,132 4,439 40,563
Purchases of restricted marketable investment securities....................... -- (11,400) (15,000)
Purchases of property and equipment............................................ (19,225) (4,030) (4,077)
Proceeds from sale of property and equipment................................... 383 523 29
Offering proceeds and investment earnings placed in escrow..................... -- (329,831) (9,589)
Funds released from escrow account............................................. -- 144,400 122,149
Accrued satellite contract costs............................................... -- (3,700) --
Investment in SSET............................................................. -- (8,750) --
Investment in DBSC............................................................. -- (4,210) --
Investment in DBSI............................................................. -- -- (1,000)
Long-term note receivable from DBSC............................................ -- -- (16,000)
Investments in joint ventures.................................................. (65) 1,614 --
Expenditures for satellite system under construction........................... -- (112,052) (129,506)
Expenditures from escrow for FCC authorization................................. -- (159) --
Expenditures for FCC authorizations............................................ -- -- (458)
Other.......................................................................... 92 (309) --
--------- --------- ---------
Net cash flows from investing activities................................. (20,910) (338,565) (38,119)
--------- --------- ---------
The accompanying notes to combined and consolidated financial
statements are an integral part of these statements.
F-6
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
1993 1994 1995
---------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term loans from banks................................................ $ 6,000 $ -- $ --
Repayments of short-term loans from banks.................................. (7,256) -- --
Minority investor investment in and loan to consolidated joint venture..... 2,504 1,000 --
Net proceeds from issuance of 1994 Notes and Common Stock Purchase
Warrants.................................................................. -- 323,325 --
Expenditures from escrow for offering costs................................ -- (837) --
Proceeds from refinancing of mortgage indebtedness......................... -- 4,200 --
Repayments of mortgage indebtedness........................................ (152) (3,435) (238)
Loans from stockholder, net................................................ 12,451 4,000 --
Repayment of loans from stockholders....................................... -- (4,075) --
Net proceeds from issuance of Class A Common Stock......................... -- 3,833 62,933
Capital contributions...................................................... 2,497 -- --
Dividends paid............................................................. (22,243) (3,000) --
---------- ----------- ---------
Net cash flows from financing activities................................. (6,199) 325,011 62,695
---------- ----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................................... 3,106 10,651 4,248
CASH AND CASH EQUIVALENTS, beginning of period............................... 3,749 6,855 17,506
---------- ----------- ---------
CASH AND CASH EQUIVALENTS, end of period..................................... $ 6,855 $ 17,506 $ 21,754
---------- ----------- ---------
---------- ----------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized....................... $ 633 $ 436 $ 461
Cash paid for income taxes............................................... 251 7,140 3,203
Cumulative Series A Preferred Stock dividends............................ -- 938 1,205
Dividends declared but not paid until 1994............................... 3,000 -- --
Accrued satellite contract costs......................................... 3,700 -- 15,000
Exchange of note payable to stockholder, and interest thereon, for Series
A Preferred Stock....................................................... -- 15,052 --
Issuance of Class A Common Stock to acquire investment in DirectSat
Corporation............................................................. -- 9,000 --
Property and equipment acquired under capital leases..................... -- 934 --
Note payable issued for deferred satellite construction payments......... -- -- 32,833
Employee Savings Plan Contribution and launch bonuses funded by issuance
of Class A Common Stock................................................. -- -- 1,192
The accompanying notes to combined and consolidated financial
statements are an integral part of these statements.
F-7
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
(1) ORGANIZATION AND BUSINESS ACTIVITIES
Certain companies principally owned and controlled by Mr. Charles Ergen were
reorganized in 1993 into Dish, Ltd., formerly known as EchoStar Communications
Corporation (together with its subsidiaries, "Dish, Ltd.").
The principal reorganized entities, Echosphere Corporation (formed in 1980)
and Houston Tracker Systems, Inc. (acquired in 1986), are primarily engaged in
the design, assembly, marketing and worldwide distribution of direct to home
("DTH") satellite television products. Satellite Source, Inc. contracts for
rights to purchase satellite delivered television programming for resale to
consumers and other DTH retailers. Echo Acceptance Corporation ("EAC") arranges
nationwide consumer financing for purchasers of DTH systems and programming. The
FCC has granted EchoStar Satellite Corporation ("ESC") a conditional satellite
construction permit and frequency assignments for eleven odd-numbered
frequencies at 119 DEG. West Longitude ("WL"). The reorganized group also
includes other less significant domestic enterprises and several foreign
entities involved in related activities outside the United States.
In January 1994, Dish, Ltd. announced its intention to merge a subsidiary of
Dish, Ltd. with DirectSat Corporation ("DirectSat"), an approximately 80% owned
subsidiary of SSE Telecom, Inc. ("SSET") at that time. The merger was approved
by the FCC and consummated in December 1994. DirectSat stockholders received an
approximate 3% equity interest in Dish, Ltd. in exchange for all of DirectSat's
outstanding stock. DirectSat's principal assets are a conditional satellite
construction permit and frequency assignments for ten even-numbered frequencies
at 119 DEG. WL granted by the FCC.
Dish, Ltd. has contracted for the construction and launch of communications
satellites. EchoStar I, a high powered direct broadcast satellite ("DBS"), was
launched on December 28, 1995. EchoStar II is currently under construction and
scheduled for launch during 1996.
In June 1994, Dish, Ltd. completed an offering of 12 7/8% Senior Secured
Discount Notes due 2004 (the "1994 Notes") (Note 5) and Common Stock Purchase
Warrants (the "Warrants") (collectively, the "Notes Offering"), receiving net
proceeds of approximately $323.3 million. Dish, Ltd. and its subsidiaries are
subject to the terms and conditions of the Indenture related to the 1994 Notes
(the "1994 Indenture").
EXCHANGE AND MERGER
In April 1995, a new company, EchoStar Communications Corporation (same name
as the original name of Dish, Ltd.), was formed to conduct a public offering of
its Class A Common Stock and to become the parent of Dish, Ltd. as described
below. The new company is described below as "ECC". Elsewhere in these
footnotes, unless otherwise indicated, "EchoStar" or the "Company" refers to ECC
and its subsidiaries, including Dish, Ltd. The assets of ECC, other than its
investment in Dish, Ltd., are not subject to the 1994 Indenture. Separate parent
only financial information for ECC is supplementally provided in Note 16.
Further, the 1994 Indenture places significant restrictions on the payment of
dividends or other transfers by Dish, Ltd. to ECC.
ECC completed an offering of its Class A Common Stock on June 26, 1995, and
received net proceeds of approximately $63.0 million. Concurrently, Charles W.
Ergen, President and Chief Executive Officer of both ECC and Dish, Ltd.,
exchanged all of his shares of Class B Common Stock and Series A Preferred Stock
of Dish, Ltd. for like shares of ECC (the "Exchange") in the ratio of 0.75
shares of ECC for each share of Dish, Ltd. capital stock (the "Exchange Ratio").
All employee stock options of Dish, Ltd. were also assumed by ECC, adjusted for
the Exchange Ratio. In December 1995, ECC merged Dish, Ltd. with a wholly owned
subsidiary of ECC (the "Merger") and all outstanding
F-8
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(1) ORGANIZATION AND BUSINESS ACTIVITIES (CONTINUED)
shares of Dish, Ltd. Class A Common Stock and Series A Preferred Stock (other
than those held by ECC) were automatically converted into the right to receive
like shares of ECC in accordance with the Exchange Ratio. Also effective with
the Merger, all outstanding Warrants for the purchase of Dish, Ltd. Class A
Common Stock automatically became exercisable for shares of ECC's Class A Common
Stock, adjusted for the Exchange Ratio. As the result of the Exchange and
Merger, ECC owns all outstanding shares of Dish, Ltd. capital stock.
SIGNIFICANT RISKS AND UNCERTAINTIES
Execution of its business strategy to launch and operate DBS satellites has
dramatically changed the Company's operating results and financial position. At
December 31, 1993, Dish, Ltd.'s long-term debt, exclusive of amounts related to
its DBS projects, consisted of less than $5.0 million in mortgage indebtedness
and its investments in property and equipment, other than DBS satellite
payments, aggregated less than $20.0 million. At December 31, 1995, the Company
is committed to expend approximately $450 million to build and launch its first
two satellites and has completed the sale of the 1994 Notes for that purpose
(Notes 5 and 11). Annual interest expense on the 1994 Notes and depreciation of
the investment in the first two satellites will each be of a magnitude that
exceeds historical levels of income before taxes and the Company has reported
net losses beginning in 1995 and expects net losses to continue for the
foreseeable future. The Company's plans also include the construction and launch
of additional satellites and marketing programs to promote its DBS products and
services. The Company will need to raise significant additional funds for those
purposes and there can be no assurance that necessary funds will be available
or, if available, available on terms favorable to the Company. However,
management believes, but has no assurance, that demand for its DBS products and
services will develop to provide cash flow from operation of EchoStar's Dish
Network-SM- which, together with other sources of capital, will be sufficient to
satisfy future planned expenditures. Significant delays in commencing operations
of the EchoStar DBS System, or significant delays or mission failures in the
Company's satellite launch program, may subject the Company to significant
monetary penalties and would have significant adverse consequences to its
operating results and financial condition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. Actual results could differ from those estimates.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION AND CONSOLIDATION
The accompanying financial statements for 1993 combine the historical cost
financial statements of all reorganized entities. The financial statements for
1994 and 1995 present the consolidation of Dish, Ltd. and its subsidiaries
through the date of the Exchange (Note 1) and the consolidation of ECC and its
subsidiaries, including Dish, Ltd. thereafter. The Exchange and Merger was
accounted for as a reorganization of entities under common control and the
historical cost basis of consolidated assets and liabilities was not affected by
the transaction. All significant intercompany transactions have been eliminated
in the combined and consolidated financial statements.
Effective June 1993, the Company acquired a fifty-one percent joint venture
interest in FlexTracker Sdn. Bhd. ("FlexTracker"), a Malaysian limited liability
company. A Singapore electronics manufacturing company owned the forty-nine
percent minority interest. FlexTracker manufactured
F-9
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
integrated and stand-alone receivers and positioners exclusively for the
Company. In December 1994, the Company terminated the FlexTracker joint venture
and effectively sold its interest in the joint venture's net assets to the
Singapore company for $1.8 million. The Company's share of FlexTracker's losses
for 1993 and 1994 amounted to approximately $50,000 and $1.3 million,
respectively, and an additional $492,000 of loss was recognized upon sale of the
net assets. FlexTracker's financial statements have been consolidated in the
accompanying combined and consolidated financial statements from the date of
acquisition through the date of disposition.
The Company accounts for investments in fifty percent or less owned entities
using the equity method. At December 31, 1994 and 1995, these investments were
not material to the combined and consolidated financial statements of the
Company.
FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar because their sales and purchases are predominantly denominated in that
currency. Transactions denominated in currencies other than U.S. dollars are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period end translation) or realized
(upon settlement of the transaction). Net transaction gains (losses) for 1993,
1994 and 1995 were $19,000, $40,000 and $70,000 respectively.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with an original
maturity of ninety days or less to be cash equivalents. Cash equivalents as of
December 31, 1994 and 1995 consist of money market funds, corporate notes and
commercial paper stated at cost which equates to market value.
MARKETABLE INVESTMENT SECURITIES AND RESTRICTED CASH AND MARKETABLE SECURITIES
At December 31, 1994 marketable investment securities were recorded in the
financial statements at amortized cost and were generally held to maturity. At
December 31, 1995, the Company has classified all marketable investment
securities as available for sale. Accordingly, these investments are reflected
at market value based on quoted market prices. Related unrealized gains and
losses are reported as a separate component of stockholders' equity, net of
related deferred income taxes of $146,000 at December 31, 1995. The specific
identification method is used to determine cost in computing realized gains and
losses. The major components of marketable investment securities as of December
31, 1994 and 1995 are as follows (in thousands).
F-10
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DECEMBER 31, 1995
DECEMBER 31, 1994 -------------------------------------
---------------------- UNREALIZED
AMORTIZED MARKET AMORTIZED HOLDING MARKET
COST VALUE COST GAIN (LOSS) VALUE
----------- --------- ----------- ------------- ---------
Commercial paper........................... $ 19,976 $ 20,233 $ 1,126 $ -- $ 1,126
Corporate notes............................ 10,992 10,987 12,353 (19) 12,334
Municipal bonds............................ 70 70 -- -- --
Government bonds........................... -- -- 2,038 -- 2,038
Mutual funds............................... -- -- 188 (16) 172
----------- --------- ----------- --- ---------
$ 31,038 $ 31,290 $ 15,705 $ (35) $ 15,670
----------- --------- ----------- --- ---------
----------- --------- ----------- --- ---------
Restricted Cash and Marketable Securities in Escrow as reflected on the
accompanying balance sheets represent net proceeds received from the Notes
Offering, plus interest earned, less amounts expended to date in connection with
the development, construction and launch of EchoStar's Dish Network-SM-. The
escrow funds are held by an escrow agent in an account (the "Escrow Account")
for the benefit of the holders of the 1994 Notes and are invested in certain
debt and other marketable securities, as permitted by the 1994 Indenture, until
disbursed for the express purposes identified in the Notes Offering prospectus.
The major components of Restricted Cash and Marketable Securities as of December
31, 1994 and 1995 are as follows (in thousands):
DECEMBER 31, 1995
DECEMBER 31, 1994 -----------------------------------
------------------------ UNREALIZED
AMORTIZED MARKET AMORTIZED HOLDING MARKET
COST VALUE COST GAIN VALUE
----------- ----------- ----------- ----------- ---------
Commercial paper.......................... $ 94,315 $ 94,909 $ 66,214 $ -- $ 66,214
Corporate notes........................... 8,954 8,954 -- -- --
Government bonds.......................... -- -- 32,904 420 33,324
Municipal bonds........................... 92,513 93,010 -- -- --
Accrued interest.......................... 1,049 1,049 153 -- 153
----------- ----------- ----------- ----- ---------
$ 196,831 $ 197,922 $ 99,271 $ 420 $ 99,691
----------- ----------- ----------- ----- ---------
----------- ----------- ----------- ----- ---------
Other Restricted Cash includes $11.4 million to satisfy certain covenants
regarding launch insurance required by the 1994 Indenture. The Company is
required to maintain launch insurance and restricted cash totalling $225.0
million for each of EchoStar I and EchoStar II. The Company has obtained $219.3
million of launch insurance on each satellite, and, together with the cash
segregated and reserved on the accompanying balance sheets, has satisfied its
insurance obligations under the 1994 Indenture. In addition, as of December 31,
1995, $15.0 million was in an escrow account established pursuant to a
manufacturing contract for payment to the manufacturer as certain milestones are
reached.
REVENUE RECOGNITION AND TRADE ACCOUNTS RECEIVABLE
Revenue from sales of DTH products is recognized upon shipment to customers.
The Company maintains a reserve for potential losses in collection of its trade
accounts receivable based upon estimates of amounts that may ultimately be
uncollectible. The allowance for doubtful accounts was $186,000 and $1.1 million
as of December 31, 1994 and 1995, respectively.
F-11
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out ("FIFO") method. Proprietary products
are manufactured by outside suppliers to the Company's specifications; however,
final testing and assembly is performed by the Company. The Company also
distributes non-proprietary products purchased from other manufacturers.
Manufactured inventories include materials, labor and manufacturing overhead.
Cost of other inventories includes parts, contract manufacturers' delivered
price, assembly and testing labor, and related overhead, including handling and
storage costs. The major components of inventory were as follows (in thousands):
DECEMBER 31,
--------------------
1994 1995
--------- ---------
DBS receiver components................................................ $ -- $ 9,615
Spare parts............................................................ 2,759 2,089
Competitor DBS Receivers............................................... 2,207 9,404
Finished goods......................................................... 16,946 20,458
Reserve for excess and obsolete inventory.............................. (1,585) (2,797)
--------- ---------
$ 20,327 $ 38,769
--------- ---------
--------- ---------
OTHER CURRENT ASSETS
Other current assets consisted of the following (in thousands):
DECEMBER 31,
--------------------
1994 1995
--------- ---------
DBS inventory deposit................................................... $ -- $ 10,000
Receivables for funded loans............................................ 257 437
Other................................................................... 2,316 2,600
--------- ---------
$ 2,573 $ 13,037
--------- ---------
--------- ---------
In conjunction with its commitments to purchase DBS satellite receivers
(Note 11), the Company has paid a deposit of $10.0 million to one of its
manufacturers. The deposit will be applied towards future payments for the DBS
satellite receivers as they are delivered during 1996.
Other current assets include receivables for consumer loans funded by EAC
but expected to be reimbursed to EAC on a nonrecourse basis by two unrelated
finance companies, normally within two business days after the credit is
accepted by those companies. Unreimbursed fundings were $257,000 and $437,000 as
of December 31, 1994 and 1995, respectively, all of which were subsequently
reimbursed. Total loans sourced by EAC during 1993, 1994 and 1995 were $85.6
million, $64.7 million and $50.1 million, respectively. In addition, EAC sourced
$8.6 million of leases in 1995.
Loan origination fees charged to the applicable DTH dealers are recognized
in income upon receipt of funding reimbursement from the purchaser of the loans.
EAC also receives a percentage of monthly finance charges billed by the
purchaser of the loans which is recognized in income as it becomes due to EAC.
FCC AUTHORIZATIONS AND ORGANIZATIONAL COSTS
FCC authorizations and organizational costs are recorded at cost and are
amortized using the straight-line method. Amortization periods for FCC
authorization costs are determined at the time
F-12
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the services related to the applicable FCC authorization commences, or
capitalized costs are written off at the time efforts to provide services are
abandoned. FCC authorization costs are expected to have a useful life of
approximately 12 years. Organizational costs are being amortized over five
years.
DEFERRED DEBT ISSUANCE COSTS AND DEBT DISCOUNT
Costs of completing the Notes Offering have been deferred (Note 4) and are
being amortized to interest expense over the term of the 1994 Notes.
Amortization of the original issue discount related to the Notes Offering (Note
5) is also being amortized and included in interest cost incurred so as to
reflect a constant rate of interest on the accredited balance of the 1994 Notes.
DEFERRED PROGRAMMING REVENUE
Deferred programming revenue consists of payments received from consumers
and dealers for satellite television programming to be provided. The revenue is
recognized on a straight-line basis over the period the programming is provided,
which generally does not exceed one year.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The composition of accrued expenses and other current liabilities is as
follows (in thousands):
DECEMBER 31,
--------------------
1994 1995
--------- ---------
Accrued satellite contract costs........................................ $ -- $ 15,000
Liability under cash management program................................. 57 --
Accrued expenses........................................................ 4,667 3,850
Reserve for warranty costs.............................................. 1,400 1,013
Other................................................................... 841 1,472
--------- ---------
$ 6,965 $ 21,335
--------- ---------
--------- ---------
The liability under cash management program represents checks written and
released in excess of balances presently on deposit with certain banks. As
checks clear these bank accounts, the resulting overdrafts are funded daily from
funds available in a concentration account at another bank.
The Company's proprietary products are under warranty against defects in
material and workmanship for one year from the date of original retail purchase.
The reserve for warranty costs is based upon historical units sold and expected
repair costs.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $3.2 million, $2.3
million and $1.9 million for the years ended December 31, 1993, 1994 and 1995,
respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development costs totaled $5.1 million, $5.9 million and $5.0 million for the
years ended December 31, 1993, 1994 and 1995, respectively.
INCOME TAXES
Prior to the December 31, 1993 reorganization (Note 1), the principal
combined entities were Subchapter S corporations and their income was taxable to
the stockholders rather than the companies. The provision for income taxes
reflected only amounts payable to states and foreign tax jurisdictions that did
not recognize Subchapter S status. Effective December 31, 1993, Subchapter S
status
F-13
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
terminated and the Company will prospectively file consolidated corporate
federal and state income tax returns. As required by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"),
this change in tax status was recognized by establishing deferred tax assets and
liabilities for temporary differences between the tax basis and amounts reported
in the accompanying combined and consolidated balance sheets (Note 7).
Under SFAS No. 109, the current provision for income taxes represents actual
or estimated amounts payable or refundable on tax returns filed or to be filed
for each year. Deferred tax assets and liabilities are recorded for the
estimated future tax effects of: (a) temporary differences between the tax basis
of assets and liabilities and amounts reported in the combined and consolidated
balance sheets, and (b) operating loss and tax credit carry forwards. The
overall change in deferred tax assets and liabilities for the period measures
the deferred tax expense for the period. Effects of changes in enacted tax laws
on deferred tax assets and liabilities are reflected as adjustments to tax
expense in the period of enactment. The measurement of deferred tax assets may
be reduced by a valuation allowance based on judgmental assessment of available
evidence if deemed more likely than not that some or all of the deferred tax
assets will not be realized.
EARNINGS PER SHARE
Earnings per share has been calculated based on the weighted average number
of shares of common stock issued and outstanding and, if dilutive, common stock
equivalents (warrants and employee stock options) during the years ended
December 31, 1994 and 1995; and net income has been adjusted for cumulative
dividends on the 8% Series A Cumulative Preferred Stock (the "Series A Preferred
Stock"). Earnings per share for the year ended December 31, 1993 has been
calculated and presented on a pro forma basis as if the shares issued to effect
the December 31, 1993 reorganization (Note 1) were outstanding during each
period.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). The
Company will be required to adopt SFAS No. 121 in 1996 and expects that its
ultimate adoption will not have a significant impact on the Company's financial
position, results of operations or cash flows.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), issued by the FASB in October 1995
and effective for fiscal years beginning after December 15, 1995, encourages,
but does not require, a fair value based method of accounting for employee stock
options or similar equity instruments. It also allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees" ("APB No. 25"), but requires
pro forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. The Company expects to adopt SFAS
No. 123 in 1996. While the Company is still evaluating SFAS No. 123, it
currently expects to elect to measure compensation cost under APB No. 25 and
comply with the pro forma disclosure requirements. If the Company makes this
election, this statement will have no impact on the Company's results of
operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's financial statement presentation.
F-14
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Cost includes interest capitalized of $370,000, $5.7 million and $25.8 million
during the years ended December 31, 1993, 1994 and 1995, respectively on the
EchoStar DBS System during construction at the Company's effective borrowing
rate. The major components of property and equipment were as follows (in
thousands):
ESTIMATED
USEFUL DECEMBER 31,
LIFE ------------------------
(IN YEARS) 1994 1995
---------- ----------- -----------
Construction in progress......................................... -- $ 139,500 $ 303,174
Land............................................................. -- 1,613 1,613
Buildings and improvements....................................... 7-40 8,936 21,006
Furniture, fixtures and equipment................................ 2-12 6,081 17,163
Vehicles......................................................... 7 992 1,310
Tooling.......................................................... 2 1,339 2,039
Furniture and equipment held for sale............................ -- 17,062
Computer equipment held for sale................................. -- 902
----------- -----------
Total property and equipment..................................... 158,461 364,269
Less-Accumulated depreciation.................................... (7,221) (10,269)
----------- -----------
Net property and equipment................................... $ 151,240 $ 354,000
----------- -----------
----------- -----------
Construction in progress includes capitalized costs related to the
construction and launch (Note 11) of EchoStar I, which was launched in late
December 1995, EchoStar II, which is scheduled for launch prior to the end of
1996 and EchoStar III.
Construction in progress consisted of the following (in thousands):
DECEMBER 31,
------------------------
1994 1995
----------- -----------
Progress amounts for satellite construction and launch, capitalized interest,
launch insurance, launch and in-orbit tracking, telemetry and control
services:
EchoStar I.................................................................. $ 75,613 $ 193,629
EchoStar II................................................................. 62,438 88,634
EchoStar III................................................................ -- 20,801
Uplink facility............................................................. 1,449 --
Other....................................................................... -- 110
----------- -----------
$ 139,500 $ 303,174
----------- -----------
----------- -----------
F-15
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(4) OTHER NONCURRENT ASSETS
The major components of other noncurrent assets were as follows (in
thousands):
DECEMBER 31,
--------------------
1994 1995
--------- ---------
Deferred debt issuance costs, net of amortization...................... $ 11,891 $ 10,622
FCC authorizations..................................................... 9,519 11,309
SSET convertible subordinated debentures and accrued interest.......... 9,029 9,610
DBSI convertible subordinated debentures............................... -- 1,000
Deferred tax assets, net............................................... 7,431 12,109
Investment in DBSC..................................................... 4,210 4,111
Long-term note receivable from DBSC.................................... -- 16,000
Warehousing bond....................................................... 432 468
Prepaid travel......................................................... 315 293
Other.................................................................. 213 136
--------- ---------
$ 43,040 $ 65,658
--------- ---------
--------- ---------
The merger with DirectSat described in Note 1 was accounted for as a
purchase. DirectSat's assets were valued at $9.0 million by the Company at the
time of the merger and are included in FCC authorizations in the above summary.
DirectSat has been granted a conditional satellite construction permit, specific
orbital slot assignments and frequency assignments by the FCC. The DirectSat
permits conditionally authorize DirectSat to provide DBS service utilizing: (i)
ten even-numbered channels at 119 DEG. WL, the same orbital location that has
been assigned to ESC; (ii) one channel at 110 DEG. WL; and (iii) 11 odd-numbered
channels at 175 DEG. WL. The Company expects to use DirectSat's approved
frequencies at 119 DEG. WL for the EchoStar II satellite.
The Company also purchased $8.75 million of SSET's 6.5% convertible
subordinated debentures which, if converted, would represent approximately 11.6%
of SSET's common stock, based on the number of shares of SSET common stock
outstanding at December 31, 1995. Management estimates that the fair value of
the SSET debentures approximates their carrying value in the accompanying
financial statements based on current interest rates and the conversion features
contained in the debentures. SSET is a reporting company under the Securities
Exchange Act of 1934 engaged in the manufacture and sale of satellite
telecommunications equipment. In March 1994, SSET also sold to the Company for
$1.25 million an approximate 6% ownership interest in the stock of Direct
Broadcasting Satellite Corporation ("DBSC") and certain notes and accounts
receivable from DBSC.
In November 1994, the Company resolved a suit brought by the Company against
DBSC regarding enforceability of the notes and accounts receivable. The
receivables were exchanged for shares of DBSC common stock and the Company
purchased additional DBSC shares for $2,960,000 so that, together with the
shares of DBSC acquired from SSET, the Company presently owns approximately 40%
of the outstanding common stock of DBSC. DBSC's principal assets include an FCC
conditional satellite construction permit and specific orbital slot assignments
for eleven DBS frequencies at 61.5 DEG. WL and eleven DBS frequencies at
175 DEG. WL.
The Company has negotiated the merger of DBSC with a subsidiary of the
Company. The merger has been approved by DBSC shareholders but may not be
completed until the FCC has approved the merger. Assuming FCC approval for
consummation of this merger, the Company will hold, through its
F-16
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(4) OTHER NONCURRENT ASSETS (CONTINUED)
DBSC subsidiary, the permit and slot assignments for these frequencies. In
connection with the merger, the Company expects to issue approximately 675,000
shares of its Class A Common Stock to DBSC shareholders in exchange for all
remaining DBSC stock.
In December 1995, the Company advanced DBSC $16.0 million to make payments
under their satellite construction contract. The Company has a note receivable
from DBSC which bears interest at 11.5% and matures December 29, 2003. Under the
terms of the promissory note, equal installments of principal and interest are
due annually commencing in December 1997. This note is secured by all the assets
of DBSC as defined in the Security Agreement. Management estimates that the fair
value of this note approximates its carrying value in the accompanying financial
statements based on current risk adjusted interest rates.
In 1995 the Company also purchased $1.0 million of DBS Industries, Inc.'s
("DBSI") convertible subordinated debentures which, if converted, would
represent less than 5% of DBSI's common stock, based on the number of shares of
DBSI common stock outstanding at December 31, 1995. The debentures bear interest
at prime plus 2%, adjusted and payable quarterly (10.5% at December 31, 1995),
and mature July 1, 1998. The debentures are secured by 125,000 shares of DBSC's
common stock and 2,000 shares of common stock of E-SAT Corporation which is
currently owned 80% by the Company. DBSI owns a minority interest in DBSC, is a
reporting company under the Securities Exchange Act of 1934 and is engaged in
the development of satellite and radio systems for use in automating the control
and distribution of gas and electric power by utility companies. Management
estimates that the fair value of the DBSI's debentures approximates their
carrying value in the accompanying financial statements based on current
interest rates and the conversion features contained in the debentures. In
January 1996, the Company purchased an additional $3 million of DBSI's
convertible subordinated debentures.
(5) SENIOR SECURED NOTES
On June 7, 1994, Dish, Ltd. completed the Notes Offering of 624,000 units
consisting of $624 million aggregate principal amount of the 12 7/8% Senior
Secured Notes (the "1994 Notes") and 3,744,000 Warrants for the purchase of
Dish, Ltd. Class A Common Stock. Effective with the Merger (Note 1), these
Warrants became exercisable for 2,808,000 Shares of ECC's Class A Common Stock
(Note 9). The Notes Offering resulted in net proceeds to Dish, Ltd. of $323.3
million. At December 31, 1994, the 1994 Notes were reflected in the financial
statements at $334.2 million, net of unamortized discount of $289.8 million. At
December 31, 1995, the 1994 Notes totaled $382.2 million, net of unamortized
discount of $241.8 million. A limited trading market exists for the 1994 Notes.
However, based on information available to the Company, the 1994 Notes traded
for approximately $690 per bond near December 31, 1995. This suggests a current
aggregate market value of the 1994 Notes of approximately $430.6 million.
The 1994 Notes rank senior in right of payment to all subordinated
indebtedness of Dish, Ltd. and PARI PASSU in right of payment with all other
senior indebtedness of Dish, Ltd., subject to the terms of an Intercreditor
Agreement between Dish, Ltd., certain of its principal subsidiaries and certain
creditors thereof. The 1994 Notes are secured by liens on certain assets of
Dish, Ltd., including EchoStar I and EchoStar II and all other components of the
EchoStar DBS System owned by Dish, Ltd. and its subsidiaries. The 1994 Notes are
guaranteed by each material direct subsidiary of Dish, Ltd. (Note 12). Although
the 1994 Notes are titled "Senior": (i) Dish, Ltd. has not issued, and does not
have any current arrangements to issue, any significant indebtedness to which
the 1994 Notes would be senior, however, Senior Secured Notes being offered for
sale subsequent to December 31, 1995, by
F-17
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(5) SENIOR SECURED NOTES (CONTINUED)
EchoStar Satellite Broadcasting Corporation, another wholly owned subsidiary of
ECC, will effectively be subordinated to the 1994 Notes and all other
liabilities of Dish, Ltd. and its subsidiaries; and (ii) at December 31, 1994
and 1995, the 1994 Notes were effectively subordinated to approximately $5.6
million and $5.4 million of mortgage indebtedness, respectively, with respect to
certain assets of Dish, Ltd.'s subsidiaries, not including the EchoStar DBS
System. Further, the 1994 Notes are subordinate to advances under the Credit
Facility (Note 6), and will be ranked PARI PASSU with the security interest of
approximately $30.0 million of contractor financing.
Interest on the 1994 Notes currently is not payable in cash but accrues
through June 1, 1999, with the 1994 Notes accrediting to $624.0 million by that
date. Thereafter, interest on the 1994 Notes will be payable in cash
semi-annually on June 1 and December 1 of each year, commencing December 1,
1999. Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1994 Notes are not redeemable at Dish, Ltd.'s
option prior to June 1, 1999. Thereafter, the 1994 Notes will be subject to
redemption, at the option of Dish, Ltd., in whole or in part, at redemption
prices ranging from 104.828% during the year commencing June 1, 1999 to 100% on
or after June 1, 2002 of principal, together with accrued and unpaid interest
thereon to the redemption date. On each of June 1, 2002 and June 1, 2003, Dish,
Ltd. will be required to redeem 25% of the original aggregate principal amount
of 1994 Notes at a redemption price equal to 100% of the principal amount
thereof, together with accrued and unpaid interest thereon to the redemption
date. The remaining principal of the 1994 Notes will mature on June 1, 2004.
In the event of a change of control and upon the occurrence of certain other
events, as described in the 1994 Indenture, Dish, Ltd. will be required to make
an offer to each holder of 1994 Notes to repurchase all or any part of such
holder's 1994 Notes at a purchase price equal to 101% of the accredited value
thereof on the date of purchase, if prior to June 1, 1999, or 101% of the
aggregate principal amount thereof, together with accrued and unpaid interest
thereon to the date of purchase, if on or after June 1, 1999.
The 1994 Indenture contains restrictive covenants that, among other things,
impose limitations on Dish, Ltd. and its subsidiaries with respect to their
ability to: (i) incur additional indebtedness; (ii) issue preferred stock; (iii)
apply the proceeds of certain asset sales; (iv) create, incur or assume liens;
(v) create dividend and other payment restrictions with respect to Dish, Ltd.'s
subsidiaries; (vi) merge, consolidate or sell assets; (vii) incur subordinated
or junior debt; and (viii) enter into transactions with affiliates. In addition,
Dish, Ltd., may pay dividends on its equity securities only if (1) no default is
continuing under the 1994 Indenture; and (2) after giving effect to such
dividend, Dish, Ltd.'s ratio of total indebtedness to cash flow (calculated in
accordance with the 1994 Indenture) would not exceed 4.0 to 1. Moreover, the
aggregate amount of such dividends generally may not exceed the sum of 50% of
Dish, Ltd.'s consolidated net income (calculated in accordance with the 1994
Indenture) from the date of issuance of the 1994 Notes, plus 100% of the
aggregate net proceeds to Dish, Ltd. from the issuance and sale of certain
equity interests of Dish, Ltd. (including common stock).
F-18
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(6) SHORT-TERM AND LONG-TERM DEBT
LONG-TERM MORTGAGE DEBT
In addition to the 1994 Notes (Note 5), long-term debt consists of the
following as of December 31, 1994 and 1995 (in thousands):
1994 1995
--------- ---------
8.75% note payable for deferred satellite contract payments due in equal monthly
installments of $677,590, including interest, through February 2001; secured by
substantially all assets of Dish, Ltd., and Dish, Ltd.'s subsidiaries...................... $ -- $ 32,833
8.0% mortgage note payable due in equal monthly installments of $41,635, including interest,
through May 2008; secured by land and office building...................................... 4,088 3,909
10.5% mortgage note payable due in equal monthly installments of $9,442, including interest,
through November 1998; final payment of $854,000 due November 1998; secured by land and
warehouse building......................................................................... 927 910
9.9375% mortgage note payable due in equal quarterly principal installments of $10,625, plus
interest, through April 2009; secured by land and office building.......................... 616 574
--------- ---------
Total long-term debt, excluding the 1994 Notes.............................................. 5,631 38,226
Less current installments................................................................... (238) (4,782)
--------- ---------
Long-term debt, excluding current installments.............................................. $ 5,393 $ 33,444
--------- ---------
--------- ---------
Aggregate maturities of the above long-term mortgage debt are as follows:
1996, $4.8 million; 1997, $6.2 million; 1998, $7.6 million; 1999, $7.3 million;
2000, $8.0 million; and thereafter, $4.3 million. In addition, contractor
financing of $28.0 million at the prime rate is available for EchoStar II
payable in installments over five years following the launch (Note 11).
DEFERRED SATELLITE CONTRACT PAYMENTS
The majority of the purchase price for the satellites is required to be paid
in progress payments, with the remainder payable in the form of non-contingent
payments deferred until EchoStar I and EchoStar II are in orbit, with interest
at the prime rate over a period of five years after the delivery and launch of
each such satellite (the "Deferred Payments"). As security for the portion of
the Deferred Payments due to the contractor (Martin Marietta), Dish, Ltd. has:
(i) granted a security interest in substantially all assets of Dish, Ltd. and
Dish, Ltd.'s subsidiaries (the "Dish, Ltd. subsidiaries"), other than the stock
of the EchoStar subsidiaries and the proceeds derived from the sale of the 1994
Notes, subordinate to the first security interest in the assets of ESC granted
to the Trustee under the 1994 Indenture (Note 5), and to the liens granted to
any commercial bank which provides a revolving credit facility to Dish, Ltd.,
except that such security interest ranks PARI PASSU with the security interest
in the assets of ESC granted for the benefit of the holders of the 1994 Notes
with respect to $30.0 million of the Deferred Payments; and (ii) caused Dish,
Ltd. and its subsidiaries to guarantee payment in full of such Deferred
Payments.
Martin Marietta has a security interest in the EchoStar DBS System which,
with respect to $30.0 million of the Deferred Payments, ranks PARI PASSU with
the lien on such assets granted for the benefit of the holders of the 1994
Notes, and, with respect to the remainder of the Deferred Payments, is
subordinated to the lien on such assets granted for the benefit of the holders
of the 1994 Notes.
F-19
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(6) SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
However, following any default on the Deferred Payments, Martin Marietta is
prohibited from realizing on any of such collateral for a period of at least
five years following consummation of the Notes Offering, and in any event for
180 days following such default. Martin Marietta also has a security interest in
the assets of the Dish, Ltd. subsidiaries other than ESC which lien, with
respect to the assets of certain of the Dish, Ltd. subsidiaries, ranks senior to
the lien on such assets granted for the benefit of the holders of the 1994
Notes.
LONG-TERM NOTES PAYABLE TO STOCKHOLDER
As of December 31, 1993, ESC had a long-term note payable to its principal
stockholder, including cumulative accrued interest at prime, of $14.7 million.
The loan proceeds were used to make payments due pursuant to the satellite
construction project (Note 11). The note accrued interest at 10% per annum from
January 1, 1994 to March 21, 1994. The stockholder exchanged the note together
with accrued but unpaid interest for Series A Preferred Stock on May 6, 1994
(Note 16). The principal stockholder also advanced $4.0 million to EchoStar in
1994 used to fund transactions with SSET (Note 4) which was repaid from proceeds
of the 1994 Notes.
The Company also had a noninterest-bearing note payable to its principal
stockholder at December 31, 1993 of $75,000 which was repaid in January 1994.
BANK CREDIT FACILITY
On May 6, 1994, the principal subsidiaries of Dish, Ltd., except ESC (the
"Borrowers"), entered into an agreement with Bank of America Illinois (the
"Bank"), to provide a revolving credit facility (the "Credit Facility") for
working capital advances and for letters of credit necessary for inventory
purchases and satellite construction payments. The maximum amount available to
the Borrowers under the Credit Facility is the lesser of the "Borrowing Base"
(as defined in the Credit Facility) or $17.0 million, if prior to March 6, 1996,
or $14.5 million,
F-20
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(6) SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
if on or after March 6, 1996. The Borrowing Base includes specified percentages
of eligible receivables, inventory and marketable investment securities. At
December 31, 1995 the Borrowing Base exceeded $17.0 million. Advances under the
Credit Facility bear interest at: (i) the Bank's Reference Rate (as defined in
the Credit Facility); (ii) Eurodollar rate plus 2% per annum or (iii) the
secondary CD bid rate plus 2.25% per annum, at the Borrowers' choice. Advances
pursuant to the Credit Facility are secured by substantially all of the assets
of the Borrowers. At December 31, 1995, standby letters of credit totaled $15.5
million, and there were no documentary letters of credit or advances
outstanding.
The Credit Facility contains customary representations, covenants and
conditions to borrowing. The Credit Facility also contains a number of negative
covenants that restrict the Borrowers from, among other things, incurring
additional indebtedness, creating liens on their assets, providing guarantees,
entering into merger or consolidation transactions, or disposing of their assets
outside the ordinary course of business. Except in certain circumstances
specified in the Credit Facility, the Borrowers are able to pay dividends to
Dish, Ltd. in an amount not to exceed 50% of excess cash flow (as defined in the
Credit Facility) in 1995 and 1996.
(7) INCOME TAXES
As stated in Note 2, the combined entities terminated their Subchapter S
status on December 31, 1993. This change in tax status was recognized by
establishing a net deferred tax asset of $1.9 million on that date for temporary
differences between tax basis and amounts reported in the accompanying combined
and consolidated balance sheet. The current provision for income taxes for 1993
reflects only amounts payable to certain states and foreign tax jurisdictions
that do not recognize Subchapter S status. Beginning in 1994, the group filed
consolidated corporate federal and state income tax returns.
The components of the (provision) benefit for income taxes are as follows
(in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Current (provision) benefit
Federal..................................................... $ -- $ (5,951) $ 1,350
State....................................................... (128) (853) (67)
Foreign..................................................... (429) (925) (301)
--------- --------- ---------
(557) (7,729) 982
--------- --------- ---------
Deferred benefit
Federal..................................................... 1,686 6,342 4,383
State....................................................... 255 988 380
--------- --------- ---------
1,941 7,330 4,763
--------- --------- ---------
Total benefit (provision)................................. $ 1,384 $ (399) $ 5,745
--------- --------- ---------
--------- --------- ---------
F-21
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(7) INCOME TAXES (CONTINUED)
The types of temporary differences that give rise to a significant portion
of net deferred tax assets and their approximate tax effects as of December 31,
1994 and 1995 are as follows (in thousands):
1994 1995
--------- ---------
Current deferred tax assets
Inventory reserves and cost methods................................... $ 438 $ 834
Reserve for warranty costs............................................ 532 385
Accrued customer incentives........................................... 234 --
Accrued employee incentives........................................... 418 168
Allowance for doubtful accounts....................................... 106 456
Unrealized holding gain on marketable investment securities........... -- (153)
Other................................................................. 112 89
--------- ---------
Net current deferred tax assets................................... 1,840 1,779
--------- ---------
Noncurrent deferred tax assets
Amortization of original issue discount (included in other noncurrent
assets).............................................................. 7,431 15,439
Other................................................................. -- 7
--------- ---------
7,431 15,446
--------- ---------
Noncurrent deferred tax liabilities
Capitalized costs deducted for tax.................................... -- (2,351)
Depreciation.......................................................... -- (986)
--------- ---------
-- (3,337)
--------- ---------
Noncurrent net deferred tax assets................................ 7,431 12,109
--------- ---------
Net deferred tax assets........................................... $ 9,271 $ 13,888
--------- ---------
--------- ---------
No valuation allowance has been provided for the above deferred tax assets
because the Company currently believes it is more likely than not that these
assets will be realized. If future operating results differ materially and
adversely from the Company's current expectations, its judgment regarding the
need for a valuation allowance may change.
PRO FORMA TAX EFFECTS
The combined and consolidated statements of income present, on an unaudited
pro forma basis, net income for 1993 as if the Company had filed consolidated C
Corporation federal and state income tax returns for that year. The pro forma
tax effects assume foreign taxes paid would have been fully creditable against
United States federal taxes payable and that the deferred tax assets established
on December 31, 1993 as described above, would have been provided for as the
related temporary
F-22
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(7) INCOME TAXES (CONTINUED)
differences arose. The pro forma provisions for income taxes for 1993 and the
actual tax provisions for 1994 and 1995 are reconciled to the amounts computed
by applying the statutory federal tax rate to income before taxes as follows
(amounts in thousands).
1993 1994 1995
---------------------- ------------------------ ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ----------- ----------- ----------- --------- -----------
Statutory rate...................................... $ (6,557) (35.0)% $ (166) (34.0)% $ 6,031 35.0%
State income taxes, net of federal benefit.......... (450) (2.4) (88) (18.0) 203 1.2
Tax exempt interest income.......................... 350 1.9 60 12.3 10 0.1
Research and development credits.................... 195 1.0 156 31.9 31 0.2
Non-deductible interest expense..................... -- -- (258) (52.7) (293) (1.7)
Other............................................... -- -- (103) (21.1) (237) (1.5)
--------- ----- ----------- ----- --------- ---
Total (provision) benefit for income taxes (pro
forma in 1993)................................. (6,462) (34.5)% $ (399) (81.6)% $ 5,745 33.3%
----- ----------- ----- --------- ---
----- ----------- ----- --------- ---
Less: Historical benefit for income taxes........... 1,384
---------
Pro forma tax effects............................... $ (7,846)
---------
---------
(8) EMPLOYEE BENEFIT PLAN AND EXECUTIVE INCENTIVE BONUS PLANS
The Company has a 401(k) Employee Savings Plan (the "401(k) Plan") for
eligible employees. Voluntary employee contributions to the 401(k) Plan may be
matched 50% by the Company, subject to a maximum annual contribution by the
Company of $1,000 per employee. The Company may also make an annual
discretionary contribution to the plan with approval by the Company's Board of
Directors, subject to the maximum deductible limit provided by the Internal
Revenue Code of 1986, as amended. The Company's total cash contributions to the
401(k) Plan were $572,000, $170,000 and $177,000 for 1993, 1994 and 1995,
respectively. Also in 1995, the Company contributed 55,000 shares of its Class A
Common Stock (fair value of approximately $1.1 million) to the 401(k) Plan as a
discretionary contribution.
During the years ended December 31, 1993, 1994 and 1995, the Company's Board
of Directors declared discretionary bonuses totaling $834,000, $711,000 and
$75,000 respectively. Also, a launch bonus award of 10 shares of the Company's
Class A Common Stock to all full time employees with more than 90 days service
as of December 16, 1995 was awarded. A total of approximately 4,900 shares with
an aggregate value of approximately $78,000 was issued.
(9) STOCKHOLDERS' EQUITY
Ownership of each of the subsidiaries was generally uniform at the time of
formation of Dish, Ltd. described in Note 1. As of December 31, 1993, the
stockholders contributed their shares in the subsidiaries for an aggregate of
7,500 shares of Common Stock of Dish, Ltd. Retained earnings that had not been
distributed prior to the reorganization and related termination of Subchapter S
status were constructively distributed to the stockholders and contributed to
Dish, Ltd. as additional paid-in capital.
Dividends declared and paid during the three years ended December 31, 1994,
included amounts to allow the stockholders to pay taxes on Subchapter S income
and for investment in and advances to ESC related to construction of EchoStar I
and EchoStar II (Notes 2, 3 and 6).
F-23
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
The Class A, Class B and Class C Common Stock are equivalent in all respects
except voting rights. Holders of Class A and Class C Common Stock are entitled
to one vote per share and holders of Class B Common Stock are entitled to ten
votes per share. Each share of Class B and Class C Common Stock is convertible
at the option of the holder, into one share of Class A Common Stock. Upon a
change in control of ECC, each holder of outstanding shares of Class C Common
Stock is entitled to ten votes for each share of Class C Common Stock held by
the holder. ECC's principal stockholder owns all outstanding Class B Common
Stock and all other stockholders own Class A Common Stock.
SERIES A PREFERRED STOCK
On May 6, 1994, the Company exchanged 1,616,681 shares of its Preferred
Stock with its principal stockholder in consideration for the cancellation of a
note, plus accrued and unpaid interest thereon. Approximately 5%, or 80,834
shares, of the Preferred Stock were subsequently sold to another stockholder and
officer of the Company. The principal stockholder has pledged all of his
Preferred Stock to Martin Marietta as collateral security for contractor
financing (Note 6).
Each share of the Preferred Stock is convertible, at the option of the
holder, into one share of Class A Common Stock, subject to adjustment from time
to time upon the occurrence of certain events, including, among other things:
(i) dividends or distributions on Class A Common Stock payable in Class A Common
Stock or certain other capital stock; (ii) subdivisions, combinations or certain
reclassifications of Class A Common Stock; and (iii) issuances of Class A Common
Stock or rights, warrants or options to purchase Class A Common Stock at a price
per share less than the liquidation preference per share. In the event of the
liquidation, dissolution or winding up of EchoStar, the holders of Preferred
Stock would be entitled to receive an amount equal to approximately $10.64 per
share as of December 31, 1995.
The aggregate liquidation preference for all outstanding shares of Series A
Preferred Stock is limited to the principal amount represented by the note, plus
accrued and unpaid dividends thereon. Each share of Series A Preferred Stock is
entitled to receive dividends equal to eight percent per annum of the initial
liquidation preference for such share. Each share of Series A Preferred Stock
automatically converts into shares of Class A Common Stock in the event they are
transferred to any person other than certain permitted transferees and is
entitled to the equivalent of ten votes for each share of Class A Common Stock
into which it is convertible. Except as otherwise required by law, holders of
Series A Preferred Stock vote together with the holders of Class A and Class B
Common Stock as a single class.
All accrued dividends payable to Mr. Ergen on his Dish, Ltd. Series A
Preferred Stock through the date of the Exchange ($1.4 million), and all accrued
dividends payable to the remaining holder of Dish, Ltd. Series A Preferred Stock
through the date of the Merger ($107,000), will remain obligations of Dish, Ltd.
(Note 1); however, no additional dividends will accrue with respect to the Dish,
Ltd. Series A Preferred Stock. The 1994 Indenture places significant
restrictions of payment of those dividends, and dividends are not expected to be
paid in the foreseeable future. Through December 31, 1995, additional accrued
dividends payable to Mr. Ergen by ECC on the ECC Series A Preferred Stock
totaled $588,000.
Cumulative but unpaid dividends totaled $938,000 and approximately $2.1
million at December 31, 1994 and 1995, respectively, including amounts which
remain the obligation of Dish, Ltd.
F-24
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
The Warrants issued in connection with the Notes Offering were valued at
$26.1 million. The 1994 Notes and the Warrants became separately transferable
and exercisable effective December 1, 1994.
Each Warrant entitles the registered holder thereof, at such holder's
option, to purchase from ECC one share of Class A Common Stock at a purchase
price of $0.01 per share (the "Exercise Price"). The Exercise Price with respect
to all of the Warrants was paid in advance and, therefore, no additional amounts
are payable upon exercise of the Warrants.
Effective with the Merger (Note 1), or subsequently, all Warrants were
exercised and 2,808,000 Shares (as adjusted for the Exchange Ratio) of ECC's
Class A Common Stock were issued.
(10) STOCK OPTIONS
In April 1994, the Company adopted a stock incentive plan (the "Stock
Incentive Plan") to provide incentive to attract and retain officers, directors
and key employees. ECC assumed all outstanding options for the purchase of Dish,
Ltd. common stock effective with the Exchange and Merger and has reserved up to
10.0 million shares of its Class A Common Stock for granting awards under the
Stock Incentive Plan. Awards available under the Stock Incentive Plan include:
(i) common stock purchase options; (ii) stock appreciation rights; (iii)
restricted stock and restricted stock units; (iv) performance awards; (v)
dividend equivalents; and (vi) other stock-based awards. All options granted
through December 31, 1995 have included exercise prices not less than the fair
market value of the Shares at the date of grant and vest as determined by the
Company's Board of Directors, generally at the rate of 20% per year.
The following summarizes the activity relating to options for the years
ended December 31, 1994 and 1995:
1994 1995
--------- -------------------
(IN THOUSANDS EXCEPT FOR PER
SHARE DATA)
Incentive stock options --
Options outstanding at beginning of year........................ -- 745
Granted....................................................... 745 420
Exercised..................................................... -- (4)
Terminated.................................................... -- (44)
--------- -------------------
Options outstanding at end of year............................ 745 1,117
--------- -------------------
--------- -------------------
Options exercisable at end of year............................ -- 141
--------- -------------------
--------- -------------------
Price of granted options...................................... $9.33 $11.87 - $20.25
--------- -------------------
--------- -------------------
Price range of outstanding options............................ $9.33 $ 9.33 - $20.25
--------- -------------------
--------- -------------------
Price of terminated options................................... $-- $ 9.33 - $20.25
--------- -------------------
--------- -------------------
In March 1994, the Company entered into an employment agreement with one of
its executive officers. The officer was granted an option, containing certain
conditions to vesting, to purchase 322,208 shares of Class A Common Stock of the
Company for $1.0 million at any time prior to
F-25
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(10) STOCK OPTIONS (CONTINUED)
December 31, 1999, subject to certain limitations. One-half of this option
became exercisable on December 31, 1994 and the remainder became exercisable on
December 31, 1995. The option was not granted pursuant to the Stock Incentive
Plan.
Effective March 1995, the Company granted an additional option to a key
employee to purchase 33,000 shares of Class A Common Stock, which vests 50% in
March 1996 and 50% in March 1997. The exercise price for each share of Class A
Common Stock is $11.87 per share. The option was not granted pursuant to the
Stock Incentive Plan.
(11) OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
The Company has contracted with Martin Marietta Corporation ("Martin
Marietta") for the construction and delivery of high powered DBS satellites, and
for related services. EchoStar I was shipped to China on November 16, 1995 and
EchoStar II is expected to be delivered in the summer of 1996. Penalties of up
to $5.0 million are payable by Martin Marietta in the event of delays in the
delivery of EchoStar I by Martin Marietta. As of December 31, 1995, those
penalties totaled $3.2 million, which amount has been deducted from the
Company's deferred satellite payment obligation (Note 6).
The Company also has contracts with China Great Wall Industry Corporation
("Great Wall") for the launch of up to seven satellites, using LM-2E or LM-3C
launch vehicles, from a launch base in China. EchoStar I was launched on
December 28, 1995. The EchoStar I and EchoStar II launch contract (the "Great
Wall Launch Contract") calls for the launch of EchoStar II during July through
September 1996.
A significant delay in the delivery or launch of EchoStar II would adversely
affect the Company's operations. In June 1995, another subsidiary of ECC
contracted with Lockheed-Khrunichev-Energia-International, Inc. ("LKE") for the
launch of a satellite, using a Proton launch vehicle, from a launch base in the
Russian Federation.
The Company has filed applications with the Federal Communications
Commission ("FCC") for authorization to construct, launch and operate a domestic
fixed satellite service system ("FSS System") and a two satellite Ka-band
satellite system. No assurances can be given that the Company applications will
be approved by the FCC or that, if approved, the Company will successfully
develop the FSS System or the Ka-band satellite system. The Company believes
that establishment of the FSS System or the Ka-band system would enhance its
competitive position in the DTH industry. In the event the Company's FSS or
Ka-band satellite system applications are approved by the FCC, or if the Company
commits to a third launch with Great Wall, additional debt or equity financing
would be required. Financing alternatives related to the FSS and Ka-band
satellite systems are currently being pursued by the Company. No assurances can
be given that financing will be available, or that it will be available on terms
favorable to the Company.
F-26
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(11) OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES
Future minimum lease payments under noncancelable operating leases as of
December 31, 1995, are as follows (in thousands):
Year ending December 31 --
1996............................................. $ 1,061
1997............................................. 686
1998............................................. 275
1999............................................. 147
2000............................................. 24
Thereafter....................................... 2
---------
Total minimum lease payments................... $ 2,195
---------
---------
Total rental expense for operating leases was $1.2 million in 1993, $1.4
million in 1994 and $1.2 million in 1995.
PURCHASE COMMITMENTS
The Company has entered into agreements with various manufacturers to
purchase DBS satellite receivers and related components manufactured based on
Dish, Ltd. supplied specifications and necessary to receive DBS programming
proposed to be offered by the Company upon commencement of operations of
EchoStar's Dish Network-SM-. As of December 31, 1995 the remaining commitments
total approximately $502.9 million. At December 31, 1995, the total of all
outstanding purchase order commitments with domestic and foreign suppliers was
$515.8 million. All but $11.1 million of the purchases related to these
commitments are expected to be made during 1996 and the remainder is expected to
be made during 1997. The Company expects to finance these purchases from
available cash and sales of inventory, including the sale of DBS receiver
systems and related products.
OTHER RISKS AND CONTINGENCIES
Equipment sold by the Company includes, as an integral component,
descrambler modules purchased from an unrelated entity under a nonexclusive
right and license which expires in 2001.
The Company has agreed to indemnify its stockholders for any adjustments to
their individual income tax returns resulting from adjustments to taxable income
or tax credits for years prior to 1994 during which the Company elected to be
taxed as Subchapter S corporations. The indemnities cover additions to tax,
interest and penalties, as well as attorneys' and accountants' fees and
expenses, if any.
The Company is subject to other legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position, results of operations or liquidity of the Company.
F-27
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(12) SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
The 1994 Notes are fully, unconditionally and jointly and severally
guaranteed by all subsidiaries of Dish, Ltd., except FlexTracker and certain DE
MINIMIS domestic and foreign subsidiaries. Summarized financial information for
Dish, Ltd. and the subsidiary guarantors is as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
Income Statement Data --
Revenue.............................................. $ 217,360 $ 187,044 $ 163,228
Expenses............................................. 199,398 174,164 171,646
----------- ----------- -----------
Operating income (loss).............................. 17,962 12,880 (8,418)
Other income (expense)............................... 543 (12,707) (9,911)
----------- ----------- -----------
Net income (loss) before income taxes................ 18,505 173 (18,329)
(Provision) benefit for income taxes................. 1,384 (433) 6,182
----------- ----------- -----------
Net income (loss)................................ $ 19,889 $ (260) $ (12,147)
----------- ----------- -----------
----------- ----------- -----------
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
Balance Sheet Data --
Current assets................................................. $ 80,914 $ 81,959
Property and equipment, net.................................... 151,211 333,160
Other noncurrent assets........................................ 239,560 143,866
------------ ------------
Total assets............................................... $ 471,685 $ 558,985
------------ ------------
Current liabilities............................................ $ 28,094 $ 50,710
Long-term liabilities.......................................... 340,014 415,662
Stockholders' equity........................................... 103,577 92,613
------------ ------------
Total liabilities and stockholders' equity................. $ 471,685 $ 558,985
------------ ------------
------------ ------------
Upon consummation of the merger with DirectSat, DirectSat became, by virtue
of the merger, a guarantor of the 1994 Notes on a full, unconditional and joint
and several basis, in addition to the guarantees of the previous subsidiaries.
F-28
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(13) OPERATIONS IN GEOGRAPHIC AREAS
The Company sells its products on a worldwide basis and has established
operations in Europe and the Pacific Rim. Information about the Company's
operations in different geographic areas as of December 31, 1993, 1994 and 1995
and for the years then ended, were as follows (in thousands):
UNITED OTHER
1993 STATES EUROPE INTERNATIONAL TOTAL
- -------------------------------------------------------------- ----------- --------- ------------ -----------
Total revenue................................................. $ 175,453 $ 25,825 $ 19,663 $ 220,941
----------- --------- ------------ -----------
----------- --------- ------------ -----------
Export sales.................................................. $ 8,005
-----------
-----------
Operating income.............................................. $ 16,551 $ 96 $ 1,557 $ 18,204
----------- --------- ------------
----------- --------- ------------
Other income (expense), net................................... 530
-----------
Net income before income taxes................................ $ 18,734
-----------
-----------
Identifiable assets........................................... $ 84,656 $ 7,272 $ 10,478 $ 102,406
----------- --------- ------------
----------- --------- ------------
Corporate assets.............................................. 4,070
-----------
Total assets.................................................. $ 106,476
-----------
-----------
1994
- --------------------------------------------------------------
Total revenue................................................. $ 137,233 $ 24,072 $ 29,678 $ 190,983
----------- --------- ------------ -----------
----------- --------- ------------ -----------
Export sales.................................................. $ 7,188
-----------
-----------
Operating income.............................................. $ 10,811 $ 1,244 $ 1,161 $ 13,216
----------- --------- ------------
----------- --------- ------------
Other income (expense), net................................... (12,727)
-----------
Net income before income taxes................................ $ 489
-----------
-----------
Identifiable assets........................................... $ 77,172 $ 6,397 $ 2,359 $ 85,928
----------- --------- ------------
----------- --------- ------------
Corporate assets.............................................. 386,564
-----------
Total assets.................................................. $ 472,492
-----------
-----------
1995
- --------------------------------------------------------------
Total revenue................................................. $ 110,629 $ 31,351 $ 21,910 $ 163,890
----------- --------- ------------ -----------
----------- --------- ------------ -----------
Export sales.................................................. $ 6,317
-----------
-----------
Operating income (loss)....................................... $ (7,860) $ 146 $ (257) $ (7,971)
----------- --------- ------------
----------- --------- ------------
Other income (expense), net................................... (9,260)
-----------
Net income before income taxes................................ $ (17,231)
-----------
-----------
Identifiable assets........................................... $ 63,136 $ 10,088 $ 3,788 $ 77,012
----------- --------- ------------
----------- --------- ------------
Corporate assets.............................................. 546,079
-----------
Total assets.................................................. $ 623,091
-----------
-----------
F-29
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(14) VALUATION AND QUALIFYING ACCOUNTS
The Company's valuation and qualifying accounts as of December 31, 1993,
1994 and 1995 are as follows (in thousands):
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
------------- ----------- ----------- ----------- -----------
Year ended December 31, 1993:
Assets:
Allowance for doubtful accounts.............. $ 92 $ 305 $ -- $ (51) $ 346
Loan loss reserve............................ 25 52 29 (56) 50
Reserve for inventory........................ 1,425 136 -- (158) 1,403
Liabilities:
Reserve for warranty costs................... 1,600 326 -- (576) 1,350
Other reserves............................... 110 -- -- (17) 93
Year ended December 31, 1994:
Assets:
Allowance for doubtful accounts.............. $ 346 $ 8 $ -- $ (168) $ 186
Loan loss reserve............................ 50 75 -- (30) 95
Reserve for inventory........................ 1,403 329 -- (147) 1,585
Liabilities:
Reserve for warranty costs................... 1,350 508 -- (458) 1,400
Other reserves............................... 93 -- -- -- 93
Year ended December 31, 1995:
Assets:
Allowance for doubtful accounts.............. $ 186 $ 1,160 $ -- $ (240) $ 1,106
Loan loss reserve............................ 95 19 -- (36) 78
Reserve for inventory........................ 1,585 1,511 -- (299) 2,797
Liabilities:
Reserve for warranty costs................... 1,400 562 -- (949) 1,013
Other reserves............................... 93 -- -- (1) 92
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly results of operations are summarized as follows (in
thousands):
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
----------- --------- ------------- ------------
Total revenue..................................... $ 46,993 $ 42,748 $ 48,958 $ 52,284
Operating income.................................. 4,359 2,573 3,481 2,803
Net income (loss)................................. 2,893 678 (1,619) (1,862)
F-30
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(15) QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
----------- --------- ------------- ------------
Total revenue............................................... $ 40,413 $ 39,252 $ 43,606 $ 40,619
Operating (loss) income..................................... (698) 768 341 (8,382)
Net loss.................................................... (2,240) (1,787) (360) (7,099)
In the fourth quarter of 1995 the Company incurred operating and net losses
principally as a result of expenses incurred related to development of the
EchoStar DBS System and lower sales volumes at reduced gross margins. The
Company also increased reserves related to inventory and trade accounts
receivable in the fourth quarter of 1995.
(16) PARENT ONLY FINANCIAL INFORMATION
The following financial information reflects the condensed parent only
balance sheets, statements of income and cash flows for ECC, reflecting the
assumed consummation of the Exchange and Merger retroactive to January 1, 1993.
The Exchange and Merger described in Note 1 was accounted for as a
reorganization of entities under common control.
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
--------- --------- ----------
(IN THOUSANDS, EXCEPT SHARES AND
PER SHARE DATA)
Income Statement Data--
Equity in earnings (losses) of subsidiaries................................. $ 20,118 $ 90 $ (12,361)
Other income................................................................ -- -- 1,321
--------- --------- ----------
Net income (loss) before income taxes....................................... 20,118 90 (11,040)
Provision for income taxes.................................................. -- -- (446)
--------- --------- ----------
Net income (loss)......................................................... $ 20,118 $ 90 $ (11,486)
--------- --------- ----------
--------- --------- ----------
Loss Attributable to Common Shares............................................ $ (848) $ (12,691)
--------- ----------
--------- ----------
Weighted Average Common Shares Outstanding.................................... 32,442 35,562
--------- ----------
--------- ----------
Loss Per Common and Common Equivalent Share................................... $ (0.03) $ (0.36)
--------- ----------
--------- ----------
Pro Forma (Unaudited) Net Income and Earnings
Per Common Share (Note 7)
Historical net income before income taxes................................. $ 20,118
Pro forma income tax effects.............................................. (7,846)
---------
Pro forma net income...................................................... $ 12,272
---------
---------
Pro forma common shares outstanding....................................... 32,221
---------
---------
Pro forma earnings per common share....................................... $ 0.38
---------
---------
F-31
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(16) PARENT ONLY FINANCIAL INFORMATION (CONTINUED)
DECEMBER 31,
------------------------
1994 1995
----------- -----------
(IN THOUSANDS)
Balance Sheet Data--
Current assets:
Cash and cash equivalents............................................................. $ -- $ 7,802
Marketable investment securities...................................................... -- 15,460
Advances to affiliates................................................................ -- 19,545
Other current assets.................................................................. -- 191
----------- -----------
Total current assets................................................................ -- 42,998
----------- -----------
Investments in subsidiaries:
Restricted (Note 12).................................................................. 103,577 92,613
Unrestricted.......................................................................... 231 280
----------- -----------
103,808 92,893
Other noncurrent assets................................................................. -- 21,111
----------- -----------
Total assets........................................................................ $ 103,808 $ 157,002
----------- -----------
----------- -----------
Current liabilities..................................................................... $ -- $ 316
Stockholders' Equity:
Preferred Stock, 20,000,000 shares authorized, 1,616,681 shares of Series A Cumulative
Preferred Stock issued and outstanding, including accrued dividends of $938,000 and
$2,143,000, respectively............................................................. 15,990 17,195
Class A Common Stock, $.01 par value, 200,000,000 shares authorized, 3,739,400 and
10,535,003 shares issued and outstanding, respectively............................... 38 105
Class B Common Stock, $.01 par value, 100,000,000 shares authorized, 29,804,401,
shares issued and outstanding........................................................ 298 298
Class C Common Stock, $.01 par value, 100,000,000 shares authorized, none
outstanding.......................................................................... -- --
Common Stock Purchase Warrants........................................................ 26,133 714
Additional paid-in capital............................................................ 62,197 151,674
Unrealized holding gain on available-for-sale securities, net......................... -- 239
Retained earnings (deficit)........................................................... (848) (13,539)
----------- -----------
Total stockholders' equity.......................................................... 103,808 156,686
----------- -----------
Total liabilities and stockholders' equity.......................................... $ 103,808 $ 157,002
----------- -----------
----------- -----------
F-32
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(16) PARENT ONLY FINANCIAL INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
---------- --------- ----------
Cash Flows Data--
Cash flows from operating activities:
Net income (loss).............................................................. $ 20,118 $ 90 $ (11,486)
Adjustments--
Equity in (earnings) losses of subsidiaries.................................. (20,118) (90) 12,361
Changes in--
Other current assets....................................................... -- -- (191)
Current liabilities........................................................ -- -- 316
---------- --- ----------
Net cash flows from operating activities................................. -- -- 1,000
---------- --- ----------
Cash flows from investing activities:
Advances to affiliates....................................................... -- -- (19,545)
Purchases of marketable investment securities, net........................... -- -- (15,475)
Increase in noncurrent assets................................................ -- -- (21,111)
---------- --- ----------
Net cash flows from investing activities................................... -- -- (56,131)
---------- --- ----------
Cash flows from financing activities:
Net proceeds from issuance of Class A Common Stock........................... -- -- 62,933
---------- --- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................................ -- -- 7,802
CASH AND CASH EQUIVALENTS, beginning of period................................... -- -- --
---------- --- ----------
CASH AND CASH EQUIVALENTS, end of period......................................... $ -- $ -- $ 7,802
---------- --- ----------
---------- --- ----------
F-33
ECHOSTAR COMMUNICATIONS CORPORATION AND AFFILIATES AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(17) SUBSEQUENT EVENTS
In March 1996, ECC announced that its wholly owned subsidiary, EchoStar
Satellite Broadcasting Corporation ("ESB"), is considering a private offering
(the "Offering") pursuant to Rule 144A under the Securities Act of 1933 of
Senior Secured Discount Notes due 2004 (the "Senior Secured Notes") expected to
provide net proceeds to ESB of $250.0 million. ESB was formed on January 24,
1996 for the purpose of the Offering. ECC will contribute all of the outstanding
capital stock of its wholly owned subsidiary, Dish, Ltd., to ESB.
EchoStar DBS Corporation ("EDC") was formed under Colorado law in January
1996 for purposes of participating in a Federal Communications Commission
auction ("FCC Auction") held on January 24 through January 26, 1996. EDC was
required to post a $10.0 million deposit to participate in the FCC Auction for
28 DBS frequencies at 110 DEG. WL and post a $2.0 million deposit to participate
in the FCC Auction for 24 DBS frequencies at 148 DEG. WL. EDC is a wholly owned
subsidiary of ECC.
On January 26, 1996, EDC submitted the winning bid of $52.3 million dollars
for 24 DBS frequencies at 148 DEG. WL. Previous deposits made with the FCC were
applied to satisfy the 20% down payment. The balance of the bid price must be
remitted to the FCC upon grant of the construction permit, which could occur as
early as April 1996.
Funds necessary to pay the balance of the purchase price are expected to be
provided by ECC from the proceeds of the Senior Secured Notes.
F-34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Direct Broadcasting Satellite Corporation
Washington, D.C.
We have audited the accompanying balance sheets of Direct Broadcasting
Satellite Corporation, a development stage company, as of March 31, 1995, and
December 31, 1995, and the related statements of income and cash flows for each
of the two years ended March 31, 1995 and the nine months ended December 31,
1995 and the statements of stockholders' equity for each of the five years ended
March 31, 1995 and the nine months ended December 31, 1995. See Note 2. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Direct Broadcasting
Satellite Corporation, as of March 31, 1995 and December 31, 1995, and the
results of its operations and its cash flows for the two years in the period
ended March 31, 1995 and the nine months ended December 31, 1995, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. The Corporation's recurring
operating losses raise substantial doubt about its ability to continue as a
going concern at December 31, 1995. Management's plans in regard to these
matters are described in Note 1 of the notes to financial statements. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
REGARDIE, BROOKS & LEWIS, CHARTERED
CERTIFIED PUBLIC ACCOUNTANTS
Bethesda, Maryland,
January 23, 1996.
F-35
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
1995 1995
---------- ------------
CURRENT ASSETS:
Cash...................................................... $ 119,892 $ 72,950
Money Market Funds --
Crestfunds, Inc. -- Cash Reserves Fund.................. 2,131,988 285,978
Pacific Horizon Prime Fund.............................. -- 7,081
---------- ------------
Total current assets................................ 2,251,880 366,009
---------- ------------
PROPERTY AND EQUIPMENT, AT COST:
Satellite development in process (Note 4)................. 372,625 17,882,707
Computer equipment........................................ 5,073 5,073
Less:
Accumulated depreciation................................ (1,725) (2,730)
---------- ------------
Cost less accumulated depreciation...................... 375,973 17,885,050
---------- ------------
OTHER ASSETS:
FCC license (Note 3)...................................... 687,136 865,571
Unamortized loan costs.................................... -- 67,058
Deferred tax benefit (Note 7)............................. -- --
Security deposits......................................... 2,575 2,575
---------- ------------
Total other assets...................................... 689,711 935,204
---------- ------------
Total assets.......................................... $3,317,564 $ 19,186,263
---------- ------------
---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 79,589 $ 140,958
Unsecured notes payable (Note 6A)......................... -- 500,000
Accrued interest.......................................... -- 237,226
Unsecured note payable (Note 6B) (in arrears)............. 350,000 325,000
Accrued interest in arrears (Note 6)...................... 340,537 341,074
Due to shareholder........................................ 7,380 3,024
---------- ------------
Total current liabilities............................... 777,506 1,547,282
---------- ------------
LONG-TERM DEBT:
Secured note payable (Note 5)............................. -- 16,000,000
Unsecured notes payable (Note 6A)......................... 500,000 --
Accrued interest (Notes 5 & 6)............................ 199,680 10,082
---------- ------------
Total long-term debt.................................... 699,680 16,010,082
---------- ------------
Total liabilities..................................... 1,477,186 17,557,364
---------- ------------
COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 3,000,000 shares authorized;
shares issued and outstanding, 1,618,138 and 1,620,138,
respectively............................................. 16,181 16,201
Additional paid in capital................................ 5,833,066 5,849,046
Accumulated deficit (Note 1).............................. (2,755,808) (2,755,808)
Accumulated deficit during development stage.............. (1,253,061) (1,480,540)
---------- ------------
Total stockholders' equity.............................. 1,840,378 1,628,899
---------- ------------
Total liabilities and stockholders' equity................ $3,317,564 $ 19,186,263
---------- ------------
---------- ------------
See the accompanying report of independent public accountants.
The accompanying notes are an integral part of these financial statements.
F-36
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF INCOME
YEARS ENDED MARCH 31
---------------------
1994 1995
--------- ---------- NINE MONTHS ENDED APRIL 1, 1990
DECEMBER 31, 1995 (INCEPTION) TO
----------------- DECEMBER 31, 1995
(NOTE 2) -----------------
(NOTE 1)
REVENUE:
Gain on settlement of indebtedness........................ $ -- $ -- $ 31,656 $ 31,656
Investment income......................................... -- 31,988 56,071 88,059
--------- ---------- ----------------- -----------------
Total revenue............................................... -- 31,988 87,727 119,715
--------- ---------- ----------------- -----------------
OPERATING EXPENSES:
Interest expense.......................................... 131,103 85,031 59,739 612,256
Legal fees................................................ 12,769 151,972 23,251 385,892
Consulting fees........................................... 36,370 148,303 167,654 417,327
Professional services..................................... 1,800 16,210 6,566 34,021
Rent...................................................... 2,206 19,369 24,975 46,550
Taxes and licenses........................................ 3,722 520 455 7,034
Other administrative expenses............................. 13,440 32,765 31,561 94,445
Depreciation.............................................. 154 1,571 1,005 2,730
--------- ---------- ----------------- -----------------
Total operating expenses................................ 201,564 455,741 315,206 1,600,255
--------- ---------- ----------------- -----------------
NET LOSS BEFORE INCOME TAXES................................ (201,564) (423,753) (227,479) (1,480,540)
--------- ---------- ----------------- -----------------
PROVISION FOR INCOME TAXES (Note 7)......................... -- -- -- --
--------- ---------- ----------------- -----------------
NET LOSS.................................................... $(201,564) $ (423,753) $ (227,479) $(1,480,540)
--------- ---------- ----------------- -----------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................. 901,555 1,272,701 1,618,583 1,024,845
--------- ---------- ----------------- -----------------
LOSS PER COMMON SHARE....................................... $ (0.23) $ (0.33) $ (0.14) $ (1.44)
--------- ---------- ----------------- -----------------
See the accompanying report of independent public accountants.
The accompanying notes are an integral part of these financial statements.
F-37
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FIVE YEARS ENDED MARCH 31, 1995
AND THE NINE MONTH PERIOD ENDED DECEMBER 31, 1995
ACCUMULATED
DEFICIT
COMMON STOCK ADDITIONAL DURING TOTAL
--------------------- PAID IN ACCUMULATED DEVELOPMENT STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT STAGE EQUITY
--------- ---------- ----------- ------------ ------------- ------------
(NOTE 1)
Balance at March 31, 1990................... 709,888 $ 7,099 $ 1,127,742 $(2,755,808) $ -- $(1,620,967)
Issuance of common stock -- October 15,
1990 at $0.01 per share.................. 150,000 1,500 (1,500) -- -- --
Net loss for the period April 1, 1990
through March 31, 1991................... -- -- -- -- (384,427) (384,427)
--------- ---------- ----------- ------------ ------------- ------------
Balance at March 31, 1991................... 859,888 8,599 1,126,242 (2,755,808) (384,427) (2,005,394)
--------- ---------- ----------- ------------ ------------- ------------
Net loss for the period April 1, 1991
through March 31, 1992................... -- -- -- -- (125,826) (125,826)
--------- ---------- ----------- ------------ ------------- ------------
Balance at March 31, 1992................... 859,888 8,599 1,126,242 (2,755,808) (510,253) (2,131,220)
--------- ---------- ----------- ------------ ------------- ------------
Net loss for the period April 1, 1992
through March 31, 1993................... -- -- -- -- (117,491) (117,491)
--------- ---------- ----------- ------------ ------------- ------------
Balance at March 31, 1993................... 859,888 8,599 1,126,242 (2,755,808) (627,744) (2,248,711)
--------- ---------- ----------- ------------ ------------- ------------
Issuance of common stock -- December 21,
1993 at $2.00 per share.................. 125,000 1,250 248,750 -- -- 250,000
Net loss for the period April 1, 1993
through March 31, 1994................... -- -- -- -- (201,564) (201,564)
--------- ---------- ----------- ------------ ------------- ------------
Balance at March 31, 1994................... 984,888 9,849 1,374,992 (2,755,808) (829,308) (2,200,275)
--------- ---------- ----------- ------------ ------------- ------------
Issuance of common stock --
April 12, 1994 at $3.00 per share......... 25,000 250 74,750 -- -- 75,000
June 13, 1994 at $4.00 per share............ 18,750 187 74,813 -- -- 75,000
August 5, 1994 at $4.00 per share......... 6,250 63 24,937 -- -- 25,000
November 15, 1994 at $7.14 per share,
net...................................... 583,250 5,832 4,283,574 -- -- 4,289,406
Net loss for the period April 1, 1994
through March 31, 1995................... -- -- -- -- (423,753) (423,753)
--------- ---------- ----------- ------------ -------------
Balance at March 31, 1995................... 1,618,138 16,181 5,833,066 (2,755,808) (1,253,061) 1,840,378
--------- ---------- ----------- ------------ ------------- ------------
Issuance of Common Stock -- November 16,
1995 at $8.00 per share.................. 2,000 20 15,980 -- -- 16,000
Net loss for the period April 1, 1995
through December 31, 1995.................. -- -- -- -- (227,479) (227,479)
--------- ---------- ----------- ------------ ------------- ------------
Balance at December 31, 1995................ 1,620,138 $ 16,201 $ 5,849,046 $(2,755,808) $(1,480,540) $1,628,899
--------- ---------- ----------- ------------ ------------- ------------
--------- ---------- ----------- ------------ ------------- ------------
See the accompanying report of independent public accountants.
The accompanying notes are an integral part of these financial statements.
F-38
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995,
AND THE NINE MONTH PERIOD ENDED DECEMBER 31, 1995
APRIL 1, 1990
NINE MONTHS (INCEPTION)
ENDED TO
DECEMBER 31, DECEMBER 31,
YEARS ENDED MARCH 31, 1995 1995
----------------------- ------------- -------------
1994 1995 (NOTE 2) (NOTE 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $ (201,564) $ (423,753) $ (227,479) $ (1,480,540)
Adjustments to reconcile net loss to net cash
applied to operating activities:
Depreciation................................... 154 1,571 1,005 2,730
Gain on settlement of indebtedness............. -- -- (31,656) (31,656)
Noncash consulting fees........................ -- -- 16,000 16,000
(Decrease) increase in accounts payable........ (51,331) 5,416 3,268 (49,074)
Increase in accrued interest payable........... 131,103 64,311 59,739 589,297
Increase (decrease) due to shareholders........ 1,667 4,378 (4,356) (5,230)
---------- ----------- ------------- -------------
Net cash applied to operating activities..... (119,971) (348,077) (183,479) (958,473)
---------- ----------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of furniture and equipment......... (3,089) (1,984) -- (5,073)
Increase in satellite development costs........ (63,500) (41,750) (17,517,375) (17,872,625)
Increase in FCC license........................ (106,097) (371,630) (170,017) (665,244)
---------- ----------- ------------- -------------
Net cash used in investing activities...... (172,686) (415,364) (17,687,392) (18,542,942)
---------- ----------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in secured notes payable.............. -- -- 16,000,000 16,000,000
Issuance of common stock....................... 250,000 3,134,999 -- 3,384,999
Increase notes payable......................... 76,250 -- -- 652,500
Increase in contract payable................... -- -- -- 62,500
Payment of contract payable.................... -- -- -- (62,500)
Payment of note payable........................ -- (152,500) (15,000) (167,500)
Increase in security deposit................... (1,463) (1,112) -- (2,575)
---------- ----------- ------------- -------------
Net cash provided by financing activities.. 324,787 2,981,387 15,985,000 19,867,424
---------- ----------- ------------- -------------
NET INCREASE (DECREASE) IN CASH.................. 32,130 2,217,946 (1,885,871) 366,009
CASH AT BEGINNING OF YEAR........................ 1,804 33,934 2,251,880 --
---------- ----------- ------------- -------------
CASH AT END OF YEAR.............................. $ 33,934 $ 2,251,880 $ 366,009 $ 366,009
---------- ----------- ------------- -------------
---------- ----------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest..... $ -- $ 20,719 $ -- $ 22,958
---------- ----------- ------------- -------------
---------- ----------- ------------- -------------
SUPPLEMENTAL SCHEDULE OF NONCASH AND FINANCING
ACTIVITIES:
Additional common stock was issued upon the
conversion of notes payable in the amount
of $700,000, plus related accrued interest
totaling.................................. $ -- $ 1,329,406 $ -- $ 1,329,406
Additional common stock was issued in
exchange for consulting services.......... -- -- 16,000 16,000
Disclosure of accounting policy:
For the purposes of the statement of cash flows, the Company considers money
market funds to be cash equivalents.
See the accompanying report of independent public accountants.
The accompanying notes are an integral part of these financial statements.
F-39
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995 AND DECEMBER 31, 1995
(1) ORGANIZATION
Direct Broadcasting Satellite Corporation (the "Company" or "DBSC"), a
development stage company, was incorporated January 23, 1981 in the state of
Delaware. It is constructing satellites, and plans to operate a direct-to-home,
multi-channel satellite broadcast television service. Funding of the Company's
operations has been obtained through the private placement of common stock and
issuance of convertible debt, demand notes and accounts payable.
On December 21, 1995, the Company and EchoStar Communications Corporation
("EchoStar"), a 39.8% shareholder, agreed to a merger, subject to receipt of
requisite government approval. EchoStar holds direct broadcasting satellite
authorizations for 21 channels at 119the Company and EchoStar agreed to merge
DBSC into a wholly-owned subsidiary of EchoStar, and (2) the Company's
shareholders will be entitled to receive at their option $7.99 in cash or .67417
EchoStar shares for each of the Company's 975,148 shares not already owned by
EchoStar.
EchoStar also agreed, at its sole discretion, to loan the Company up to
$150,000,000 for expenses associated with the construction, launch, and
insurance of the Company's spacecraft. On December 29, 1995, the Company drew
down $16 million under its loan purchase agreement with EchoStar and paid
Lockheed Martin Corporation $16 million on the same day.
Without the EchoStar or other financing, the Company's ability to meet its
existing obligations and proceed with the construction of the satellite is
doubtful. In such case, the ultimate realization of the capitalized FCC license
application costs, as well as the deferred satellite development costs, are
doubtful, and the continuance of the Company as an operating entity would be
uncertain.
The Company's development activities were dormant for a period of years
ended March 31, 1990. During the year ended March 31, 1991, the Company began
development of two new satellites. In accordance with SFAS No. 7, development
stage activities for presentation purposes on the statements of income and
statements of stockholders' equity are for the period April 1, 1990 to December
31, 1995. Prior development stage activity losses amounting to $2,755,808 are
reflected in stockholders' equity as accumulated deficit.
(2) SIGNIFICANT ACCOUNTING POLICIES
Effective April 1, 1995, the Company changed its fiscal year to December 31
from March 31. All balances for the nine months ended December 31, 1995 include
activity from April 1, 1995 to December 31, 1995.
Loan costs will be amortized over the 8-year life of the $16 million secured
note, effective January 1, 1996.
Management uses estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could differ from those
estimates.
(3) FCC LICENSE
The Company's application for authority to construct and operate a direct
broadcast satellite system was approved by the Federal Communications Commission
("FCC") and a conditional construction permit for two spacecraft was released on
August 15, 1989. On November 10, 1993, the FCC found that the Company had
complied with the necessary due diligence requirements and assigned specific
orbit/spectrum resources to the Company. On December 8, 1995, the FCC staff
granted the
F-40
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
(3) FCC LICENSE (CONTINUED)
Company an extension of time through November 1998, to construct and launch two
spacecrafts. Pursuant to a FCC request, on January 31, 1994 the Company
submitted certain technical data to the FCC and asked for launch authority.
On June 30, 1995, the Company notified the FCC that it had signed a
spacecraft contract modification and sought approval thereof. The FCC has not
yet acted on either request. Certain costs incurred in connection with filing
the FCC license application and maintaining the authority have been capitalized.
Amortization periods for these costs will be determined at the time the services
related to the applicable FCC license commences, or capitalized costs will be
written off at the time efforts to provide services are abandoned. FCC licenses
are expected to have a useful life of approximately 12 years.
(4) SATELLITE DEVELOPMENT COSTS
The Company has entered into a contract for the construction of two
satellites. The contract, as amended May 31, 1995, provides for periodic,
non-refundable payments over a period extending to October 30, 2003, as well as
cancellation penalties if the contract is terminated before the satellites are
launched. As of December 31, 1995, payments made under the terms of the contract
totaled $17,838,500. The contract calls for additional payments of $30,000,000
in the year ending December 31, 1996. The total commitment under the contract is
in excess of $160 million.
At December 31, 1995, total satellite development costs amounted to
$17,882,707, including capitalized interest of $10,082.
During construction and prior to launch, the Company has granted to the
Contractor a full security interest in all hardware, software and work in
process (collectively "Security") related to the two satellites. In the event of
certain defaults by the Company, the Contractor shall immediately assume
ownership of the entire Security.
(5) SECURED NOTE PAYABLE
On December 29, 1995, the Company borrowed $16,000,000, per the terms of a
note purchase agreement and a security agreement between EchoStar and the
Company. The promissory note is secured by an assignment, pledge and grant of
security interest in all the estate, right, title, and interest of the Company,
whether now owned or hereafter acquired, in, to and under (1) the Satellites and
DBS Rights, (2) all agreements, contracts and documents related to the
Satellites, DBS Rights, and business of the Company, (3) all income and revenues
from all business operations, and (4) all tangible and/or intangible property of
the Company, including the Satellites. However, the security in the Satellites
is subordinate to the security interest in and to the Satellites held by Martin
Marietta.
Interest accrues at Chase Manhattan Bank prime rate plus 3 percent as of the
date of the loan. Principal and interest is payable in equal installments
beginning on December 29, 1997, and ending on December 29, 2003. The December
29, 1997 installment related to the $16,000,000 loan will be approximately
$3,713,300, including interest at 11.5%.
(6) UNSECURED NOTES PAYABLE
A. UNSECURED NOTE PAYABLE
Note payable in the amount of $500,000 is payable 90 days after the
successful launch and check-out of the Company's first Direct Broadcast
Satellite-Broadcast Satellite System, or on demand in certain other limited
circumstances. Interest is payable at Chase Manhattan Bank prime rate plus 1%
per annum or 4% after maturity, or in the event of default. At December 31,
1995, the note payable and
F-41
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
(6) UNSECURED NOTES PAYABLE (CONTINUED)
the related accrued interest were payable on demand. At March 31, 1995, both the
principal and interest were classified as long-term debt since the launching of
the satellite was not within one year of the balance sheet date.
B. CONVERTIBLE NOTES PAYABLE
Convertible notes payable at December 31, 1995 amounted to $325,000, and at
March 31, 1995 amounted to $350,000. At December 31, 1995, notes totalling
$100,000 accrue interest at 75% of Chase Manhattan Bank prime rate, and notes
totalling $225,000 accrue interest at 100% of the prime rate.
Until November 15, 1994, notes totalling $475,000 accrue interest at 75% of
Chase Manhattan Bank prime rate, and notes totalling $500,000 accrue interest at
100% of the prime rate. The notes were issued on various dates from October 1,
1982 to March 6, 1984 and were due 24 months from date of issue. Interest
payments have not been made over the years. However, interest has been accrued
and is reflected in the accompanying financial statements. Both the principal
and interest are classified as currently payable since the notes are in arrears.
The notes provide that until they are paid in full, a note holder at his
option may convert principal into shares of the authorized common stock of the
Company as follows: $100,000 of principal at $6.67 per share, and $225,000 of
principal at $8.33 per share. On November 15, 1994, certain notes were converted
to common stock.
(7) INCOME TAXES
Effective April 1, 1992, the Company adopted SFAS No. 109, "Accounting for
Income Taxes", which requires an asset and liability approach to financial
accounting and reporting for income taxes. The difference between the financial
statement and tax bases of assets and liabilities are computed for those
differences that have future tax consequences using the currently enacted tax
laws and rates that apply to the periods in which they are expected to affect
taxable income. Valuation allowances are established, if necessary, to reduce
the deferred tax asset to the amount that will more likely than not be realized.
Income tax expense is the current tax payable or refundable for the period, plus
or minus the net change in the deferred tax assets and liabilities.
The adoption of SFAS No. 109 did not have an effect on the Company's
financial statements because the deferred income tax benefit has been offset by
a valuation allowance of equal amount. The valuation allowance was established
to reduce the deferred tax benefit to the amount that will more likely than not
be realized. This reduction is necessary due to the uncertainty of the Company's
ability to utilize all of the future tax deduction resulting from net operating
losses.
The gross deferred income tax benefit was approximately $849,382 at December
31, 1995, and $781,002 at March 31, 1995.
The deferred income tax benefit results primarily from net operating losses
for tax purposes. The net operating loss carryover to future years is $2,202,393
at December 31, 1995, none of which will expire until the year 1999. In
addition, the Company has not claimed as a tax deduction accrued interest
payable of $578,300. For income tax purposes, the Company reports its net income
(loss) on the cash basis.
(8) CONTINGENT LIABILITIES
In 1982, the Company entered into agreements with two French corporations
pursuant to which each corporation, in exchange for the Company's commitment to
procure satellite hardware, paid to a satellite launch provider, for the benefit
of the Company, a launch reservation fee of $100,000. The first agreement, as
amended, specified that payment of the $100,000 plus interest of 13% per annum
F-42
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
(8) CONTINGENT LIABILITIES (CONTINUED)
was due on December 31, 1983. The second agreement provided that the Company was
obligated to issue 6,000 (as adjusted) shares of common stock no later than two
years from the date of the agreement.
No equipment was procured from either corporation, no shares of common stock
have been issued nor has the Company returned the $100,000 payment to either
corporation. The Company has not determined whether either obligation is
currently enforceable under French law. The Company is unaware of any request
for payment or for the issuance of the Company's shares from August 3, 1987 to
date.
(9) STOCKHOLDERS' EQUITY
In November 1994, the Company resolved a suit brought by EchoStar against
the Company regarding enforceability of certain notes and accounts payable of
the Company. Pursuant to the settlement, the payables were exchanged for shares
of the Company's common stock and EchoStar purchased additional shares of the
Company for $2,960,000 so that, together with the shares of DBSC previously
acquired, EchoStar presently owns approximately 40% of the outstanding common
stock of DBSC. As part of this settlement the Company issued an option to sell
at a fixed price of $2,000,000 the greater of 11.3% of its issued and
outstanding common stock at the date of exercise, or 333,333 shares of common
stock, and an Optional Merger Election, whereby the Company or the Purchaser's
wholly owned subsidiary can elect to merge with each other provided certain
conditions precedent have been met. On December 21, 1995, the Company and
EchoStar entered into a Merger Agreement. See Note 1.
Legal fees expense has been charged $125,000 for costs incurred in
connection with the above transaction.
(10) RELATED PARTY TRANSACTIONS
Consulting fees are paid to certain shareholders and officers.
F-43
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
F-44
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER MARCH 31,
31, 1996
1995 (UNAUDITED)
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents............................ $ 21,754 $ 164,813
Marketable investment securities..................... 15,670 212
Trade accounts receivable, net....................... 9,179 10,072
Inventories.......................................... 38,769 27,298
Income tax receivable................................ 3,554 4,806
Deferred tax assets.................................. 1,779 3,973
Other current assets................................. 13,037 15,468
----------- -----------
Total current assets............................. 103,742 226,642
----------- -----------
RESTRICTED CASH AND MARKETABLE SECURITIES:
1994 Notes escrow.................................... 73,291 63,617
1996 Notes escrow.................................... -- 169,970
Other................................................ 26,400 41,900
PROPERTY AND EQUIPMENT, net............................ 354,000 359,821
OTHER NONCURRENT ASSETS................................ 65,658 102,721
----------- -----------
Total assets..................................... $ 623,091 $ 964,671
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable............................... $ 19,063 $ 13,599
Deferred programming revenue......................... 5,563 7,416
Accrued expenses and other current liabilities....... 21,335 7,072
Notes payable and current portion of long-term
debt................................................ 4,782 4,783
----------- -----------
Total current liabilities........................ 50,743 32,870
----------- -----------
LONG-TERM DEFERRED PROGRAMMING REVENUE................. -- 3,790
1994 NOTES, net...................................... 382,218 395,333
1996 NOTES, net...................................... -- 350,890
LONG-TERM MORTGAGE DEBT AND NOTE PAYABLE, excluding
current portion..................................... 33,444 32,421
----------- -----------
Total liabilities................................ 466,405 815,304
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred Stock, 20,000,000 shares authorized,
1,616,681 shares of Series A Cumulative Preferred
Stock issued and outstanding, including accrued
dividends of $2,143,000 and $2,444,000,
respectively........................................ 17,195 17,496
Class A Common Stock, $.01 par value, 200,000,000
shares authorized, 10,535,003 and 10,621,116 shares
issued and outstanding, respectively................ 105 106
Class B Common Stock, $.01 par value, 100,000,000
shares authorized, 29,804,401 shares issued and
outstanding......................................... 298 298
Common Stock Purchase Warrants....................... 714 20
Class C Common Stock, 100,000,000 shares authorized,
none outstanding.................................... -- --
Additional paid-in capital........................... 151,674 152,487
Unrealized holding gains on available-for-sale
securities, net of deferred taxes................... 239 21
Retained earnings (deficit).......................... (13,539) (21,061)
----------- -----------
Total stockholders' equity......................... 156,686 149,367
----------- -----------
Total liabilities and stockholders' equity......... $ 623,091 $ 964,671
----------- -----------
----------- -----------
The accompanying notes to consolidated financial
statements are an integral part of these statements.
F-45
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
1995 1996
---------- ----------
REVENUE:
DTH products and technical services.................................................... $ 36,277 $ 36,741
Programming............................................................................ 3,871 3,913
Loan origination and participation income.............................................. 265 813
---------- ----------
Total revenue........................................................................ 40,413 41,467
---------- ----------
---------- ----------
EXPENSES:
DTH products and technical services.................................................... 29,445 32,750
Programming............................................................................ 3,432 3,283
Selling, general and administrative.................................................... 7,871 10,733
Depreciation........................................................................... 363 3,330
---------- ----------
Total expenses....................................................................... 41,111 50,096
---------- ----------
OPERATING LOSS........................................................................... (698) (8,629)
OTHER INCOME (EXPENSE):
Interest income........................................................................ 3,638 2,677
Interest expense, net of amounts capitalized........................................... (6,563) (6,043)
Other, net............................................................................. 28 (17)
---------- ----------
Total other income (expense)......................................................... (2,897) (3,383)
---------- ----------
NET LOSS BEFORE INCOME TAXES............................................................. (3,595) (12,012)
BENEFIT FOR INCOME TAXES................................................................. 1,355 4,791
---------- ----------
NET LOSS................................................................................. $ (2,240) $ (7,221)
---------- ----------
---------- ----------
NET LOSS ATTRIBUTABLE TO COMMON SHARES................................................... $ (2,541) $ (7,522)
---------- ----------
---------- ----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................................... 33,544 40,376
---------- ----------
---------- ----------
LOSS PER COMMON AND COMMON EQUIVALENT SHARE.............................................. $ (0.08) $ (0.19)
---------- ----------
---------- ----------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-46
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
RETAINED
EARNINGS
(DEFICIT)
SHARES OF COMMON AND
COMMON STOCK ADDITIONAL UNREALIZED TOTAL
STOCK PREFERRED COMMON PURCHASE PAID-IN HOLDING STOCKHOLDERS'
OUTSTANDING STOCK STOCK WARRANTS CAPITAL LOSSES EQUITY
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCES, at December 31, 1995...... 40,339 $ 17,195 $ 403 $ 714 $ 151,674 $ (13,300) $ 156,686
Series A Cumulative Preferred
Stock dividends.................. 301 301
Issuance of Class A Common
Stock............................ 13 113 113
Common Stock Purchase Warrants
exercised........................... 74 1 (694) 693 --
Employee Incentives Funded by
Issuance of Class A Common Stock.... 7 7
Unrealized holding losses on
available-for-sale securities,
net................................. (218) (218)
Net loss............................ (7,522) (7,522)
----------- ----------- ----- ----------- ----------- ----------- -----------
BALANCES, at March 31, 1996......... 40,426 $ 17,496 $ 404 $ 20 $ 152,487 $ (21,040) $ 149,367
----------- ----------- ----- ----------- ----------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-47
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................ $ (2,240) $ (7,221)
Adjustments to reconcile net loss to net cash flows from operating
activities--
Depreciation.......................................................... 363 3,330
Provision for doubtful accounts....................................... 111 621
Benefit for deferred taxes............................................ (2,493) (1,371)
Amortization of deferred debt issuance costs on 1994 Notes............ 315 315
Amortization of discount on 1994 Notes, net of amounts capitalized.... 6,131 4,189
Amortization of discount on 1996 Notes, net of amounts capitalized.... -- 843
Equity in (earnings) losses of joint venture.......................... (15) 25
Change in reserve for excess and obsolete inventory................... 233 227
Long-term deferred programming revenue................................ -- 3,790
Other, net............................................................ 26 (163)
Changes in working capital items--
Trade accounts receivable........................................... (728) (1,514)
Inventories......................................................... (4,238) 11,244
Income tax receivable............................................... -- (1,252)
Other current assets................................................ (730) (2,431)
Liability under cash management program............................. (57) --
Trade accounts payable.............................................. (1,061) (5,464)
Deferred programming revenue........................................ (657) 1,853
Accrued expenses.................................................... 1,221 97
Other current liabilities........................................... 38 640
--------- ---------
Net cash flows from operating activities.......................... (3,781) 7,758
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities........................... (15,211) (2)
Sales of marketable investment securities............................... 27,777 15,479
Purchases of restricted marketable investment securities................ -- (15,500)
Purchases of property and equipment..................................... (538) (2,715)
Offering proceeds and investment earnings placed in escrow.............. (2,714) (178,452)
Funds released from escrow accounts..................................... 16,257 17,785
Investment in convertible subordinated debentures from DBSI............. -- (3,000)
Long-term note receivable from DBSC..................................... -- (7,500)
Expenditures for satellite systems under construction................... (19,621) (13,292)
Deposit on FCC authorization............................................ -- (10,459)
Expenditures for FCC authorizations..................................... -- (3,177)
--------- ---------
Net cash flows from investing activities.......................... 5,950 (200,833)
--------- ---------
The accompanying notes to consolidated financial
statements are an integral part of these statements.
F-48
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
1995 1996
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgage indebtedness and note payable............... $ (57) $ (1,022)
Stock options exercised............................................ -- 113
Net proceeds from issuance of 1996 Notes........................... -- 337,043
--------- -----------
Net cash flows from financing activities..................... (57) 336,134
--------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................ 2,112 143,059
CASH AND CASH EQUIVALENTS, beginning of period....................... 17,506 21,754
--------- -----------
CASH AND CASH EQUIVALENTS, end of period............................. $ 19,618 $ 164,813
--------- -----------
--------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized................. $ 106 $ 354
Cash paid for income taxes......................................... 39 --
Cumulative Series A Preferred Stock dividends...................... 301 301
Satellite launch payment for EchoStar II applied to EchoStar I
launch............................................................ -- 15,000
Employee incentives funded by issuance of Class A Common Stock..... -- 7
The accompanying notes to consolidated financial
statements are an integral part of these statements.
F-49
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND MARCH 31, 1996
(1) ORGANIZATION AND PRESENTATION OF FINANCIAL STATEMENTS
EchoStar Communications Corporation ("EchoStar") successfully launched its
first direct broadcast satellite ("DBS"), EchoStar I, in December 1995 and, on
March 4, 1996, began broadcasting its DBS programming (the "Dish NetworkSM") to
the entire continental United States. The Dish NetworkSM currently includes over
100 channels of high quality digital video and audio programming and will expand
to approximately 200 digital video and audio channels following the successful
launch of a second DBS satellite, DirectSat I ("EchoStar II"), currently
scheduled in the fall of 1996.
In addition to its DBS business, EchoStar is engaged in the design,
manufacture, distribution and installation of satellite direct to home ("DTH")
products, domestic distribution of DTH programming and consumer financing of
EchoStar's domestic DTH products and services.
In January 1996, EchoStar formed a wholly owned subsidiary, EchoStar
Satellite Broadcasting Corporation ("ESB"), for the purpose of completing a
private offering (the "1996 Notes Offering"), pursuant to Rule 144A of the
Securities Act of 1933, as amended (the "Securities Act"), of 13 1/8% Senior
Secured Discount Notes due 2004 (the "1996 Notes"), resulting in net proceeds of
approximately $337.0 million. The 1996 Notes Offering was consummated in March
1996. Proceeds from the 1996 Notes Offering will be used for: (i) continued
development, marketing and distribution of the Dish NetworkSM; (ii) EchoStar's
purchase of DBS frequencies at 148 DEG. WL; (iii) construction, launch and
insurance of EchoStar III and EchoStar IV; (iv) additional launch costs of
EchoStar II; and (v) other general corporate purposes. The additional
frequencies were acquired by EchoStar at a public auction held by the Federal
Communications Commission ("FCC") in January 1996 (the "FCC Auction"). In
connection with the 1996 Notes Offering, EchoStar contributed all of the
outstanding capital stock of its wholly owned subsidiary, Dish, Ltd., to ESB.
This transaction has been accounted for as a reorganization of entities under
common control whereby Dish, Ltd. has been treated as the predecessor to ESB.
ESB is subject to all, and EchoStar is subject to certain of, the terms and
conditions of the Indenture related to the 1996 Notes (the "1996 Notes
Indenture"). On April 24, 1996, ESB filed a Registration Statement on Form S-1
under the Securities Act to exchange the 1996 Notes for publicly registered
notes.
In June 1995, EchoStar completed an offering of its Class A Common Stock,
resulting in net proceeds of approximately $63.0 million (the "Equity
Offering"). Dish, Ltd. owns the majority of EchoStar's operating subsidiaries.
In June 1994, Dish, Ltd. completed an offering of 12 7/8% Senior Secured
Discount Notes due 2004 (the "1994 Notes") and Warrants (collectively, the "1994
Notes Offering"), resulting in net proceeds of approximately $323.3 million.
Dish, Ltd. and most of its subsidiaries are subject to the terms and conditions
of the Indenture related to the 1994 Notes (the "1994 Notes Indenture").
Unless otherwise stated herein, or the context otherwise requires,
references herein to EchoStar shall include EchoStar and all of its direct and
indirect wholly owned subsidiaries.
The accompanying unaudited condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 1996
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the Combined and
F-50
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(1) ORGANIZATION AND PRESENTATION OF FINANCIAL STATEMENTS (CONTINUED)
Consolidated Financial Statements and footnotes thereto included in EchoStar
Communications Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995. Certain prior year amounts have been reclassified to conform
with the current year presentation.
SIGNIFICANT RISKS AND UNCERTAINTIES
Execution of EchoStar's business strategy to launch and operate DBS
satellites has dramatically changed its operating results and financial
position. As of March 31, 1996, EchoStar expects to expend approximately an
additional $520 million through 1999 to build, launch and support its first four
satellites (Note 6), assuming receipt of all required FCC licenses and permits.
EchoStar consummated the 1994 Notes Offering, the 1996 Notes Offering and the
Equity Offering to satisfy these capital requirements. Annual interest expense
on the 1994 and 1996 Notes and depreciation of the investment in the satellites
and related assets will each be of a magnitude that exceeds historical levels of
income before taxes. Beginning in 1995 EchoStar reported significant net losses
and expects net losses to continue for the foreseeable future. EchoStar's plans
also include the construction and launch of two fixed service satellites,
additional DBS satellites and marketing campaigns (including receiver
subsidization if market conditions warrant) to promote its DBS products and
services. EchoStar may need to raise significant additional funds for
construction and launch of additional satellites, and there can be no assurance
that necessary funds will be available or, if available, that they will be
available on terms favorable to EchoStar. However, management believes, but can
give no assurance, that demand for its DBS products and services will result in
sufficient cash flow which, together with other sources of capital, will be
sufficient to satisfy future planned expenditures. Significant delays or launch
failures in EchoStar's satellite launch program may have significant adverse
consequences to EchoStar's operating results and financial condition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses for each reporting
period. Actual results could differ from those estimates.
(2) SUPPLEMENTAL ANALYSIS
CASH AND CASH EQUIVALENTS
EchoStar considers all liquid investments purchased with an original
maturity of ninety days or less to be cash equivalents. Cash equivalents as of
December 31, 1995, and March 31, 1996 consist of money market funds, corporate
notes and commercial paper stated at cost which equates to market value.
RESTRICTED CASH AND MARKETABLE SECURITIES
EchoStar classifies all marketable investment securities as
available-for-sale. Accordingly, these investments are reflected at market value
based on quoted market prices. Related unrealized gains and losses are reported
as a separate component of stockholders' equity, net of related deferred income
taxes. The specific identification method is used to determine cost in computing
realized gains and losses.
Restricted Cash and Marketable Securities in Escrow Accounts as reflected on
the accompanying balance sheets represent the remaining net proceeds received
from the 1994 Notes Offerings, and a portion of the proceeds from the 1996 Notes
Offering, plus interest earned, less amounts expended to date in connection with
the development, construction and launch of the Dish NetworkSM. These proceeds
are held in separate escrow accounts (the "1994 Escrow Account" and the "1996
Escrow
F-51
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) SUPPLEMENTAL ANALYSIS (CONTINUED)
Account", respectively) for the benefit of the holders of the 1994 and 1996
Notes and are invested in certain debt and other marketable securities, as
permitted by the respective Indentures, until disbursed for the express purposes
identified in the 1994 Notes Offering Prospectus and the 1996 Notes Offering
Memorandum, as the case may be.
Other Restricted Cash includes $11.4 million to satisfy certain covenants
regarding launch insurance required by the 1994 Notes Indenture. EchoStar is
required to maintain launch insurance and Restricted Cash totalling $225.0
million for each of EchoStar I and EchoStar II. EchoStar has obtained $219.3
million of launch insurance on each satellite, and, together with the cash
segregated and reserved on the accompanying balance sheets, has satisfied its
insurance obligations under the 1994 Notes Indenture. In addition, as of March
31, 1996, $15.0 million was in an escrow account established pursuant to a DBS
satellite receiver manufacturing contract for payment to the manufacturer as
certain milestones are reached and $15.5 million was in an escrow account for
the purpose of cash collateralizing certain standby letters of credit (Note 4).
The major components of Restricted Cash and Marketable Securities are as follows
(in thousands):
DECEMBER 31, 1995 MARCH 31, 1996
------------------------------------- --------------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING MARKET AMORTIZED HOLDING MARKET
COST GAIN VALUE COST GAIN VALUE
----------- ----------- ----------- ------------ ----------- -----------
Commercial paper.............................. $ 66,214 $ -- $ 66,214 $ 70,600 $ -- $ 70,600
Government bonds.............................. 32,904 420 33,324 204,411 49 204,460
Accrued interest.............................. 153 -- 153 427 -- 427
----------- ----------- ----------- ------------ ----- -----------
$ 99,271 $ 420 $ 99,691 $ 275,438 $ 49 $ 275,487
----------- ----------- ----------- ------------ ----- -----------
----------- ----------- ----------- ------------ ----- -----------
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out ("FIFO") method. Proprietary products
are manufactured by outside suppliers to EchoStar's specifications. EchoStar
also distributes non-proprietary products purchased from other manufacturers.
Manufactured inventories include materials, labor and manufacturing overhead.
Cost of other inventories includes parts, contract manufacturers' delivered
price, assembly and testing labor, and related overhead, including handling and
storage costs. The major components of inventory were as follows (in thousands):
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
Finished goods...................................................... $ 20,458 $ 17,957
DBS receiver components............................................. 9,615 9,728
Competitor DBS Receivers............................................ 9,404 559
Spare parts......................................................... 2,089 2,078
Reserve for excess and obsolete inventory........................... (2,797) (3,024)
------------ -----------
$ 38,769 $ 27,298
------------ -----------
------------ -----------
F-52
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) SUPPLEMENTAL ANALYSIS (CONTINUED)
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The composition of accrued expenses and other current liabilities is as
follows (in thousands):
DECEMBER 31, MARCH 31,
------------ -----------
1995 1996
------------ -----------
Accrued EchoStar I launch costs......................................................... $ 15,000 $ --
Accrued expenses........................................................................ 3,850 3,947
Reserve for warranty costs.............................................................. 1,013 1,013
Other................................................................................... 1,472 2,112
------------ -----------
$ 21,335 $ 7,072
------------ -----------
------------ -----------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Cost includes interest capitalized on the EchoStar DBS System during
construction at EchoStar's effective borrowing rate. The major components of
property and equipment were as follows (in thousands):
ESTIMATED
USEFUL LIFE DECEMBER 31, MARCH 31,
(IN YEARS) 1995 1996
----------- ------------ -----------
Construction in progress................................................. -- $ 303,174 $ 107,912
EchoStar I satellite..................................................... 12 -- 198,143
Furniture, fixtures and equipment........................................ 2-12 17,163 21,329
Buildings and improvements............................................... 7-40 21,006 21,109
Tooling and other........................................................ 2 2,039 3,470
Land..................................................................... -- 1,613 1,613
Vehicles................................................................. 7 1,310 1,325
Furniture and equipment held for sale.................................... 17,062 17,614
Computer equipment held for sale......................................... 902 885
------------ -----------
Total property and equipment........................................... 364,269 373,400
Less-Accumulated depreciation............................................ (10,269 ) (13,579)
------------ -----------
Net property and equipment............................................. $ 354,000 $ 359,821
------------ -----------
------------ -----------
Construction in progress includes capitalized costs related to the
construction and launch of EchoStar II, which is scheduled for launch in the
fall of 1996 and DBSC I ("EchoStar III") which is scheduled for launch prior to
the end of 1997.
F-53
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) SUPPLEMENTAL ANALYSIS (CONTINUED)
Construction in progress consisted of the following (in thousands):
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
Progress amounts for satellite construction, launch, launch
insurance, capitalized interest, launch and in-orbit tracking,
telemetry and control services:
EchoStar I.................................................... $ 193,629 $ --
EchoStar II................................................... 88,634 81,133
EchoStar III launch........................................... 20,801 5,058
EchoStar IV launch............................................ -- 21,532
Other......................................................... 110 189
------------ -----------
$ 303,174 $ 107,912
------------ -----------
------------ -----------
OTHER NONCURRENT ASSETS
The major components of other noncurrent assets were as follows (in
thousands):
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
Long-term note receivable from DBSC................................................... $ 16,000 $ 23,500
FCC authorizations, net of amortization............................................... 11,309 15,288
1996 Notes deferred debt issuance costs, net of amortization.......................... -- 13,004
1994 Notes deferred debt issuance costs............................................... 10,622 10,307
Deferred tax assets, net.............................................................. 12,109 11,420
Deposit on FCC authorization.......................................................... -- 10,459
SSET convertible subordinated debentures and accrued interest......................... 9,610 9,758
Investment in DBSC.................................................................... 4,111 4,086
DBSI convertible subordinated debentures.............................................. 1,000 4,000
Other, net............................................................................ 897 899
------------ -----------
$ 65,658 $ 102,721
------------ -----------
------------ -----------
EchoStar presently owns approximately 40% of the outstanding common stock of
Direct Broadcasting Satellite Corporation ("DBSC"). DBSC's principal assets
include an FCC conditional satellite construction permit and specific orbital
slot assignments for eleven DBS frequencies at 61.5 DEG. WL and eleven DBS
frequencies at 175 DEG. WL (the "DBS Rights"). EchoStar intends to merge DBSC
with Direct Broadcasting Satellite Corporation ("New DBSC"), a wholly owned
subsidiary of EchoStar (the "DBSC Merger"). The DBSC Merger has been approved by
DBSC shareholders but will not be consummated until the FCC has approved the
DBSC Merger. Although no assurances can be given, EchoStar expects the FCC to
issue an order with respect to the DBSC Merger in the near future. Assuming FCC
approval of the DBSC Merger, EchoStar will hold, through New DBSC, DBSC's DBS
Rights. On April 16, 1996, EchoStar filed a Registration Statement on Form S-4
under the Securities Act covering 658,000 shares of EchoStar Class A Common
Stock that are intended to be issued in connection with the DBSC Merger.
F-54
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) SUPPLEMENTAL ANALYSIS (CONTINUED)
EARNINGS PER SHARE
Earnings per share have been calculated based on the weighted average number
of shares of common stock issued and outstanding and, if dilutive, common stock
equivalents (warrants and employee stock options) during the three months ended
March 31, 1995 and 1996. Net loss has been adjusted for cumulative dividends on
the 8% Series A Cumulative Preferred Stock.
(3) LONG-TERM DEBT
1994 NOTES
On June 7, 1994, Dish, Ltd. completed the 1994 Notes Offering of 624,000
units consisting of $624.0 million aggregate principal amount of the 1994 Notes
and 3,744,000 Warrants. The 1994 Notes Offering resulted in net proceeds to
Dish, Ltd. of approximately $323.3 million. Interest on the 1994 Notes currently
is not payable in cash but accrues through June 1, 1999, with the 1994 Notes
accreting to $624.0 million by that date. Thereafter, interest on the 1994 Notes
will be payable in cash semi-annually on June 1 and December 1 of each year,
commencing December 1, 1999. At March 31, 1996, the 1994 Notes were reflected in
the accompanying financial statements at $395.3 million, net of unamortized
discount of $228.7 million.
1996 NOTES
On March 25, 1996, ESB completed the 1996 Notes Offering consisting of
$580.0 million aggregate principal amount of the 1996 Notes. The 1996 Notes
Offering resulted in net proceeds to ESB of approximately $337.0 million.
Interest on the 1996 Notes currently is not payable in cash but accrues through
March 15, 2000, with the 1996 Notes accreting to $580.0 million by that date.
Thereafter, interest on the 1996 Notes will be payable in cash semi-annually on
March 15 and September 15 of each year, commencing September 15, 2000. At March
31, 1996, the 1996 Notes were reflected in the accompanying financial statements
at $350.9 million, net of unamortized discount of $229.1 million.
(4) BANK CREDIT FACILITY AND LETTERS OF CREDIT
On May 6, 1994, the principal subsidiaries of EchoStar, except EchoStar
Satellite Corporation ("ESC") (the "Borrowers"), entered into an agreement with
Bank of America Illinois, to provide a revolving credit facility (the "Credit
Facility") for working capital advances and for letters of credit necessary for
inventory purchases and satellite construction payments. The Credit Facility
expired in May 1996 and EchoStar does not currently intend to arrange a new
credit facility. Instead, EchoStar is using available cash to collateralize its
letter of credit obligations, which have historically been the only significant
use of the Credit Facility. At March 31, 1996, EchoStar had cash collateralized
$15.5 million of certain standby letters of credit for trade purchases which is
included in restricted cash and marketable securities in the accompanying
financial statements (Note 2).
F-55
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(5) INCOME TAXES
The components of the benefit for income taxes were as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31,
------------------------------
1995 1996
------------------- ---------
Current (provision) benefit
Federal..................................................... $ (767) $ 3,202
State....................................................... (194) 340
Foreign..................................................... (177) (122)
------- ---------
(1,138) 3,420
------- ---------
Deferred benefit
Federal..................................................... 2,050 1,281
State....................................................... 443 90
------- ---------
2,493 1,371
------- ---------
Total benefit............................................. $ 1,355 $ 4,791
------- ---------
------- ---------
EchoStar's deferred tax assets (approximately $15.4 million at March 31,
1996) relate principally to temporary differences for amortization of original
issue discount on the 1994 and 1996 Notes and various accrued expenses which are
not deductible until paid. No valuation allowance has been provided because
EchoStar currently believes it is more likely than not that these deferred
assets will ultimately be realized. If future operating results differ
materially and adversely from EchoStar's current expectations, its judgment
regarding the need for a valuation allowance may change.
(6) OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
EchoStar has contracted with Martin Marietta Corporation ("Martin Marietta")
for the construction and delivery of high powered DBS satellites and for related
services. Penalties are payable by Martin Marietta as a result of delays in the
delivery of EchoStar I by Martin Marietta and may be payable with respect to
EchoStar II or EchoStar III. As of November 19, 1995, the date that EchoStar I
was delivered by Martin Marietta to China, those penalties totaled approximately
$3.2 million with respect to EchoStar I. Penalties of $2.0 million are payable
by Martin Marietta in the event that EchoStar II is not delivered by May 15,
1996. Thereafter, delays in the delivery of EchoStar II would result in per diem
additional penalties up to a maximum of $5.0 million in the aggregate. Beginning
August 1, 1997, a per diem penalty of $3,333, to a maximum of $100,000, is
payable if EchoStar III is not delivered by July 31, 1997. Beginning September
1, 1997, additional delays in the delivery of EchoStar III would result in
additional per diem penalties of $33,333, up to a maximum of $5.0 million in the
aggregate.
EchoStar has entered into a contract with Arianespace, Inc. ("Arianespace")
to launch EchoStar II from Korou, French Guiana in the fall of 1996 (the
"Arianespace Contract"). The launch is scheduled to be performed on a dedicated
Ariane 42P launch vehicle. The Arianespace Contract provides the potential for
the EchoStar launch to occur before the fall of 1996 if earlier scheduled
launches are accelerated or delayed. The Arianespace Contract contains
provisions entitling either party to delay the launch in limited circumstances,
subject to the payment of penalties in some cases.
F-56
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(6) OTHER COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of March 31, 1996, EchoStar has paid Arianespace approximately $4.4 million
pursuant to the Arianespace Contract. All remaining payments are payable monthly
and will be due prior to the launch.
EchoStar II was previously scheduled to be launched by the same launch
provider as EchoStar I, China Great Wall Industry Corporation ("Great Wall").
EchoStar I was successfully launched by Great Wall in December 1995. EchoStar
notified Great Wall of its decision to terminate the launch of EchoStar II with
Great Wall. EchoStar applied $15.0 million previously paid Great Wall in
connection with this launch to the final $15.0 million owed Great Wall related
to the launch of EchoStar I. In May 1996, EchoStar received a refund of the
remaining $4.5 million previously paid Great Wall in connection with the second
launch.
EchoStar has entered into a contract for launch services with Lockheed
Martin Commercial Launch Services, Inc. ("Lockheed") for the launch of EchoStar
III from Cape Canaveral Air Station, Florida during the fall of 1997, subject to
delay or acceleration in certain circumstances (the "Lockheed Contract"). The
Lockheed Contract provides for launch of the satellite utilizing an Atlas IIAS
launch vehicle. EchoStar has made an initial payment to Lockheed of $5.0 million
and the remaining cost is payable in installments in accordance with the payment
schedule set forth in the Lockheed Contract, which requires that substantially
all payments be made to Lockheed prior to the launch.
EchoStar has contracted with Lockheed-Khrunichev-Energia-International, Inc.
("LKE") for the launch of EchoStar IV during 1998 from the Kazakh Republic, a
territory of the former Soviet Union, utilizing a Proton launch vehicle (the
"LKE Contract"). Either party may request a delay in the relevant launch period,
subject to the payment of penalties based on the length of the delay and the
proximity of the request to the launch date. EchoStar has paid LKE $20.0 million
pursuant to the LKE Contract. No additional payments are currently required to
be made to LKE until 1997.
PURCHASE COMMITMENTS
EchoStar has entered into agreements with various manufacturers to purchase
DBS satellite receivers and related components manufactured based on EchoStar's
supplied specifications. As of March 31, 1996 the remaining commitments total as
much as $622.2 million. At March 31, 1996, the total of all outstanding purchase
order commitments with domestic and foreign suppliers was as much as $641.3
million. All but approximately $85.9 million of the purchases related to these
commitments are expected to be made during 1996 and the remainder is expected to
be made during 1997. EchoStar expects to finance these purchases from available
cash, marketable investment securities and sales of inventory, including the
sale of EchoStar Receiver Systems and related products.
OTHER RISKS AND CONTINGENCIES
EchoStar is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position, results of operations or liquidity of EchoStar.
F-57
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(7) SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
The 1994 Notes are fully, unconditionally and jointly and severally
guaranteed by all subsidiaries of Dish, Ltd., except for certain de minimis
domestic and foreign subsidiaries (collectively, the "1994 Notes Guarantors").
The 1996 Notes are initially guaranteed by EchoStar on a subordinated basis. On
and after the Dish Guarantee Date (as defined in the 1996 Notes Indenture), the
1996 Notes will be guaranteed by Dish, Ltd., which guarantee will rank PARI
PASSU with all senior unsecured indebtedness of Dish, Ltd. On and after the date
upon which the DBSC Merger is consummated, the 1996 Notes will be guaranteed by
New DBSC, which guarantee will rank PARI PASSU with all senior unsecured
indebtedness of New DBSC. If the DBSC Merger is not consummated, New DBSC will
not be required to guarantee the 1996 Notes. There can be no assurance that the
DBSC Merger will be approved by the FCC or that it will be consummated.
The net assets of Dish, Ltd. exceed the net assets of the 1994 Notes
Guarantors by approximately $277,000 and $223,000 as of December 31, 1995 and
March 31, 1996, respectively. Summarized consolidated financial information for
Dish, Ltd. is as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
Income Statement Data--
Revenue.............................................................. $ 40,413 $ 41,026
Expenses............................................................. 41,111 49,934
Operating loss....................................................... (698) (8,908)
Other income (expense), net.......................................... (2,897) (3,234)
Net loss before income taxes......................................... (3,595) (12,142)
Benefit for income taxes............................................. 1,355 4,852
--------- ---------
Net loss........................................................... $ (2,240) $ (7,290)
--------- ---------
--------- ---------
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
Balance Sheet Data--
Current assets.................................................. $ 81,858 $ 64,144
Property and equipment, net..................................... 333,199 333,231
Other noncurrent assets......................................... 144,238 150,659
------------ -----------
Total assets.................................................. $ 559,295 $ 548,034
------------ -----------
------------ -----------
Current liabilities............................................. $ 50,743 $ 31,167
Long-term liabilities........................................... 415,662 431,544
Stockholder's equity............................................ 92,890 85,323
------------ -----------
Total liabilities and stockholder's equity.................... $ 559,295 $ 548,034
------------ -----------
------------ -----------
F-58
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
DIRECT BROADCASTING SATELLITE CORPORATION (DELAWARE)
(A DEVELOPMENT STAGE COMPANY)
F-59
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
DECEMBER 31, MARCH 31,
1995 1996
-------------- --------------
(AUDITED) (UNAUDITED)
CURRENT ASSETS:
Cash........................................................................... $ 72,950 $ 18,857
Money Market Funds --
Crestfunds, Inc. -- Cash Reserves Fund....................................... 285,978 199,497
Pacific Horizon Prime Fund................................................... 7,081 2,516,577
-------------- --------------
Total current assets....................................................... 366,009 2,734,931
-------------- --------------
PROPERTY AND EQUIPMENT, AT COST:
Satellite development in process (Note 4)...................................... 17,882,707 23,396,333
Computer equipment............................................................. 5,073 5,073
Less: Accumulated depreciation (2,730) (2,998)
-------------- --------------
Cost less accumulated depreciation........................................... 17,885,050 23,398,408
-------------- --------------
OTHER ASSETS:
FCC license (Note 3)........................................................... 865,571 927,770
Unamortized loan costs......................................................... 67,058 64,963
Deferred tax benefit (Note 7).................................................. -- --
Security deposits.............................................................. 2,575 2,575
-------------- --------------
Total other assets........................................................... 935,204 995,308
-------------- --------------
Total assets............................................................... $ 19,186,263 $ 27,128,647
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................... $ 140,958 $ 124,139
Unsecured note payable (Note 6A)............................................... 500,000 500,000
Accrued interest............................................................... 237,226 249,027
Unsecured notes payable (Note 6B) (in arrears)................................. 325,000 325,000
Accrued interest in arrears (Note 6)........................................... 341,074 347,794
Due to shareholder............................................................. 3,024 2,182
-------------- --------------
Total current liabilities.................................................... 1,547,282 1,548,142
-------------- --------------
LONG-TERM DEBT:
Secured notes payable (Note 5)................................................. 16,000,000 23,500,000
Accrued interest (Notes 5 & 6)................................................. 10,082 523,708
-------------- --------------
Total long-term debt......................................................... 16,010,082 24,023,708
-------------- --------------
Total liabilities............................................................ 17,557,364 25,571,850
-------------- --------------
COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 3,000,000 shares authorized; 1,620,138 shares
issued and outstanding........................................................ 16,201 16,201
Additional paid in capital..................................................... 5,849,046 5,849,046
Accumulated deficit (Note 1)................................................... (2,755,808) (2,755,808)
Accumulated deficit during development stage................................... (1,480,540) (1,552,642)
-------------- --------------
Total stockholders' equity................................................... 1,628,899 1,556,797
-------------- --------------
Total liabilities and stockholders' equity................................. $ 19,186,263 $ 27,128,647
-------------- --------------
-------------- --------------
The accompanying notes are an integral part of these financial statements.
F-60
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, APRIL 1, 1990
------------------------ (INCEPTION) TO
1995 1996 MARCH 31, 1996
----------- ----------- --------------
REVENUE:
Gain on settlement of indebtedness.................................. $ -- $ -- $ 31,656
Investment income................................................... 19,480 13,015 101,074
----------- ----------- --------------
Total revenue..................................................... 19,480 13,015 132,730
----------- ----------- --------------
OPERATING EXPENSES:
Interest income..................................................... 19,320 18,520 630,776
Legal fees.......................................................... -- 7,303 393,195
Consulting fees..................................................... 42,303 36,000 453,327
Professional services............................................... 4,660 6,650 40,671
Rent................................................................ 7,226 6,800 53,350
Taxes and licenses.................................................. -- 670 7,704
Other administrative expenses....................................... 7,811 6,810 101,255
Depreciation and amortization....................................... 691 2,364 5,094
----------- ----------- --------------
Total operating expenses.......................................... 82,011 85,117 1,685,372
----------- ----------- --------------
NET LOSS BEFORE INCOME TAXES.......................................... (62,531) (72,102) (1,552,642)
PROVISION FOR INCOME TAXES (Note 7)................................... -- -- --
----------- ----------- --------------
NET LOSS.............................................................. $ (62,531) $ (72,102) $ (1,552,642)
----------- ----------- --------------
----------- ----------- --------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................ 1,618,138 1,620,138 1,049,565
----------- ----------- --------------
----------- ----------- --------------
LOSS PER COMMON SHARE................................................. $ (.04) $ (.04) $ (1.48)
----------- ----------- --------------
----------- ----------- --------------
The accompanying notes are an integral part of these financial statements.
F-61
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
ACCUMULATED
COMMON STOCK ADDITIONAL DEFICIT DURING TOTAL
---------------------- PAID-IN ACCUMULATED DEVELOPMENT STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT STAGE EQUITY
----------- --------- ------------- -------------- -------------- -------------
BALANCE at December 31, 1995........ 1,620,138 $ 16,201 $ 5,849,046 $ (2,755,808) $ (1,480,540) $ 1,628,899
Net loss.......................... (72,102) (72,102)
----------- --------- ------------- -------------- -------------- -------------
BALANCE at March 31, 1996........... 1,620,138 $ 16,201 $ 5,849,046 $ (2,755,808) $ (1,552,642) $ 1,556,797
----------- --------- ------------- -------------- -------------- -------------
----------- --------- ------------- -------------- -------------- -------------
The accompanying notes are an integral part of these financial statements.
F-62
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED APRIL 1, 1990
MARCH 31, (INCEPTION) TO
---------------------- MARCH 31, 1996
1995 1996 --------------
---------- ----------
(NOTE 1)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (62,531) $ (72,102) $ (1,552,642)
Adjustments to reconcile net
loss to net cash applied to
operating activities:
Depreciation and
amortization............. 691 2,364 5,094
Gain on settlement of
indebtedness............. -- -- (31,656)
Noncash consulting fees... -- -- 16,000
Increase (decrease) in
accounts payable......... 3,235 2,747 (46,327)
Increase in accrued
interest payable......... 19,319 18,521 607,818
Increase (decrease) due to
shareholders............. 7,380 (842) (6,072)
---------- ---------- --------------
Net cash applied to
operating activities... (31,906) (49,312) (1,007,785)
---------- ---------- --------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of furniture and
equipment.................. -- -- (5,073)
Increase in satellite
development costs.......... (21,000) (5,000,000) (22,872,625)
Increase in FCC license..... (101,544) (14,708) (679,952)
---------- ---------- --------------
Net cash used in investing
activities............... (122,544) (5,014,708) (23,557,650)
---------- ---------- --------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Increase in secured notes
payable.................... -- 7,500,000 23,500,000
Issuance of common stock.... -- -- 3,384,999
Increase notes payable...... -- -- 652,500
Increase in contract
payable.................... -- -- 62,500
Payment on contract
payable.................... -- -- (62,500)
Increase in loan costs...... -- (67,058) (67,058)
Payment of notes payable.... -- -- (167,500)
Increase in security
deposit.................... (380) -- (2,575)
---------- ---------- --------------
Net cash provided by
financing activities..... (380) 7,432,942 27,300,366
---------- ---------- --------------
NET INCREASE (DECREASE) IN
CASH......................... (154,830) 2,368,922 2,734,931
CASH AT BEGINNING OF PERIOD... 2,406,710 366,009 --
---------- ---------- --------------
CASH AT END OF PERIOD......... $2,251,880 $2,734,931 $ 2,734,931
---------- ---------- --------------
---------- ---------- --------------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the year for
interest..................... $ -- $ -- $ 22,958
---------- ---------- --------------
---------- ---------- --------------
SUPPLEMENTAL SCHEDULE OF
NONCASH AND FINANCING
ACTIVITIES:
Additional common stock was
issued upon the conversion
of notes payable in the
amount of $700,000, plus
related accrued interest
totaling $629,406.......... -- -- $ 1,329,406
Additional common stock was
issued in exchange for
consulting services........ -- -- 16,000
Disclosure of accounting
policy:
For the purposes of the
statement of cash flows,
the Company considers money
market funds to be cash
equivalents.
The accompanying notes are an integral part of these financial statements.
F-63
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND MARCH 31, 1996
(1) ORGANIZATION
Direct Broadcasting Satellite Corporation (the "Company" or "DBSC"), a
development stage company, was incorporated January 23, 1981 in the State of
Delaware. It is constructing satellites, and plans to operate a direct-to-home,
multi-channel satellite broadcast television service. Funding of the Company's
operations has been obtained through the private placement of common stock and
issuance of convertible debt, demand notes and accounts payable.
On December 21, 1995, the Company and EchoStar Communications Corporation
("EchoStar"), a 39.8% shareholder, agreed to a merger, subject to receipt of
requisite government approval. EchoStar holds direct broadcasting satellite
authorizations for 21 channels at 119(9) W.L. Under the terms of the Merger
Agreement, (1) the Company and EchoStar agreed to merge DBSC into a wholly-owned
subsidiary of EchoStar, and (2) the Company's shareholders will be entitled to
receive at their option, $7.99 in cash or .67417 EchoStar shares for each of the
Company's 975,148 shares not already owned by EchoStar.
EchoStar also agreed, at its sole discretion, to loan the Company up to
$150,000,000 for expenses associated with the construction, launch, and
insurance of the Company's spacecraft. On December 29, 1995, the Company drew
down $16 million under its loan purchase agreement with EchoStar and paid
Lockheed Martin Corporation $16 million on the same day. During the three months
ended March 31, 1996, the Company drew down an additional $7.5 million under the
agreement.
Without the EchoStar or other financing, the Company's ability to meet its
existing obligations and proceed with the construction of the satellite is
doubtful. In such case, the ultimate realization of the capitalized FCC license
application costs, as well as the deferred satellite development costs, are
doubtful, and the continuance of the Company as an operating entity would be
uncertain.
The Company's development activities were dormant for a period of years
ended March 31, 1990. During the year ended March 31, 1991, the Company began
development of two new satellites. In accordance with SFAS No. 7, development
stage activities for presentation purposes on the statements of income and cash
flow are for the period April 1, 1990 to March 31, 1996. Prior development stage
activity losses amounting to $2,755,808 are reflected in stockholders' equity as
accumulated deficit.
(2) SIGNIFICANT ACCOUNTING POLICIES
Effective April 1, 1995, the Company changed its fiscal year to December 31
from March 31.
Loan costs are being amortized over the 8-year life of the secured notes,
effective January 1, 1996.
Management uses estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could differ from those
estimates.
Losses per share have been computed based on the weighted average number of
shares of common stock outstanding during each three month period.
(3) FCC LICENSE
The Company's application for authority to construct and operate a direct
broadcast satellite system was approved by the Federal Communications Commission
("FCC") and a conditional construction permit for two spacecraft was released on
August 15, 1989. On November 10, 1993, the FCC found that the Company had
complied with the necessary due diligence requirements and assigned specific
orbit/spectrum resources to the Company. On December 8, 1995, the FCC staff
granted the
F-64
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND MARCH 31, 1996
(CONTINUED)
(3) FCC LICENSE (CONTINUED)
Company an extension of time through November 1998, to construct and launch two
spacecrafts. Pursuant to a FCC request, on January 31, 1994 the Company
submitted certain technical data to the FCC and asked for launch authority.
On June 30, 1995, the Company notified the FCC that it had signed a
spacecraft contract modification and sought approval thereof. Certain costs
incurred in connection with filing the FCC license application and maintaining
the authority have been capitalized. Amortization periods for these costs will
be determined at the time the services related to the applicable FCC license
commences, or capitalized costs will be written off at the time efforts to
provide services are abandoned. FCC licenses are expected to have a useful life
of approximately 12 years.
(4) SATELLITE DEVELOPMENT COSTS
The Company has entered into a contract for the construction of two
satellites. The contract, as amended May 31, 1995, provides for periodic,
non-refundable payments over a period extending to October 30, 2003, as well as
cancellation penalties if the contract is terminated before the satellites are
launched. As of March 31, 1996, payments made under the terms of the contract
totaled $22,838,500. The contract calls for additional payments of $52,500,000
in the year ending December 31, 1996. The total commitment under the contract is
in excess of $160 million.
At March 31, 1996, total satellite development costs amounted to
$23,396,333, including capitalized interest of $523,708.
During construction and prior to launch, the Company has granted to the
Contractor a full security interest in all hardware, software and work in
process (collectively "Security") related to the two satellites. In the event of
certain defaults by the Company, the Contractor shall immediately assume
ownership of the entire Security.
(5) SECURED NOTES PAYABLE
On December 29, 1995, the Company borrowed $16,000,000, and during the three
months ended March 31, 1996, borrowed $7,500,000, per the terms of a note
purchase agreement and a security agreement between EchoStar and the Company.
The promissory notes are secured by an assignment, pledge and grant of security
interest in all the estate, right, title and interest of the Company, whether
now owned or hereafter acquired, in, to and under (1) the Satellites and DBS
Rights, (2) all agreements, contracts and documents related to the Satellites,
DBS Rights, and business of the Company, (3) all income and revenues from all
business operations, and (4) all tangible and/or intangible property of the
Company, including the Satellites. However, the security in the Satellites is
subordinate to the security interest in and to the Satellites held by Martin
Marietta.
Interest accrues at Chase Manhattan Bank prime rate plus 3 percent as of the
date of each loan draw. Principal and interest is payable in seven equal annual
installments beginning two years after each loan draw. The December 29, 1997
installment related to the $16,000,000 loan will be approximately $3,713,300,
including interest at 11.5%. The annual installments related to the $7,500,000
of additional loans will be approximately $1,725,027, starting in February 1998,
including interest at 11.25%.
F-65
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND MARCH 31, 1996
(CONTINUED)
(6) UNSECURED NOTES PAYABLE
A. UNSECURED NOTE PAYABLE.
A note payable in the amount of $500,000 is payable 90 days after the
successful launch and check-out of DBSC's first Direct Broadcast
Satellite-Broadcast Satellite System, or on demand in certain other limited
circumstances. Interest is payable at Chase Manhattan Bank prime rate plus 1%
per annum or 4% after maturity, or in event of default. As of December 31, 1995,
the note payable and the related accrued interest were payable on demand.
B. CONVERTIBLE NOTES PAYABLE.
Convertible notes payable amounted to $325,000 at December 31, 1995 and
March 31, 1996. Notes totalling $100,000 accrue interest at 75% of Chase
Manhattan Bank prime rate, and notes totalling $225,000 accrue interest at 100%
of the prime rate.
The notes provide that until they are paid in full, a note holder at his
option may convert principal into shares of the authorized common stock of the
Company as follows: $100,000 of principal at $6.67 per share, and $225,000 of
principal at $8.33 per share.
(7) INCOME TAXES
Effective April 1, 1992, the Company adopted SFAS No. 109, "Accounting for
Income Taxes", which requires an asset and liability approach to financial
accounting and reporting for income taxes. The difference between the financial
statement and tax bases of assets and liabilities are computed for those
differences that have future tax consequences using the currently enacted tax
laws and rates that apply to the periods in which they are expected to affect
taxable income. Valuation allowances are established, if necessary, to reduce
the deferred tax asset to the amount that will more likely than not be realized.
Income tax expense is the current tax payable or refundable for the period, plus
or minus the net change in the deferred tax assets and liabilities.
The adoption of Statement 109 did not have an effect on the Company's
financial statements because the deferred income tax benefit has been offset by
a valuation allowance of equal amount. The valuation allowance was established
to reduce the deferred tax benefit to the amount that will more likely than not
be realized. This reduction is necessary due to the uncertainty of the Company's
ability to utilize all of the future tax deduction resulting from net operating
losses.
The gross deferred income tax benefit was approximately $849,382 at December
31, 1995, and $868,146 at March 31, 1996.
The deferred income tax benefit results primarily from net operating losses
for tax purposes. The net operating loss carryover to future years is $2,202,393
at December 31, 1995, and $2,250,483 at March 31, 1996, none of which will
expire until the year 1999. In addition, the Company has not claimed as a tax
deduction accrued interest payable of $596,821. For income tax purposes, the
Company reports its net income (loss) on the cash basis.
(8) CONTINGENT LIABILITIES
In 1982, the Company entered into agreements with two French corporations
pursuant to which each corporation, in exchange for the Company's commitment to
procure satellite hardware, paid to a satellite launch provider, for the benefit
of the Company, a launch reservation fee of $100,000. The first agreement, as
amended, specified that payment of the $100,000 plus interest of 13% per annum
F-66
DIRECT BROADCASTING SATELLITE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND MARCH 31, 1996
(CONTINUED)
(8) CONTINGENT LIABILITIES (CONTINUED)
was due on December 31, 1983. The second agreement provided that the Company was
obligated to issue 6,000 (as adjusted) shares of common stock no later than two
years from the date of the agreement.
No equipment was procured from either corporation, no shares of common stock
have been issued nor has the Company returned the $100,000 payment to either
corporation. The Company has not determined whether either obligation is
currently enforceable under French law. The Company is unaware of any request
for payment or for the issuance of the Company's shares from August 3, 1987 to
date.
(9) RELATED PARTY TRANSACTIONS
Consulting fees are paid to certain shareholders and officers.
F-67
ANNEX I
PLAN AND AGREEMENT OF MERGER
This PLAN AND AGREEMENT OF MERGER ("Agreement") is made as of the 21st day
of December, 1995, by and among ECHOSTAR COMMUNICATIONS CORPORATION, a Nevada
corporation formed in April 1995 ("EchoStar"), DIRECT BROADCASTING SATELLITE
CORPORATION, a Colorado corporation ("DBSC"), and DIRECT BROADCASTING SATELLITE
CORPORATION, A Delaware corporation ("DBSD").
RECITALS
WHEREAS, DBSD and EchoStar Communications Corporation, a Nevada Corporation
formed in December 1993 ("Old EchoStar"), have entered into a Stock Purchase
Agreement, dated November 15, 1994 (the "Purchase Agreement"), pursuant to which
EchoStar purchased certain shares of DBSD's Common Stock, $0.01 par value (the
"DBSD Shares"), for the consideration set forth in the Purchase Agreement, and
was granted certain other rights as more particularly set forth therein;
WHEREAS, the Purchase Agreement contemplates the potential execution by Old
EchoStar, DBSD and DBSC or a plan and agreement of merger at the option of the
parties as provided in the Purchase Agreement;
WHEREAS, Old EchoStar has assigned its right to enter into this Agreement to
EchoStar;
WHEREAS, the parties hereto intend the Merger to constitute and do hereby
adopt this Agreement as a plan of reorganization pursuant to Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended; and
WHEREAS, the Boards of Directors of DBSD, EchoStar and DBSC, deeming it
advisable for the mutual benefit of EchoStar, DBSC, DBSD and their respective
shareholders that DBSD merge with DBSC (the "Merger"), have approved this Plan
and Agreement of Merger under the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties herein contained, the parties hereto agree that
DBSD and DBSC shall be merged and that the terms and conditions of the Merger
and the mode of carrying the same into effect shall be as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. For purposes of this Agreement, and except as otherwise
expressly provided, or unless the context otherwise requires, the following
terms shall have the meanings set forth below:
"Additional Equity Rights" shall mean any valid equity rights not disclosed
to EchoStar on the date of the Purchase Agreement pursuant to Schedule 5.2 of
the Purchase Agreement.
"Adverse Notice" shall have the meaning set forth in Subsection 8.3.2
herein.
"Affiliate" means as to any particular Person, any other Person or entity
that directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with such particular Person.
"Agreement" means this Agreement.
"Appraisal Laws" shall have the meaning set forth in Subsection 2.5.1
herein.
A-1
"Cash Value" shall have the meaning set forth in Subsection 2.3.2 herein.
"Challenge" shall have the meaning set forth in Section 4.16.6 herein.
"DBSD Due Diligence" shall have the meaning set forth in Section 4.20
herein.
"DBSD Financial Statements" shall have the meaning set forth in Section
4.15.1 herein.
"DBSD Liabilities" has the meaning set forth in Subsection 6.3.2 hereof.
"DBSD Option" means the option granted by DBSD to EchoStar to acquire an
additional 333,333, or 11.3% of the, DBSD Shares.
"DBSD's Business" shall have the meaning set forth in Section 4.8 herein.
"DBS Rights" means the construction permits and related rights with respect
to eleven (11) frequencies at an eastern, and eleven (11) frequencies at a
western, orbital location, together with any further permits or rights requested
or granted to DBSD.
"DBSD Shares" has the meaning set forth in the RECITALS above.
"DBSD Stock Certificates" shall have the meaning set forth in Subsection
2.3.4 herein.
"Defaulting Party" shall have the meaning set forth in Section 12.3 herein.
"Deemed Acceleration" shall have the meaning set forth in Section 5.7
herein.
"DGCL" shall have the meaning set forth in Section 2.1 herein.
"Direct Broadcasting Satellite Corporation" shall have the meaning set forth
in Subsection 2.1.1 herein.
"Dissenting Shares" shall have the meaning set forth in Subsection 2.5.1
herein.
"Due Diligence" shall have the meaning set forth in Section 4.20 herein.
"EchoStar" shall mean, unless otherwise stated herein or the context
otherwise requires, EchoStar and Old EchoStar.
"EchoStar Common Stock" means the Class A Common Stock of EchoStar
Communications Corporation, a Nevada corporation formed in April 1995, $0.01 par
value.
"EchoStar Financials" shall have the meaning set forth in Subsection 5.6.1
herein.
"Effective Time of the Merger" has the meaning specified in Subsection 2.2.6
hereof.
"Entitle Acceleration" shall have the meaning set forth in Section 5.7
herein.
"Existing Equity Rights" shall have the meaning set forth in Section 6.4.2
herein.
"FCC" means the Federal Communications Commission and its staff, and
includes any governmental body or agency succeeding to the functions thereof.
"FCC Approval" shall have the meaning set forth in Subsection 8.4.1 herein.
"GAAP" shall have the meaning set forth in Section 4.15.1 herein.
"Governing Documents" shall have the meaning set forth in Section 4.12
herein.
"Indenture" shall have the meaning set forth in Section 7.3 herein.
"Merger Closing" or "Merger Closing Date" have the meanings specified in
Article X herein.
"Merger Price" shall have the meaning set forth in Subsection 2.3.2 herein.
"Negotiations" shall have the meaning set forth in Section 12.6 herein.
"Nondefaulting Party" shall have the meaning set forth in Section 12.3
herein.
A-2
"Outstanding Common Shares" shall have the meaning set forth in Section 4.2
herein.
"Permitted Liabilities" shall mean the reasonable and prudent expenses
incurred by DBSD in connection with the transactions contemplated by the
Purchase Agreement and in the ordinary course of DBSD's pursuit of a successful
DBS business, and as required pursuant to the Satellite Contract, or otherwise
necessary to maintain the DBS Rights.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a trust, an organization, a governmental
entity or any department, agency or political subdivision thereof, or any other
legal entity.
"Purchase Agreement" shall have the meaning set forth in Section 8.1 herein.
"Purchase Closing" shall mean the closing of the purchase by EchoStar of
DBSD Shares pursuant to the Purchase Agreement.
"Registration Statement" shall have the meaning set forth in 6.12 herein.
"Satellite Contract" shall have the meaning set forth in Subsection 6.4.9
herein.
"SEC" means the Securities and Exchange Commission and includes any
governmental body or agency succeeding to the functions thereof.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar federal law then in force.
"Senior Notes" shall have the meaning set forth in Section 7.3 herein.
"Share Value" shall have the meaning set forth in Subsection 2.3.2 herein.
"Subsidiaries" means, with respect to any Person, any corporation,
partnership, association or other business entity of which (i) if a corporation,
a majority of the total voting power of shares of 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 that Person or one or more of the other Subsidiaries of that
Person or a combination thereof, or (ii) if a partnership, association or other
business entity, a majority of the partnership of other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a partnership, association or other business entity if
such Person or Persons shall be allocated a majority of partnership, association
or other business entity gains or losses and shall be or control the managing
director or general partner of such partnership, association or other business
entity.
"Tax Liabilities" shall have the meaning set forth in Section 4.17 herein.
"Transfer" shall have the meaning set forth in Subsection 6.4.3 herein.
1.1.1 In addition, other capitalized words and phrases used in this
Agreement shall have the meanings ascribed herein.
ARTICLE II
MERGER
2.1 ACTIONS TO BE TAKEN. Upon performance of all the covenants and
obligations of the parties contained herein required to be accomplished by the
Merger Closing and upon fulfillment (or waiver) of all the conditions to the
obligations of the parties contained herein required to be accomplished by
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the Merger Closing, at the Effective Time of the Merger and pursuant to the
Delaware General Corporation Law (the "DGCL") and the Colorado Business
Corporation Act (the "CBA"), the following shall occur:
2.1.1 DBSD shall be merged with and into DBSC, which shall be the
Surviving Corporation (the "Surviving Corporation"). The separate existence and
corporate organization of DBSD shall cease at the Effective Time of the Merger,
and thereupon, DBSD and DBSC shall be a single corporation, the name of which
shall be "Direct Broadcasting Satellite Corporation." DBSC, as the Surviving
Corporation, shall succeed, insofar as permitted by law to all of the rights,
assets, liabilities and obligations of DBSD in accordance with the CBA.
2.2.2 The Certificate of Incorporation of DBSC shall be and remain
the Certificate of Incorporation of the Surviving Corporation until amended as
provided by law.
2.2.3 The By-Laws of DBSC shall become the By-Laws of the Surviving
Corporation until amended as provided by law.
2.2.4 Until changed in accordance with the Certificate of
Incorporation and By-Laws of the Surviving Corporation, the directors of DBSC
immediately prior to the Effective Time of the Merger shall become the directors
of the Surviving Corporation.
2.2.5 Until changed in accordance with the Certificate of
Incorporation and By-Laws of the Surviving Corporation, the officers of DBSC
immediately prior to the Effective Time of the Merger shall become the officers
of the Surviving Corporation.
2.2.6 As soon as practicable after the terms and conditions of this
Agreement have been satisfied, and upon consummation of the closing referred to
in Article XI hereof (the "Merger Closing"), a Certificate of Merger and
Articles of Merger, consistent with this Agreement, in the form prescribed by,
and properly executed in accordance with, the DGCL and the CBA, respectively, in
form and substance satisfactory to counsel for the parties hereto and providing
for immediate effectiveness of the Merger, shall be filed with the Secretaries
of State of the States of Delaware and Colorado, respectively. The Merger shall
become effective when the Certificate of Merger and the Articles of Merger are
deemed filed with both such Secretaries of State pursuant to the DGCL and the
CBA, as the case may be. The date and time when the Merger shall become
effective is referred to in this Agreement as the "Effective Time of the
Merger."
2.3 CANCELLATION OR CONVERSION OF DBSD SHARES. As of the Effective Time of
the Merger, by virtue of the Merger and without any action on the part of any
shareholder:
2.3.1 Any DBSD Shares held in the treasury of DBSD, and any DBSD
Shares issued and outstanding immediately prior to the Effective Time of the
Merger which are owned by EchoStar or DBSC, shall be cancelled and retired. No
cash, securities or other consideration shall be paid or delivered in exchange
for such DBSD Shares under this Agreement.
2.3.2 Except with regard to DBSD Shares cancelled pursuant to
Subsection 2.3.1 hereof, and subject to Subsection 2.3.3 below, at the Effective
Time of the Merger, all DBSD Shares held by shareholders of DBSD other than
EchoStar shall, by virtue of the Merger and without any action on the part of
DBSD, be converted into and exchanged for: (i) .67417 EchoStar Shares (the
"Share Value"); or (ii) $7.99 in cash (the "Cash Value") (the Share Value and
the Cash Value being hereafter jointly referred to as the "Merger Price"). At
the time of the vote by DBSD shareholders on the Merger, each DBSD shareholder
in its sole discretion shall determine the portion of their DBSD Shares to be
exchanged for EchoStar Shares, and the portion of their DBSD Shares to be
exchanged for cash, provided that in the event the number of DBSD Shares to be
exchanged for cash, together with the number of DBSD Shares with respect to
which appraisal rights under Delaware law have been reserved, would exceed 50%
of the DBSD Shares held by shareholders other than EchoStar, the portion of the
DBSD Shares to be exchanged for cash, of each shareholder who elects to take a
combination of EchoStar Shares and cash, shall be reduced by the same percentage
for each such
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DBSD shareholder (i.e., for example, the number of DBSD Shares each such
shareholder may exchange for cash would each be reduced by 5%) and exchanged for
EchoStar Shares instead if numerically possible, so that the total number of
DBSD Shares exchanged for cash does not exceed 50%. Any DBSD Shareholder who
fails to make an election shall receive EchoStar Shares, not cash, for their
DBSD Shares. The number of EchoStar Shares set forth in clause (i) above shall
be adjusted, if at all, according to the provisions set forth in Section 2.4
below, and shall be appropriately adjusted to reflect any stock split, stock
dividend, combination or other similar transaction, involving EchoStar.
2.3.3 In lieu of the issuance or recognition of fractional EchoStar
Shares, cash equal to the value of such fractional shares shall be paid to each
holder of DBSD Shares electing to receive EchoStar Shares pursuant to Subsection
2.3.2 hereof.
2.3.4 After the Effective Time of the Merger, each holder of an
outstanding certificate or certificates theretofore representing DBSD Shares
converted into EchoStar Shares or cash pursuant to Subsection 2.3.2 hereof (the
"DBSD Stock Certificates"), upon surrender thereof to EchoStar or such other
entity as shall, prior to the Merger Closing, be designated by DBSD (and as
shall be reasonably acceptable to EchoStar) as exchange agent (the "Exchange
Agent"), shall be entitled to receive either: (i) the Cash Value; or (ii) a
Stock Certificate representing the number of EchoStar Shares into which the DBSD
Shares theretofore represented by such surrendered DBSD Stock Certificates shall
have been converted pursuant to Subsection 2.3.2 hereof. Until so surrendered,
each DBSD Stock Certificate shall be deemed for all purposes, other than as
provided below with respect to the payment of dividends or other distributions,
if any, in respect of EchoStar Shares, to represent the number of EchoStar
Shares into which the DBSD Shares theretofore represented thereby shall have
been converted, or the Cash Value, as the case may be. Until so surrendered,
EchoStar may, at its option, refuse to pay: (y) any dividend or other
distribution with respect to EchoStar Shares; or (z) any interest with respect
to the Cash Value, payable to such shareholders of DBSD; provided, however, that
upon surrender and exchange of such DBSD Stock Certificates there shall be paid
to DBSD's shareholders the amount, without interest, of dividends and other
distributions with respect to EchoStar Shares, if any, which have become payable
with respect to the EchoStar Shares and which have not previously been paid.
Whether or not a DBSD Stock Certificate is surrendered, from and after the
Effective Time of the Merger, such DBSD Stock Certificates shall under no
circumstances evidence, represent or otherwise constitute any stock or other
interest whatsoever in DBSC, the Surviving Corporation or any other Person, firm
or corporation other than EchoStar or its successors.
In the event any DBSD Stock Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and subject to such other
conditions as the Board of Directors of EchoStar may impose, EchoStar shall
issue in exchange for such lost, stolen or destroyed Certificate the Merger
Price deliverable in respect thereof as determined in accordance with Section
2.3.2. When authorizing such issue of the Merger Price in exchange therefor, the
Board of Directors of EchoStar may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed Certificate to give EchoStar a bond or other surety in such sum as
EchoStar may reasonably direct as indemnity against any claim that may be made
against EchoStar with respect to the Certificates alleged to have been lost,
stolen or destroyed.
2.4 ADJUSTMENT TO THE SHARE VALUE OR CASH VALUE. The Share Value or Cash
Value, as the case may be, shall be appropriately adjusted in the event that:
(i) on the Merger Closing Date DBSD Liabilities exceed the Permitted
Liabilities, but EchoStar desires to proceed with the Merger Closing
notwithstanding; (ii) any liabilities are asserted against DBSD which are
alleged to have arisen on or before March 31, 1994, but which are not shown in
the DBSD Financial Statements; or (iii) any Additional Equity Rights are
asserted. In the event an adjustment is necessary as a result of Subsection
2.4(i) or (ii) above, the Share Value or the Cash Value, as applicable, shall be
reduced by the percentage obtained from the quotient of "x"/$7,785,184, where
"x" is equal to the amount by which
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DBSD Liabilities exceed Permitted Liabilities, plus the amount (not to exceed
$5,000,000) of any liabilities contemplated by Subsection 4.2(ii) above. In the
event that liabilities contemplated by Subsection 4.2(ii) above exceed
$7,000,000, EchoStar may at its option either consummate the Merger and assume
those liabilities, or terminate this Agreement. In the event EchoStar elects to
terminate this Agreement as a result, then the DBSD Option shall terminate on
the close of business on the 90th day following the date of such termination. In
the event an adjustment is necessary as the result of Subsection 2.4(iii) above,
the Share Value or the Cash Value, as applicable, shall be reduced by the
percentage obtained from the quotient of "x"/"y" where "x" is the total number
of DBSD Shares which would be issued pursuant to all Additional Equity Rights in
the aggregate, if all such Additional Equity Rights were determined to be valid,
and "y" is the total number of DBSD Shares outstanding excluding DBSD Shares
held by EchoStar or its Affiliates. DBSD shall have the right to contest any
Additional Equity Rights and may incur reasonable expenses in that regard. In
the event any such Additional Equity Rights are being contested by DBSD on the
Merger Closing, EchoStar shall withhold the portion of the Merger Price which
would be allocable to holders of the Additional Equity Rights being contested.
To the extent the contested Additional Equity Rights are ultimately determined
to be invalid, EchoStar shall promptly release the portion of the Merger Price
withheld to the former DBSD shareholders entitled to receipt thereof. Following
Merger Closing, DBSD shall be required to continue to contest those Additional
Equity Rights only to the extent the costs and expenses of doing so are
reasonable.
2.5 DISSENTERS' RIGHTS.
2.5.1 The DBSD Shares held by those shareholders of DBSD who have
timely and properly exercised their dissenters' rights in accordance with the
provisions of the DGCL applicable to dissenters' rights (the "Appraisal Laws")
are referred to herein as "Dissenting Shares." Each Dissenting Share, the holder
of which, as of the Effective Time of the Merger, has not effectively withdrawn
or lost his dissenters' rights under the Appraisal Laws, shall not be converted
into or represent a right to receive EchoStar Shares or the Cash Value, as the
case may be, in connection with the Merger, but the holder thereof shall be
entitled only to such rights as are granted by the Appraisal Laws. Each holder
of Dissenting Shares who becomes entitled to cash pursuant to the provisions of
the Appraisal Laws shall receive payment therefor from the Surviving Corporation
from funds provided by EchoStar. EchoStar shall also be obligated to pay the
costs and expenses of both DBSD and EchoStar in connection with the exercise of
any appraisal rights, but not the costs of any dissenting DBSD shareholder,
unless required to do so by the Appraisal Laws. If any holder of Dissenting
Shares shall effectively withdraw or lose his dissenters' rights under the
Appraisal Laws, such Dissenting Shares shall be converted into the right to
receive cash in accordance with the Cash Value as set forth in Subsection 2.3.2
hereof.
2.5.2 Immediately following the expiration of the time for Dissenting
Shares to be paid pursuant to the Appraisal Laws, EchoStar shall make available,
by delivery to the Exchange Agent, Stock Certificates for such number of
EchoStar Shares as shall be required for exchange in accordance with this
Agreement and the Cash Value.
2.6 FURTHER ASSURANCES. From time to time, on and after the Effective Time
of the Merger, as and when requested by EchoStar or its successors or assigns,
the proper officers and directors of DBSD immediately before the Effective Date
of the Merger, all of whom shall submit their resignations to be effective at
the Effective Time of the Merger, shall, at EchoStar's expense and for and on
behalf and in the name of DBSD or otherwise, take or cause to be taken such
further or other actions as EchoStar or their respective successors or assigns
may deem necessary or desirable in order to confirm or record or otherwise
transfer to the Surviving Corporation title to and possession of all the
properties, rights, privileges, powers, franchises and immunities of DBSD and
otherwise to carry out fully the provisions and purposes of this Agreement.
2.7 INTENTION. The parties agree and acknowledge that prior to receipt, if
ever requested, of FCC Approval for a transfer of control of DBSD to EchoStar:
(i) it is not the intent of the parties to
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affect a transfer of control of DBSD to EchoStar, nor shall EchoStar assert
control over DBSD; and (ii) DBSD, acting through its Board of Directors, shall
retain sole and exclusive responsibility for and authority over, by example and
not by limitation, its corporate policy and actions, day to day operations,
finances, personnel policy and actions, FCC authorizations and the privileges
and obligations it has as a DBS conditional permittee.
2.8 RESTRICTIONS ON TRANSFER.
2.8.1 Each DBSD shareholder electing to receive EchoStar Shares in
connection with the Merger shall not offer, sell, contract to sell, grant any
option to purchase, pledge or otherwise dispose of, transfer or hypothecate any
of its EchoStar Shares, or in any other manner transfer all or a portion of the
economic consequences associated with ownership of the EchoStar Shares until
ninety (90) days following the Effective Time of the Merger (the "Lock Up" and
the "Lock Up Period"). Each certificate for EchoStar Shares issued in the Merger
shall contain a legend restricting the transfer of the EchoStar Shares except in
compliance with this Section 2.8.1.
2.8.2 If just prior to the Effective Time of the Merger, EchoStar is
unable to make the representations referenced in Section 5.8 below, and as a
result of this and no other significant factors, tax counsel in connection with
the Merger is unable to provide assurance that the Merger will qualify for
tax-free status, then the Lock Up will terminate on that date with respect to
50% of the EchoStar Shares held by each shareholder, but shall continue with
respect to the remainder of the EchoStar Shares for the remainder of the Lock Up
Period. As used in this Section 2.8.2, tax counsel shall mean the law firm of
Sullivan & Worcester, except that if EchoStar disagrees with the opinion of
Sullivan & Worcester, EchoStar shall be free to engage counsel reasonably
acceptable to DBSD, at EchoStar's expense, and if that counsel renders an
opinion that would not trigger partial or full release of the Lock Up, then the
Lock Up shall not terminate.
ARTICLE III
THIS ARTICLE HAS BEEN INTENTIONALLY DELETED.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DBSD
DBSD hereby represents and warrants to EchoStar and DBSC as follows, which
representations and warranties shall be deemed to have been made on the date
hereof and at the Effective Time of the Merger:
4.1 ORGANIZATION. DBSD is a corporation, duly organized, validly existing,
and in good standing under the laws of the State of Delaware, and has all the
requisite corporate power and authority to own its property and conduct the
business in which it is engaged. Attached as Schedule 4.1 are true and complete
copies of DBSD's Certificate of Incorporation and By-Laws as amended to the date
hereof.
4.2 CAPITALIZATION. DBSD is authorized to issue three million (3,000,000)
DBSD Shares and no other capital stock of any kind or class. As of the date
hereof, there are 1,618,138 DBSD Shares issued and outstanding (the "Outstanding
Common Shares"). DBSD does not have any other shares of capital stock issued and
outstanding other than the Outstanding Common Shares. All of the Outstanding
Common Shares are validly issued, fully paid and non-assessable. To the best of
DBSD's knowledge, following diligent investigation, other than the DBSD Option,
DBSD does not have outstanding any options or warrants to purchase, or contracts
to issue, or contracts or any other rights entitling anyone to acquire, DBSD
Shares, or securities convertible into such DBSD Shares, other than as set forth
in Schedule 4.2 attached hereto. There are no Existing Equity Issuances pending
as of the date of this Agreement.
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4.3 SUBSIDIARIES. DBSD has no Subsidiaries or equity interest in any
corporation, partnership or other entity.
4.4 QUALIFICATION. DBSD is not qualified as a foreign corporation in any
jurisdiction other than as set forth in Schedule 4.4 attached hereto. The nature
of the business of DBSD does not make qualification of it as a foreign
corporation necessary under the laws of any jurisdiction other than as set forth
in Schedule 4.4 which are the only jurisdictions in which the nature of its
business requires qualification.
4.5 OWNED REAL ESTATE. DBSD does not have title to any real estate.
4.6 LEASED REAL ESTATE. DBSD does not lease any real estate other than as
set forth in Schedule 4.6.
4.7 LEASED TANGIBLE PERSONAL PROPERTY. DBSD does not lease any personal
property other than as set forth in Schedule 4.7.
4.8 ALL CONTRACTS. Schedule 4.8 attached hereto lists all contracts or
other obligations to which DBSD is a party or by which it is bound, which
constitute all of the contracts and other obligations to which DBSD is a party
or by which it is bound except to the extent any such contract or obligation is
clearly not material to DBSD's business operations, governance, or prospects
(collectively "DBSD's Business"). DBSD is not in default under any of such
contracts, obligations or commitments, is not aware of any facts which, with
notice and/or the passage of time, would constitute such a default and is not
aware of any default by any party thereto except: (i) for such defaults as do
not and will not have in the aggregate any material adverse effect on DBSD's
Business, or the ability of DBSD to perform any of its obligations under this
Agreement or limit in any way the benefits EchoStar expects to obtain pursuant
to this Agreement, or (ii) as limited in Schedule 4.8. No consent is required
under the contracts, obligations and commitments referred to in this Section 4.8
in connection with the Merger, other than as set forth in Schedule 4.8. To the
extent Schedule 4.8 overlaps with matters required by other Schedules to this
Agreement, DBSD shall list the matter on each applicable Schedule.
4.9 TRANSACTIONS WITH DIRECTORS, OFFICERS, EMPLOYEES AND AFFILIATES. Since
August 3, 1987 except as set forth in Schedule 4.9 attached hereto, there have
been no transactions between DBSD and any director, officer, employee of
affiliate (as defined in Rule 405 under the Securities Act) of DBSD. Since
August 3, 1987 none of the officers, directors, employees or affiliates of DBSD,
or any member of the immediate family of any such persons, has been a director
or officer of, or has had a material interest in, any firm, corporation,
association or business enterprise which during such period has been a supplier,
customer or sales agent of DBSD or has completed to any extent with DBSD, except
as otherwise set forth in Schedule 4.9.
4.10 LITIGATION. Other than as set forth in Schedule 4.10, there are no
legal, administrative, arbitration or other proceedings or claims pending or, to
the best of DBSD's knowledge, threatened against DBSD, nor is DBSD subject to
any existing judgment, nor has DBSD received any inquiry from an agency of the
Federal or of any state or local government regarding the transactions
contemplated hereby, or regarding any violation or possible violation of any
law, regulation or ordinance affecting its business or assets.
4.11 LICENSES AND PERMITS. Other than: (i) as set forth in Schedule 4.11;
(ii) the DBS Rights; and (iii) DBSD's foreign qualification to do business in
the District of Columbia, DBSD has no other licenses, permits, orders, approvals
or authorizations of any nature, and to DBSD's knowledge, no such licenses,
permits, orders, approvals, or authorizations of any nature are required for
DBSD's current business, except to the extent any such failures are clearly not
material to DBSD's Business.
4.12 AUTHORITY RELATIVE TO AGREEMENT; ENFORCEABILITY. The execution,
delivery and performance of this Agreement are within the legal capacity and
power of DBSD; have been duly authorized by all requisite corporate action on
the part of DBSD; require the approval or consent of no other Persons, entities
or agencies (except for: (i) FCC notifications, consents and approvals; and (ii)
approval of the
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shareholders of DBSD); and will neither violate nor constitute a default under,
nor create a lien or breach under, nor result in the acceleration of performance
or right to accelerate a lien or breach under, nor result in the acceleration of
performance or right to accelerate performance under (whether or not after
giving of notice or lapse of time or both), the terms of the Certificate of
Incorporation or By-Laws of DBSD or of any agreement, obligation or commitment
binding upon DBSD (the "Governing Documents") except: (i) as set forth in
Schedule 4.12; or (ii) to the extent any such argument, obligation, commitment,
or the acceleration or breach thereof, is clearly not material to DBSD's
Business. This Agreement is a legal, valid and binding obligation of DBSD
enforceable against DBSD in accordance with its terms, except insofar as the
enforcement thereof may be limited by bankruptcy, insolvency, moratorium or
similar laws affecting the enforcement of creditors rights generally and subject
to equitable principles limiting the availability of equitable remedies, and
except insofar as the enforcement thereof may be limited by the rules,
regulations or orders of the FCC.
4.13 COMPLIANCE WITH APPLICABLE LAWS. To the best of DBSD's knowledge,
DBSD is in compliance in all material respects with all Federal, state, county
and municipal laws, ordinances, regulations, rules, reporting requirements,
judgments, orders, decrees and requirements of common law applicable to the
conduct and business of DBSD (together, the "General Laws") except to the extent
any such violation is clearly not material to DBSD's Business.
4.14 EMPLOYMENT MATTERS.
4.14.1 No employee of DBSD has a written or oral agreement (or an
assurance pursuant to any employee manual) which would preclude DBSD from
terminating such employee's employment at any time with no obligation to DBSD to
make any payment except wages to the date of termination. DBSD has not engaged
in any discriminatory hiring or employment practices nor have any employment
discrimination complaints been filed against DBSD with any state or Federal
agency. DBSD has not been threatened by any former employee with any suit
alleging wrongful termination.
4.14.2 To the best of DBSD's knowledge there is no arrangements or
contracts with any present or former director, officer, employee or independent
contractor of DBSD, or any other Person, that require any deferred compensation,
retirement or welfare benefits to be paid or provided following termination of
services, except as set forth on Schedule 4.14.2.
4.15 FINANCIAL STATEMENTS.
4.15.1 The financial statements of DBSD provided to EchoStar for the
fiscal year ended March 31, 1995, a copy of which are attached hereto as Exhibit
D (the "DBSD Financial Statements"), fairly represent the financial position of
DBSD and the results of its operations at the dates and for the periods to which
they apply. To the best of DBSD's knowledge, following diligent investigation,
the DBSD Financial Statements reflect all Existing Equity Rights, as such term
is defined in Subsection 6.4.2 below. Such DBSD Financial Statements have been
prepared in conformity with generally accepted accounting principles, applied on
a consistent basis throughout the periods involved ("GAAP") except as
specifically noted therein.
4.15.2 The DBSD Financial Statements reflect substantially all of the
liabilities and obligations (whether absolute, accrued, contingent or otherwise)
of DBSD. Other than the $300,000 of liabilities referenced in Subsection 5.15.2
of the Purchase Agreement, since the date of the DBSD Financial Statements, DBSD
has incurred no liabilities (whether absolute, accrued, contingent or otherwise)
other than Permitted Liabilities.
4.16 BUSINESS CHANGES. Except as set forth on Schedule 4.16 attached
hereto, since the date of the DBSD Financial Statements there has not been:
4.16.1 any adverse changes in the working capital, financial
condition, assets, liabilities, or in the business or prospects of DBSD (except
to the extent such adverse change is clearly not
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material to DBSD's Business and except for: (i) the $300,000 of liabilities
referenced in Subsection 5.15.2 of the Purchase Agreement; and (ii) Permitted
Liabilities incurred subsequent to the Purchase Closing and disclosed in a
permitted amendment to Schedule 5.16 to the Purchase Agreement;
4.16.2 any damage, destruction or loss affecting the business of DBSD
(except to the extent clearly not material to DBSD's Business);
4.16.3 any amendment or termination of any contract, lease or license
to which DBSD is a party or by which it is, or may be bound (except to the
extent clearly not material to DBSD's Business);
4.16.4 any dividend or distribution declared, set aside or paid in
respect of the DBSD Shares;
4.16.5 any sale or other disposition of assets of DBSD having a value
in excess of $1,000; or
4.16.6 any actual or threatened challenge to the DBS Rights (a
"Challenge").
4.17 TAXES. As of the date of this Agreement, all tax and information
returns required to have been filed by DBSD have been filed with the appropriate
authority; and all Federal, state and local taxes (including without limitation
income, franchise, property, sales, use, value added, withholding, excise,
capital or other tax liabilities), charges, assessments, penalties and interest
of DBSD (collectively, the "Tax Liabilities") required to be paid on or before
the date of this Agreement were paid or have been accrued on DBSD's books. Such
returns were correct in all material respects as filed. As of the date of this
Agreement, no assessments or additional Tax Liabilities have been proposed or
threatened against DBSD or any of its assets, and DBSD has not executed any
waiver of the statute of limitations on the assessments or collection of any Tax
Liabilities. The representations above shall continue to be true and complete on
the date of consummation of the Merger, except as to those Tax Liabilities which
are currently being contested in good faith and with respect to which adequate
provision for the payment thereof has been reserved and set aside by DBSD. The
DBSD Financial Statements include adequate provision for Tax Liabilities
incurred or accrued as of the date thereof. True and complete copies of DBSD's
most recent federal, state and local tax returns have delivered previously by
DBSD to EchoStar.
4.17.1 Since August 3, 1987, no federal tax returns of DBSD have ever
been audited or examined by the Internal Revenue Service. There are no pending
investigations of DBSD or its tax returns by any Federal, state or local taxing
authority and there are no Federal, state or local tax liens upon any of DBSD's
assets.
4.17.2 DBSD and EchoStar intend the Merger to constitute a plan of
reorganization pursuant to Section 368(a)1(A) of the Internal Revenue Code of
1986, as amended, provided, however, that notwithstanding this statement of
intent and the similar statement in the third Recital of this Agreement, DBSD
has concluded that the Merger, and the transactions contemplated hereby, as
currently structured and under existing tax law, will provide the tax treatment
to DBSD and its shareholders desired by them, and that regardless of the actual
tax outcome of the transactions, DBSD shall not raise such tax treatment as an
impediment to the Merger.
4.18 VALID ISSUANCE OF DBSD SHARES. The Outstanding Common Stock is all
duly and validly authorized and issued, fully paid and nonassessable. All
Outstanding Common Stock issued since August 3, 1987 has been issued in
compliance with all applicable Federal and state securities laws. With respect
to Outstanding Common Stock issued prior to August 3, 1987, nothing has come to
the attention of DBSD which would lead it to believe that any such stock was
issued in violation of any applicable Federal or state securities laws. The
Option Shares issuable upon exercise of the DBSD Option have been duly and
validly reserved for issuance and, upon issuance in accordance with the terms of
the DBSD Option pursuant to Section 2.2 of the Purchase Agreement, shall be duly
and
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validly issued, fully paid and nonassessable, and issued in compliance with all
applicable Federal and state securities laws. Such DBSD Option Shares are not
subject to any preemptive rights of any Person.
4.19 BROKERAGES. DBSD has not engaged any broker or finder to render
services in connection with this Agreement. No fee or other amount is payable by
DBSD with respect to such type of services. A list of all brokers and finders
DBSD has retained since August 3, 1987, together with a copy of each such
agreement (or if oral a summary of all material terms thereof), is attached as
Schedule 4.19. With respect to any broker, finders' or similar contracts,
regardless of when entered into, nothing has come to the attention of DBSD which
would lead it to believe that any fee would be payable by DBSD at any time in
the future in connection with any possible transaction unless, at the request of
DBSD, any such broker or finder brings a Person to the attention of DBSD, with
which Person DBSD ultimately consummates an agreement.
4.20 DBS LICENSES. DBSD has been awarded by the FCC a conditional
construction permit and specific orbital slot assignments with respect to eleven
(11) DBS frequencies located at 61.5 degrees West Longitude, and eleven (11) DBS
frequencies located at 175 degrees West Longitude. Other than those filed by
Dominion Video Services, Inc. ("DVS") and others as may be set forth in Schedule
4.20, there are no Challenges to the DBS Rights and DBSD reasonably believes
that such Challenges will not be successful. As of the date hereof, DBSD is in
full compliance with all FCC "due diligence" requirements (hereinafter, "DBSD
Due Diligence") to the best of its knowledge.
4.21 PENDING OR CONTEMPLATED TRANSACTIONS. DBSD is not a party to any
agreement, express or implied, with any party, other than EchoStar, regarding a
transaction involving the DBS Rights, or otherwise related to the transactions
contemplated by this Agreement.
4.22 SHAREHOLDER APPROVAL. Pursuant to applicable law, and the Governing
Documents: (i) approval of the Merger by fifty percent (50%), plus one DBSD
Share, of the total Outstanding Common Stock shall be sufficient to approve the
Merger; and (ii) neither EchoStar nor Harley Radin (DBSD's Chairman) shall be
prohibited from voting any of their DBSD Shares in favor of the Merger.
4.23 BOARD APPROVAL. The Board of DBSD has voted to approve all of the
transactions contemplated by this Agreement, including but not limited to the
recommendation that DBSD's shareholders vote to approve the Merger, and that the
DBSD Board shall recommend that DBSD's shareholders approve the Merger except in
the circumstances specified in Section 6.8 below. DBSD shall not assert that an
appraisal or valuation or either DBSD or EchoStar is required, or request any
appraisal or valuation, in connection with Board approval of the Merger, the
solicitation of its shareholders or otherwise, unless required by Federal or
state securities laws.
4.24 RELIANCE. In determining whether to enter into this Agreement and the
transactions contemplated hereby, DBSD has not relied upon any representations
or warranties or other information (whether oral or written) furnished by
EchoStar other than as set forth in, or scheduled pursuant to, this Agreement or
the Purchase Agreement.
4.25 FULL DISCLOSURE. No representation or warranty made by DBSD in this
Agreement, no certification furnished or to be furnished to EchoStar pursuant to
this Agreement, and no document delivered by DBSD to EchoStar or its counsel
hereunder, contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the statements
contained herein or therein not misleading.
DBSD shall be permitted to amend any Schedule provided pursuant to this
Article IV at any time to reflect action taken by DBSD as permitted by this
Agreement or as necessary to reflect any subsequent Challenges in Schedule 4.20;
provided that: (i) DBSD shall provide such revised Schedule to EchoStar within
five (5) business days of the event which results in the necessity of an update;
and (ii) this provision shall only apply prospectively (i.e., it shall not be
construed as allowing DBSD to cure a representation or schedule which was false,
incomplete or inaccurate at the time it was made or provided, through a
subsequent amendment thereto).
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ECHOSTAR AND DBSC
EchoStar and DBSC hereby represent and warrant to DBSD as follows, which
representations and warranties shall be deemed to have been made on the date
hereof and as of the Effective Time of the Merger:
5.1 ORGANIZATION. EchoStar and DBSC are each corporations duly organized,
validly existing, and in good standing under the laws of the States of Nevada
and Colorado, respectively, and have all requisite corporate power and authority
to own their property and conduct the business in which each is engaged.
Attached as Schedule 5.1.1 are true and complete copies of EchoStar's and DBSC's
Articles of Incorporation and By-Laws as amended to the date hereof.
5.2 CAPITALIZATION. All outstanding shares of EchoStar are validly issued,
fully paid and non-assessable.
5.3 AUTHORITY RELATIVE TO AGREEMENT; ENFORCEMENT. The execution, delivery
and performance of this Agreement is within the legal capacity and power of
EchoStar and DBSC; have been duly authorized by all requisite corporate action
on the part of EchoStar and DBSC; require the approval or consent of no persons,
entities or agencies, other than such approval required from the FCC and as
shown on Schedule 5.3.1 attached hereto, and will neither violate nor constitute
a default under, nor create a lien or breach under, nor result in the
acceleration of performance or right to accelerate performance under (whether or
not after the giving of notice or lapse of time or both), the terms of the
Articles of Incorporation and By-Laws of EchoStar or DBSC or of any material
agreement, obligation or commitment binding upon EchoStar (other than agreements
as to which appropriate consents, if obtained, shall avoid any defaults, which
consents have been, or will be, obtained). This Agreement is a legal, valid and
binding obligation of EchoStar and DBSC enforceable against EchoStar and DBSC in
accordance with its terms, except insofar as the enforcement thereof may be
limited by bankruptcy, insolvency, moratorium or similar laws affecting the
enforcement of creditors rights generally and subject to equitable principles
limiting the availability of equitable remedies, and except insofar as the
enforcement thereof may be limited by the rules, regulations or orders of the
FCC.
5.4 INAPPLICABILITY OF SPECIFIED STATUTES. EchoStar is not a "holding
company," or a "subsidiary company" or an "affiliate" of a "holding company," as
such terms are defined in the Public Utility Holding Company Act of 1935, as
amended, or an "investment company" or a company controlled by or acting on
behalf of an "investment company," required to be registered under the
Investment Company Act of 1940, as amended.
5.5 ISSUANCE OF SHARES. EchoStar has reserved for issuance the EchoStar
Shares to be issued pursuant to this Agreement, and upon issuance in accordance
with the terms hereof the EchoStar Shares will be duly and validly issued, fully
paid and nonassessable, and issued in compliance with all applicable federal and
state securities laws. Such EchoStar Shares are not subject to the preemptive
rights of any Person.
5.6 FULL DISCLOSURE. No representation or warranty made by EchoStar in
this Agreement, no certification furnished or to be furnished by EchoStar or
DBSD pursuant to this Agreement, and no document delivered by EchoStar to DBSD
or its counsel hereunder, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary to make
the statements contained herein or therein not misleading, as of the date made
furnished or delivered.
5.7 NO INDENTURE DEFAULTS. There are no defaults under the Indenture
pursuant to which EchoStar issued its Senior Discount Notes dated May 31, 1994
(the "Indenture" and the "Senior Notes") which entitle the holders of the Senior
Notes (the "Holders") to accelerate (as defined in the Indenture) the Senior
Notes, or any default EchoStar has notified the Holders of, and which would
entitle the Holders to declare a default and accelerate the Senior Notes (in
either event "Entitle
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Acceleration"). If the Senior Notes have been retired as of any date this
representation is required to be made, EchoStar represents and warrants that if
the Senior Notes were still outstanding there would be no defaults which Entitle
Acceleration ("Deemed Acceleration").
5.8 TAX REPRESENTATIONS. In addition to the representations and warranties
contained in this Article V, EchoStar shall make the representations and
warranties set forth in Schedule 5.8 attached hereto as of the date of this
Agreement only, which representations and warranties shall be incorporated
herein, and made a part hereof, by this reference.
EchoStar shall be permitted to amend any Schedule provided pursuant to this
Article V at any time to reflect action taken by EchoStar as permitted by this
Agreement; provided that: (i) EchoStar shall provide such revised Schedule to
DBSD within five (5) business days of the event which results in the necessity
of an update; and (ii) this provision shall only apply prospectively (i.e., it
shall not be construed as allowing EchoStar to cure a representation or schedule
which was false, incomplete or inaccurate at the time it was made or provided,
through a subsequent amendment thereto).
ARTICLE VI
COVENANTS OF DBSD
6.1 REGULAR COURSE OF BUSINESS. Through to the Effective Time of the
Merger DBSD shall carry on its business diligently and in the ordinary course
and use its best efforts to preserve its present business organization intact
and preserve its present relationships with Persons having business dealings
with it. DBSD shall not, and shall instruct its agents (including without
limitation its directors, officers, attorneys, accountants and investment
bankers) not to take any action which DBSD is prohibited from taking pursuant to
this Agreement, or which could reasonably be expected to increase the
liabilities or obligations, or decrease the rights, which EchoStar expects to
obtain consistent with the terms of this Agreement.
6.2 OUTSTANDING COMMON SHARES. Immediately prior to the Effective Time of
the Merger, the Outstanding Common Stock shall not exceed the number set forth
in Section 4.2 and Schedule 4.2 hereof, plus any Additional Equity Rights.
6.3 DBSD ASSETS AND LIABILITIES.
6.3.1 Through the Effective Time of the Merger, DBSD shall maintain
the DBS Rights free and clear of all liens, charges, encumbrances, pledges,
leases or any other restrictions which could limit in any way the uses which
EchoStar can make of the DBS Rights (other than those limitations imposed by the
FCC on all DBS licensees).
6.3.2 Prior to the Effective Time of the Merger, DBSD shall satisfy
in full each and every liability of DBSD, contingent, fixed, actual, accrued or
otherwise (including, without limitation, all current and long term liabilities
shown on the DBSD Financial Statements) (hereinafter referred to as the "DBSD
Liabilities") which accrued subsequent to August 3, 1987 (other than the debt to
TCI-K1, Inc. in the original principal amount of $500,000, which DBSD shall only
be required to repay if such debt is then due and owing and then only to the
extent of available cash or cash equivalents on hand on the day immediately
preceding the Merger Closing Date), so that there shall exist absolutely no DBSD
Liabilities at the Effective Time of the Merger other than Permitted Liabilities
(to the extent that DBSD does not have cash and cash equivalents on hand
adequate to pay such Permitted Liabilities).
6.3.3 If DBSD fails to satisfy Section 6.3.2 above prior to Closing,
then in addition to all other remedies available to EchoStar pursuant to this
Agreement, EchoStar shall be entitled, to the extent necessary in order to
satisfy all of the DBSD Liabilities in full, to adjust and amend the Share
Value, or the Cash Value, as the case may be, as set forth in Section 2.4 of
this Agreement.
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6.4 RESTRICTED ACTIVITIES AND TRANSACTIONS. Prior to the Effective Time of
the Merger, DBSD shall not:
6.4.1 amend its Certificate of Incorporation or By-Laws;
6.4.2 issue, sell or deliver, or agree to issue, sell or deliver or
grant, or declare any stock dividend or stock split with respect to, any DBSD
Shares or any securities convertible into any such DBSD Shares or convertible
into securities in turn so convertible, to any options, warrants or other rights
calling for the issuance, sale or delivery of any such shares or convertible
securities, provided, however, nothing in this Subsection 6.4.2 shall prohibit
DBSD from issuing DBSD Shares pursuant to any obligations, contingent or
absolute, in existence on the date of this Agreement and disclosed in the DBSD
Financial Statements and Schedule 4.2 to this Agreement ("Existing Equity
Rights") or Additional Equity Rights as permitted elsewhere in this Agreement;
6.4.3 sell, mortgage, pledge, lease or otherwise transfer or encumber
(a "Transfer"), or grant or agree to grant any rights to Transfer, any of the
DBSD Rights or any of its other material assets, property or rights, tangible or
intangible;
6.4.4 borrow, or agree to borrow, any funds or voluntarily incur,
assume or become subject to, whether directly or by way of guarantee or
otherwise, any obligation or liability, absolute or contingent, other than
Permitted Liabilities;
6.4.5 acquire control or ownership of any other corporation,
association, joint venture, partnership, business trust or other business
entity, or acquire control or ownership of all or a substantial portion of the
assets of any of foregoing, or enter into any agreement providing for any of the
foregoing;
6.4.6 solicit, discuss, negotiate or enter into any agreement with
any third party, or provide any information to any third party, with respect to
any inquiry, proposal, offer or possible offer from a third party relating to:
(i) the purchase of DBSD Shares or the acquisition of any option, warrant or
other right to purchase or otherwise acquire any such DBSD Shares or convertible
securities; (ii) an exchange offer for any DBSD Shares; (iii) a purchase, lease
or other acquisition of all or a substantial portion of the assets of DBSD; (iv)
a merger, consolidation or other combination involving DBSD; (v) any transaction
involving the DBS Rights; or (vi) any similar matter; provided, however, nothing
in this Subsection 6.4.6 shall prohibit DBSD from continuing its discussions
with foreign governments and foreign or domestic Persons regarding international
applications for the DBS Rights and joint venture opportunities with respect
thereto, provided that DBSD: (x) discloses all such discussions in existence on
the date of this Agreement in Schedule 6.4.6 attached hereto; (y) notifies
EchoStar in writing regarding the substance and content of any further
discussions; and (z) enters into no agreements, contracts, arrangements or
commitments which limit in any respect the uses to which EchoStar can put the
DBS Rights in the event the Merger is consummated, otherwise diminishes or
restricts the benefits or rights EchoStar expects to obtain from the
transactions contemplated by this Agreement, or exposes DBSD to any obligations
or liabilities, contingent, absolute or otherwise. DBSD shall immediately notify
EchoStar of any inquiries received with respect to any of matters set forth in
clauses (i) through (vi) above.
6.4.7 declare or pay any dividend with respect to DBSD Shares in
cash, stock or property, or redeem, purchase (or otherwise acquire any DBSD
Shares) or any options, warrants or other rights to purchase or to be issued
DBSD Shares;
6.4.8 enter into any contract (other than in the ordinary course of
its business or as otherwise permitted by this Agreement), or any licensing
arrangement;
6.4.9 conduct no business other than: (i) exercising its rights as
required by this Agreement; (ii) satisfying its obligation pursuant to its
Satellite Contract, by and between DBSD and
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Martin Marietta Corporation, dated March 12, 1990, as amended (the "Satellite
Contract"), or necessary to maintain its DBS Rights; or (iii) otherwise
necessary in the ordinary course of business; or
6.4.10 except as set forth in Section 8.8, take any action or fail to
take any action that could: (i) prevent any of its warranties and
representations herein from being true in all material respects as of the
Effective Time of the Merger; (ii) jeopardize the performance or fulfillment of
any of its obligations or commitments under this Agreement; or (iii) reasonably
be expected to have a material adverse effect on any of the benefits EchoStar
may derive from the transactions contemplated by this Agreement or from its
ownership of the DBSD Shares following the Effective Time of the Merger.
6.5 NO DEFAULT OR VIOLATION. Prior to the Effective Time of the Merger,
DBSD shall not: (i) violate, or commit a breach of or a default under, any
contract, obligation or commitment to which it is a party or to which any of its
assets may be subject (except to the extent clearly not material to DBSD's
Business); or (ii) violate any applicable General Law or judgments binding upon
DBSD (except to the extent clearly not material to DBSD's Business) or which
would prevent the consummation of the transactions contemplated by this
Agreement.
6.6 REPORTS; TAXES, ETC. Prior to the Effective Time of the Merger:
6.6.1 DBSD shall duly and timely (by the due date or any duly granted
extension thereof) file all reports and returns required to be filed with the
Federal, state and local authorities; and
6.6.2 DBSD shall: (i) promptly pay all Tax Liabilities indicated by
such returns or otherwise lawfully levied or assessed upon it or any of its
properties (except those Tax Liabilities which are currently being contested in
good faith and with respect to which adequate provision for the payment thereof
has been reserved and set aside by DBSD); and (ii) withhold or collect and pay
to the proper governmental authorities or hold in separate bank accounts for
such payment all taxes and other assessments which it believes in good faith to
be required by law to be so withheld or collected.
6.7 ADVICE OF CHANGES. DBSD shall promptly advise EchoStar orally and in
writing of: (i) any event occurring subsequent to the date of this Agreement
which would render any representation or warranty of DBSD contained in this
Agreement, if made on or as of the date of such event or the Merger Closing
Date, untrue, inaccurate or incomplete in any material respect; and (ii) any
material adverse change in the DBSD Financial Statements, working capital,
financial condition, assets, liabilities (whether absolute, accrued, contingent
to otherwise), operating profits, business or prospects of DBSD not otherwise
disclosed to EchoStar through permitted schedule updates to the Purchase
Agreement.
6.8 CONSENTS, APPROVALS AND FILINGS. DBSD shall use its best efforts to
obtain as promptly as possible all necessary approvals, authorizations,
consents, licenses, clearances or orders of governmental and regulatory
authorities required in order for DBSD to perform its obligations hereunder.
DBSD shall, as soon as practicable after the execution of this Agreement and the
effectiveness of the Form S-4 registration statement referenced in Section 6.12
hereof, and within the time provided by DGCL, call a special meeting of its
shareholders for the express purpose of voting upon this Agreement. DBSD shall
fully coordinate with EchoStar the preparation and timing of distribution of
those materials to its shareholders, including in those materials all materials
requested to be included by EchoStar, and no other material other than a proxy
and the Board recommendation described in this Section 6.8, provided that all
such materials must be in compliance with all applicable Federal and state
securities laws. The Board of DBSD shall recommend that the shareholders approve
the Merger and DBSD shall use its best efforts to obtain that approval, unless
at the time the materials are forwarded EchoStar is in material breach of this
Agreement, which breach has not been cured following required notice and the
expiration of all cure periods, or in the event of a Deemed Acceleration or a
default under the Indenture which Entitles Acceleration.
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6.9 DBSD DUE DILIGENCE. From the date hereof through the Effective Time of
the Merger, DBSD shall use its best efforts to comply with all DBSD Due
Diligence requirements imposed by the FCC. Unless and until the FCC has approved
a transfer of control of DBSD to EchoStar, nothing herein shall be construed as
limiting the sole prerogative of DBSD's Board and management to file FCC
applications and any responses to FCC inquiries.
6.10 ACCESS TO RECORDS AND PROPERTIES. EchoStar may, prior to the
Effective Time of the Merger, through its employees, agents and representatives,
make or cause to be made a detailed review of the business and financial
condition of DBSD and make or cause to made such investigation as it deems
necessary or advisable of the properties, assets, businesses, books and records
of DBSD. DBSD agrees to reasonably assist EchoStar in conducting such review and
investigation and will provide, and will cause its independent public
accountants to provide, EchoStar and its employees, agents and representatives
during regular business hours, in a manner that does not unreasonably interfere
with the operation of the business of DBSD, full access to, and complete
information concerning, all aspects of the businesses of DBSD, including its
books, records (including tax returns filed or in preparation), FCC filings,
contracts, projections, personnel and premises, the audit work papers and other
records of its independent public accountants and any documents (including any
documents filed on a confidential basis) included in any report filed with any
governmental agency.
6.11 BEST EFFORTS. DBSD shall use its best efforts to: (i) cause to be
fulfilled and satisfied all of the conditions to the Merger Closing to be
fulfilled and satisfied by it; (ii) cause to be performed all of the matters
required of it at or prior to the Merger Closing; (iii) fully comply with all
General Laws (except to the extent clearly not material to DBSD's Business) and
DBSD Due Diligence; (iv) use its good faith best efforts to obtain approval of
the Merger by DBSD's shareholders and the FCC at the earliest possible date; and
(v) cooperate with EchoStar, in all reasonable respects in order to comply in
full with the spirit and intent of this Agreement. DBSD shall further take all
steps as shall be necessary to the end that the transactions contemplated hereby
shall be timely consummated; shall not commit or cause to be committed any act
which would prohibit the consummation of the transactions contemplated by this
Agreement; and shall not refrain or cause any Affiliate to refrain from taking
any action necessary or appropriate in furtherance of the consummation of the
transactions contemplated by this Agreement. DBSD shall use its best efforts to
make all of its warranties and representations contained in this Agreement true
and correct in all material respects as at the Merger Closing, with the same
effect as if the same had been made and this Agreement had been dated as at the
Merger Closing.
6.12 REGISTRATION STATEMENT, PROXY STATEMENT AND PROSPECTUS.
6.12.1 EchoStar and DBSD shall prepare, and EchoStar file with the
SEC as soon as is reasonably practicable after the date hereof a Form S-4
registration statement (the "S-4 Registration Statement") and a Proxy Statement
and Prospectus and shall use their best efforts to have the S-4 Registration
Statement declared effective by the Commission as promptly as practicable. The
S-4 Registration Statement shall provide for the registration under the
Securities Act of that number of EchoStar Shares which is sufficient to satisfy
EchoStar's obligations to issue EchoStar Shares in the Merger. EchoStar and DBSD
shall also take any action required to be taken under applicable law in
connection with the consummation of the transactions contemplated by this
Agreement, including, without limitation, in the case of EchoStar, all filings
under applicable state blue sky or securities laws in connection with the
issuance of the EchoStar Shares. EchoStar and DBSD shall promptly furnish to
each other all information, and take such other actions, as may reasonably be
requested in connection with any action by either of them in connection with the
provisions of this Section. DBSD and EchoStar shall cooperate in the preparation
and filing of the S-4 Registration Statement, Proxy Statement and Prospectus and
all information furnished for use therein by either party shall be reasonably
satisfactory to the other; PROVIDED, HOWEVER, that neither party shall have any
liability to the other or to any third party for any information contained
therein which is furnished by the other party. The information provided and to
be provided by DBSD and EchoStar, respectively, for use in the
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Proxy Statement and Prospectus shall be true and correct in all material
respects and shall not omit to state any material fact necessary in order to
make such information and the Proxy Statement and Prospectus not misleading as
of the date of the Proxy Statement and Prospectus.
6.12.2 Prior to the date of approval of the Merger by DBSD's
shareholders, each of DBSD and EchoStar shall correct promptly any information
provided by it to be used specifically in the Proxy Statement, Prospectus and
S-4 Registration Statement that shall have become false or misleading in any
material respect and EchoStar shall take all steps necessary to file with the
SEC and have declared effective or cleared by the SEC any amendment or
supplement to the Prospectus or the S-4 Registration Statement and together with
DBSD to cause the Prospectus as so corrected to be disseminated to the
shareholders of DBSD, in each case to the extent required by applicable law.
Without limiting the generality of the foregoing, EchoStar shall notify DBSD
promptly of the receipt of the comments of the SEC and of any request by the SEC
for amendments or supplements to the Prospectus and S-4 Registration Statement,
or for additional information, and EchoStar shall supply DBSD with copies of all
correspondence between EchoStar on the one hand, and the SEC on the other hand,
with respect to the Prospectus and S-4 Registration Statement. If at any time
prior to the DBSD shareholder meeting any event should occur relating to DBSD or
EchoStar or their respective officers or directors which should be described in
an amendment or supplement to the Prospectus and S-4 Registration Statement, the
parties shall promptly inform each other. Whenever any event occurs which should
be described in an amendment or a supplement to the Proxy Statement, Prospectus
or S-4 Registration Statement, DBSD and EchoStar shall, upon learning of such
event, cooperate in promptly preparing, filing and clearing with the SEC and
mailing to DBSD's shareholders such amendment or supplement; PROVIDED, HOWEVER,
that prior to such mailing (i) DBSD and EchoStar shall consult with each other
with respect to such amendment or supplement, (ii) shall afford each other
reasonable opportunity to comment thereon and (iii) each such amendment or
supplement shall be reasonably satisfactory to the other.
ARTICLE VII
COVENANT OF ECHOSTAR
7.1 BEST EFFORTS. EchoStar shall: (i) cause to be fulfilled and satisfied
all of the conditions to the Merger Closing to be fulfilled and satisfied by it;
(ii) cause to be performed all of the matters required of it at or prior to the
Merger Closing; (iii) cooperate with DBSD in order to obtain FCC Approval at the
earliest possible date; and (iv) cooperate with DBSD in all reasonable respects
in order to comply in full with the spirit and intent of this Agreement.
EchoStar shall further take all steps as shall be necessary to the end that the
Merger and the transactions contemplated hereby shall be timely consummated;
shall not commit or cause to be committed any act which would prohibit the
consummation of the transactions contemplated by this Agreement (other than
pursuing actions at the FCC with respect to applicants other than DBSD); and
shall not refrain or cause any Subsidiary to refrain from taking any action
necessary or appropriate in furtherance of the consummation of the transactions
contemplated by this Agreement. Nothing herein or anywhere else in this
Agreement shall be construed as obligating EchoStar to provide any additional
funds or guarantees to DBSD or otherwise to finance DBSD's business. EchoStar
shall use its best efforts to make all of its warranties and representations
contained in this Agreement which are expressly deemed made as of the Effective
Time of the Merger, true and correct in all material respects as at the Merger
Closing, with the same effect as if the same had been made and this Agreement
had been dated as at the Merger Closing.
7.2 CONSENTS, APPROVALS AND FILINGS. EchoStar shall use its best efforts
to obtain as promptly as possible all necessary approvals, authorizations,
consents, licenses, clearances or orders of governmental and regulatory
authorities required in order for EchoStar to perform its obligations hereunder.
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7.3 ADVICE OF CHANGES. EchoStar shall promptly advise DBSD orally and in
writing of: (i) any event occurring subsequent to the date of this Agreement
which would render any representation or warranty of EchoStar contained in this
Agreement, which representation or warranty is expressly deemed made as of the
Effective Time of the Merger, if made on or as of the date of such event or the
Merger Closing Date, untrue, inaccurate or incomplete in any material respect;
and (ii) any default under the Indenture which Entitles Acceleration or a Deemed
Acceleration.
7.4 RESTRICTED ACTIVITIES AND TRANSACTIONS. Prior to the Merger Closing,
EchoStar shall not take any action or fail to take any action that: (i) will
prevent any of its warranties and representations herein from being true in all
material respects as of the Merger Closing; (ii) will jeopardize the performance
or fulfillment of any of its obligations or commitments under this Agreement; or
(iii) could reasonably be expected to have a material adverse effect on any of
the benefits DBSD may derive from the transactions contemplated by this
Agreement following the Merger Closing (other than pursuing actions at the FCC
with respect to applicants other than DBSD).
7.5 NEGOTIATIONS WITH DBSD SHAREHOLDERS. Until such time as the Merger is
approved by DBSD's shareholders, EchoStar shall not, and shall cause its
officers, directors, employees, representatives and agents not to, directly or
indirectly, negotiate with any shareholder of DBSD to purchase their DBSD
Shares, provided, however, nothing contained in this Section 7.5 or elsewhere in
this Agreement shall prohibit EchoStar from accepting a pledge of DBSD Shares
from any DBSD shareholder as security for the repayment of obligations of such
shareholder to EchoStar, provided that such pledge: (i) shall not limit the
ability of such shareholder to vote their DBSD Shares without influence by
EchoStar, unless and until an event of default occurs, and then only provided
that any required FCC notifications and approvals have been obtained; and (ii)
shall not occur until after the Merger Trigger Date. Any transfer of DBSD Shares
following an event of default shall not be recognized as effective by DBSD
unless and until any required FCC notifications and approvals have been
obtained.
7.6 ACCESS TO RECORDS AND PROPERTIES.
7.6.1 DBSD may, prior to the Effective Time of the Merger, through
its employees, agents and representatives, make or cause to be made a detailed
review of the business and financial condition of EchoStar and make or cause to
be made such investigation as it deems necessary or advisable of the properties,
assets, businesses, books and records of EchoStar, in order to aid in the
preparation of materials for distribution to its shareholders to seek approval
of the Merger. EchoStar agrees to reasonably assist DBSD in conducting such
review and investigation and will provide and will cause its independent public
accountants to provide, DBSD and its employees, agents and representatives
reasonable access during regular business hours, in a manner that does not
unreasonably interfere with the operation of the business of EchoStar, to, and
complete information concerning, all aspects of the business of EchoStar,
including its books, records (including tax returns filed or in preparation),
projections, personnel and premises, the audit work papers and other records of
its independent public accountants and any documents (excluding any documents
filed on a confidential basis) included in any report filed with a governmental
agency.
7.6.2 All materials provided to DBSD pursuant to Subsection 7.6.1
hereof shall be used by DBSD solely in connection with its due diligence
examination of EchoStar and the preparation of materials necessary or required
to seek shareholder approval of the Merger; provided, however, unless such
materials or the contents thereof have been publicly disclosed to the SEC under
the Securities Act or the Securities Exchange Act, such materials or the
contents thereof shall not be disclosed to such shareholders in connection with
a proxy solicitation or otherwise. Without limiting the generality of the
foregoing, and notwithstanding any prior public disclosure with the SEC or
otherwise, DBSD shall not provide to its shareholders, or any Person, any
projections obtained from EchoStar, or materials based on projections obtained
from EchoStar. The restrictions and prohibitions contained in this Subsection
7.6.2 are in addition to any confidentially agreements between the parties,
whether contained in this Agreement or otherwise.
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7.7 REGISTRATION STATEMENT, PROXY STATEMENT AND JOINT PROSPECTUS.
7.7.1 EchoStar and DBSD shall prepare, and EchoStar shall file with
the SEC as soon as is reasonably practicable after the date hereof the S-4
Registration Statement and a Proxy Statement and Prospectus and shall use their
best efforts to have the S-4 Registration Statement declared effective by the
Commission as promptly as practicable. The S-4 Registration Statement shall
provide for the registration under the Securities Act of that number of EchoStar
Shares which is sufficient to satisfy EchoStar's obligations to issue EchoStar
Shares in the Merger. EchoStar and DBSD shall also take any action required to
be taken under applicable law in connection with the consummation of the
transactions contemplated by this Agreement, including, without limitation, in
the case of EchoStar all filings under applicable state blue sky or securities
laws in connection with the issuance of the EchoStar Shares. EchoStar and DBSD
shall promptly furnish to each other all information, and take such other
actions, as may reasonably be requested in connection with any action by either
of them in connection with the provisions of this Section. DBSD and EchoStar
shall cooperate in the preparation and filing of the S-4 Registration Statement,
Proxy Statement and Prospectus and all information furnished for use therein by
either party shall be reasonably satisfactory to the other; PROVIDED, HOWEVER,
that neither party shall have any liability to the other or to any third party
for any information contained therein which is furnished by the other party. The
information provided and to be provided by DBSD and EchoStar, respectively, for
use in the Proxy Statement and Prospectus shall be true and correct in all
material respects and shall not omit to state any material fact necessary in
order to make such information and the Proxy Statement and Prospectus not
misleading as of the date of the Proxy Statement and Prospectus.
7.7.2 Prior to the date of approval of the Merger by DBSD's
shareholders, each of DBSD and EchoStar shall correct promptly any information
provided by it to be used specifically in the Proxy Statement, Prospectus and
S-4 Registration Statement that shall have become false or misleading in any
material respect and EchoStar shall take all steps necessary to file with the
SEC and have declared effective or cleared by the SEC any amendment or
supplement to the Prospectus or the S-4 Registration Statement and together with
DBSD to cause the Prospectus as so corrected to be disseminated to the
shareholders of DBSD, in each case to the extent required by applicable law.
Without limiting the generality of the foregoing, EchoStar shall notify DBSD
promptly of the receipt of the comments of the SEC and of any request by the SEC
for amendments or supplements to the Prospectus and S-4 Registration Statement,
or for additional information, and EchoStar shall supply DBSD with copies of all
correspondence between EchoStar on the one hand, and the SEC on the other hand,
with respect to the Prospectus and S-4 Registration Statement. If at any time
prior to the DBSD shareholder meeting any event should occur relating to DBSD or
EchoStar or their respective officers or directors which should be described in
an amendment or supplement to the Prospectus and S-4 Registration Statement, the
parties shall promptly inform each other. Whenever any event occurs which should
be described in an amendment or a supplement to the Proxy Statement, Prospectus
or S-4 Registration Statement, DBSD and EchoStar shall, upon learning of such
event, cooperate in promptly preparing, filing and clearing with the SEC and
mailing to DBSD's shareholders such amendment or supplement; PROVIDED, HOWEVER,
that, prior to such mailing, (i) DBSD and EchoStar shall consult with each other
with respect to such amendment or supplement, (ii) shall afford each other
reasonable opportunity to comment thereon and (iii) each such amendment or
supplement shall be reasonably satisfactory to the other.
7.8 REPORTS. Subsequent to consummation of the Merger, EchoStar shall
provide to the former DBSD shareholders such periodic reports as it furnishes to
the other shareholders of EchoStar generally, for as long as they remain
EchoStar shareholders.
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ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS
OF ECHOSTAR AND DBSC
The obligations of EchoStar and DBSC under this Agreement to consummate the
Merger shall be subject to the satisfaction, or to the waiver by them in the
manner contemplated by Section 12.2 hereof, on or before the Merger Closing
Date, of the following conditions:
8.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of DBSD contained in this Agreement, and of DBSD and Radin contained
in Section 4.3 of the Stock Purchase Agreement between EchoStar, DBSD and Radin
dated November 15, 1994 (the "Purchase Agreement"), shall be in all material
respects true and accurate as of the date when made and, except as to
representations and warranties (consisting solely of representations and
warranties regarding the DBSD Financial Statements and as to Additional Equity
Rights), which are expressly limited to a state of facts existing at a time
prior to the Merger Date, shall be in all material respects true and accurate at
and as of the Merger Closing Date as if made on the Merger Closing Date.
8.2 PERFORMANCE OF COVENANTS. DBSD shall have performed and complied in
all material respects with each and every covenant, agreement and condition
required by this Agreement to be performed or complied with by it prior to or on
the Merger Closing Date.
8.3 NO GOVERNMENTAL OR OTHER PROCEEDING OR LITIGATION.
8.3.1. No order of any court or administrative agency shall be in
effect which restrains or prohibits any transaction contemplated hereby or which
would limit or materially adversely affect EchoStar's ownership of DBSD; no
suit, action, investigation, inquiry or proceeding by any governmental body or
other Person or entity shall be pending or threatened against EchoStar, DBSC or
DBSD which challenges the validity or legality, or seeks to restrain the
consummation, of the transactions contemplated hereby or which seeks to limit or
otherwise materially adversely affect EchoStar's ownership of DBSD; and no
written advice shall have been received by EchoStar, DBSC, DBSD or their
respective counsel from any governmental body, which remains in effect, stating
that an action or proceeding will, if the Merger is consummated or sought to be
consummated, be filed seeking to invalidate or restrain the Merger or limit or
otherwise affect EchoStar's ownership of DBSD as contemplated by this Agreement.
8.3.2 In addition to the conditions to the Merger Closing set forth
in Subsection 8.3.1 hereof, EchoStar shall have received no oral or written
notice from the FCC that consummation of the transactions contemplated hereby
could reasonably be expected to result in a loss of any of EchoStar's DBS
licenses or rights, or the DBS Rights (an "Adverse Notice"); provided, however,
that in the event that any such Adverse Notice by the FCC is orally provided to
EchoStar the condition to the Merger Closing set forth in this Subsection 8.3.2
shall not be satisfied until the FCC confirms the Adverse Notice to counsel to
DBSD.
8.4 APPROVALS AND CONSENTS.
8.4.1 The transfer of control of DBSD, resulting from the
transactions contemplated by this Agreement, shall have received the approval
and consent of the FCC as required by applicable rules and regulations of the
FCC ("FCC Approval") in a "Final Order". For the purposes of this Agreement,
"Final Order" means an action or decision as to which: (i) no request for a stay
is pending, no stay is in effect, and any deadline for filing such request that
may be designated by statute or regulation has passed; (ii) no petition for
rehearing or reconsideration or application for review is pending and the time
for the filing of any such petition or application has passed; (iii) the FCC or
other
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regulatory agency does not have the action or decision under reconsideration on
its own motion and the time within which it may effect such reconsideration has
passed; and (iv) no appeal is pending or in effect and any deadline for filing
any such appeal that may be designated by statute or rule has passed.
8.4.2 The approval of shareholders of DBSD to the Merger, and all
approvals of applications to public authorities, Federal, state, or local, if
any, and all consents or approvals of any nongovernmental Persons, the granting
of which is necessary for the consummation of the Merger or for preventing the
termination or material breach of any right, privilege, license or agreement of
EchoStar of DBSD which is material to the business of EchoStar or DBSD, or for
preventing any material loss or disadvantage to EchoStar or DBSD, by reason of
the Merger, shall have been obtained; and no such consents or approvals shall
have imposed a condition to such consent or approval which in the reasonable
opinion of EchoStar is unduly burdensome to the consolidated financial condition
or operations of EchoStar or to DBSD's business.
8.5 OPINIONS OF COUNSEL. EchoStar shall have received an opinion of
Sullivan & Worcester, counsel to DBSD, dated the Merger Closing Date and
addressed to EchoStar, in substantially the form and substance set forth in
Schedule 8.5 attached hereto.
8.6 CERTIFICATES. DBSD shall have furnished EchoStar with a certificate of
DBSD in form and substance satisfactory to EchoStar, signed by DBSD's President,
to the effect that DBSD's representations and warranties contained in this
Agreement are true and correct in all material respects on and as of the Merger
Closing Date as though such representations and warranties were made at such
time (except as contemplated in Section 8.1 hereof) and that DBSD has performed
and complied in all material respects with all terms, covenants and provisions
of this Agreement required to be performed or complied with or by it prior to or
on the Merger Closing Date.
8.7 RESIGNATIONS. DBSD shall have received resignations (in form and
substance satisfactory to EchoStar) for each of its directors and officers, in
each case effective as of the Effective Time of the Merger.
8.8 ADVERSE CHANGES. DBSD shall have experienced no material adverse
change in its business, business prospects or financial condition between the
date of this Agreement and the consummation of the Merger other than such change
as is unrelated to events arising prior to the Merger Trigger Date, and: (i) is
the direct or indirect result of action within the control of DBSD which DBSD
takes or fails to take; and (ii) is contrary to a reasonable alternative course
of action which, following reasonable prior written notice of the change,
EchoStar suggested that DBSD pursue.
8.9 DBS RIGHTS. The DBS Rights shall continue to be held by DBSD free and
clear of any Challenges, mortgages, pledges, leases, or other encumbrances,
absolute or contingent which could limit in any way the uses which EchoStar can
make of the DBS Rights (other than those limitations imposed by the FCC on all
DBS licensees), except as limited by Section 8.8 above.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF DBSD
The obligations of DBSD under this Agreement to consummate the Merger shall
be subject to the satisfaction, or to the waiver by it in the manner
contemplated by Section 12.2 hereof, on or before the Merger Closing Date of the
following conditions:
9.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of EchoStar contained in this Agreement shall be in all material
respects true and accurate as of the date when made, and the representations and
warranties which are expressly deemed made as of the Effective Time of the
Merger shall be in all material respects true and accurate at and as of the
Merger Closing Date as if made on the Merger Closing Date.
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9.2 PERFORMANCE OF COVENANTS. EchoStar and DBSC shall have performed and
complied in all material respects with each and every covenant, agreement and
condition required by this Agreement to be performed or complied with or by it
prior to or on the Merger Closing Date.
9.3 NO GOVERNMENTAL OR OTHER PROCEEDING OR LITIGATION. No order of any
court or administrative agency shall be in effect which restrains or prohibits
any transaction contemplated hereby.
9.4 APPROVALS AND CONSENTS. The approval of the shareholders of DBSD to
the Merger.
9.5 OPINION OF COUNSEL. DBSD shall have received an opinion of David K.
Moskowitz, Esquire, counsel for EchoStar, dated the Merger Closing Date and
addressed to DBSD, in the form and substance set forth in Schedule 9.5 attached
hereto.
9.6 CERTIFICATES. EchoStar shall have furnished DBSD with a certificate of
EchoStar in form and substance satisfactory to DBSD, signed by its President or
Executive Vice President, to the effect that the representations and warranties
contained in this Agreement are true and correct in all material respects on and
as of the Merger Closing Date as though such representations and warranties were
made at such time and that it has performed and complied in all material
respects with all terms, covenants and provisions of this Agreement required to
be performed or complied with by it prior to or on the Merger Closing Date.
ARTICLE X
CLOSING; CLOSING DATE
Unless this Agreement shall have been terminated and the Merger shall have
been abandoned pursuant to a provisions of Article XI hereof, a closing (the
"Merger Closing") will be held on a date mutually acceptable to EchoStar and
DBSD as soon as practicable after the Effective Time of the Merger, at the
offices of EchoStar Communications Corporation commencing at 10:00 a.m. At such
time and place, the documents referred to in Articles VIII and IX hereof shall
be exchanged by the parties and, immediately thereafter, the Certificate of
Merger and the Articles of Merger shall be filed by DBSC and DBSD with the
Secretaries of State of the States of Delaware and Colorado; provided, however,
that if any of the conditions provided for in Articles VIII and IX hereof shall
not have been met or waived by the date on which the Merger Closing is otherwise
scheduled, then, subject to Section 11.1.3 hereof, the party to this Agreement
which is unable to meet such condition or conditions shall be entitled (provided
that such party is acting in good faith) to postpone the Merger Closing for a
reasonable period of time by notice to the other parties until such condition or
conditions shall have been met (which such notifying party will seek to cause to
happen at the earliest practicable date) or waived. The date on which the Merger
Closing occurs is hereinafter referred to as the "Merger Closing Date."
ARTICLE XI
TERMINATION
11.1 TERMINATION AND ABANDONMENT. This Agreement may be terminated and the
Merger may be abandoned before the Effective Time of the Merger, notwithstanding
any approval and adoption of this Agreement by the Board of Directors or
shareholders of DBSD, EchoStar or DBSC:
11.1.1 by the mutual consent of the Boards of Directors of EchoStar,
DBSC and DBSD; or
11.1.2 by EchoStar or DBSC if there has been a material
misrepresentation or material breach on the part of DBSD in the representations,
warranties or covenants of DBSD set forth herein or in the Purchase Agreement,
or if there has been any material failure on the part of DBSD to comply with its
obligations hereunder or in the Purchase Agreement, or by DBSD if there has been
a material misrepresentation or material breach on the part of EchoStar or DBSC
in the representations, warranties or covenants of EchoStar or DBSC set forth
herein or in the Purchase Agreement, or if
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there has been any material failure on the part of EchoStar or DBSC to comply
with their obligations hereunder or in the Purchase Agreement; in either event
only if the other party does not materially cure such breach within five (5)
business days following written notice from the non-breaching party.
11.1.3 by EchoStar if the FCC notifies EchoStar at any time that
consummation of the transactions contemplated hereby could reasonably be
expected to result in loss of any of EchoStar's DBS licenses or rights, or the
DBS Rights. In the event that any such notification is provided orally, Echostar
shall only be permitted to rely on this provision to terminate if the FCC
confirms those comments to counsel for DBSD.
11.1.4 by EchoStar if all the conditions set forth in Article VIII,
or by DBSD if all of the conditions set forth in Article IX, are not satisfied
by December 31, 1997.
11.1.5 by EchoStar as provided in Section 2.4 herein.
11.2 TERMINATION PROCEDURES. The power of termination provided for by this
Article XI may be exercised for EchoStar, DBSC or DBSD only by its respective
Board of Directors and will be effective only after written notice thereof,
signed on behalf of the party for which it is given by its President or other
duly authorized officer, shall have been given to the other.
11.3 EFFECT OF TERMINATION. If this Agreement is terminated in accordance
with this Article XI then the Merger shall be abandoned without further action
by DBSD, EchoStar or DBSC, and their officers shall not file the Certificate of
Merger or the Articles of Merger with the Secretaries of State of the states of
Delaware and Colorado. Nothing in this Article XI shall relieve any party to
this Agreement of liability for breach of this Agreement.
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.1 AMENDMENT AND MODIFICATION.
12.1.1 To the fullest extent permitted by applicable law, this
Agreement may be amended, modified and supplemented with respect to any of the
terms contained herein by mutual consent of DBSD and EchoStar, and the
respective Boards of Directors of EchoStar and DBSD, or by their respective
officers duly authorized by such Board of Directors, by an appropriate written
instrument executed at any time prior to the Merger Closing.
12.1.2 In the event that the inclusion herein of any provision of
this Agreement would cause EchoStar or DBSD to be in violation of any FCC rule
or regulation, or any other applicable law, or would cause a loss of, or
materially adversely affect EchoStar's DBS licenses or rights, or the DBS
Rights, those provisions shall be deemed automatically rewritten, without any
further action by the parties hereto, to the minimum extent required in order to
permit their intent to be carried out as best as is possible without so
violating FCC rules or regulations or causing the loss or material adverse
affect. The parties agree to promptly use their best efforts to reflect in
writing any modification or amendment to this Agreement that may be required in
order to carry out the intentions of this Subsection 12.1.2.
12.2 WAIVER OF COMPLIANCE. To the fullest extent permitted by law, each of
EchoStar, DBSC and DBSD may, pursuant to action by its respective Board of
Directors, or its respective officers duly authorized by its Board of Directors,
by an instrument in writing extend the time for or waive the performance of any
of the obligations of the other or waive compliance by the other with any of the
covenants, or waive any of the conditions of its obligations, contained herein.
No such extension of time or waiver shall operate as a waiver of, or estoppel
with respect to, any subsequent failure to comply with any of the covenants in
this Agreement.
12.3 ENFORCEMENT REMEDIES. If a party (the "Defaulting Party") materially
breaches any obligation or covenant made in this Agreement, or fails to fulfill
any condition, or if any representation or
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warranty made by or on behalf of the Defaulting Party in this Agreement or in
any certificate or other instrument delivered under or pursuant to any term
hereof shall be untrue or incorrect in any material respect as of the date of
this Agreement or as of the date it was made, furnished or delivered, the
nondefaulting party (the "Nondefaulting Party") may proceed to protect and
enforce its rights by suit in equity or action at law. The parties acknowledge
that the representations, covenants, agreements and obligations hereunder are
unique and that, in the event of breach of such, remedies at law would be
inadequate, it would be difficult to determine the amount of damages resulting
therefrom, and such breach would cause irreparable injury to the Nondefaulting
Party. The Nondefaulting Party shall be entitled, in addition to any other legal
or equitable right, to the remedy of specific performance of any term contained
in this Agreement, or to a preliminary or permanent injunction against the
breach of any such term or in aid of the exercise of any power or right granted
in this Agreement, or any combination thereof. Except as provided above, none of
the rights, powers or remedies conferred herein shall be mutually exclusive, and
each such right, power or remedy shall be cumulative and in addition to every
other right, power or remedy, whether conferred hereby or hereafter available at
law, in equity, by statute or otherwise.
12.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations and warranties of each party hereto contained herein shall not
be deemed to be waived or otherwise affected by any investigation made by the
other parties hereto. The representation and warranty of EchoStar that the
information contained in its S-4 registration statement to be filed with the SEC
in connection with the Merger complied with all SEC rules when declared
effective, shall survive the Merger Closing.
12.5 NO THIRD PARTY RIGHTS. Except as otherwise provided in this
Agreement, nothing herein expressed or implied is intended, nor shall they be
construed, to confer upon or give any Person, firm or corporation (other than
EchoStar, DBSC and DBSD, and their respective security holders), any rights or
remedies under or by reason of this Agreement.
12.6 CONFIDENTIALITY. EchoStar and DBSD shall honor the confidentiality
agreements previously delivered by each such party to the other with respect to
matters pertaining to the transactions contemplated by this Agreement. In
addition to the terms of such agreements, this Agreement, the negotiations
leading to it, together with all terms and conditions of each, and all
information disclosed in the course of either party's due diligence
investigation (collectively, the "Negotiations"), shall be kept and treated as
strictly confidential, unless and until one week prior to the date that the
parties intend to file for FCC Approval of the Merger, or the parties sooner
agree that confidentially is no longer desired with respect to all or certain
portions of the Negotiations. Notwithstanding anything above to the contrary,
the parties shall have the right to disclose the fact of the existence of this
Agreement and the transactions contemplated hereby, together with the minimum
amount of other information deemed necessary by securities or other regulatory
counsel to either party, if such securities or other regulatory counsel in good
faith determines that public disclosure of the information is necessary under
Federal or state securities or other laws applicable to such party. Disclosure
of such information shall be coordinated in advance with the other party. Any
such disclosure shall not permit the disclosing party to issue any press release
or otherwise discuss or further disseminate the information contained in the
securities or other regulatory filing in any manner. Additionally, EchoStar
shall be permitted to disclose the Negotiations to DirectSat, Donaldson, Lufkin
& Jenrette Securities Corporation ("DLJ") and to potential strategic investors
in EchoStar, provided that DirectSat, DLJ and such other investors agree to
maintain the confidentiality of the Negotiations pursuant to a standard
confidentiality agreement.
12.7 EXPENSES. Each party hereto shall bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby and
thereby.
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12.8 NOTICES. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand or when mailed by registered or certified
mail, postage paid, or when given by telex or facsimile transmission (promptly
confirmed in writing), as follows:
(a) If to DBSD:
Harley W. Radin, Chairman and Chief Executive Officer
Direct Broadcasting Satellite Corporation
4401-A Connecticut Avenue, N.W., Suite 400
Washington, D.C. 20008
Fax No. (202) 364-2288
with a copy to:
William L. Fishman
Sullivan & Worcester
1025 Connecticut Ave., N.W.
Washington, D.C. 20036
Fax No. (202) 293-2275
or to such other Person as DBSD shall designate in writing, such writing to be
delivered to EchoStar in the manner provided in this Section 12.8; and
(b) if to EchoStar:
Charles Ergen
President and Chief Executive Officer
EchoStar Communications Corporation
90 Inverness Circle East
Englewood, CO 80112
Fax No. 303-799-6222
with a copy to:
David K. Moskowitz, Esquire
Vice President and General Counsel
EchoStar Communications Corporation
90 Inverness Circle East
Englewood, Colorado 80112
Fax No. 303-799-0354
or to such other Person as EchoStar shall designate in writing to be delivered
to DBSD in the manner provided in this Section 12.8.
12.9 ASSIGNMENT. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto without prior written consent of the other parties; provided,
however, that EchoStar or DBSC may assign this Agreement and its rights,
interests and obligations hereunder to a Subsidiary without the consent of DBSD
provided that EchoStar remains liable for each of its assigned obligations
hereunder in the event such assignee fails to perform such obligations.
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12.10. GOVERNING LAWS AND EXCLUSIVE JURISDICTION.
12.10.1 This Agreement and the legal relations between the parties
hereto, including all disputes and claims, whether arising in contract, tort or
under statute, shall be governed by and construed in accordance with the laws of
the State of Colorado without giving effect to its conflict of law provisions.
12.10.2 Any and all disputes arising out of or in connection with the
interpretation, performance or the nonperformance of this Agreement or any and
all disputes arising out of or in connection with transaction in any way related
to this Agreement and/or the relationship between the parties shall be litigated
solely and exclusively before the United States District Court for the District
of Colorado. The parties consent to the in personam jurisdiction of such court
for the purposes of any such litigation, and waive, fully and completely, any
right to dismiss and/or transfer any action pursuant to 28 U.S.C. Section 1404
or 1406 (or any successor statute). In the event the United States District
Court for the District of Colorado does not have subject matter jurisdiction of
such matter, then such matter shall be litigated solely and exclusively before
the appropriate state court of competent jurisdiction located in Arapahoe
County, State of Colorado.
12.11 COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts and by the different parties hereto on separate
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.12 HEADINGS AND REFERENCES. The headings of the Sections, Subsections
and Articles of this Agreement are inserted for convenience of reference only
and shall not constitute a part hereof. All references herein to Sections,
Subsection and Articles are to Sections, Subsections and Articles of this
Agreement, unless otherwise indicated.
12.13 ENTIRE AGREEMENT. This Agreement (including the exhibits hereto and
thereto and the documents referred to herein and therein, all of which form a
part hereof), together with the confidentiality agreements delivered by EchoStar
and DBSD to each other, contain the entire understanding of the parties hereto
and thereto in respect of the subject matter contained herein and therein and
supersede all prior agreements and understandings between the parties with
respect to such subject matter. There are no restrictions, promises,
representations, warranties, covenants or undertakings, other than those
expressly set forth or referred to herein or therein.
12.14 FURTHER ASSURANCES. Each party shall, at and from time to time after
the Merger Trigger Date, upon request of the other party, and without any
further consideration, execute and deliver any additional instruments or
documents to such party as that party may reasonably request, and take such
other actions as may be reasonably requested from time to time by the other
party hereto, as is necessary in order to carry out, evidence and confirm the
intent of the parties in connection with the transactions contemplated by this
Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date and year first written above.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ CHARLIE ERGEN
-----------------------------------
Charlie Ergen, President
DIRECT BROADCASTING SATELLITE
CORPORATION
By: /s/ HARLEY RADIN
-----------------------------------
Harley Radin, Chairman
DIRECT BROADCASTING SATELLITE
CORPORATION
By: /s/ CHARLIE ERGEN
-----------------------------------
Charlie Ergen, President
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ANNEX II
MERGER TRIGGER AGREEMENT
EchoStar Communications Corporation, a Nevada corporation formed in 1995
("EchoStar"), Direct Broadcasting Satellite Corporation, a Colorado corporation
("DBSC") and Direct Broadcasting Satellite Corporation, a Delaware corporation
("DBSD"), in consideration of the benefit which will accrue to each as a result
of the matters described below, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby mutually acknowledged, enter
into this Merger Trigger Agreement (the "Agreement") as of the 21st day of
December, 1995, and agree as follows:
1. DBSD hereby provides notice to EchoStar of its exercise, and EchoStar
hereby provides notice to DBSD of its exercise, effective immediately, of their
respective rights to require a merger agreement to be signed among EchoStar,
DBSC and DBSD (the "Merger Agreement" and the "Merger")).
2. EchoStar, DBSC and DBSD (together, the "Parties") agree that the Merger
Agreement, in the form attached as Exhibit A hereto, shall be entered into by
all of them contemporaneous with execution of this Agreement.
3. The Parties hereby irrevocable agree to consummate the Merger without
preconditions, except as specifically set forth below. Further, the Parties
hereby irrevocably waive any right they have had, may now have, or which might
at any time in the future otherwise be available to them, to terminate or refuse
to complete the Merger, whether: a) based upon covenants or conditions to be
fulfilled by the other Party, as set forth in the Merger Agreement; or b) events
which must occur (or not occur) prior to the Merger, as set forth in the Merger
Agreement; or c) based on any other legal, contractual or common law theory,
other than the condition that: d) the Merger must be approved by the Federal
Communications Commission (the "FCC"); and e) the Merger must be approved by
DBSD shareholders.
Notwithstanding anything set forth above, a Party may refuse to complete the
Merger if the other Party wilfully and in bad faith acts, or fails to act, in a
manner that materially impedes consummation of the Merger in material compliance
with the terms the Parties have agreed upon.
Nothing herein shall be construed as relieving any Party of its good faith
obligations to take actions required of it pursuant to the Merger Agreement, or
as limiting the right of a nondefaulting Party to pursue the remedies of
specific performance and other equitable remedies provided in Section 12.3 of
the Merger Agreement.
4. DBSD acknowledges that contemporaneous with execution of this Agreement
and the Merger Agreement, DBSD shareholders owning greater than 50% of the
outstanding shares of DBSD (including EchoStar), will be executing shareholder
consent minutes in the form attached as Exhibit B to this Agreement in
satisfaction of the condition to the Merger set forth in Paragraph 3 e) above,
and ratifying this Agreement and any transactions or agreements entered into
pursuant to this Agreement. DBSD acknowledges and affirms the effectiveness of
those minutes to achieve the intended result.
5. The Parties agree to enter into the Note Purchase Agreement and the
Security Agreement, and DBSD agrees to execute the Direct Broadcasting Satellite
Corporation Promissory Note (the "DBSD Note"), all in the forms attached as
Exhibits C, D and E, respectively, with such reasonable changes as the Parties
mutually agree upon.
6. The Parties agree that in the event the Merger is not completed for any
reason, it is the intent of the Parties to structure a transaction or series of
transactions which will have the effect of providing to DBSD's existing
shareholders as of the date of this Agreement (the "Existing Shareholders"), as
nearly as is possible, the cash amount or number of shares of EchoStar Class A
Common Stock they would have received if the Merger had been completed, and that
it is further the intent of the Parties,
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in those circumstances, to structure a transaction or series of transactions
which will have the effect of providing to EchoStar, as nearly as is possible,
the benefits which would have accrued to EchoStar had the Merger been completed,
for, as nearly as is possible, the cash amount or number of shares of EchoStar
Class A Common Stock EchoStar would have provided to the Existing Shareholders
had the Merger been completed (the "Intent", and the "Intent Consideration").
The Parties intend that the Intent Consideration would be paid in full as soon
as the Intent has been accomplished. Notwithstanding anything in this Agreement
which might otherwise be construed to the contrary, in no event shall EchoStar
be obligated to pay both the Intent Consideration and the Non-Duplication
Payment (as defined below), and payment by EchoStar of either shall extinguish
any obligation to pay the other at any time in the future, but shall not
extinguish the obligation of DBSD to fulfill the Intent, or to abide by the
Non-Duplication Agreement.
In structuring the transaction or series of transactions, the Parties agree
to attempt to provide tax-free treatment under the Internal Revenue Code,
provided that such structuring does not have the effect of decreasing any of the
full rights or benefits, or increasing any of the obligations, that EchoStar or
DBSC expect to obtain as a result of the Merger.
In the event either Party reasonably determines that the Merger is unlikely
to be completed, the Parties agree to negotiate in good faith, and use their
best efforts to effectuate the Intent. If at any time the Parties are unable to
agree on the best method to effectuate the Intent, the parties hereby commit to
submit any dispute to mandatory fast track binding arbitration in accordance
with the procedures set forth below.
7. In order to fulfill the Intent, the Parties agree that in addition to
any other actions which the Parties may take, that EchoStar shall have the
right, at any time and from time to time, to convert the DBSD Note, and any
other Notes issued to EchoStar or its affiliates pursuant to the Note Purchase
Agreement, to a pay out for perpetuity of profits of DBSD (and a participation
in any distributions to shareholders, spinoffs or similar transactions). The pay
out will be a percentage of the total profits -- paid quarterly within thirty
(30) days of the end of each calendar quarter (or distribution -- paid when
distributed to shareholders) of DBSD at any time, in accordance with the formula
"X/ (X+$12,945,104)", where "X" is equal to the aggregate amount, including
accrued but unpaid interest, due to EchoStar under the Notes at the time of
conversion (the "Profit Pay Out Percentage"). The Profit Pay Out Percentage
shall be in addition to EchoStar's equity ownership interest in DBSD.
Notwithstanding the above, EchoStar shall not have any right to a Profit Pay Out
Percentage unless and until either the Intent Consideration or the
Non-Duplication Payment has been paid.
8. In the event the Merger is not consummated for any reason, the parties
irrevocably commit to enter into a Capacity Lease Agreement (the "CPA"). The
Parties shall cooperate in good faith and use their best efforts to agree upon
provisions which so far as is reasonably possible give EchoStar the full and
unfettered use of DBSD's spacecraft, including its communications capacity,
TT&C, uplink arrangements and auxiliary or related functions or activities
subject only to the limitation that: a) the terms of the CLA must not be
inconsistent with the full exercise by DBSD of its obligations as an FCC
licensee; b) the terms of the CLA must not interfere with DBSD's right to
control the satellite for technical purposes as required by FCC regulations; and
c) the terms of the CLA must not be inconsistent with the Communications Act of
1934, as amended. The Parties agree that the amount EchoStar shall be obligated
to pay for the capacity, shall be payable in full upon final FCC approval of the
CLA, and shall be the Intent Consideration.
In negotiation of the CLA, which shall commence promptly following execution
of this Agreement, the Parties shall negotiate in good faith, and use their best
efforts to effectuate the intent of the Parties, as described above. If at any
time the Parties are unable to agree on a method to effectuate the intent of the
Parties, the Parties hereby commit to submit any dispute to mandatory fast track
binding arbitration in accordance with the procedures set forth below.
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In the event that the FCC rejects the CLA, or that EchoStar determines that
the Intent would not be adequately fulfilled by a CLA which would be acceptable
to the FCC, then no CLA shall be implemented.
9. DBSD hereby irrevocably commits to utilize EchoStar's DBS operating
system for DBSD's DBS system, including but not limited to utilization of
EchoStar's conditional access and compression system, and EchoStar's uplink
facility (all to be administered through EchoStar), and to purchase from
EchoStar all of its "smart cards" needed to allow customer access to the DBSD
programming. Commencing with the commercial operation of DBSD's first satellite,
DBSD shall pay to EchoStar on a monthly basis, DBSD's pro rata share of the
costs of EchoStar's DBS operating system. The Parties shall enter into an
agreement or agreements as is reasonably requested by any other Party in order
to more fully reflect the terms of this agreement. In the negotiation of those
agreements, the Parties shall negotiate in good faith, and use their best
efforts to effectuate the intent of the Parties, as described above. If at any
time the Parties are unable to agree on a method to effectuate the intent of the
Parties, the Parties hereby commit to submit any dispute to mandatory fast track
binding arbitration in accordance with the procedures set forth below.
10. DBSD hereby irrevocably commits that it will not at anytime, for
perpetuity, carry on any of its DBS satellites any video, audio or data
programming which duplicates any programming carried by EchoStar on any of the
satellites in its DBS system at the time DBSD desires to carry any such
programming (the "Non-Duplication Agreement").
The Non-Duplication Agreement is initially being provided by DBSD in
consideration for the execution by EchoStar of the Note Purchase Agreement. No
additional consideration will be due for continuation of the Non-Duplication
Agreement for perpetuity unless on July 1, 1998: a) approval of the Merger by
the FCC is still pending; or b) the FCC has rejected the Merger and the Intent
has not yet been effectuated, nor the Intent Consideration paid, because FCC
approval is required but that approval has not yet been completed. If either of
the events described in the sentence immediately above exist on July 1, 1998,
then EchoStar shall make an additional one time payment for the continued
applicability, for perpetuity, of the Non-Duplication Agreement. The amount of
the payment shall be equal to the amount of the Intent Consideration (the
"Non-Duplication Payment").
11. In the event any agreement or action of the Parties pursuant to this
Agreement requires FCC approval, and the FCC does not provide that approval, the
Parties agree to restructure the agreement or action to the minimum extent
necessary in order to preserve the transaction, as nearly as is possible, and to
most closely effectuate the Intent and the Intent Consideration, and to
otherwise effectuate the intention of the Parties as expressed in this
Agreement.
12. At the election of any Party, any matter not resolved amicably among the
Parties to the satisfaction of the other Parties, shall be subject to mandatory
binding arbitration, and the other Parties shall submit to arbitration. Within
ten (10) days of receipt of notice from the electing party, each Party shall
select an arbitrator, and within five (5) days thereafter the two (2) selected
arbitrators shall select a third arbitrator. The Parties hereby express their
desire that the arbitration be concluded on an expedited basis. The decision of
a majority of the arbitrators shall be considered the decision of all, except
that if no two can agree, then the decision of the arbitrator chosen by the
other two shall be considered the decision of all. Such arbitration shall
proceed in accordance with the Commercial Arbitration Rules of the American
Arbitration Association then pertaining (the "Rules"), insofar as such Rules are
not inconsistent with the provisions expressly set forth in this Agreement,
unless the parties mutually agree otherwise, and pursuant to the following
procedures: a) the minimum amount of discovery deemed necessary by the
arbitrators shall be allowed in arbitration; b) the costs and fees of the
arbitration, including attorneys' fees, shall be allocated by the arbitrators,
as they deem reasonably appropriate; c) the award rendered by the arbitrators
shall be binding on the Parties, shall be final, and judgment may be entered in
accordance with applicable law and in any court having
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jurisdiction thereof; d) the existence and resolution of the arbitration shall
be kept confidential by the Parties in the same manner as confidential
information is required to be kept under Paragraph 13 below, and shall also be
kept confidential by the arbitrators.
13. This Agreement, the negotiations leading to it, and the fact of the
Agreement, together with all terms and conditions of each (collectively the
"Negotiations"), shall be kept confidential, and treated as strictly
confidential pursuant to the Confidentiality Agreement previously entered into
between the Parties, unless and until the Negotiations are no longer required to
be kept confidential pursuant to the terms of the Confidentiality Agreement, or
if EchoStar sooner, in its sole discretion, determines that confidentiality is
no longer needed or is no longer possible with respect to all or certain
portions of the Negotiations. Notwithstanding the above, DBSD shall have the
right to disclose the fact of the existence of this Agreement, together with the
minimum amount of other information deemed necessary by counsel to DBSD, if
counsel in good faith determines that disclosure of the information is
necessary. Disclosure of such information shall be coordinated in advance with
EchoStar.
14. Each of the Parties hereby agrees to take or cause to be taken such
further actions, to execute, acknowledge, deliver, and file or cause to be
executed, acknowledged, delivered, and filed such further documents and
instruments, and to use best efforts to obtain such consents, as may be
necessary or as may be reasonably requested in order to fully effectuate the
purposes, terms, and conditions of this Agreement, whether before, at, or after
the occurrence of the transactions contemplated by this Agreement.
15. The invalidity of any provisions of this Agreement, or of any other
agreement or instrument given pursuant to or in connection with this Agreement
("Other Agreements") shall not affect the remaining portions of this Agreement
or the Other Agreements, all of which are inserted conditionally on their being
held valid in law. In the event any provisions of this Agreement or Other
Agreements are found to be invalid, or would operate to render this Agreement or
any Other Agreement invalid, this Agreement and such Other Agreements shall be
construed as if the invalid provisions had not been inserted, and the offending
provisions shall be rewritten to the minimum extent necessary in order to permit
their intent to be carried out as best as is possible without invalidity. The
Parties agree to promptly use their good faith best efforts to reflect in
writing any modification to this Agreement which may be necessary in order to
carry out the intentions of this provision.
16. It is the express intention and agreement of the Parties that all
covenants, agreements, statements, representations, and warranties made in this
Agreement shall survive execution of this Agreement.
17. Except as otherwise specifically provided in this Agreement, this
Agreement may be modified or amended only by a writing executed by the parties
which, by its terms, expressly modifies, alters or amends any term or provision
contained herein.
18. Each party acknowledges that it has read, understands and agrees to the
terms and conditions of this Agreement. Each party represents that it has the
full power and authority to enter into this Agreement, and intends to be bound
by all of the terms and conditions of this Agreement. Further, each Party
acknowledges that the delivery of this Agreement by that Party has not been
induced by any representations, statements, warranties, or agreements other than
those expressly set forth herein.
19. To facilitate execution, this Agreement may be executed in as many
counterparts as may be required, and it shall not be necessary that the
signatures of, or on behalf of, each Party, or that the signatures of all
persons required to bind any Party, appear on each counterpart; but it shall be
sufficient that the signature of, or on behalf of, each Party, or that the
signatures of the persons required to bind any Party, appear on one or more of
the counterparts. This Agreement shall be binding and enforceable upon execution
of counterparts by all the Parties hereto, and such counterparts shall thereupon
collectively constitute a single agreement.
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20. The validity, interpretation and enforcement of this Agreement shall be
governed by the laws of the State of Colorado without giving effect to the
conflict of law principles thereof.
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement, or
have caused this Agreement to be duly executed on their behalf, as of the day
and year set forth above.
DIRECT BROADCASTING SATELLITE
CORPORATION, a Delaware Corporation
By: /s/ HARLEY RADIN
-----------------------------------
Harley Radin, President
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ CHARLIE ERGEN
-----------------------------------
Charlie Ergen, President
DIRECT BROADCASTING SATELLITE
CORPORATION, a Colorado Corporation
By: /s/ CHARLIE ERGEN
-----------------------------------
Charlie Ergen, President
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ANNEX III
262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
subsection (g) of section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the holders of the surviving corporation as provided in
subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to
SectionSection 251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof,
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealer, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
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(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of his shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of his
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation
who has complied with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
SectionSection 228 or 253 of this title, the surviving or resulting
corporation, either before the effective date of the merger or consolidation
or within 10 days thereafter, shall notify each of the stockholders entitled
to appraisal rights of the effective date of the merger or consolidation and
that appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it appears
on the records of the corporation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of the notice, demand
in writing from the surviving or resulting corporation the appraisal of his
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder at that the stockholder
intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
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(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to
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the effective date of the merger or consolidation); provided, however, that if
no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of his demand for an
appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
C-4
PART II
INFORMATION NOT REQUIRED IN INFORMATION STATEMENT -- PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Chapter 78.751(1) of the Nevada Revised Statutes allows EchoStar to
indemnify any person made or threatened to be made a party to any action (except
an action by or in the right of EchoStar, a "derivative action"), by reason of
the fact that he is or was a director, officer, employee or agent of EchoStar,
or is or was serving at the request of EchoStar as a director, officer, employee
or agent of another corporation, against expenses including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with the action, suit or proceeding if he acted in a good
faith manner which he reasonably believed to be in or not opposed to the best
interests of EchoStar, and, with respect to any criminal proceeding, had no
reasonable cause to believe that his conduct was unlawful. Under Chapter
78.751(2), a similar standard of care applies to derivative actions, except that
indemnification is limited solely to expenses (including attorneys' fees)
incurred in connection with the defense or settlement of the action and court
approval of the indemnification is required where the person seeking
indemnification has been found liable to EchoStar. In addition, Chapter
78.751(5) allows EchoStar to advance payment of indemnifiable expenses prior to
final disposition of the proceeding in question. Decisions as to the payment of
indemnification are made by a majority of the Board of Directors at a meeting at
which a quorum of disinterested directors is present, or by written opinion of
special legal counsel, or by the stockholders.
Provisions relating to liability and indemnification of officers and
directors of EchoStar for acts by such officers and directors are contained in
Article IX of the Amended and Restated Articles of Incorporation of EchoStar,
Exhibit 3.1(a) hereto and Article IX of EchoStar's Bylaws, Exhibit 3.2(a)
hereto, which are incorporated herein by reference. These provisions state,
among other things, that, consistent with and to the extent allowable under
Nevada law, and upon the decision of a disinterested majority of EchoStar's
Board of Directors, or a written opinion of outside legal counsel, or EchoStar's
stockholders: 1) EchoStar shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative and
whether formal or informal (other than an action by or in the right of EchoStar)
by reason of the fact that he is or was a director, officer, employee, fiduciary
or agent of EchoStar, or is or was serving at the request of EchoStar as a
director, officer, employee, fiduciary or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding, if he conducted himself in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
EchoStar, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; and 2) EchoStar shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of
EchoStar to procure a judgment in its favor by reason of the fact that he is or
was a director, officer, employee, fiduciary or agent of EchoStar, or is or was
serving at the request of EchoStar as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of EchoStar and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to EchoStar unless and only to the
extent that the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such court shall deem proper.
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ITEM 21. EXHIBITS.
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------------- ---------------
2.1 * Amended and Restated Agreement for Exchange of Stock and Merger, dated as of May
31, 1995, by and among EchoStar Communications Corporation, a Nevada corporation
formed in April 1995 ("EchoStar"), Charles W. Ergen and EchoStar (Incorporated
herein by reference to Exhibit 2.2 to the Registration Statement Form S-1 of
EchoStar, Registration No. 33-91276).
2.2 * Agreement regarding purchase of debentures between Dish, Ltd. (formerly EchoStar
Communications Corporation, a Nevada corporation formed in December 1993
("Dish")), EchoStar and SSE Telecom, Inc. ("SSET"), dated March 14, 1994,
including Plan and Agreement of Merger, by and among Dish, DirectSat Merger
Corporation, DirectSat Corporation and SSE Telecom, Inc. ("SSET") (Incorporated
herein by reference to Exhibit 2.2 to the Registration Statement on Form S-1 of
Dish, Registration No. 33-76450).
2.3 Plan and Agreement of Merger made as of December 21, 1995 by and among EchoStar,
Direct Broadcasting Satellite Corporation, a Colorado corporation ("MergerCo") and
Direct Broadcasting Satellite Corporation, a Delaware corporation ("DBSC").
2.4 Merger Trigger Agreement entered into as of December 21, 1995 by and among
EchoStar, MergerCo and DBSC.
3.1 (a)* Amended and Restated Articles of Incorporation of EchoStar (Incorporated herein by
reference to Exhibit 3.1(a) to the Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
3.1 (b)* Bylaws of EchoStar (Incorporated by reference to Exhibit 3.1(b) to the
Registration Statement on Form S-1 of EchoStar, Registration No. 33-91276).
4.1 * Indenture of Trust between Dish and First Trust National Association ("First
Trust"), as Trustee (incorporated herein by reference to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
4.2 * Warrant Agreement between EchoStar and First Trust, as Warrant Agent (incorporated
herein by reference to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
4.3 * Security Agreement in favor of First Trust, as Trustee under the Indenture filed
as Exhibit 4.1 (incorporated herein by reference to the Registration Statement on
Form S-1 of Dish, Registration No. 33-76450).
4.4 * Escrow and Disbursement Agreement between Dish and First Trust (incorporated
herein by reference to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
4.5 * Pledge Agreement in favor of First Trust, as Trustee under the Indenture filed as
Exhibit 4.1 herein (incorporated herein by reference to the Registration Statement
on Form S-1 of Dish, Registration No. 33-76450).
II-2
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------------- ---------------
4.6 * Intercreditor Agreement among First Trust, Continental Bank, N.A. and Martin
Marietta Corporation ("Martin Marietta") (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Registration No. 33-76450).
4.7 * Series A Preferred Stock Certificate of Designation of EchoStar (Incorporated
herein by reference to Exhibit 4.7 to the Registration Statement on Form S-1 of
EchoStar, Registration No. 33-91276).
4.8 * Registration Rights Agreement by and between EchoStar and Charles W. Ergen
(incorporated herein by reference to Exhibit 4.8 to the Registration Statement on
Form S-1 of EchoStar, Registration No. 33-91276).
4.9 * Indenture of Trust between EchoStar Satellite Broadcasting Corporation ("ESBC")
and First Trust, as Trustee (incorporated herein by reference to Exhibit 4.9 to
the Annual Report on Form 10-K of EchoStar, Commission File No. 0-26176).
4.10 * Security Agreement of ESBC in favor of First Trust, as Trustee under the Indenture
filed as Exhibit 4.9 (incorporated herein by reference to Exhibit 4.10 to the
Annual Report on Form 10-K of EchoStar, Commission File No. 0-26176).
4.11 * Escrow and Disbursement Agreement between ESBC and First Trust (incorporated
herein by reference to Exhibit 4.11 to the Annual Report on Form 10-K of EchoStar,
Commission File No. 0-26176).
4.12 * Pledge Agreement of ESBC in favor of First Trust, as Trustee under the Indenture
filed as Exhibit 4.9 herein (incorporated herein by reference to Exhibit 4.12 to
the Annual Report on Form 10-K of EchoStar, Commission File No. 0-26176).
4.13 * Pledge Agreement of EchoStar in favor of First Trust, as Trustee under the
Indenture filed as Exhibit 4.9 hereunder (incorporated herein by reference to
Exhibit 4.13 to the Annual Report on Form 10-K of EchoStar, Commission File No.
0-26176).
4.14 * Registration Rights Agreement by and between ESBC, EchoStar, Dish, MergerCo and
Donald, Lufkin & Jenrette Securities Corporation (incorporated herein by reference
to Exhibit 4.14 to the Annual Report on Form 10-K of EchoStar, Commission File No.
0-26176)
5.1 Opinion of David Moskowitz regarding legality of securities being registered [1
page].
8.1 Opinion of Sullivan & Worcester LLP regarding certain tax consequences of the
Merger [3 pages].
10.1 (a)* Satellite Construction Contract, dated as of February 6, 1990, between EchoStar
Satellite Corporation ("ESC") and Martin Marietta Corporation as successor to
General Electric EchoStar, Astro-Space Division ("General Electric") (incorporated
herein by reference to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
II-3
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------------- ---------------
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 herein by reference 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 herein by reference 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 herein by reference 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 herein by reference 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 herein by reference to the Registration Statement on
Form S-1 of Dish, Registration No. 33-81234).
10.1 (g)* Sixth Amendment to the Satellite Construction Contract, dated as of June 7, 1994,
between ESC and Martin Marietta (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Registration No. 33-81234).
10.2 * Satellite Launch Contract, dated as of September 27, 1993, between ESC and the
China Great Wall Industry Corporation (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Registration No. 33-76450).
10.3 * Distributor Agreement, dated as of July 30, 1993, between Echosphere Corporation
("Echosphere") and Thomson Consumer Electronics, Inc. (incorporated herein by
reference to the Registration Statement on Form S-1 of Dish, Registration No.
33-76450).
10.4 * 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 herein by reference
to the Registration Statement on Form S-1 of Dish, Registration No. 33-76450).
10.5 * Master Purchase and License Agreement, dated as of June 18, 1986, between
Echosphere and Cable/Home Communications Corp. (a subsidiary of General
Instruments Corporation) (incorporated herein by reference to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
10.6 * Merchandise Financing Agreement, dated as of June 29, 1989, between Echo
Acceptance Corporation ("EAC") and Household Retail Services, Inc. (incorporated
herein by reference to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
II-4
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
- ----------- ---------------------------------------------------------------------------------- ---------------
10.7 * Key Employee Bonus Plan, dated as of January 1, 1994 (incorporated herein by
reference to the Registration Statement on Form S-1 of Dish, Registration No.
33-76450).
10.8 * Consulting Agreement, dated as of February 17, 1994, between ESC and Telesat
Canada (incorporated herein by reference to the Registration Statement on Form S-1
of Dish, Registration No. 33-76450).
10.9 * Form of Satellite Launch Insurance Declarations (incorporated herein by reference
to the Registration Statement on Form S-1 of Dish, Registration No. 33-76450).
10.10 * Dish 1994 Stock Incentive Plan (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Registration No. 33-76450).
10.11 * Form of Tracking, Telemetry and Control Contract between AT&T Corporation and ESC
(incorporated herein by reference to the Registration Statement on Form S-1 of
Dish, Registration No. 33-81234).
10.12 * Manufacturing Agreement, dated as of March 22, 1995, between HTS and SCI
Technology, Inc. (Incorporated herein by reference to Exhibit 10.12 to the Annual
Report on Form 10-K of Dish, Commission File No. 33-81234).
10.13 * Manufacturing Agreement, dated as of April 14, 1995, by and between ESC and Sagem
Group. (Incorporated herein by reference to Exhibit 10.13 to the Registration
Statement on Form S-1 of EchoStar, Registration No. 33-91276).
11 * Computation of Earnings Per Share for fiscal year ended December 31, 1995
(incorporated herein by reference to Exhibit 11 to the Annual Report on Form 10-K
of EchoStar, Commission File No. 0-26176).
21 * List of EchoStar Subsidiaries (incorporated herein by reference to Exhibit 21 to
the Annual Report on Form 10-K of EchoStar, Commission File No. 0-26176).
23.1 Consent of Arthur Andersen LLP. [1 page]
23.2 Consent of Regardie, Brooks & Lewis, Chartered, Certified Public Accountants [1
page]
23.2 Consent of David Moskowitz - Included in Exhibit 5.1.
23.3 Consent of Sullivan & Worcester LLP - Included in Exhibit 8.1.
24 + Powers of Attorney authorizing signature of Charles W. Ergen, R. Scott Zimmer,
James DeFranco, J. Allen Fears and Steven B. Schaver. [2 pages]
- ------------------------
+ Previously filed
* Incorporated by reference
(b) Financial Statement Schedules.
None.
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
II-5
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Information Statement --
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 incorporated 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.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Englewood,
State of Colorado, as of July 11, 1996.
ECHOSTAR COMMUNICATIONS
CORPORATION
By: /s/ J. ALLEN FEARS
-----------------------------------
J. Allen Fears
VICE PRESIDENT, TREASURER AND
CONTROLLER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and as of the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------------- ----------------
*/s/ CHARLES W. ERGEN Chief Executive Officer, President and July 11, 1996
------------------------------------------- Director
Charles W. Ergen (Principal Executive Officer)
*/s/ STEVEN B. SCHAVER Vice President and Chief Financial July 11, 1996
------------------------------------------- Officer
Steven B. Schaver (Principal Financial Officer)
/s/ J. ALLEN FEARS Vice President, Treasurer and Corporate July 11, 1996
------------------------------------------- Controller (Principal Accounting
J. Allen Fears Officer)
*/s/ JAMES DEFRANCO Director July 11, 1996
-------------------------------------------
James DeFranco
*/s/ R. SCOTT ZIMMER Director July 11, 1996
-------------------------------------------
R. Scott Zimmer
*/s/ ALAN M. ANGELICH Director July 11, 1996
-------------------------------------------
Alan M. Angelich
*/s/ RAYMOND L. FRIEDLOB Director July 11, 1996
-------------------------------------------
Raymond L. Friedlob
*By: /s/ J. ALLEN FEARS
--------------------------------------
J. Allen Fears
ATTORNEY-IN-FACT
II-7
PLAN AND AGREEMENT OF MERGER
This PLAN AND AGREEMENT OF MERGER ("Agreement") is made as of the 21st day
of December, 1995, by and among ECHOSTAR COMMUNICATIONS CORPORATION, a Nevada
corporation formed in April 1995 ("EchoStar"), DIRECT BROADCASTING SATELLITE
CORPORATION, a Colorado corporation ("DBSC"), and DIRECT BROADCASTING SATELLITE
CORPORATION, A Delaware corporation ("DBSD").
RECITALS
WHEREAS, DBSD and EchoStar Communications Corporation, a Nevada Corporation
formed in December 1993 ("Old EchoStar"), have entered into a Stock Purchase
Agreement, dated November 15, 1994 (the "Purchase Agreement"), pursuant to which
EchoStar purchased certain shares of DBSD's Common Stock, $0.01 par value (the
"DBSD Shares"), for the consideration set forth in the Purchase Agreement, and
was granted certain other rights as more particularly set forth therein;
WHEREAS, the Purchase Agreement contemplates the potential execution by Old
EchoStar, DBSD and DBSC or a plan and agreement of merger at the option of the
parties as provided in the Purchase Agreement;
WHEREAS, Old EchoStar has assigned its right to enter into this Agreement to
EchoStar;
WHEREAS, the parties hereto intend the Merger to constitute and do hereby
adopt this Agreement as a plan of reorganization pursuant to Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended; and
WHEREAS, the Boards of Directors of DBSD, EchoStar and DBSC, deeming it
advisable for the mutual benefit of EchoStar, DBSC, DBSD and their respective
shareholders that DBSD merge with DBSC (the "Merger"), have approved this Plan
and Agreement of Merger under the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties herein contained, the parties hereto agree that
DBSD and DBSC shall be merged and that the terms and conditions of the Merger
and the mode of carrying the same into effect shall be as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. For purposes of this Agreement, and except as otherwise
expressly provided, or unless the context otherwise requires, the following
terms shall have the meanings set forth below:
"Additional Equity Rights" shall mean any valid equity rights not disclosed
to EchoStar on the date of the Purchase Agreement pursuant to Schedule 5.2 of
the Purchase Agreement.
"Adverse Notice" shall have the meaning set forth in Subsection 8.3.2
herein.
"Affiliate" means as to any particular Person, any other Person or entity
that directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with such particular Person.
"Agreement" means this Agreement.
"Appraisal Laws" shall have the meaning set forth in Subsection 2.5.1
herein.
"Cash Value" shall have the meaning set forth in Subsection 2.3.2 herein.
1
"Challenge" shall have the meaning set forth in Section 4.16.6 herein.
"DBSD Due Diligence" shall have the meaning set forth in Section 4.20
herein.
"DBSD Financial Statements" shall have the meaning set forth in Section
4.15.1 herein.
"DBSD Liabilities" has the meaning set forth in Subsection 6.3.2 hereof.
"DBSD Option" means the option granted by DBSD to EchoStar to acquire an
additional 333,333, or 11.3% of the, DBSD Shares.
"DBSD's Business" shall have the meaning set forth in Section 4.8 herein.
"DBS Rights" means the construction permits and related rights with respect
to eleven (11) frequencies at an eastern, and eleven (11) frequencies at a
western, orbital location, together with any further permits or rights requested
or granted to DBSD.
"DBSD Shares" has the meaning set forth in the RECITALS above.
"DBSD Stock Certificates" shall have the meaning set forth in Subsection
2.3.4 herein.
"Defaulting Party" shall have the meaning set forth in Section 12.3 herein.
"Deemed Acceleration" shall have the meaning set forth in Section 5.7
herein.
"DGCL" shall have the meaning set forth in Section 2.1 herein.
"Direct Broadcasting Satellite Corporation" shall have the meaning set forth
in Subsection 2.1.1 herein.
"Dissenting Shares" shall have the meaning set forth in Subsection 2.5.1
herein.
"Due Diligence" shall have the meaning set forth in Section 4.20 herein.
"EchoStar" shall mean, unless otherwise stated herein or the context
otherwise requires, EchoStar and Old EchoStar.
"EchoStar Common Stock" means the Class A Common Stock of EchoStar
Communications Corporation, a Nevada corporation formed in April 1995, $0.01 par
value.
"EchoStar Financials" shall have the meaning set forth in Subsection 5.6.1
herein.
"Effective Time of the Merger" has the meaning specified in Subsection 2.2.6
hereof.
"Entitle Acceleration" shall have the meaning set forth in Section 5.7
herein.
"Existing Equity Rights" shall have the meaning set forth in Section 6.4.2
herein.
"FCC" means the Federal Communications Commission and its staff, and
includes any governmental body or agency succeeding to the functions thereof.
"FCC Approval" shall have the meaning set forth in Subsection 8.4.1 herein.
"GAAP" shall have the meaning set forth in Section 4.15.1 herein.
"Governing Documents" shall have the meaning set forth in Section 4.12
herein.
"Indenture" shall have the meaning set forth in Section 7.3 herein.
"Merger Closing" or "Merger Closing Date" have the meanings specified in
Article X herein.
"Merger Price" shall have the meaning set forth in Subsection 2.3.2 herein.
"Negotiations" shall have the meaning set forth in Section 12.6 herein.
"Nondefaulting Party" shall have the meaning set forth in Section 12.3
herein.
"Outstanding Common Shares" shall have the meaning set forth in Section 4.2
herein.
2
"Permitted Liabilities" shall mean the reasonable and prudent expenses
incurred by DBSD in connection with the transactions contemplated by the
Purchase Agreement and in the ordinary course of DBSD's pursuit of a successful
DBS business, and as required pursuant to the Satellite Contract, or otherwise
necessary to maintain the DBS Rights.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a trust, an organization, a governmental
entity or any department, agency or political subdivision thereof, or any other
legal entity.
"Purchase Agreement" shall have the meaning set forth in Section 8.1 herein.
"Purchase Closing" shall mean the closing of the purchase by EchoStar of
DBSD Shares pursuant to the Purchase Agreement.
"Registration Statement" shall have the meaning set forth in 6.12 herein.
"Satellite Contract" shall have the meaning set forth in Subsection 6.4.9
herein.
"SEC" means the Securities and Exchange Commission and includes any
governmental body or agency succeeding to the functions thereof.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar federal law then in force.
"Senior Notes" shall have the meaning set forth in Section 7.3 herein.
"Share Value" shall have the meaning set forth in Subsection 2.3.2 herein.
"Subsidiaries" means, with respect to any Person, any corporation,
partnership, association or other business entity of which (i) if a corporation,
a majority of the total voting power of shares of 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 that Person or one or more of the other Subsidiaries of that
Person or a combination thereof, or (ii) if a partnership, association or other
business entity, a majority of the partnership of other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a partnership, association or other business entity if
such Person or Persons shall be allocated a majority of partnership, association
or other business entity gains or losses and shall be or control the managing
director or general partner of such partnership, association or other business
entity.
"Tax Liabilities" shall have the meaning set forth in Section 4.17 herein.
"Transfer" shall have the meaning set forth in Subsection 6.4.3 herein.
1.1.1 In addition, other capitalized words and phrases used in this
Agreement shall have the meanings ascribed herein.
ARTICLE II
MERGER
2.1 ACTIONS TO BE TAKEN. Upon performance of all the covenants and
obligations of the parties contained herein required to be accomplished by the
Merger Closing and upon fulfillment (or waiver) of all the conditions to the
obligations of the parties contained herein required to be accomplished by
3
the Merger Closing, at the Effective Time of the Merger and pursuant to the
Delaware General Corporation Law (the "DGCL") and the Colorado Business
Corporation Act (the "CBA"), the following shall occur:
2.1.1 DBSD shall be merged with and into DBSC, which shall be the
Surviving Corporation (the "Surviving Corporation"). The separate existence and
corporate organization of DBSD shall cease at the Effective Time of the Merger,
and thereupon, DBSD and DBSC shall be a single corporation, the name of which
shall be "Direct Broadcasting Satellite Corporation." DBSC, as the Surviving
Corporation, shall succeed, insofar as permitted by law to all of the rights,
assets, liabilities and obligations of DBSD in accordance with the CBA.
2.2.2 The Certificate of Incorporation of DBSC shall be and remain
the Certificate of Incorporation of the Surviving Corporation until amended as
provided by law.
2.2.3 The By-Laws of DBSC shall become the By-Laws of the Surviving
Corporation until amended as provided by law.
2.2.4 Until changed in accordance with the Certificate of
Incorporation and By-Laws of the Surviving Corporation, the directors of DBSC
immediately prior to the Effective Time of the Merger shall become the directors
of the Surviving Corporation.
2.2.5 Until changed in accordance with the Certificate of
Incorporation and By-Laws of the Surviving Corporation, the officers of DBSC
immediately prior to the Effective Time of the Merger shall become the officers
of the Surviving Corporation.
2.2.6 As soon as practicable after the terms and conditions of this
Agreement have been satisfied, and upon consummation of the closing referred to
in Article XI hereof (the "Merger Closing"), a Certificate of Merger and
Articles of Merger, consistent with this Agreement, in the form prescribed by,
and properly executed in accordance with, the DGCL and the CBA, respectively, in
form and substance satisfactory to counsel for the parties hereto and providing
for immediate effectiveness of the Merger, shall be filed with the Secretaries
of State of the States of Delaware and Colorado, respectively. The Merger shall
become effective when the Certificate of Merger and the Articles of Merger are
deemed filed with both such Secretaries of State pursuant to the DGCL and the
CBA, as the case may be. The date and time when the Merger shall become
effective is referred to in this Agreement as the "Effective Time of the
Merger."
2.3 CANCELLATION OR CONVERSION OF DBSD SHARES. As of the Effective Time of
the Merger, by virtue of the Merger and without any action on the part of any
shareholder:
2.3.1 Any DBSD Shares held in the treasury of DBSD, and any DBSD
Shares issued and outstanding immediately prior to the Effective Time of the
Merger which are owned by EchoStar or DBSC, shall be cancelled and retired. No
cash, securities or other consideration shall be paid or delivered in exchange
for such DBSD Shares under this Agreement.
2.3.2 Except with regard to DBSD Shares cancelled pursuant to
Subsection 2.3.1 hereof, and subject to Subsection 2.3.3 below, at the Effective
Time of the Merger, all DBSD Shares held by shareholders of DBSD other than
EchoStar shall, by virtue of the Merger and without any action on the part of
DBSD, be converted into and exchanged for: (i) .67417 EchoStar Shares (the
"Share Value"); or (ii) $7.99 in cash (the "Cash Value") (the Share Value and
the Cash Value being hereafter jointly referred to as the "Merger Price"). At
the time of the vote by DBSD shareholders on the Merger, each DBSD shareholder
in its sole discretion shall determine the portion of their DBSD Shares to be
exchanged for EchoStar Shares, and the portion of their DBSD Shares to be
exchanged for cash, provided that in the event the number of DBSD Shares to be
exchanged for cash, together with the number of DBSD Shares with respect to
which appraisal rights under Delaware law have been reserved, would exceed 50%
of the DBSD Shares held by shareholders other than EchoStar, the portion of the
DBSD Shares to be exchanged for cash, of each shareholder who elects to take a
combination of EchoStar Shares and cash, shall be reduced by the same percentage
for each such
4
DBSD shareholder (i.e., for example, the number of DBSD Shares each such
shareholder may exchange for cash would each be reduced by 5%) and exchanged for
EchoStar Shares instead if numerically possible, so that the total number of
DBSD Shares exchanged for cash does not exceed 50%. Any DBSD Shareholder who
fails to make an election shall receive EchoStar Shares, not cash, for their
DBSD Shares. The number of EchoStar Shares set forth in clause (i) above shall
be adjusted, if at all, according to the provisions set forth in Section 2.4
below, and shall be appropriately adjusted to reflect any stock split, stock
dividend, combination or other similar transaction, involving EchoStar.
2.3.3 In lieu of the issuance or recognition of fractional EchoStar
Shares, cash equal to the value of such fractional shares shall be paid to each
holder of DBSD Shares electing to receive EchoStar Shares pursuant to Subsection
2.3.2 hereof.
2.3.4 After the Effective Time of the Merger, each holder of an
outstanding certificate or certificates theretofore representing DBSD Shares
converted into EchoStar Shares or cash pursuant to Subsection 2.3.2 hereof (the
"DBSD Stock Certificates"), upon surrender thereof to EchoStar or such other
entity as shall, prior to the Merger Closing, be designated by DBSD (and as
shall be reasonably acceptable to EchoStar) as exchange agent (the "Exchange
Agent"), shall be entitled to receive either: (i) the Cash Value; or (ii) a
Stock Certificate representing the number of EchoStar Shares into which the DBSD
Shares theretofore represented by such surrendered DBSD Stock Certificates shall
have been converted pursuant to Subsection 2.3.2 hereof. Until so surrendered,
each DBSD Stock Certificate shall be deemed for all purposes, other than as
provided below with respect to the payment of dividends or other distributions,
if any, in respect of EchoStar Shares, to represent the number of EchoStar
Shares into which the DBSD Shares theretofore represented thereby shall have
been converted, or the Cash Value, as the case may be. Until so surrendered,
EchoStar may, at its option, refuse to pay: (y) any dividend or other
distribution with respect to EchoStar Shares; or (z) any interest with respect
to the Cash Value, payable to such shareholders of DBSD; provided, however, that
upon surrender and exchange of such DBSD Stock Certificates there shall be paid
to DBSD's shareholders the amount, without interest, of dividends and other
distributions with respect to EchoStar Shares, if any, which have become payable
with respect to the EchoStar Shares and which have not previously been paid.
Whether or not a DBSD Stock Certificate is surrendered, from and after the
Effective Time of the Merger, such DBSD Stock Certificates shall under no
circumstances evidence, represent or otherwise constitute any stock or other
interest whatsoever in DBSC, the Surviving Corporation or any other Person, firm
or corporation other than EchoStar or its successors.
In the event any DBSD Stock Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and subject to such other
conditions as the Board of Directors of EchoStar may impose, EchoStar shall
issue in exchange for such lost, stolen or destroyed Certificate the Merger
Price deliverable in respect thereof as determined in accordance with Section
2.3.2. When authorizing such issue of the Merger Price in exchange therefor, the
Board of Directors of EchoStar may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed Certificate to give EchoStar a bond or other surety in such sum as
EchoStar may reasonably direct as indemnity against any claim that may be made
against EchoStar with respect to the Certificates alleged to have been lost,
stolen or destroyed.
2.4 ADJUSTMENT TO THE SHARE VALUE OR CASH VALUE. The Share Value or Cash
Value, as the case may be, shall be appropriately adjusted in the event that:
(i) on the Merger Closing Date DBSD Liabilities exceed the Permitted
Liabilities, but EchoStar desires to proceed with the Merger Closing
notwithstanding; (ii) any liabilities are asserted against DBSD which are
alleged to have arisen on or before March 31, 1994, but which are not shown in
the DBSD Financial Statements; or (iii) any Additional Equity Rights are
asserted. In the event an adjustment is necessary as a result of Subsection
2.4(i) or (ii) above, the Share Value or the Cash Value, as applicable, shall be
reduced by the percentage obtained from the quotient of "x"/$7,785,184, where
"x" is equal to the amount by which
5
DBSD Liabilities exceed Permitted Liabilities, plus the amount (not to exceed
$5,000,000) of any liabilities contemplated by Subsection 4.2(ii) above. In the
event that liabilities contemplated by Subsection 4.2(ii) above exceed
$7,000,000, EchoStar may at its option either consummate the Merger and assume
those liabilities, or terminate this Agreement. In the event EchoStar elects to
terminate this Agreement as a result, then the DBSD Option shall terminate on
the close of business on the 90th day following the date of such termination. In
the event an adjustment is necessary as the result of Subsection 2.4(iii) above,
the Share Value or the Cash Value, as applicable, shall be reduced by the
percentage obtained from the quotient of "x"/"y" where "x" is the total number
of DBSD Shares which would be issued pursuant to all Additional Equity Rights in
the aggregate, if all such Additional Equity Rights were determined to be valid,
and "y" is the total number of DBSD Shares outstanding excluding DBSD Shares
held by EchoStar or its Affiliates. DBSD shall have the right to contest any
Additional Equity Rights and may incur reasonable expenses in that regard. In
the event any such Additional Equity Rights are being contested by DBSD on the
Merger Closing, EchoStar shall withhold the portion of the Merger Price which
would be allocable to holders of the Additional Equity Rights being contested.
To the extent the contested Additional Equity Rights are ultimately determined
to be invalid, EchoStar shall promptly release the portion of the Merger Price
withheld to the former DBSD shareholders entitled to receipt thereof. Following
Merger Closing, DBSD shall be required to continue to contest those Additional
Equity Rights only to the extent the costs and expenses of doing so are
reasonable.
2.5 DISSENTERS' RIGHTS.
2.5.1 The DBSD Shares held by those shareholders of DBSD who have
timely and properly exercised their dissenters' rights in accordance with the
provisions of the DGCL applicable to dissenters' rights (the "Appraisal Laws")
are referred to herein as "Dissenting Shares." Each Dissenting Share, the holder
of which, as of the Effective Time of the Merger, has not effectively withdrawn
or lost his dissenters' rights under the Appraisal Laws, shall not be converted
into or represent a right to receive EchoStar Shares or the Cash Value, as the
case may be, in connection with the Merger, but the holder thereof shall be
entitled only to such rights as are granted by the Appraisal Laws. Each holder
of Dissenting Shares who becomes entitled to cash pursuant to the provisions of
the Appraisal Laws shall receive payment therefor from the Surviving Corporation
from funds provided by EchoStar. EchoStar shall also be obligated to pay the
costs and expenses of both DBSD and EchoStar in connection with the exercise of
any appraisal rights, but not the costs of any dissenting DBSD shareholder,
unless required to do so by the Appraisal Laws. If any holder of Dissenting
Shares shall effectively withdraw or lose his dissenters' rights under the
Appraisal Laws, such Dissenting Shares shall be converted into the right to
receive cash in accordance with the Cash Value as set forth in Subsection 2.3.2
hereof.
2.5.2 Immediately following the expiration of the time for Dissenting
Shares to be paid pursuant to the Appraisal Laws, EchoStar shall make available,
by delivery to the Exchange Agent, Stock Certificates for such number of
EchoStar Shares as shall be required for exchange in accordance with this
Agreement and the Cash Value.
2.6 FURTHER ASSURANCES. From time to time, on and after the Effective Time
of the Merger, as and when requested by EchoStar or its successors or assigns,
the proper officers and directors of DBSD immediately before the Effective Date
of the Merger, all of whom shall submit their resignations to be effective at
the Effective Time of the Merger, shall, at EchoStar's expense and for and on
behalf and in the name of DBSD or otherwise, take or cause to be taken such
further or other actions as EchoStar or their respective successors or assigns
may deem necessary or desirable in order to confirm or record or otherwise
transfer to the Surviving Corporation title to and possession of all the
properties, rights, privileges, powers, franchises and immunities of DBSD and
otherwise to carry out fully the provisions and purposes of this Agreement.
2.7 INTENTION. The parties agree and acknowledge that prior to receipt, if
ever requested, of FCC Approval for a transfer of control of DBSD to EchoStar:
(i) it is not the intent of the parties to
6
affect a transfer of control of DBSD to EchoStar, nor shall EchoStar assert
control over DBSD; and (ii) DBSD, acting through its Board of Directors, shall
retain sole and exclusive responsibility for and authority over, by example and
not by limitation, its corporate policy and actions, day to day operations,
finances, personnel policy and actions, FCC authorizations and the privileges
and obligations it has as a DBS conditional permittee.
2.8 RESTRICTIONS ON TRANSFER.
2.8.1 Each DBSD shareholder electing to receive EchoStar Shares in
connection with the Merger shall not offer, sell, contract to sell, grant any
option to purchase, pledge or otherwise dispose of, transfer or hypothecate any
of its EchoStar Shares, or in any other manner transfer all or a portion of the
economic consequences associated with ownership of the EchoStar Shares until
ninety (90) days following the Effective Time of the Merger (the "Lock Up" and
the "Lock Up Period"). Each certificate for EchoStar Shares issued in the Merger
shall contain a legend restricting the transfer of the EchoStar Shares except in
compliance with this Section 2.8.1.
2.8.2 If just prior to the Effective Time of the Merger, EchoStar is
unable to make the representations referenced in Section 5.8 below, and as a
result of this and no other significant factors, tax counsel in connection with
the Merger is unable to provide assurance that the Merger will qualify for
tax-free status, then the Lock Up will terminate on that date with respect to
50% of the EchoStar Shares held by each shareholder, but shall continue with
respect to the remainder of the EchoStar Shares for the remainder of the Lock Up
Period. As used in this Section 2.8.2, tax counsel shall mean the law firm of
Sullivan & Worcester, except that if EchoStar disagrees with the opinion of
Sullivan & Worcester, EchoStar shall be free to engage counsel reasonably
acceptable to DBSD, at EchoStar's expense, and if that counsel renders an
opinion that would not trigger partial or full release of the Lock Up, then the
Lock Up shall not terminate.
ARTICLE III
THIS ARTICLE HAS BEEN INTENTIONALLY DELETED.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DBSD
DBSD hereby represents and warrants to EchoStar and DBSC as follows, which
representations and warranties shall be deemed to have been made on the date
hereof and at the Effective Time of the Merger:
4.1 ORGANIZATION. DBSD is a corporation, duly organized, validly existing,
and in good standing under the laws of the State of Delaware, and has all the
requisite corporate power and authority to own its property and conduct the
business in which it is engaged. Attached as Schedule 4.1 are true and complete
copies of DBSD's Certificate of Incorporation and By-Laws as amended to the date
hereof.
4.2 CAPITALIZATION. DBSD is authorized to issue three million (3,000,000)
DBSD Shares and no other capital stock of any kind or class. As of the date
hereof, there are 1,618,138 DBSD Shares issued and outstanding (the "Outstanding
Common Shares"). DBSD does not have any other shares of capital stock issued and
outstanding other than the Outstanding Common Shares. All of the Outstanding
Common Shares are validly issued, fully paid and non-assessable. To the best of
DBSD's knowledge, following diligent investigation, other than the DBSD Option,
DBSD does not have outstanding any options or warrants to purchase, or contracts
to issue, or contracts or any other rights entitling anyone to acquire, DBSD
Shares, or securities convertible into such DBSD Shares, other than as set forth
in Schedule 4.2 attached hereto. There are no Existing Equity Issuances pending
as of the date of this Agreement.
7
4.3 SUBSIDIARIES. DBSD has no Subsidiaries or equity interest in any
corporation, partnership or other entity.
4.4 QUALIFICATION. DBSD is not qualified as a foreign corporation in any
jurisdiction other than as set forth in Schedule 4.4 attached hereto. The nature
of the business of DBSD does not make qualification of it as a foreign
corporation necessary under the laws of any jurisdiction other than as set forth
in Schedule 4.4 which are the only jurisdictions in which the nature of its
business requires qualification.
4.5 OWNED REAL ESTATE. DBSD does not have title to any real estate.
4.6 LEASED REAL ESTATE. DBSD does not lease any real estate other than as
set forth in Schedule 4.6.
4.7 LEASED TANGIBLE PERSONAL PROPERTY. DBSD does not lease any personal
property other than as set forth in Schedule 4.7.
4.8 ALL CONTRACTS. Schedule 4.8 attached hereto lists all contracts or
other obligations to which DBSD is a party or by which it is bound, which
constitute all of the contracts and other obligations to which DBSD is a party
or by which it is bound except to the extent any such contract or obligation is
clearly not material to DBSD's business operations, governance, or prospects
(collectively "DBSD's Business"). DBSD is not in default under any of such
contracts, obligations or commitments, is not aware of any facts which, with
notice and/or the passage of time, would constitute such a default and is not
aware of any default by any party thereto except: (i) for such defaults as do
not and will not have in the aggregate any material adverse effect on DBSD's
Business, or the ability of DBSD to perform any of its obligations under this
Agreement or limit in any way the benefits EchoStar expects to obtain pursuant
to this Agreement, or (ii) as limited in Schedule 4.8. No consent is required
under the contracts, obligations and commitments referred to in this Section 4.8
in connection with the Merger, other than as set forth in Schedule 4.8. To the
extent Schedule 4.8 overlaps with matters required by other Schedules to this
Agreement, DBSD shall list the matter on each applicable Schedule.
4.9 TRANSACTIONS WITH DIRECTORS, OFFICERS, EMPLOYEES AND AFFILIATES. Since
August 3, 1987 except as set forth in Schedule 4.9 attached hereto, there have
been no transactions between DBSD and any director, officer, employee of
affiliate (as defined in Rule 405 under the Securities Act) of DBSD. Since
August 3, 1987 none of the officers, directors, employees or affiliates of DBSD,
or any member of the immediate family of any such persons, has been a director
or officer of, or has had a material interest in, any firm, corporation,
association or business enterprise which during such period has been a supplier,
customer or sales agent of DBSD or has completed to any extent with DBSD, except
as otherwise set forth in Schedule 4.9.
4.10 LITIGATION. Other than as set forth in Schedule 4.10, there are no
legal, administrative, arbitration or other proceedings or claims pending or, to
the best of DBSD's knowledge, threatened against DBSD, nor is DBSD subject to
any existing judgment, nor has DBSD received any inquiry from an agency of the
Federal or of any state or local government regarding the transactions
contemplated hereby, or regarding any violation or possible violation of any
law, regulation or ordinance affecting its business or assets.
4.11 LICENSES AND PERMITS. Other than: (i) as set forth in Schedule 4.11;
(ii) the DBS Rights; and (iii) DBSD's foreign qualification to do business in
the District of Columbia, DBSD has no other licenses, permits, orders, approvals
or authorizations of any nature, and to DBSD's knowledge, no such licenses,
permits, orders, approvals, or authorizations of any nature are required for
DBSD's current business, except to the extent any such failures are clearly not
material to DBSD's Business.
4.12 AUTHORITY RELATIVE TO AGREEMENT; ENFORCEABILITY. The execution,
delivery and performance of this Agreement are within the legal capacity and
power of DBSD; have been duly authorized by all requisite corporate action on
the part of DBSD; require the approval or consent of no other Persons, entities
or agencies (except for: (i) FCC notifications, consents and approvals; and (ii)
approval of the
8
shareholders of DBSD); and will neither violate nor constitute a default under,
nor create a lien or breach under, nor result in the acceleration of performance
or right to accelerate a lien or breach under, nor result in the acceleration of
performance or right to accelerate performance under (whether or not after
giving of notice or lapse of time or both), the terms of the Certificate of
Incorporation or By-Laws of DBSD or of any agreement, obligation or commitment
binding upon DBSD (the "Governing Documents") except: (i) as set forth in
Schedule 4.12; or (ii) to the extent any such argument, obligation, commitment,
or the acceleration or breach thereof, is clearly not material to DBSD's
Business. This Agreement is a legal, valid and binding obligation of DBSD
enforceable against DBSD in accordance with its terms, except insofar as the
enforcement thereof may be limited by bankruptcy, insolvency, moratorium or
similar laws affecting the enforcement of creditors rights generally and subject
to equitable principles limiting the availability of equitable remedies, and
except insofar as the enforcement thereof may be limited by the rules,
regulations or orders of the FCC.
4.13 COMPLIANCE WITH APPLICABLE LAWS. To the best of DBSD's knowledge,
DBSD is in compliance in all material respects with all Federal, state, county
and municipal laws, ordinances, regulations, rules, reporting requirements,
judgments, orders, decrees and requirements of common law applicable to the
conduct and business of DBSD (together, the "General Laws") except to the extent
any such violation is clearly not material to DBSD's Business.
4.14 EMPLOYMENT MATTERS.
4.14.1 No employee of DBSD has a written or oral agreement (or an
assurance pursuant to any employee manual) which would preclude DBSD from
terminating such employee's employment at any time with no obligation to DBSD to
make any payment except wages to the date of termination. DBSD has not engaged
in any discriminatory hiring or employment practices nor have any employment
discrimination complaints been filed against DBSD with any state or Federal
agency. DBSD has not been threatened by any former employee with any suit
alleging wrongful termination.
4.14.2 To the best of DBSD's knowledge there is no arrangements or
contracts with any present or former director, officer, employee or independent
contractor of DBSD, or any other Person, that require any deferred compensation,
retirement or welfare benefits to be paid or provided following termination of
services, except as set forth on Schedule 4.14.2.
4.15 FINANCIAL STATEMENTS.
4.15.1 The financial statements of DBSD provided to EchoStar for the
fiscal year ended March 31, 1995, a copy of which are attached hereto as Exhibit
D (the "DBSD Financial Statements"), fairly represent the financial position of
DBSD and the results of its operations at the dates and for the periods to which
they apply. To the best of DBSD's knowledge, following diligent investigation,
the DBSD Financial Statements reflect all Existing Equity Rights, as such term
is defined in Subsection 6.4.2 below. Such DBSD Financial Statements have been
prepared in conformity with generally accepted accounting principles, applied on
a consistent basis throughout the periods involved ("GAAP") except as
specifically noted therein.
4.15.2 The DBSD Financial Statements reflect substantially all of the
liabilities and obligations (whether absolute, accrued, contingent or otherwise)
of DBSD. Other than the $300,000 of liabilities referenced in Subsection 5.15.2
of the Purchase Agreement, since the date of the DBSD Financial Statements, DBSD
has incurred no liabilities (whether absolute, accrued, contingent or otherwise)
other than Permitted Liabilities.
4.16 BUSINESS CHANGES. Except as set forth on Schedule 4.16 attached
hereto, since the date of the DBSD Financial Statements there has not been:
4.16.1 any adverse changes in the working capital, financial
condition, assets, liabilities, or in the business or prospects of DBSD (except
to the extent such adverse change is clearly not
9
material to DBSD's Business and except for: (i) the $300,000 of liabilities
referenced in Subsection 5.15.2 of the Purchase Agreement; and (ii) Permitted
Liabilities incurred subsequent to the Purchase Closing and disclosed in a
permitted amendment to Schedule 5.16 to the Purchase Agreement;
4.16.2 any damage, destruction or loss affecting the business of DBSD
(except to the extent clearly not material to DBSD's Business);
4.16.3 any amendment or termination of any contract, lease or license
to which DBSD is a party or by which it is, or may be bound (except to the
extent clearly not material to DBSD's Business);
4.16.4 any dividend or distribution declared, set aside or paid in
respect of the DBSD Shares;
4.16.5 any sale or other disposition of assets of DBSD having a value
in excess of $1,000; or
4.16.6 any actual or threatened challenge to the DBS Rights (a
"Challenge").
4.17 TAXES. As of the date of this Agreement, all tax and information
returns required to have been filed by DBSD have been filed with the appropriate
authority; and all Federal, state and local taxes (including without limitation
income, franchise, property, sales, use, value added, withholding, excise,
capital or other tax liabilities), charges, assessments, penalties and interest
of DBSD (collectively, the "Tax Liabilities") required to be paid on or before
the date of this Agreement were paid or have been accrued on DBSD's books. Such
returns were correct in all material respects as filed. As of the date of this
Agreement, no assessments or additional Tax Liabilities have been proposed or
threatened against DBSD or any of its assets, and DBSD has not executed any
waiver of the statute of limitations on the assessments or collection of any Tax
Liabilities. The representations above shall continue to be true and complete on
the date of consummation of the Merger, except as to those Tax Liabilities which
are currently being contested in good faith and with respect to which adequate
provision for the payment thereof has been reserved and set aside by DBSD. The
DBSD Financial Statements include adequate provision for Tax Liabilities
incurred or accrued as of the date thereof. True and complete copies of DBSD's
most recent federal, state and local tax returns have delivered previously by
DBSD to EchoStar.
4.17.1 Since August 3, 1987, no federal tax returns of DBSD have ever
been audited or examined by the Internal Revenue Service. There are no pending
investigations of DBSD or its tax returns by any Federal, state or local taxing
authority and there are no Federal, state or local tax liens upon any of DBSD's
assets.
4.17.2 DBSD and EchoStar intend the Merger to constitute a plan of
reorganization pursuant to Section 368(a)1(A) of the Internal Revenue Code of
1986, as amended, provided, however, that notwithstanding this statement of
intent and the similar statement in the third Recital of this Agreement, DBSD
has concluded that the Merger, and the transactions contemplated hereby, as
currently structured and under existing tax law, will provide the tax treatment
to DBSD and its shareholders desired by them, and that regardless of the actual
tax outcome of the transactions, DBSD shall not raise such tax treatment as an
impediment to the Merger.
4.18 VALID ISSUANCE OF DBSD SHARES. The Outstanding Common Stock is all
duly and validly authorized and issued, fully paid and nonassessable. All
Outstanding Common Stock issued since August 3, 1987 has been issued in
compliance with all applicable Federal and state securities laws. With respect
to Outstanding Common Stock issued prior to August 3, 1987, nothing has come to
the attention of DBSD which would lead it to believe that any such stock was
issued in violation of any applicable Federal or state securities laws. The
Option Shares issuable upon exercise of the DBSD Option have been duly and
validly reserved for issuance and, upon issuance in accordance with the terms of
the DBSD Option pursuant to Section 2.2 of the Purchase Agreement, shall be duly
and
10
validly issued, fully paid and nonassessable, and issued in compliance with all
applicable Federal and state securities laws. Such DBSD Option Shares are not
subject to any preemptive rights of any Person.
4.19 BROKERAGES. DBSD has not engaged any broker or finder to render
services in connection with this Agreement. No fee or other amount is payable by
DBSD with respect to such type of services. A list of all brokers and finders
DBSD has retained since August 3, 1987, together with a copy of each such
agreement (or if oral a summary of all material terms thereof), is attached as
Schedule 4.19. With respect to any broker, finders' or similar contracts,
regardless of when entered into, nothing has come to the attention of DBSD which
would lead it to believe that any fee would be payable by DBSD at any time in
the future in connection with any possible transaction unless, at the request of
DBSD, any such broker or finder brings a Person to the attention of DBSD, with
which Person DBSD ultimately consummates an agreement.
4.20 DBS LICENSES. DBSD has been awarded by the FCC a conditional
construction permit and specific orbital slot assignments with respect to eleven
(11) DBS frequencies located at 61.5 degrees West Longitude, and eleven (11) DBS
frequencies located at 175 degrees West Longitude. Other than those filed by
Dominion Video Services, Inc. ("DVS") and others as may be set forth in Schedule
4.20, there are no Challenges to the DBS Rights and DBSD reasonably believes
that such Challenges will not be successful. As of the date hereof, DBSD is in
full compliance with all FCC "due diligence" requirements (hereinafter, "DBSD
Due Diligence") to the best of its knowledge.
4.21 PENDING OR CONTEMPLATED TRANSACTIONS. DBSD is not a party to any
agreement, express or implied, with any party, other than EchoStar, regarding a
transaction involving the DBS Rights, or otherwise related to the transactions
contemplated by this Agreement.
4.22 SHAREHOLDER APPROVAL. Pursuant to applicable law, and the Governing
Documents: (i) approval of the Merger by fifty percent (50%), plus one DBSD
Share, of the total Outstanding Common Stock shall be sufficient to approve the
Merger; and (ii) neither EchoStar nor Harley Radin (DBSD's Chairman) shall be
prohibited from voting any of their DBSD Shares in favor of the Merger.
4.23 BOARD APPROVAL. The Board of DBSD has voted to approve all of the
transactions contemplated by this Agreement, including but not limited to the
recommendation that DBSD's shareholders vote to approve the Merger, and that the
DBSD Board shall recommend that DBSD's shareholders approve the Merger except in
the circumstances specified in Section 6.8 below. DBSD shall not assert that an
appraisal or valuation or either DBSD or EchoStar is required, or request any
appraisal or valuation, in connection with Board approval of the Merger, the
solicitation of its shareholders or otherwise, unless required by Federal or
state securities laws.
4.24 RELIANCE. In determining whether to enter into this Agreement and the
transactions contemplated hereby, DBSD has not relied upon any representations
or warranties or other information (whether oral or written) furnished by
EchoStar other than as set forth in, or scheduled pursuant to, this Agreement or
the Purchase Agreement.
4.25 FULL DISCLOSURE. No representation or warranty made by DBSD in this
Agreement, no certification furnished or to be furnished to EchoStar pursuant to
this Agreement, and no document delivered by DBSD to EchoStar or its counsel
hereunder, contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the statements
contained herein or therein not misleading.
DBSD shall be permitted to amend any Schedule provided pursuant to this
Article IV at any time to reflect action taken by DBSD as permitted by this
Agreement or as necessary to reflect any subsequent Challenges in Schedule 4.20;
provided that: (i) DBSD shall provide such revised Schedule to EchoStar within
five (5) business days of the event which results in the necessity of an update;
and (ii) this provision shall only apply prospectively (i.e., it shall not be
construed as allowing DBSD to cure a representation or schedule which was false,
incomplete or inaccurate at the time it was made or provided, through a
subsequent amendment thereto).
11
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ECHOSTAR AND DBSC
EchoStar and DBSC hereby represent and warrant to DBSD as follows, which
representations and warranties shall be deemed to have been made on the date
hereof and as of the Effective Time of the Merger:
5.1 ORGANIZATION. EchoStar and DBSC are each corporations duly organized,
validly existing, and in good standing under the laws of the States of Nevada
and Colorado, respectively, and have all requisite corporate power and authority
to own their property and conduct the business in which each is engaged.
Attached as Schedule 5.1.1 are true and complete copies of EchoStar's and DBSC's
Articles of Incorporation and By-Laws as amended to the date hereof.
5.2 CAPITALIZATION. All outstanding shares of EchoStar are validly issued,
fully paid and non-assessable.
5.3 AUTHORITY RELATIVE TO AGREEMENT; ENFORCEMENT. The execution, delivery
and performance of this Agreement is within the legal capacity and power of
EchoStar and DBSC; have been duly authorized by all requisite corporate action
on the part of EchoStar and DBSC; require the approval or consent of no persons,
entities or agencies, other than such approval required from the FCC and as
shown on Schedule 5.3.1 attached hereto, and will neither violate nor constitute
a default under, nor create a lien or breach under, nor result in the
acceleration of performance or right to accelerate performance under (whether or
not after the giving of notice or lapse of time or both), the terms of the
Articles of Incorporation and By-Laws of EchoStar or DBSC or of any material
agreement, obligation or commitment binding upon EchoStar (other than agreements
as to which appropriate consents, if obtained, shall avoid any defaults, which
consents have been, or will be, obtained). This Agreement is a legal, valid and
binding obligation of EchoStar and DBSC enforceable against EchoStar and DBSC in
accordance with its terms, except insofar as the enforcement thereof may be
limited by bankruptcy, insolvency, moratorium or similar laws affecting the
enforcement of creditors rights generally and subject to equitable principles
limiting the availability of equitable remedies, and except insofar as the
enforcement thereof may be limited by the rules, regulations or orders of the
FCC.
5.4 INAPPLICABILITY OF SPECIFIED STATUTES. EchoStar is not a "holding
company," or a "subsidiary company" or an "affiliate" of a "holding company," as
such terms are defined in the Public Utility Holding Company Act of 1935, as
amended, or an "investment company" or a company controlled by or acting on
behalf of an "investment company," required to be registered under the
Investment Company Act of 1940, as amended.
5.5 ISSUANCE OF SHARES. EchoStar has reserved for issuance the EchoStar
Shares to be issued pursuant to this Agreement, and upon issuance in accordance
with the terms hereof the EchoStar Shares will be duly and validly issued, fully
paid and nonassessable, and issued in compliance with all applicable federal and
state securities laws. Such EchoStar Shares are not subject to the preemptive
rights of any Person.
5.6 FULL DISCLOSURE. No representation or warranty made by EchoStar in
this Agreement, no certification furnished or to be furnished by EchoStar or
DBSD pursuant to this Agreement, and no document delivered by EchoStar to DBSD
or its counsel hereunder, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary to make
the statements contained herein or therein not misleading, as of the date made
furnished or delivered.
5.7 NO INDENTURE DEFAULTS. There are no defaults under the Indenture
pursuant to which EchoStar issued its Senior Discount Notes dated May 31, 1994
(the "Indenture" and the "Senior Notes") which entitle the holders of the Senior
Notes (the "Holders") to accelerate (as defined in the Indenture) the Senior
Notes, or any default EchoStar has notified the Holders of, and which would
entitle the Holders to declare a default and accelerate the Senior Notes (in
either event "Entitle
12
Acceleration"). If the Senior Notes have been retired as of any date this
representation is required to be made, EchoStar represents and warrants that if
the Senior Notes were still outstanding there would be no defaults which Entitle
Acceleration ("Deemed Acceleration").
5.8 TAX REPRESENTATIONS. In addition to the representations and warranties
contained in this Article V, EchoStar shall make the representations and
warranties set forth in Schedule 5.8 attached hereto as of the date of this
Agreement only, which representations and warranties shall be incorporated
herein, and made a part hereof, by this reference.
EchoStar shall be permitted to amend any Schedule provided pursuant to this
Article V at any time to reflect action taken by EchoStar as permitted by this
Agreement; provided that: (i) EchoStar shall provide such revised Schedule to
DBSD within five (5) business days of the event which results in the necessity
of an update; and (ii) this provision shall only apply prospectively (i.e., it
shall not be construed as allowing EchoStar to cure a representation or schedule
which was false, incomplete or inaccurate at the time it was made or provided,
through a subsequent amendment thereto).
ARTICLE VI
COVENANTS OF DBSD
6.1 REGULAR COURSE OF BUSINESS. Through to the Effective Time of the
Merger DBSD shall carry on its business diligently and in the ordinary course
and use its best efforts to preserve its present business organization intact
and preserve its present relationships with Persons having business dealings
with it. DBSD shall not, and shall instruct its agents (including without
limitation its directors, officers, attorneys, accountants and investment
bankers) not to take any action which DBSD is prohibited from taking pursuant to
this Agreement, or which could reasonably be expected to increase the
liabilities or obligations, or decrease the rights, which EchoStar expects to
obtain consistent with the terms of this Agreement.
6.2 OUTSTANDING COMMON SHARES. Immediately prior to the Effective Time of
the Merger, the Outstanding Common Stock shall not exceed the number set forth
in Section 4.2 and Schedule 4.2 hereof, plus any Additional Equity Rights.
6.3 DBSD ASSETS AND LIABILITIES.
6.3.1 Through the Effective Time of the Merger, DBSD shall maintain
the DBS Rights free and clear of all liens, charges, encumbrances, pledges,
leases or any other restrictions which could limit in any way the uses which
EchoStar can make of the DBS Rights (other than those limitations imposed by the
FCC on all DBS licensees).
6.3.2 Prior to the Effective Time of the Merger, DBSD shall satisfy
in full each and every liability of DBSD, contingent, fixed, actual, accrued or
otherwise (including, without limitation, all current and long term liabilities
shown on the DBSD Financial Statements) (hereinafter referred to as the "DBSD
Liabilities") which accrued subsequent to August 3, 1987 (other than the debt to
TCI-K1, Inc. in the original principal amount of $500,000, which DBSD shall only
be required to repay if such debt is then due and owing and then only to the
extent of available cash or cash equivalents on hand on the day immediately
preceding the Merger Closing Date), so that there shall exist absolutely no DBSD
Liabilities at the Effective Time of the Merger other than Permitted Liabilities
(to the extent that DBSD does not have cash and cash equivalents on hand
adequate to pay such Permitted Liabilities).
6.3.3 If DBSD fails to satisfy Section 6.3.2 above prior to Closing,
then in addition to all other remedies available to EchoStar pursuant to this
Agreement, EchoStar shall be entitled, to the extent necessary in order to
satisfy all of the DBSD Liabilities in full, to adjust and amend the Share
Value, or the Cash Value, as the case may be, as set forth in Section 2.4 of
this Agreement.
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6.4 RESTRICTED ACTIVITIES AND TRANSACTIONS. Prior to the Effective Time of
the Merger, DBSD shall not:
6.4.1 amend its Certificate of Incorporation or By-Laws;
6.4.2 issue, sell or deliver, or agree to issue, sell or deliver or
grant, or declare any stock dividend or stock split with respect to, any DBSD
Shares or any securities convertible into any such DBSD Shares or convertible
into securities in turn so convertible, to any options, warrants or other rights
calling for the issuance, sale or delivery of any such shares or convertible
securities, provided, however, nothing in this Subsection 6.4.2 shall prohibit
DBSD from issuing DBSD Shares pursuant to any obligations, contingent or
absolute, in existence on the date of this Agreement and disclosed in the DBSD
Financial Statements and Schedule 4.2 to this Agreement ("Existing Equity
Rights") or Additional Equity Rights as permitted elsewhere in this Agreement;
6.4.3 sell, mortgage, pledge, lease or otherwise transfer or encumber
(a "Transfer"), or grant or agree to grant any rights to Transfer, any of the
DBSD Rights or any of its other material assets, property or rights, tangible or
intangible;
6.4.4 borrow, or agree to borrow, any funds or voluntarily incur,
assume or become subject to, whether directly or by way of guarantee or
otherwise, any obligation or liability, absolute or contingent, other than
Permitted Liabilities;
6.4.5 acquire control or ownership of any other corporation,
association, joint venture, partnership, business trust or other business
entity, or acquire control or ownership of all or a substantial portion of the
assets of any of foregoing, or enter into any agreement providing for any of the
foregoing;
6.4.6 solicit, discuss, negotiate or enter into any agreement with
any third party, or provide any information to any third party, with respect to
any inquiry, proposal, offer or possible offer from a third party relating to:
(i) the purchase of DBSD Shares or the acquisition of any option, warrant or
other right to purchase or otherwise acquire any such DBSD Shares or convertible
securities; (ii) an exchange offer for any DBSD Shares; (iii) a purchase, lease
or other acquisition of all or a substantial portion of the assets of DBSD; (iv)
a merger, consolidation or other combination involving DBSD; (v) any transaction
involving the DBS Rights; or (vi) any similar matter; provided, however, nothing
in this Subsection 6.4.6 shall prohibit DBSD from continuing its discussions
with foreign governments and foreign or domestic Persons regarding international
applications for the DBS Rights and joint venture opportunities with respect
thereto, provided that DBSD: (x) discloses all such discussions in existence on
the date of this Agreement in Schedule 6.4.6 attached hereto; (y) notifies
EchoStar in writing regarding the substance and content of any further
discussions; and (z) enters into no agreements, contracts, arrangements or
commitments which limit in any respect the uses to which EchoStar can put the
DBS Rights in the event the Merger is consummated, otherwise diminishes or
restricts the benefits or rights EchoStar expects to obtain from the
transactions contemplated by this Agreement, or exposes DBSD to any obligations
or liabilities, contingent, absolute or otherwise. DBSD shall immediately notify
EchoStar of any inquiries received with respect to any of matters set forth in
clauses (i) through (vi) above.
6.4.7 declare or pay any dividend with respect to DBSD Shares in
cash, stock or property, or redeem, purchase (or otherwise acquire any DBSD
Shares) or any options, warrants or other rights to purchase or to be issued
DBSD Shares;
6.4.8 enter into any contract (other than in the ordinary course of
its business or as otherwise permitted by this Agreement), or any licensing
arrangement;
6.4.9 conduct no business other than: (i) exercising its rights as
required by this Agreement; (ii) satisfying its obligation pursuant to its
Satellite Contract, by and between DBSD and
14
Martin Marietta Corporation, dated March 12, 1990, as amended (the "Satellite
Contract"), or necessary to maintain its DBS Rights; or (iii) otherwise
necessary in the ordinary course of business; or
6.4.10 except as set forth in Section 8.8, take any action or fail to
take any action that could: (i) prevent any of its warranties and
representations herein from being true in all material respects as of the
Effective Time of the Merger; (ii) jeopardize the performance or fulfillment of
any of its obligations or commitments under this Agreement; or (iii) reasonably
be expected to have a material adverse effect on any of the benefits EchoStar
may derive from the transactions contemplated by this Agreement or from its
ownership of the DBSD Shares following the Effective Time of the Merger.
6.5 NO DEFAULT OR VIOLATION. Prior to the Effective Time of the Merger,
DBSD shall not: (i) violate, or commit a breach of or a default under, any
contract, obligation or commitment to which it is a party or to which any of its
assets may be subject (except to the extent clearly not material to DBSD's
Business); or (ii) violate any applicable General Law or judgments binding upon
DBSD (except to the extent clearly not material to DBSD's Business) or which
would prevent the consummation of the transactions contemplated by this
Agreement.
6.6 REPORTS; TAXES, ETC. Prior to the Effective Time of the Merger:
6.6.1 DBSD shall duly and timely (by the due date or any duly granted
extension thereof) file all reports and returns required to be filed with the
Federal, state and local authorities; and
6.6.2 DBSD shall: (i) promptly pay all Tax Liabilities indicated by
such returns or otherwise lawfully levied or assessed upon it or any of its
properties (except those Tax Liabilities which are currently being contested in
good faith and with respect to which adequate provision for the payment thereof
has been reserved and set aside by DBSD); and (ii) withhold or collect and pay
to the proper governmental authorities or hold in separate bank accounts for
such payment all taxes and other assessments which it believes in good faith to
be required by law to be so withheld or collected.
6.7 ADVICE OF CHANGES. DBSD shall promptly advise EchoStar orally and in
writing of: (i) any event occurring subsequent to the date of this Agreement
which would render any representation or warranty of DBSD contained in this
Agreement, if made on or as of the date of such event or the Merger Closing
Date, untrue, inaccurate or incomplete in any material respect; and (ii) any
material adverse change in the DBSD Financial Statements, working capital,
financial condition, assets, liabilities (whether absolute, accrued, contingent
to otherwise), operating profits, business or prospects of DBSD not otherwise
disclosed to EchoStar through permitted schedule updates to the Purchase
Agreement.
6.8 CONSENTS, APPROVALS AND FILINGS. DBSD shall use its best efforts to
obtain as promptly as possible all necessary approvals, authorizations,
consents, licenses, clearances or orders of governmental and regulatory
authorities required in order for DBSD to perform its obligations hereunder.
DBSD shall, as soon as practicable after the execution of this Agreement and the
effectiveness of the Form S-4 registration statement referenced in Section 6.12
hereof, and within the time provided by DGCL, call a special meeting of its
shareholders for the express purpose of voting upon this Agreement. DBSD shall
fully coordinate with EchoStar the preparation and timing of distribution of
those materials to its shareholders, including in those materials all materials
requested to be included by EchoStar, and no other material other than a proxy
and the Board recommendation described in this Section 6.8, provided that all
such materials must be in compliance with all applicable Federal and state
securities laws. The Board of DBSD shall recommend that the shareholders approve
the Merger and DBSD shall use its best efforts to obtain that approval, unless
at the time the materials are forwarded EchoStar is in material breach of this
Agreement, which breach has not been cured following required notice and the
expiration of all cure periods, or in the event of a Deemed Acceleration or a
default under the Indenture which Entitles Acceleration.
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6.9 DBSD DUE DILIGENCE. From the date hereof through the Effective Time of
the Merger, DBSD shall use its best efforts to comply with all DBSD Due
Diligence requirements imposed by the FCC. Unless and until the FCC has approved
a transfer of control of DBSD to EchoStar, nothing herein shall be construed as
limiting the sole prerogative of DBSD's Board and management to file FCC
applications and any responses to FCC inquiries.
6.10 ACCESS TO RECORDS AND PROPERTIES. EchoStar may, prior to the
Effective Time of the Merger, through its employees, agents and representatives,
make or cause to be made a detailed review of the business and financial
condition of DBSD and make or cause to made such investigation as it deems
necessary or advisable of the properties, assets, businesses, books and records
of DBSD. DBSD agrees to reasonably assist EchoStar in conducting such review and
investigation and will provide, and will cause its independent public
accountants to provide, EchoStar and its employees, agents and representatives
during regular business hours, in a manner that does not unreasonably interfere
with the operation of the business of DBSD, full access to, and complete
information concerning, all aspects of the businesses of DBSD, including its
books, records (including tax returns filed or in preparation), FCC filings,
contracts, projections, personnel and premises, the audit work papers and other
records of its independent public accountants and any documents (including any
documents filed on a confidential basis) included in any report filed with any
governmental agency.
6.11 BEST EFFORTS. DBSD shall use its best efforts to: (i) cause to be
fulfilled and satisfied all of the conditions to the Merger Closing to be
fulfilled and satisfied by it; (ii) cause to be performed all of the matters
required of it at or prior to the Merger Closing; (iii) fully comply with all
General Laws (except to the extent clearly not material to DBSD's Business) and
DBSD Due Diligence; (iv) use its good faith best efforts to obtain approval of
the Merger by DBSD's shareholders and the FCC at the earliest possible date; and
(v) cooperate with EchoStar, in all reasonable respects in order to comply in
full with the spirit and intent of this Agreement. DBSD shall further take all
steps as shall be necessary to the end that the transactions contemplated hereby
shall be timely consummated; shall not commit or cause to be committed any act
which would prohibit the consummation of the transactions contemplated by this
Agreement; and shall not refrain or cause any Affiliate to refrain from taking
any action necessary or appropriate in furtherance of the consummation of the
transactions contemplated by this Agreement. DBSD shall use its best efforts to
make all of its warranties and representations contained in this Agreement true
and correct in all material respects as at the Merger Closing, with the same
effect as if the same had been made and this Agreement had been dated as at the
Merger Closing.
6.12 REGISTRATION STATEMENT, PROXY STATEMENT AND PROSPECTUS.
6.12.1 EchoStar and DBSD shall prepare, and EchoStar file with the
SEC as soon as is reasonably practicable after the date hereof a Form S-4
registration statement (the "S-4 Registration Statement") and a Proxy Statement
and Prospectus and shall use their best efforts to have the S-4 Registration
Statement declared effective by the Commission as promptly as practicable. The
S-4 Registration Statement shall provide for the registration under the
Securities Act of that number of EchoStar Shares which is sufficient to satisfy
EchoStar's obligations to issue EchoStar Shares in the Merger. EchoStar and DBSD
shall also take any action required to be taken under applicable law in
connection with the consummation of the transactions contemplated by this
Agreement, including, without limitation, in the case of EchoStar, all filings
under applicable state blue sky or securities laws in connection with the
issuance of the EchoStar Shares. EchoStar and DBSD shall promptly furnish to
each other all information, and take such other actions, as may reasonably be
requested in connection with any action by either of them in connection with the
provisions of this Section. DBSD and EchoStar shall cooperate in the preparation
and filing of the S-4 Registration Statement, Proxy Statement and Prospectus and
all information furnished for use therein by either party shall be reasonably
satisfactory to the other; PROVIDED, HOWEVER, that neither party shall have any
liability to the other or to any third party for any information contained
therein which is furnished by the other party. The information provided and to
be provided by DBSD and EchoStar, respectively, for use in the
16
Proxy Statement and Prospectus shall be true and correct in all material
respects and shall not omit to state any material fact necessary in order to
make such information and the Proxy Statement and Prospectus not misleading as
of the date of the Proxy Statement and Prospectus.
6.12.2 Prior to the date of approval of the Merger by DBSD's
shareholders, each of DBSD and EchoStar shall correct promptly any information
provided by it to be used specifically in the Proxy Statement, Prospectus and
S-4 Registration Statement that shall have become false or misleading in any
material respect and EchoStar shall take all steps necessary to file with the
SEC and have declared effective or cleared by the SEC any amendment or
supplement to the Prospectus or the S-4 Registration Statement and together with
DBSD to cause the Prospectus as so corrected to be disseminated to the
shareholders of DBSD, in each case to the extent required by applicable law.
Without limiting the generality of the foregoing, EchoStar shall notify DBSD
promptly of the receipt of the comments of the SEC and of any request by the SEC
for amendments or supplements to the Prospectus and S-4 Registration Statement,
or for additional information, and EchoStar shall supply DBSD with copies of all
correspondence between EchoStar on the one hand, and the SEC on the other hand,
with respect to the Prospectus and S-4 Registration Statement. If at any time
prior to the DBSD shareholder meeting any event should occur relating to DBSD or
EchoStar or their respective officers or directors which should be described in
an amendment or supplement to the Prospectus and S-4 Registration Statement, the
parties shall promptly inform each other. Whenever any event occurs which should
be described in an amendment or a supplement to the Proxy Statement, Prospectus
or S-4 Registration Statement, DBSD and EchoStar shall, upon learning of such
event, cooperate in promptly preparing, filing and clearing with the SEC and
mailing to DBSD's shareholders such amendment or supplement; PROVIDED, HOWEVER,
that prior to such mailing (i) DBSD and EchoStar shall consult with each other
with respect to such amendment or supplement, (ii) shall afford each other
reasonable opportunity to comment thereon and (iii) each such amendment or
supplement shall be reasonably satisfactory to the other.
ARTICLE VII
COVENANT OF ECHOSTAR
7.1 BEST EFFORTS. EchoStar shall: (i) cause to be fulfilled and satisfied
all of the conditions to the Merger Closing to be fulfilled and satisfied by it;
(ii) cause to be performed all of the matters required of it at or prior to the
Merger Closing; (iii) cooperate with DBSD in order to obtain FCC Approval at the
earliest possible date; and (iv) cooperate with DBSD in all reasonable respects
in order to comply in full with the spirit and intent of this Agreement.
EchoStar shall further take all steps as shall be necessary to the end that the
Merger and the transactions contemplated hereby shall be timely consummated;
shall not commit or cause to be committed any act which would prohibit the
consummation of the transactions contemplated by this Agreement (other than
pursuing actions at the FCC with respect to applicants other than DBSD); and
shall not refrain or cause any Subsidiary to refrain from taking any action
necessary or appropriate in furtherance of the consummation of the transactions
contemplated by this Agreement. Nothing herein or anywhere else in this
Agreement shall be construed as obligating EchoStar to provide any additional
funds or guarantees to DBSD or otherwise to finance DBSD's business. EchoStar
shall use its best efforts to make all of its warranties and representations
contained in this Agreement which are expressly deemed made as of the Effective
Time of the Merger, true and correct in all material respects as at the Merger
Closing, with the same effect as if the same had been made and this Agreement
had been dated as at the Merger Closing.
7.2 CONSENTS, APPROVALS AND FILINGS. EchoStar shall use its best efforts
to obtain as promptly as possible all necessary approvals, authorizations,
consents, licenses, clearances or orders of governmental and regulatory
authorities required in order for EchoStar to perform its obligations hereunder.
17
7.3 ADVICE OF CHANGES. EchoStar shall promptly advise DBSD orally and in
writing of: (i) any event occurring subsequent to the date of this Agreement
which would render any representation or warranty of EchoStar contained in this
Agreement, which representation or warranty is expressly deemed made as of the
Effective Time of the Merger, if made on or as of the date of such event or the
Merger Closing Date, untrue, inaccurate or incomplete in any material respect;
and (ii) any default under the Indenture which Entitles Acceleration or a Deemed
Acceleration.
7.4 RESTRICTED ACTIVITIES AND TRANSACTIONS. Prior to the Merger Closing,
EchoStar shall not take any action or fail to take any action that: (i) will
prevent any of its warranties and representations herein from being true in all
material respects as of the Merger Closing; (ii) will jeopardize the performance
or fulfillment of any of its obligations or commitments under this Agreement; or
(iii) could reasonably be expected to have a material adverse effect on any of
the benefits DBSD may derive from the transactions contemplated by this
Agreement following the Merger Closing (other than pursuing actions at the FCC
with respect to applicants other than DBSD).
7.5 NEGOTIATIONS WITH DBSD SHAREHOLDERS. Until such time as the Merger is
approved by DBSD's shareholders, EchoStar shall not, and shall cause its
officers, directors, employees, representatives and agents not to, directly or
indirectly, negotiate with any shareholder of DBSD to purchase their DBSD
Shares, provided, however, nothing contained in this Section 7.5 or elsewhere in
this Agreement shall prohibit EchoStar from accepting a pledge of DBSD Shares
from any DBSD shareholder as security for the repayment of obligations of such
shareholder to EchoStar, provided that such pledge: (i) shall not limit the
ability of such shareholder to vote their DBSD Shares without influence by
EchoStar, unless and until an event of default occurs, and then only provided
that any required FCC notifications and approvals have been obtained; and (ii)
shall not occur until after the Merger Trigger Date. Any transfer of DBSD Shares
following an event of default shall not be recognized as effective by DBSD
unless and until any required FCC notifications and approvals have been
obtained.
7.6 ACCESS TO RECORDS AND PROPERTIES.
7.6.1 DBSD may, prior to the Effective Time of the Merger, through
its employees, agents and representatives, make or cause to be made a detailed
review of the business and financial condition of EchoStar and make or cause to
be made such investigation as it deems necessary or advisable of the properties,
assets, businesses, books and records of EchoStar, in order to aid in the
preparation of materials for distribution to its shareholders to seek approval
of the Merger. EchoStar agrees to reasonably assist DBSD in conducting such
review and investigation and will provide and will cause its independent public
accountants to provide, DBSD and its employees, agents and representatives
reasonable access during regular business hours, in a manner that does not
unreasonably interfere with the operation of the business of EchoStar, to, and
complete information concerning, all aspects of the business of EchoStar,
including its books, records (including tax returns filed or in preparation),
projections, personnel and premises, the audit work papers and other records of
its independent public accountants and any documents (excluding any documents
filed on a confidential basis) included in any report filed with a governmental
agency.
7.6.2 All materials provided to DBSD pursuant to Subsection 7.6.1
hereof shall be used by DBSD solely in connection with its due diligence
examination of EchoStar and the preparation of materials necessary or required
to seek shareholder approval of the Merger; provided, however, unless such
materials or the contents thereof have been publicly disclosed to the SEC under
the Securities Act or the Securities Exchange Act, such materials or the
contents thereof shall not be disclosed to such shareholders in connection with
a proxy solicitation or otherwise. Without limiting the generality of the
foregoing, and notwithstanding any prior public disclosure with the SEC or
otherwise, DBSD shall not provide to its shareholders, or any Person, any
projections obtained from EchoStar, or materials based on projections obtained
from EchoStar. The restrictions and prohibitions contained in this Subsection
7.6.2 are in addition to any confidentially agreements between the parties,
whether contained in this Agreement or otherwise.
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7.7 REGISTRATION STATEMENT, PROXY STATEMENT AND JOINT PROSPECTUS.
7.7.1 EchoStar and DBSD shall prepare, and EchoStar shall file with
the SEC as soon as is reasonably practicable after the date hereof the S-4
Registration Statement and a Proxy Statement and Prospectus and shall use their
best efforts to have the S-4 Registration Statement declared effective by the
Commission as promptly as practicable. The S-4 Registration Statement shall
provide for the registration under the Securities Act of that number of EchoStar
Shares which is sufficient to satisfy EchoStar's obligations to issue EchoStar
Shares in the Merger. EchoStar and DBSD shall also take any action required to
be taken under applicable law in connection with the consummation of the
transactions contemplated by this Agreement, including, without limitation, in
the case of EchoStar all filings under applicable state blue sky or securities
laws in connection with the issuance of the EchoStar Shares. EchoStar and DBSD
shall promptly furnish to each other all information, and take such other
actions, as may reasonably be requested in connection with any action by either
of them in connection with the provisions of this Section. DBSD and EchoStar
shall cooperate in the preparation and filing of the S-4 Registration Statement,
Proxy Statement and Prospectus and all information furnished for use therein by
either party shall be reasonably satisfactory to the other; PROVIDED, HOWEVER,
that neither party shall have any liability to the other or to any third party
for any information contained therein which is furnished by the other party. The
information provided and to be provided by DBSD and EchoStar, respectively, for
use in the Proxy Statement and Prospectus shall be true and correct in all
material respects and shall not omit to state any material fact necessary in
order to make such information and the Proxy Statement and Prospectus not
misleading as of the date of the Proxy Statement and Prospectus.
7.7.2 Prior to the date of approval of the Merger by DBSD's
shareholders, each of DBSD and EchoStar shall correct promptly any information
provided by it to be used specifically in the Proxy Statement, Prospectus and
S-4 Registration Statement that shall have become false or misleading in any
material respect and EchoStar shall take all steps necessary to file with the
SEC and have declared effective or cleared by the SEC any amendment or
supplement to the Prospectus or the S-4 Registration Statement and together with
DBSD to cause the Prospectus as so corrected to be disseminated to the
shareholders of DBSD, in each case to the extent required by applicable law.
Without limiting the generality of the foregoing, EchoStar shall notify DBSD
promptly of the receipt of the comments of the SEC and of any request by the SEC
for amendments or supplements to the Prospectus and S-4 Registration Statement,
or for additional information, and EchoStar shall supply DBSD with copies of all
correspondence between EchoStar on the one hand, and the SEC on the other hand,
with respect to the Prospectus and S-4 Registration Statement. If at any time
prior to the DBSD shareholder meeting any event should occur relating to DBSD or
EchoStar or their respective officers or directors which should be described in
an amendment or supplement to the Prospectus and S-4 Registration Statement, the
parties shall promptly inform each other. Whenever any event occurs which should
be described in an amendment or a supplement to the Proxy Statement, Prospectus
or S-4 Registration Statement, DBSD and EchoStar shall, upon learning of such
event, cooperate in promptly preparing, filing and clearing with the SEC and
mailing to DBSD's shareholders such amendment or supplement; PROVIDED, HOWEVER,
that, prior to such mailing, (i) DBSD and EchoStar shall consult with each other
with respect to such amendment or supplement, (ii) shall afford each other
reasonable opportunity to comment thereon and (iii) each such amendment or
supplement shall be reasonably satisfactory to the other.
7.8 REPORTS. Subsequent to consummation of the Merger, EchoStar shall
provide to the former DBSD shareholders such periodic reports as it furnishes to
the other shareholders of EchoStar generally, for as long as they remain
EchoStar shareholders.
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ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS
OF ECHOSTAR AND DBSC
The obligations of EchoStar and DBSC under this Agreement to consummate the
Merger shall be subject to the satisfaction, or to the waiver by them in the
manner contemplated by Section 12.2 hereof, on or before the Merger Closing
Date, of the following conditions:
8.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of DBSD contained in this Agreement, and of DBSD and Radin contained
in Section 4.3 of the Stock Purchase Agreement between EchoStar, DBSD and Radin
dated November 15, 1994 (the "Purchase Agreement"), shall be in all material
respects true and accurate as of the date when made and, except as to
representations and warranties (consisting solely of representations and
warranties regarding the DBSD Financial Statements and as to Additional Equity
Rights), which are expressly limited to a state of facts existing at a time
prior to the Merger Date, shall be in all material respects true and accurate at
and as of the Merger Closing Date as if made on the Merger Closing Date.
8.2 PERFORMANCE OF COVENANTS. DBSD shall have performed and complied in
all material respects with each and every covenant, agreement and condition
required by this Agreement to be performed or complied with by it prior to or on
the Merger Closing Date.
8.3 NO GOVERNMENTAL OR OTHER PROCEEDING OR LITIGATION.
8.3.1. No order of any court or administrative agency shall be in
effect which restrains or prohibits any transaction contemplated hereby or which
would limit or materially adversely affect EchoStar's ownership of DBSD; no
suit, action, investigation, inquiry or proceeding by any governmental body or
other Person or entity shall be pending or threatened against EchoStar, DBSC or
DBSD which challenges the validity or legality, or seeks to restrain the
consummation, of the transactions contemplated hereby or which seeks to limit or
otherwise materially adversely affect EchoStar's ownership of DBSD; and no
written advice shall have been received by EchoStar, DBSC, DBSD or their
respective counsel from any governmental body, which remains in effect, stating
that an action or proceeding will, if the Merger is consummated or sought to be
consummated, be filed seeking to invalidate or restrain the Merger or limit or
otherwise affect EchoStar's ownership of DBSD as contemplated by this Agreement.
8.3.2 In addition to the conditions to the Merger Closing set forth
in Subsection 8.3.1 hereof, EchoStar shall have received no oral or written
notice from the FCC that consummation of the transactions contemplated hereby
could reasonably be expected to result in a loss of any of EchoStar's DBS
licenses or rights, or the DBS Rights (an "Adverse Notice"); provided, however,
that in the event that any such Adverse Notice by the FCC is orally provided to
EchoStar the condition to the Merger Closing set forth in this Subsection 8.3.2
shall not be satisfied until the FCC confirms the Adverse Notice to counsel to
DBSD.
8.4 APPROVALS AND CONSENTS.
8.4.1 The transfer of control of DBSD, resulting from the
transactions contemplated by this Agreement, shall have received the approval
and consent of the FCC as required by applicable rules and regulations of the
FCC ("FCC Approval") in a "Final Order". For the purposes of this Agreement,
"Final Order" means an action or decision as to which: (i) no request for a stay
is pending, no stay is in effect, and any deadline for filing such request that
may be designated by statute or regulation has passed; (ii) no petition for
rehearing or reconsideration or application for review is pending and the time
for the filing of any such petition or application has passed; (iii) the FCC or
other
20
regulatory agency does not have the action or decision under reconsideration on
its own motion and the time within which it may effect such reconsideration has
passed; and (iv) no appeal is pending or in effect and any deadline for filing
any such appeal that may be designated by statute or rule has passed.
8.4.2 The approval of shareholders of DBSD to the Merger, and all
approvals of applications to public authorities, Federal, state, or local, if
any, and all consents or approvals of any nongovernmental Persons, the granting
of which is necessary for the consummation of the Merger or for preventing the
termination or material breach of any right, privilege, license or agreement of
EchoStar of DBSD which is material to the business of EchoStar or DBSD, or for
preventing any material loss or disadvantage to EchoStar or DBSD, by reason of
the Merger, shall have been obtained; and no such consents or approvals shall
have imposed a condition to such consent or approval which in the reasonable
opinion of EchoStar is unduly burdensome to the consolidated financial condition
or operations of EchoStar or to DBSD's business.
8.5 OPINIONS OF COUNSEL. EchoStar shall have received an opinion of
Sullivan & Worcester, counsel to DBSD, dated the Merger Closing Date and
addressed to EchoStar, in substantially the form and substance set forth in
Schedule 8.5 attached hereto.
8.6 CERTIFICATES. DBSD shall have furnished EchoStar with a certificate of
DBSD in form and substance satisfactory to EchoStar, signed by DBSD's President,
to the effect that DBSD's representations and warranties contained in this
Agreement are true and correct in all material respects on and as of the Merger
Closing Date as though such representations and warranties were made at such
time (except as contemplated in Section 8.1 hereof) and that DBSD has performed
and complied in all material respects with all terms, covenants and provisions
of this Agreement required to be performed or complied with or by it prior to or
on the Merger Closing Date.
8.7 RESIGNATIONS. DBSD shall have received resignations (in form and
substance satisfactory to EchoStar) for each of its directors and officers, in
each case effective as of the Effective Time of the Merger.
8.8 ADVERSE CHANGES. DBSD shall have experienced no material adverse
change in its business, business prospects or financial condition between the
date of this Agreement and the consummation of the Merger other than such change
as is unrelated to events arising prior to the Merger Trigger Date, and: (i) is
the direct or indirect result of action within the control of DBSD which DBSD
takes or fails to take; and (ii) is contrary to a reasonable alternative course
of action which, following reasonable prior written notice of the change,
EchoStar suggested that DBSD pursue.
8.9 DBS RIGHTS. The DBS Rights shall continue to be held by DBSD free and
clear of any Challenges, mortgages, pledges, leases, or other encumbrances,
absolute or contingent which could limit in any way the uses which EchoStar can
make of the DBS Rights (other than those limitations imposed by the FCC on all
DBS licensees), except as limited by Section 8.8 above.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF DBSD
The obligations of DBSD under this Agreement to consummate the Merger shall
be subject to the satisfaction, or to the waiver by it in the manner
contemplated by Section 12.2 hereof, on or before the Merger Closing Date of the
following conditions:
9.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of EchoStar contained in this Agreement shall be in all material
respects true and accurate as of the date when made, and the representations and
warranties which are expressly deemed made as of the Effective Time of the
Merger shall be in all material respects true and accurate at and as of the
Merger Closing Date as if made on the Merger Closing Date.
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9.2 PERFORMANCE OF COVENANTS. EchoStar and DBSC shall have performed and
complied in all material respects with each and every covenant, agreement and
condition required by this Agreement to be performed or complied with or by it
prior to or on the Merger Closing Date.
9.3 NO GOVERNMENTAL OR OTHER PROCEEDING OR LITIGATION. No order of any
court or administrative agency shall be in effect which restrains or prohibits
any transaction contemplated hereby.
9.4 APPROVALS AND CONSENTS. The approval of the shareholders of DBSD to
the Merger.
9.5 OPINION OF COUNSEL. DBSD shall have received an opinion of David K.
Moskowitz, Esquire, counsel for EchoStar, dated the Merger Closing Date and
addressed to DBSD, in the form and substance set forth in Schedule 9.5 attached
hereto.
9.6 CERTIFICATES. EchoStar shall have furnished DBSD with a certificate of
EchoStar in form and substance satisfactory to DBSD, signed by its President or
Executive Vice President, to the effect that the representations and warranties
contained in this Agreement are true and correct in all material respects on and
as of the Merger Closing Date as though such representations and warranties were
made at such time and that it has performed and complied in all material
respects with all terms, covenants and provisions of this Agreement required to
be performed or complied with by it prior to or on the Merger Closing Date.
ARTICLE X
CLOSING; CLOSING DATE
Unless this Agreement shall have been terminated and the Merger shall have
been abandoned pursuant to a provisions of Article XI hereof, a closing (the
"Merger Closing") will be held on a date mutually acceptable to EchoStar and
DBSD as soon as practicable after the Effective Time of the Merger, at the
offices of EchoStar Communications Corporation commencing at 10:00 a.m. At such
time and place, the documents referred to in Articles VIII and IX hereof shall
be exchanged by the parties and, immediately thereafter, the Certificate of
Merger and the Articles of Merger shall be filed by DBSC and DBSD with the
Secretaries of State of the States of Delaware and Colorado; provided, however,
that if any of the conditions provided for in Articles VIII and IX hereof shall
not have been met or waived by the date on which the Merger Closing is otherwise
scheduled, then, subject to Section 11.1.3 hereof, the party to this Agreement
which is unable to meet such condition or conditions shall be entitled (provided
that such party is acting in good faith) to postpone the Merger Closing for a
reasonable period of time by notice to the other parties until such condition or
conditions shall have been met (which such notifying party will seek to cause to
happen at the earliest practicable date) or waived. The date on which the Merger
Closing occurs is hereinafter referred to as the "Merger Closing Date."
ARTICLE XI
TERMINATION
11.1 TERMINATION AND ABANDONMENT. This Agreement may be terminated and the
Merger may be abandoned before the Effective Time of the Merger, notwithstanding
any approval and adoption of this Agreement by the Board of Directors or
shareholders of DBSD, EchoStar or DBSC:
11.1.1 by the mutual consent of the Boards of Directors of EchoStar,
DBSC and DBSD; or
11.1.2 by EchoStar or DBSC if there has been a material
misrepresentation or material breach on the part of DBSD in the representations,
warranties or covenants of DBSD set forth herein or in the Purchase Agreement,
or if there has been any material failure on the part of DBSD to comply with its
obligations hereunder or in the Purchase Agreement, or by DBSD if there has been
a material misrepresentation or material breach on the part of EchoStar or DBSC
in the representations, warranties or covenants of EchoStar or DBSC set forth
herein or in the Purchase Agreement, or if
22
there has been any material failure on the part of EchoStar or DBSC to comply
with their obligations hereunder or in the Purchase Agreement; in either event
only if the other party does not materially cure such breach within five (5)
business days following written notice from the non-breaching party.
11.1.3 by EchoStar if the FCC notifies EchoStar at any time that
consummation of the transactions contemplated hereby could reasonably be
expected to result in loss of any of EchoStar's DBS licenses or rights, or the
DBS Rights. In the event that any such notification is provided orally, Echostar
shall only be permitted to rely on this provision to terminate if the FCC
confirms those comments to counsel for DBSD.
11.1.4 by EchoStar if all the conditions set forth in Article VIII,
or by DBSD if all of the conditions set forth in Article IX, are not satisfied
by December 31, 1997.
11.1.5 by EchoStar as provided in Section 2.4 herein.
11.2 TERMINATION PROCEDURES. The power of termination provided for by this
Article XI may be exercised for EchoStar, DBSC or DBSD only by its respective
Board of Directors and will be effective only after written notice thereof,
signed on behalf of the party for which it is given by its President or other
duly authorized officer, shall have been given to the other.
11.3 EFFECT OF TERMINATION. If this Agreement is terminated in accordance
with this Article XI then the Merger shall be abandoned without further action
by DBSD, EchoStar or DBSC, and their officers shall not file the Certificate of
Merger or the Articles of Merger with the Secretaries of State of the states of
Delaware and Colorado. Nothing in this Article XI shall relieve any party to
this Agreement of liability for breach of this Agreement.
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.1 AMENDMENT AND MODIFICATION.
12.1.1 To the fullest extent permitted by applicable law, this
Agreement may be amended, modified and supplemented with respect to any of the
terms contained herein by mutual consent of DBSD and EchoStar, and the
respective Boards of Directors of EchoStar and DBSD, or by their respective
officers duly authorized by such Board of Directors, by an appropriate written
instrument executed at any time prior to the Merger Closing.
12.1.2 In the event that the inclusion herein of any provision of
this Agreement would cause EchoStar or DBSD to be in violation of any FCC rule
or regulation, or any other applicable law, or would cause a loss of, or
materially adversely affect EchoStar's DBS licenses or rights, or the DBS
Rights, those provisions shall be deemed automatically rewritten, without any
further action by the parties hereto, to the minimum extent required in order to
permit their intent to be carried out as best as is possible without so
violating FCC rules or regulations or causing the loss or material adverse
affect. The parties agree to promptly use their best efforts to reflect in
writing any modification or amendment to this Agreement that may be required in
order to carry out the intentions of this Subsection 12.1.2.
12.2 WAIVER OF COMPLIANCE. To the fullest extent permitted by law, each of
EchoStar, DBSC and DBSD may, pursuant to action by its respective Board of
Directors, or its respective officers duly authorized by its Board of Directors,
by an instrument in writing extend the time for or waive the performance of any
of the obligations of the other or waive compliance by the other with any of the
covenants, or waive any of the conditions of its obligations, contained herein.
No such extension of time or waiver shall operate as a waiver of, or estoppel
with respect to, any subsequent failure to comply with any of the covenants in
this Agreement.
12.3 ENFORCEMENT REMEDIES. If a party (the "Defaulting Party") materially
breaches any obligation or covenant made in this Agreement, or fails to fulfill
any condition, or if any representation or
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warranty made by or on behalf of the Defaulting Party in this Agreement or in
any certificate or other instrument delivered under or pursuant to any term
hereof shall be untrue or incorrect in any material respect as of the date of
this Agreement or as of the date it was made, furnished or delivered, the
nondefaulting party (the "Nondefaulting Party") may proceed to protect and
enforce its rights by suit in equity or action at law. The parties acknowledge
that the representations, covenants, agreements and obligations hereunder are
unique and that, in the event of breach of such, remedies at law would be
inadequate, it would be difficult to determine the amount of damages resulting
therefrom, and such breach would cause irreparable injury to the Nondefaulting
Party. The Nondefaulting Party shall be entitled, in addition to any other legal
or equitable right, to the remedy of specific performance of any term contained
in this Agreement, or to a preliminary or permanent injunction against the
breach of any such term or in aid of the exercise of any power or right granted
in this Agreement, or any combination thereof. Except as provided above, none of
the rights, powers or remedies conferred herein shall be mutually exclusive, and
each such right, power or remedy shall be cumulative and in addition to every
other right, power or remedy, whether conferred hereby or hereafter available at
law, in equity, by statute or otherwise.
12.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations and warranties of each party hereto contained herein shall not
be deemed to be waived or otherwise affected by any investigation made by the
other parties hereto. The representation and warranty of EchoStar that the
information contained in its S-4 registration statement to be filed with the SEC
in connection with the Merger complied with all SEC rules when declared
effective, shall survive the Merger Closing.
12.5 NO THIRD PARTY RIGHTS. Except as otherwise provided in this
Agreement, nothing herein expressed or implied is intended, nor shall they be
construed, to confer upon or give any Person, firm or corporation (other than
EchoStar, DBSC and DBSD, and their respective security holders), any rights or
remedies under or by reason of this Agreement.
12.6 CONFIDENTIALITY. EchoStar and DBSD shall honor the confidentiality
agreements previously delivered by each such party to the other with respect to
matters pertaining to the transactions contemplated by this Agreement. In
addition to the terms of such agreements, this Agreement, the negotiations
leading to it, together with all terms and conditions of each, and all
information disclosed in the course of either party's due diligence
investigation (collectively, the "Negotiations"), shall be kept and treated as
strictly confidential, unless and until one week prior to the date that the
parties intend to file for FCC Approval of the Merger, or the parties sooner
agree that confidentially is no longer desired with respect to all or certain
portions of the Negotiations. Notwithstanding anything above to the contrary,
the parties shall have the right to disclose the fact of the existence of this
Agreement and the transactions contemplated hereby, together with the minimum
amount of other information deemed necessary by securities or other regulatory
counsel to either party, if such securities or other regulatory counsel in good
faith determines that public disclosure of the information is necessary under
Federal or state securities or other laws applicable to such party. Disclosure
of such information shall be coordinated in advance with the other party. Any
such disclosure shall not permit the disclosing party to issue any press release
or otherwise discuss or further disseminate the information contained in the
securities or other regulatory filing in any manner. Additionally, EchoStar
shall be permitted to disclose the Negotiations to DirectSat, Donaldson, Lufkin
& Jenrette Securities Corporation ("DLJ") and to potential strategic investors
in EchoStar, provided that DirectSat, DLJ and such other investors agree to
maintain the confidentiality of the Negotiations pursuant to a standard
confidentiality agreement.
12.7 EXPENSES. Each party hereto shall bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby and
thereby.
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12.8 NOTICES. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand or when mailed by registered or certified
mail, postage paid, or when given by telex or facsimile transmission (promptly
confirmed in writing), as follows:
(a) If to DBSD:
Harley W. Radin, Chairman and Chief Executive Officer
Direct Broadcasting Satellite Corporation
4401-A Connecticut Avenue, N.W., Suite 400
Washington, D.C. 20008
Fax No. (202) 364-2288
with a copy to:
William L. Fishman
Sullivan & Worcester
1025 Connecticut Ave., N.W.
Washington, D.C. 20036
Fax No. (202) 293-2275
or to such other Person as DBSD shall designate in writing, such writing to be
delivered to EchoStar in the manner provided in this Section 12.8; and
(b) if to EchoStar:
Charles Ergen
President and Chief Executive Officer
EchoStar Communications Corporation
90 Inverness Circle East
Englewood, CO 80112
Fax No. 303-799-6222
with a copy to:
David K. Moskowitz, Esquire
Vice President and General Counsel
EchoStar Communications Corporation
90 Inverness Circle East
Englewood, Colorado 80112
Fax No. 303-799-0354
or to such other Person as EchoStar shall designate in writing to be delivered
to DBSD in the manner provided in this Section 12.8.
12.9 ASSIGNMENT. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto without prior written consent of the other parties; provided,
however, that EchoStar or DBSC may assign this Agreement and its rights,
interests and obligations hereunder to a Subsidiary without the consent of DBSD
provided that EchoStar remains liable for each of its assigned obligations
hereunder in the event such assignee fails to perform such obligations.
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12.10. GOVERNING LAWS AND EXCLUSIVE JURISDICTION.
12.10.1 This Agreement and the legal relations between the parties
hereto, including all disputes and claims, whether arising in contract, tort or
under statute, shall be governed by and construed in accordance with the laws of
the State of Colorado without giving effect to its conflict of law provisions.
12.10.2 Any and all disputes arising out of or in connection with the
interpretation, performance or the nonperformance of this Agreement or any and
all disputes arising out of or in connection with transaction in any way related
to this Agreement and/or the relationship between the parties shall be litigated
solely and exclusively before the United States District Court for the District
of Colorado. The parties consent to the in personam jurisdiction of such court
for the purposes of any such litigation, and waive, fully and completely, any
right to dismiss and/or transfer any action pursuant to 28 U.S.C. Section 1404
or 1406 (or any successor statute). In the event the United States District
Court for the District of Colorado does not have subject matter jurisdiction of
such matter, then such matter shall be litigated solely and exclusively before
the appropriate state court of competent jurisdiction located in Arapahoe
County, State of Colorado.
12.11 COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts and by the different parties hereto on separate
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.12 HEADINGS AND REFERENCES. The headings of the Sections, Subsections
and Articles of this Agreement are inserted for convenience of reference only
and shall not constitute a part hereof. All references herein to Sections,
Subsection and Articles are to Sections, Subsections and Articles of this
Agreement, unless otherwise indicated.
12.13 ENTIRE AGREEMENT. This Agreement (including the exhibits hereto and
thereto and the documents referred to herein and therein, all of which form a
part hereof), together with the confidentiality agreements delivered by EchoStar
and DBSD to each other, contain the entire understanding of the parties hereto
and thereto in respect of the subject matter contained herein and therein and
supersede all prior agreements and understandings between the parties with
respect to such subject matter. There are no restrictions, promises,
representations, warranties, covenants or undertakings, other than those
expressly set forth or referred to herein or therein.
12.14 FURTHER ASSURANCES. Each party shall, at and from time to time after
the Merger Trigger Date, upon request of the other party, and without any
further consideration, execute and deliver any additional instruments or
documents to such party as that party may reasonably request, and take such
other actions as may be reasonably requested from time to time by the other
party hereto, as is necessary in order to carry out, evidence and confirm the
intent of the parties in connection with the transactions contemplated by this
Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date and year first written above.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ CHARLIE ERGEN
-----------------------------------
Charlie Ergen, President
DIRECT BROADCASTING SATELLITE
CORPORATION
By: /s/ HARLEY RADIN
-----------------------------------
Harley Radin, Chairman
DIRECT BROADCASTING SATELLITE
CORPORATION
By: /s/ CHARLIE ERGEN
-----------------------------------
Charlie Ergen, President
27
MERGER TRIGGER AGREEMENT
EchoStar Communications Corporation, a Nevada corporation formed in 1995
("EchoStar"), Direct Broadcasting Satellite Corporation, a Colorado corporation
("DBSC") and Direct Broadcasting Satellite Corporation, a Delaware corporation
("DBSD"), in consideration of the benefit which will accrue to each as a result
of the matters described below, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby mutually acknowledged, enter
into this Merger Trigger Agreement (the "Agreement") as of the 21st day of
December, 1995, and agree as follows:
1. DBSD hereby provides notice to EchoStar of its exercise, and EchoStar
hereby provides notice to DBSD of its exercise, effective immediately, of their
respective rights to require a merger agreement to be signed among EchoStar,
DBSC and DBSD (the "Merger Agreement" and the "Merger")).
2. EchoStar, DBSC and DBSD (together, the "Parties") agree that the Merger
Agreement, in the form attached as Exhibit A hereto, shall be entered into by
all of them contemporaneous with execution of this Agreement.
3. The Parties hereby irrevocable agree to consummate the Merger without
preconditions, except as specifically set forth below. Further, the Parties
hereby irrevocably waive any right they have had, may now have, or which might
at any time in the future otherwise be available to them, to terminate or refuse
to complete the Merger, whether: a) based upon covenants or conditions to be
fulfilled by the other Party, as set forth in the Merger Agreement; or b) events
which must occur (or not occur) prior to the Merger, as set forth in the Merger
Agreement; or c) based on any other legal, contractual or common law theory,
other than the condition that: d) the Merger must be approved by the Federal
Communications Commission (the "FCC"); and e) the Merger must be approved by
DBSD shareholders.
Notwithstanding anything set forth above, a Party may refuse to complete the
Merger if the other Party wilfully and in bad faith acts, or fails to act, in a
manner that materially impedes consummation of the Merger in material compliance
with the terms the Parties have agreed upon.
Nothing herein shall be construed as relieving any Party of its good faith
obligations to take actions required of it pursuant to the Merger Agreement, or
as limiting the right of a nondefaulting Party to pursue the remedies of
specific performance and other equitable remedies provided in Section 12.3 of
the Merger Agreement.
4. DBSD acknowledges that contemporaneous with execution of this Agreement
and the Merger Agreement, DBSD shareholders owning greater than 50% of the
outstanding shares of DBSD (including EchoStar), will be executing shareholder
consent minutes in the form attached as Exhibit B to this Agreement in
satisfaction of the condition to the Merger set forth in Paragraph 3 e) above,
and ratifying this Agreement and any transactions or agreements entered into
pursuant to this Agreement. DBSD acknowledges and affirms the effectiveness of
those minutes to achieve the intended result.
5. The Parties agree to enter into the Note Purchase Agreement and the
Security Agreement, and DBSD agrees to execute the Direct Broadcasting Satellite
Corporation Promissory Note (the "DBSD Note"), all in the forms attached as
Exhibits C, D and E, respectively, with such reasonable changes as the Parties
mutually agree upon.
6. The Parties agree that in the event the Merger is not completed for any
reason, it is the intent of the Parties to structure a transaction or series of
transactions which will have the effect of providing to DBSD's existing
shareholders as of the date of this Agreement (the "Existing Shareholders"), as
nearly as is possible, the cash amount or number of shares of EchoStar Class A
Common Stock they would have received if the Merger had been completed, and that
it is further the intent of the Parties, in those circumstances, to structure a
transaction or series of transactions which will have the effect of providing to
EchoStar, as nearly as is possible, the benefits which would have accrued to
EchoStar had
1
the Merger been completed, for, as nearly as is possible, the cash amount or
number of shares of EchoStar Class A Common Stock EchoStar would have provided
to the Existing Shareholders had the Merger been completed (the "Intent", and
the "Intent Consideration"). The Parties intend that the Intent Consideration
would be paid in full as soon as the Intent has been accomplished.
Notwithstanding anything in this Agreement which might otherwise be construed to
the contrary, in no event shall EchoStar be obligated to pay both the Intent
Consideration and the Non-Duplication Payment (as defined below), and payment by
EchoStar of either shall extinguish any obligation to pay the other at any time
in the future, but shall not extinguish the obligation of DBSD to fulfill the
Intent, or to abide by the Non-Duplication Agreement.
In structuring the transaction or series of transactions, the Parties agree
to attempt to provide tax-free treatment under the Internal Revenue Code,
provided that such structuring does not have the effect of decreasing any of the
full rights or benefits, or increasing any of the obligations, that EchoStar or
DBSC expect to obtain as a result of the Merger.
In the event either Party reasonably determines that the Merger is unlikely
to be completed, the Parties agree to negotiate in good faith, and use their
best efforts to effectuate the Intent. If at any time the Parties are unable to
agree on the best method to effectuate the Intent, the parties hereby commit to
submit any dispute to mandatory fast track binding arbitration in accordance
with the procedures set forth below.
7. In order to fulfill the Intent, the Parties agree that in addition to
any other actions which the Parties may take, that EchoStar shall have the
right, at any time and from time to time, to convert the DBSD Note, and any
other Notes issued to EchoStar or its affiliates pursuant to the Note Purchase
Agreement, to a pay out for perpetuity of profits of DBSD (and a participation
in any distributions to shareholders, spinoffs or similar transactions). The pay
out will be a percentage of the total profits -- paid quarterly within thirty
(30) days of the end of each calendar quarter (or distribution -- paid when
distributed to shareholders) of DBSD at any time, in accordance with the formula
"X/ (X+$12,945,104)", where "X" is equal to the aggregate amount, including
accrued but unpaid interest, due to EchoStar under the Notes at the time of
conversion (the "Profit Pay Out Percentage"). The Profit Pay Out Percentage
shall be in addition to EchoStar's equity ownership interest in DBSD.
Notwithstanding the above, EchoStar shall not have any right to a Profit Pay Out
Percentage unless and until either the Intent Consideration or the
Non-Duplication Payment has been paid.
8. In the event the Merger is not consummated for any reason, the parties
irrevocably commit to enter into a Capacity Lease Agreement (the "CPA"). The
Parties shall cooperate in good faith and use their best efforts to agree upon
provisions which so far as is reasonably possible give EchoStar the full and
unfettered use of DBSD's spacecraft, including its communications capacity,
TT&C, uplink arrangements and auxiliary or related functions or activities
subject only to the limitation that: a) the terms of the CLA must not be
inconsistent with the full exercise by DBSD of its obligations as an FCC
licensee; b) the terms of the CLA must not interfere with DBSD's right to
control the satellite for technical purposes as required by FCC regulations; and
c) the terms of the CLA must not be inconsistent with the Communications Act of
1934, as amended. The Parties agree that the amount EchoStar shall be obligated
to pay for the capacity, shall be payable in full upon final FCC approval of the
CLA, and shall be the Intent Consideration.
In negotiation of the CLA, which shall commence promptly following execution
of this Agreement, the Parties shall negotiate in good faith, and use their best
efforts to effectuate the intent of the Parties, as described above. If at any
time the Parties are unable to agree on a method to effectuate the intent of the
Parties, the Parties hereby commit to submit any dispute to mandatory fast track
binding arbitration in accordance with the procedures set forth below.
In the event that the FCC rejects the CLA, or that EchoStar determines that
the Intent would not be adequately fulfilled by a CLA which would be acceptable
to the FCC, then no CLA shall be implemented.
2
9. DBSD hereby irrevocably commits to utilize EchoStar's DBS operating
system for DBSD's DBS system, including but not limited to utilization of
EchoStar's conditional access and compression system, and EchoStar's uplink
facility (all to be administered through EchoStar), and to purchase from
EchoStar all of its "smart cards" needed to allow customer access to the DBSD
programming. Commencing with the commercial operation of DBSD's first satellite,
DBSD shall pay to EchoStar on a monthly basis, DBSD's pro rata share of the
costs of EchoStar's DBS operating system. The Parties shall enter into an
agreement or agreements as is reasonably requested by any other Party in order
to more fully reflect the terms of this agreement. In the negotiation of those
agreements, the Parties shall negotiate in good faith, and use their best
efforts to effectuate the intent of the Parties, as described above. If at any
time the Parties are unable to agree on a method to effectuate the intent of the
Parties, the Parties hereby commit to submit any dispute to mandatory fast track
binding arbitration in accordance with the procedures set forth below.
10. DBSD hereby irrevocably commits that it will not at anytime, for
perpetuity, carry on any of its DBS satellites any video, audio or data
programming which duplicates any programming carried by EchoStar on any of the
satellites in its DBS system at the time DBSD desires to carry any such
programming (the "Non-Duplication Agreement").
The Non-Duplication Agreement is initially being provided by DBSD in
consideration for the execution by EchoStar of the Note Purchase Agreement. No
additional consideration will be due for continuation of the Non-Duplication
Agreement for perpetuity unless on July 1, 1998: a) approval of the Merger by
the FCC is still pending; or b) the FCC has rejected the Merger and the Intent
has not yet been effectuated, nor the Intent Consideration paid, because FCC
approval is required but that approval has not yet been completed. If either of
the events described in the sentence immediately above exist on July 1, 1998,
then EchoStar shall make an additional one time payment for the continued
applicability, for perpetuity, of the Non-Duplication Agreement. The amount of
the payment shall be equal to the amount of the Intent Consideration (the
"Non-Duplication Payment").
11. In the event any agreement or action of the Parties pursuant to this
Agreement requires FCC approval, and the FCC does not provide that approval, the
Parties agree to restructure the agreement or action to the minimum extent
necessary in order to preserve the transaction, as nearly as is possible, and to
most closely effectuate the Intent and the Intent Consideration, and to
otherwise effectuate the intention of the Parties as expressed in this
Agreement.
12. At the election of any Party, any matter not resolved amicably among the
Parties to the satisfaction of the other Parties, shall be subject to mandatory
binding arbitration, and the other Parties shall submit to arbitration. Within
ten (10) days of receipt of notice from the electing party, each Party shall
select an arbitrator, and within five (5) days thereafter the two (2) selected
arbitrators shall select a third arbitrator. The Parties hereby express their
desire that the arbitration be concluded on an expedited basis. The decision of
a majority of the arbitrators shall be considered the decision of all, except
that if no two can agree, then the decision of the arbitrator chosen by the
other two shall be considered the decision of all. Such arbitration shall
proceed in accordance with the Commercial Arbitration Rules of the American
Arbitration Association then pertaining (the "Rules"), insofar as such Rules are
not inconsistent with the provisions expressly set forth in this Agreement,
unless the parties mutually agree otherwise, and pursuant to the following
procedures: a) the minimum amount of discovery deemed necessary by the
arbitrators shall be allowed in arbitration; b) the costs and fees of the
arbitration, including attorneys' fees, shall be allocated by the arbitrators,
as they deem reasonably appropriate; c) the award rendered by the arbitrators
shall be binding on the Parties, shall be final, and judgment may be entered in
accordance with applicable law and in any court having jurisdiction thereof; d)
the existence and resolution of the arbitration shall be kept confidential by
the Parties in the same manner as confidential information is required to be
kept under Paragraph 13 below, and shall also be kept confidential by the
arbitrators.
13. This Agreement, the negotiations leading to it, and the fact of the
Agreement, together with all terms and conditions of each (collectively the
"Negotiations"), shall be kept confidential, and
3
treated as strictly confidential pursuant to the Confidentiality Agreement
previously entered into between the Parties, unless and until the Negotiations
are no longer required to be kept confidential pursuant to the terms of the
Confidentiality Agreement, or if EchoStar sooner, in its sole discretion,
determines that confidentiality is no longer needed or is no longer possible
with respect to all or certain portions of the Negotiations. Notwithstanding the
above, DBSD shall have the right to disclose the fact of the existence of this
Agreement, together with the minimum amount of other information deemed
necessary by counsel to DBSD, if counsel in good faith determines that
disclosure of the information is necessary. Disclosure of such information shall
be coordinated in advance with EchoStar.
14. Each of the Parties hereby agrees to take or cause to be taken such
further actions, to execute, acknowledge, deliver, and file or cause to be
executed, acknowledged, delivered, and filed such further documents and
instruments, and to use best efforts to obtain such consents, as may be
necessary or as may be reasonably requested in order to fully effectuate the
purposes, terms, and conditions of this Agreement, whether before, at, or after
the occurrence of the transactions contemplated by this Agreement.
15. The invalidity of any provisions of this Agreement, or of any other
agreement or instrument given pursuant to or in connection with this Agreement
("Other Agreements") shall not affect the remaining portions of this Agreement
or the Other Agreements, all of which are inserted conditionally on their being
held valid in law. In the event any provisions of this Agreement or Other
Agreements are found to be invalid, or would operate to render this Agreement or
any Other Agreement invalid, this Agreement and such Other Agreements shall be
construed as if the invalid provisions had not been inserted, and the offending
provisions shall be rewritten to the minimum extent necessary in order to permit
their intent to be carried out as best as is possible without invalidity. The
Parties agree to promptly use their good faith best efforts to reflect in
writing any modification to this Agreement which may be necessary in order to
carry out the intentions of this provision.
16. It is the express intention and agreement of the Parties that all
covenants, agreements, statements, representations, and warranties made in this
Agreement shall survive execution of this Agreement.
17. Except as otherwise specifically provided in this Agreement, this
Agreement may be modified or amended only by a writing executed by the parties
which, by its terms, expressly modifies, alters or amends any term or provision
contained herein.
18. Each party acknowledges that it has read, understands and agrees to the
terms and conditions of this Agreement. Each party represents that it has the
full power and authority to enter into this Agreement, and intends to be bound
by all of the terms and conditions of this Agreement. Further, each Party
acknowledges that the delivery of this Agreement by that Party has not been
induced by any representations, statements, warranties, or agreements other than
those expressly set forth herein.
19. To facilitate execution, this Agreement may be executed in as many
counterparts as may be required, and it shall not be necessary that the
signatures of, or on behalf of, each Party, or that the signatures of all
persons required to bind any Party, appear on each counterpart; but it shall be
sufficient that the signature of, or on behalf of, each Party, or that the
signatures of the persons required to bind any Party, appear on one or more of
the counterparts. This Agreement shall be binding and enforceable upon execution
of counterparts by all the Parties hereto, and such counterparts shall thereupon
collectively constitute a single agreement.
20. The validity, interpretation and enforcement of this Agreement shall be
governed by the laws of the State of Colorado without giving effect to the
conflict of law principles thereof.
4
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement, or
have caused this Agreement to be duly executed on their behalf, as of the day
and year set forth above.
DIRECT BROADCASTING SATELLITE
CORPORATION, a Delaware Corporation
By: /s/ HARLEY RADIN
-----------------------------------
Harley Radin, President
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ CHARLIE ERGEN
-----------------------------------
Charlie Ergen, President
DIRECT BROADCASTING SATELLITE
CORPORATION, a Colorado Corporation
By: /s/ CHARLIE ERGEN
-----------------------------------
Charlie Ergen, President
5
EXHIBIT 5.1
[ECHOSTAR COMMUNICATIONS CORPORATION LETTERHEAD]
July 9, 1996
EchoStar Communications Corporation
90 Inverness Circle East
Englewood, Colorado 80112
Gentlemen:
I am the Senior Vice President, General Counsel and Secretary of EchoStar
Communications Corporation (the "Company") and have acted on behalf of the
Company in connection with the registration under the Securities Act of 1933
(the "Act") on the Company's Form S-4 Registration Statement (the "Registration
Statement") of 658,000 shares of the Company's Class A Common Stock, $0.01 Par
Value (the "Shares").
I have examined the Certificate of Incorporation, the Bylaws and the
Minutes of the Board of Directors and the Stockholders of the Company, the
applicable laws of the State of Nevada and a copy of the Registration Statement.
Based on the foregoing, and having regard for such legal considerations as
we deem relevant, I am of the opinion that the Company is authorized to issue
and to sell the Shares; and the Shares, when issued will be fully paid and
nonassessable.
I hereby consent to the use of this opinion as a part of the Registration
Statement.
Very truly yours,
/s/ David K. Moskowitz
David K. Moskowitz
Senior Vice President, General Counsel and
Secretary
[LETTERHEAD]
July 10, 1996
Direct Broadcasting Satellite Corporation
1155 Connecticut Avenue, N.W. 45th Floor
Washington, D.C. 20036
The Shareholders of Direct Broadcasting
Satellite Corporation
c/o Direct Broadcasting Satellite Corporation
1155 Connecticut Avenue, N.W. 4th Floor
Washington, D.C. 20036
Ladies and Gentlemen:
You have requested our opinion as to certain federal income tax
consequences of the transactions referred to below. This opinion is
delivered in connection with the Plan and Agreement of Merger dated as of
December 21, 1995, by and among Direct Broadcasting Satellite Corporation, a
Delaware corporation ("DBSC"), EchoStar Communication Corporation, a Nevada
corporation ("EchoStar"), and Direct Broadcasting Satellite Corporation, a
Colorado corporation and a subsidiary of EchoStar ("MergerCo"). The Plan and
Agreement of Merger, and all other agreements expressly contemplated thereby,
are collectively referred to herein as the "Merger Agreement". Capitalized
term herein have the same meaning they have in the Merger Agreement, except
as otherwise defined herein.
FACTS. Pursuant to the Merger Agreement, DBSC will be merged with and
into MergerCo, and the issued and outstanding shares of DBSC owned by the
shareholders of DBSC will be exchanged for voting common stock of EchoStar.
The Merger will be carried out in accordance with the terms of the Merger
Agreement.
REPRESENTATIONS AND ASSUMPTIONS. Written representations, copies of
which are attached hereto, have been made by the appropriate officers of DBSC
and EchoStar, and we have without independent verification relied upon such
representations in rendering our opinions.
Direct Broadcasting Satellite Corporation
July 10, 1996
Page 2
In addition, we have, with the permission of DBSC, EchoStar, MergerCo
and the DBSC stockholders, assumed the following facts to be true, and we
have without independent verification relied upon such assumptions in
rendering our opinions:
1. The written representations provided by EchoStar and MergerCo at
the time of the Merger Agreement will continue to be accurate at the time of
the Merger Closing.
2. No consideration for the Merger has been or will be provided by
EchoStar or any EchoStar subsidiary to DBSC or to the stockholders of DBSC,
other than as expressly provided for in the Merger Agreement.
3. No dividends or distributions have been made or will be made with
respect to any stock of DBSC immediately prior to the transactions described
in the Merger Agreement.
4. The payment of cash in lieu of fractional shares of EchoStar common
stock is solely for the purpose of avoiding the expense and inconvenience to
EchoStar of issuing fractional shares and does not represent
separately-bargained-for consideration. The total cash consideration that
will be paid in the Merger to the stockholders of DBSC instead of issuing
fractional shares of EchoStar will not exceed one percent (1%) of the total
consideration that will be issued in the Merger to the stockholders of DBSC
in exchange for their shares of DBSC stock. The fractional share interests
of each holder of DBSC stock will be aggregated and no stockholder of DBSC
will receive cash in an amount equal to or greater than the value of one full
share of EchoStar common stock.
5. At the time of the Merger Closing, MergerCo has no plan or
intention to issue any warrants, options, convertible securities, or any
other type of right pursuant to which any person could acquire stock in
MergerCo that, if exercised or converted, would result in EchoStar losing
control of MergerCo.
OPINIONS. Based on the foregoing facts, representations, and
assumptions, and assuming the accuracy thereof, we are of the opinion that,
for federal income tax purposes:
1. The Merger will qualify as a reorganization within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code.
2. EchoStar, MergerCo and DBSC will each be a "party to a
reorganization" within the meaning of Section 368(b) of the Code.
Direct Broadcasting Satellite Corporation
July 10, 1996
Page 3
3. No gain or loss will be recognized by DBSC upon the transfer of its
assets to MergerCo in the Merger. Sections 357 and 361 of the Code.
4. No gain or loss will be recognized by either EchoStar or MergerCo
upon MergerCo's receipt of DBSC's assets in the Merger. Section 1032 of the
Code and Treasury Regulation Section 1-1032-2.
5. No gain or loss will be recognized by a DBSC shareholder upon his
receipt of EchoStar common stock in exchange for DBSC stock surrendered
therefor in the Merger, and a DBSC shareholder's basis in his EchoStar common
stock received will be the same as his basis in the DBSC stock surrendered
therefor in the Merger.
6. The payment of cash in lieu of fractional EchoStar shares will be
treated as if fractional EchoStar shares had been issued in the Merger, and
then such fractional shares were redeemed with cash distributions in full
payment in exchange for the stock redeemed, as provided in Section 302(a) of
the Code. Sections 354 and 358 of the Code; Revenue Ruling 66-365, 1966-2
C.B. 116, and Revenue Procedure 77-41, 1977-2 C.B. 574.
7. The holding period of EchoStar stock to be received by a DBSC
shareholder will include the holding period of his DBSC stock surrendered in
exchange therefor in the Merger, provided the DBSC stock was held as a
capital asset on the date of the Merger. Section 1223(1) of the Code.
MISCELLANEOUS. The foregoing opinions are based on the Code as in
effect on the date hereof and administrative and judicial interpretations of
it. No assurance can be given that the Code will not change or that such
interpretations will not be revised or amended adversely, possibly with
retroactive effect. This opinion is intended solely for the benefit and use
of DBSC and the DBSC stockholders; and is not to be used, released, quoted,
or relied upon by anyone else for any purpose (other than as required by law)
without our prior written consent.
We hereby consent to the filing of this opinion with and as a part of
the Registration Statement on Form S-4 and to the reference to our firm under
the caption "The Merger - Certain Federal Income Tax Consequences" in the
Information Statement-Prospectus filed as part of the Registration Statement.
In giving such consent we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the
Securities Act of 1933 or the rules and regulations promulgated thereunder.
Very truly yours,
/s/ SULLIVAN & WORCESTER LLP
--------------------------------------
SULLIVAN & WORCESTER LLP
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
Registration Statement File No. 333-3584.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
July 10, 1996.
EXHIBIT 23.2
[LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated January 23, 1996 with respect to the financial statements of Direct
Broadcasting Satellite Corporation and to all references to our Firm included in
or made a part of this Registration Statement on Form S-4.
/s/ Regardie, Brooks & Lewis, Chartered
by Nathan J. Rosen, CPA, V. President
Bethesda, Maryland
July 9, 1996
DIRECT BROADCASTING SATELLITE CORPORATION
ELECTION FORM AND LETTER OF TRANSMITTAL
THIS FORM SHOULD BE COMPLETED, SIGNED AND SENT TO
AMERICAN SECURITIES TRANSFER, INC. AS EXCHANGE AGENT,
TOGETHER WITH YOUR CERTIFICATE(S) FORMERLY REPRESENTING
SHARES OF COMMON STOCK OF DIRECT BROADCASTING SATELLITE CORPORATION.
PLEASE READ ACCOMPANYING INSTRUCTIONS CAREFULLY.
Prior to the Election Deadline (to have your election or preference
considered) or as soon thereafter as possible (if you do wish to have your
election or preference considered), this Election Form and Letter of Transmittal
should be (i) completed and signed in the space provided below and on the
Substitute Form W-9 and (ii) mailed or delivered with your certificate(s)
representing shares of Direct Broadcasting Satellite Corporation common stock to
the Exchange Agent the following address:
BY MAIL/HAND/OVERNIGHT COURIER
American Securities Transfer, Inc.
1825 Lawrence Street, Suite 444
Denver, Colorado 80202
To American Securities Transfer, Inc.:
Under the Plan and Agreement of Merger, dated as of December 21, 1995, as
amended (the "Agreement"), among EchoStar Communications Corporation
("EchoStar"), Direct Broadcasting Satellite Corporation, a Delaware corporation
("DBSC") and Direct Broadcasting Satellite Corporation, a Colorado corporation
("MergerCo"), pursuant to which DBSC will merge with and into MergerCo ("the
Merger"), resulting in DBSC becoming a wholly-owned subsidiary of EchoStar.
Pursuant to the Merger, the undersigned hereby surrenders to you, as Exchange
Agent, the certificate(s) described below, which formerly represented shares of
common stock of DBSC ("DBSC Shares"). You are authorized and directed to
exchange each surrendered DBSC Share for cash and shares of Class A common stock
of EchoStar ("EchoStar Shares"), with cash in lieu of any fractional share, in
accordance with the terms of the Agreement and with the Election Form below. I
understand that the Exchange Amount (the exact value of such combination of cash
and stock) will not be determined until immediately before the anticipated
completion of the Merger and after preparation of this form.
ELECTION FORM
Enclosed with this Letter of Transmittal is a summary of the Cash/Stock
Election that is available to DBSC shareholders. "Market Value" of EchoStar
Class A common stock for purposes of the Merger is $27.50 per share. The actual
bid and asked prices per share of the EchoStar Class A common stock on the
Nasdaq National Market at the time of the Merger, at the time a DBSC shareholder
receives his or her certificate(s) representing EchoStar Shares and thereafter
may be higher or lower than the Market Value. Shareholders should obtain
information on the current market price of EchoStar Class A common stock from
their broker or other independent sources. There is no assurance that your
election or preference will be honored in full. PLEASE REVIEW THE ENCLOSED
SUMMARY OF CASH/STOCK ELECTION CAREFULLY AND MAKE YOUR ELECTION OR PREFERENCE BY
MARKING THE APPROPRIATE BOX BELOW AND RETURNING THIS ELECTION FORM AND LETTER OF
TRANSMITTAL.
ELECTION OR PREFERENCE
(Check only one)
/ / Cash Only Preference
I elect to exchange all of my DBSC Shares for cash.
/ / Stock Only Preference
I elect to exchange all of my DBSC Shares for EchoStar Shares.
/ / Cash and Stock Preference
I elect to exchange DBSC Shares for cash and DBSC Shares for EchoStar
Shares.
INSTRUCTIONS: Please express your preference by checking the appropriate
box(es) above. Your election or preference is subject to the limitations set
forth in the Information Statement-Prospectus. TO MAKE AN EFFECTIVE ELECTION,
YOU MUST RETURN THE ELECTION FORM AND LETTER OF TRANSMITTAL TO THE EXCHANGE
AGENT AT THE ADDRESS INDICATED ABOVE NO LATER THAN , 1996 (SUBJECT TO
EXTENSION BY ECHOSTAR IN ITS SOLE DISCRETION). If your Election Form
and Letter of Transmittal are not received by that time, no assurance can be
given that the preference you express will be taken into account in determining
the allocation of cash and stock that you will receive as described in the
accompanying Information Statement-Prospectus.
DESCRIPTION OF CERTIFICATE(S) SURRENDERED
(Attach list if necessary)
- -----------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS OF NUMBER OF SHARES
REGISTERED HOLDER(S) CERTIFICATE REPRESENTED BY
(PLEASE PRINT) NUMBER CERTIFICATE
- -----------------------------------------------------------------------------------------------------------
TOTAL SHARES
- -----------------------------------------------------------------------------------------------------------
The undersigned represents and warrants that he/she has full power and
authority to transfer the DBSC Shares surrendered hereby and that EchoStar will
acquire good and unencumbered title thereto, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claims
when the shares are accepted for exchange. The undersigned will, upon request,
execute and deliver any additional documents deemed by EchoStar or the Exchange
Agent to be necessary or desirable to complete the transfer of the DBSC Shares
surrendered hereby. Delivery of the enclosed certificate(s) of DBSC Shares shall
be effected, and risk of the loss and title to such certificate(s) of DBSC
Shares shall pass, only upon delivery to you.
Unless otherwise indicated under the box headed "Special Delivery
Instructions," please send the cash (including payment in lieu of any fractional
share) and certificate(s) for the EchoStar Shares to the address of the
registered holder(s) appearing under the box headed "Description of
Certificate(s) Surrendered."
DATED: _________________________________ , 1996 PLEASE SIGN HERE:
________________________________________________
________________________________________________
Signature(s) of registered holder(s) must be
EXACTLY as name(s) appear on certificate(s) or
on the assignment authorizing transfer. If
signed by an agent, see Instruction 2.
------------------------
THE EXCHANGE AGENT HAS BEEN INSTRUCTED NOT TO EXCHANGE OR MAKE PAYMENT
FOR YOUR SHARES UNTIL THIS ELECTION STATEMENT AND LETTER OF TRANSMITTAL
HAS BEEN EXECUTED AND DELIVERED TO THE EXCHANGE AGENT.
------------------------
BOX A
SIGNATURE GUARANTEE
Fill in this space ONLY if required by _______________________________________________
Instruction 4. The undersigned hereby (Name of Firm Issuing Guarantee)
guarantees the signature(s) which appears on _______________________________________________
this Letter of Transmittal and the (Signature of Officer)
certificate(s) deposited pursuant to this
Letter of Transmittal
_______________________________________________
(Title of Officer Signing this Guarantee)
Dated: _______________________________________ _______________________________________________
(Address of Guaranteeing Firm)
- ----------------------------------------------------------------------------------------------------
BOX B
TAXPAYER IDENTIFICATION NUMBER
SUBSTITUTE FORM W-9
PAYER'S NAME: ECHOSTAR COMMUNICATIONS CORPORATION
- ----------------------------------------------------------------------------------------------------
DEPARTMENT OF THE TREASURY Part 1 -- PLEASE PROVIDE YOUR TIN IN Social Security Number
INTERNAL REVENUE SERVICE THE BOX AT THE RIGHT AND CERTIFY BY OR
SIGNING AND DATING BELOW Employer ID Number
----------------------------------------------------------------
PAYER'S REQUEST FOR Part 2 -- Check the box if you are Part 3 --
TAXPAYER IDENTIFICATION NOT subject to backup withholding Check the box
NUMBER (TIN) under the provisions of Section if you are
3406(a)(1)(C) of the Internal Revenue Awaiting TIN
Code because (i) you have not been / /
notified that you are subject to
backup withholding as a result of
failure to report all interest or
dividends or (ii) the Internal
Revenue Service has notified you that
you are no longer subject to backup
withholding. / /
----------------------------------------------------------------
CERTIFICATION -- UNDER THE PENALTIES OF PERJURY I CERTIFY THAT
THE INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT AND
COMPLETE.
SIGNATURE _____________________ Date _____________________
- ----------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM W-9 MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENT MADE TO YOU. SEE INSTRUCTION 3.
BOX C
SPECIAL ISSUANCE AND
PAYMENT INSTRUCTIONS
(See Instruction 4)
Fill in this space ONLY if the EchoStar Shares and any check(s) issued for the
cash payment are to be issued in the name(s) of someone other than the person(s)
in whose name(s) the surrendered certificate(s) described above are registered.
(Unless otherwise indicated in Box D, the EchoStar Shares and any check(s) will
be mailed to the address in this Box C.)
Name __________________________________________________________________________
(Type or Print)
________________________________________________________________________________
(Type or Print)
Address _______________________________________________________________________
(Number and Street)
________________________________________________________________________________
(City) (State) (Zip Code)
________________________________________________________________________________
(Social Security or Taxpayer ID Number)
BOX D
SPECIAL DELIVERY INSTRUCTION
(See Instruction 5)
MAIL CERTIFICATES AND CHECK(S) TO:
Fill in this space ONLY if the EchoStar Shares issued in exchange for any DBSC
Shares described above and any check(s) issued for the cash payment are to be
mailed to an address other than that indicated in the box headed "Description of
Certificate(s) Surrendered" or in Box C.
Name __________________________________________________________________________
(Type or Print)
Address _______________________________________________________________________
(Number and Street)
________________________________________________________________________________
(City) (State) (Zip Code)
INSTRUCTIONS
1. COMPLETION AND DELIVERY OF LETTER OF TRANSMITTAL. The Election Form and
Letter of Transmittal ("Letter of Transmittal") must be properly completed and
signed by the registered holder(s) of the DBSC Shares being surrendered herewith
and mailed or hand delivered with the certificate(s) for such shares (and any
other documents required by Instruction 4) to the Exchange Agent at the address
set forth on the front hereof. If additional space is needed for listing
certificates, attach a separate signed sheet. A return envelope is enclosed for
your convenience. THE ELECTION FORM AND LETTER OF TRANSMITTAL SHOULD BE RETURNED
NO LATER THAN , 1996 (SUBJECT TO EXTENSION BY ECHOSTAR IN ITS SOLE
DISCRETION), IF THE HOLDER WISHES TO HAVE HIS OR HER ELECTION OR PREFERENCE
TAKEN INTO ACCOUNT IN THE ALLOCATION OF CASH AND ECHOSTAR SHARES.
THE METHOD OF DELIVERY TO THE EXCHANGE AGENT OF THIS DOCUMENT AND ANY
ENCLOSURES IS AT THE ELECTION AND RISK OF THE OWNER. IF SENT BY MAIL, REGISTERED
MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED SINCE THE
RISK OF LOSS IN TRANSIT IS YOURS.
2. SIGNING LETTER OF TRANSMITTAL. The shareholder's name on the Letter of
Transmittal must be signed in EXACTLY the same manner as the name appears on the
certificate(s) surrendered herewith (or in the form of assignment, if such
certificate(s) has been assigned). If the DBSC Shares are registered in the name
of a trustee, executor, administrator, guardian or other person acting in a
fiduciary or representative capacity, such person must indicate his capacity
when signing the documents. If certificates are registered in different forms of
a name (e.g. "John Doe" and "J. Doe"), the shareholder should sign as many
Letters of Transmittal as there are different registrations. See Instruction 8.
If a certificate is registered in the name of two or more holders, EACH such
holder must sign the document.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the DBSC Shares surrendered herewith, the certificates
must be endorsed or accompanied by appropriate stock powers as required by
Instruction 4 and signature on this Letter of Transmittal must be guaranteed by
an Eligible Institution (as defined in Instruction 4). If special delivery
instructions have been indicated in Box D, the signature on this Letter of
Transmittal must also be guaranteed by an Eligible Institution (as defined in
Instruction 4).
If the Letter of Transmittal or any endorsement or stock power required by
Instruction 4 is signed by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a
fiduciary or representative capacity, and such person is not the registered
stockholder, he must indicate his capacity when signing and must submit to the
Exchange Agent proper documentary evidence of his authority to act.
3. BACKUP WITHHOLDING. Under the federal income tax law, a person
surrendering certificate(s) must provide the Exchange Agent with his correct
taxpayer identification number (TIN) and certify that such TIN is correct on
Substitute Form W-9 in Box B. If the correct TIN is not provided, a $50.00
penalty may be imposed by the Internal Revenue Service and the Exchange Agent
may be required to withhold 31% of the payments made in connection with the
merger. The TIN that must be provided is that of the registered holder of the
certificate(s) or of the last transferee appearing on the transfers attached to
or endorsed on the certificate(s) (or, if the check is made payable to another
person as provided in Box C, then of such person). The TIN for an individual is
his social security number. Exempt persons (including, among others, all
corporations and certain foreign individuals) are not subject to backup
withholding. Exempt persons, other than foreign individuals, should indicate
their exempt status by checking the box in Part 2 of the Substitute Form W-9. A
foreign individual may qualify as an exempt person by submitting a statement
(Form W-8), signed under penalties of perjury, certifying such individual's
foreign status. Copies of Form W-8 can be obtained from the Exchange Agent. The
box in Part 3 of the Substitute Form W-9 may be checked if the person
surrendering the certificate(s) has not been issued a TIN and has applied for a
TIN or intends to apply for a TIN in the near future. If the box in Part 3 is
checked and a TIN is not provided within 60 days, the Exchange Agent may be
required to withhold 31% of any payments until a TIN is provided. For additional
guidance, Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 may be obtained from the Exchange Agent.
4. ENDORSEMENT OF CERTIFICATE(S). If the EchoStar Shares and the check are
to be issued to the registered holder of the certificate(s) surrendered
herewith, no endorsements of certificates or separate stock powers are required.
If, however, the EchoStar Shares and the check are to be issued to a person
other than the registered holder, then (a) the certificate(s) for the DBSC
Shares must be endorsed or accompanied by a separate stock power, in either case
signed exactly as the name or names of the registered holder or holders appear
on the certificate(s), (b) the signatures of endorsement on the stock
certificate(s) or on the separate stock power(s) must be guaranteed by an
Eligible Institution (a bank, stockbroker, savings and loan association or
credit union with membership in an approved signature guarantee medallion
program) pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934, and
(c) the person surrendering the stock certificate(s) must pay to the Exchange
Agent the amount of any transfer or other taxes payable on account of the
payment to such other person or establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not applicable.
5. SPECIAL INSTRUCTIONS FOR DELIVERIES BY THE EXCHANGE AGENT. Unless
instructions to the contrary are given in Box D above, any EchoStar Shares and
check to be distributed in connection with the Merger will be mailed to the
address shown in the box headed "Description of Certificate(s) Surrendered" (if
this Letter of Transmittal is signed by the persons whose name appears in such
box) or to the address shown in Box C (if Box C is completed in accordance with
the applicable Instructions).
6. LOST CERTIFICATE(S). If a certificate representing any of your DBSC
Shares is lost or stolen, complete and execute this Letter of Transmittal and
forward it to the Exchange Agent along with your claim that the certificate
representing such shares is lost. The Exchange Agent will issue EchoStar Shares
and make payment for DBSC Shares registered in DBSC's stock transfer records and
represented by lost certificates upon delivery of an appropriate surety bond (or
other undertaking satisfactory to EchoStar in its reasonable discretion) and
appropriate evidence of loss.
7. MISCELLANEOUS. EchoStar, DBSC and the Exchange Agent are not under any
duty to give notification of defect in any Letter of Transmittal and shall not
incur any liability for failure to give such notification. Each of EchoStar,
DBSC and the Exchange Agent has the absolute right to reject any and all Letters
of Transmittal not in proper form or to waive any irregularities in any Letter
of Transmittal.
8. ADDITIONAL COPIES. Additional copies of the Letter of Transmittal may
be obtained from the Exchange Agent at the address set forth on the front
hereof.
PLEASE COMPLETE AND RETURN THE ELECTION FORM BY , 1996 WHICH IS
THE ELECTION DEADLINE, IF YOU WISH TO HAVE YOUR ELECTION OR PREFERENCE
TAKEN INTO ACCOUNT IN THE ALLOCATION OF CASH AND ECHOSTAR SHARES.
