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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 2001
REGISTRATION NO. 333 -
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 88-0336997
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
5701 South Santa Fe Drive
Littleton, Colorado 80120
(303) 723-1000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive office)
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David K. Moskowitz, Esq.
Senior Vice President, General Counsel and Secretary
EchoStar Communications Corporation
5701 South Santa Fe Drive
Littleton, Colorado 80120
(303) 723-1000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With copies to:
Raymond L. Friedlob, Esq.
John W. Kellogg, Esq.
Ralea Sluga, Esq.
Friedlob Sanderson Paulson & Tourtillott, LLC
1400 Glenarm Place, Third Floor
Denver, Colorado 80202
(303) 571-1400
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Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box: [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE PROPOSED PROPOSED MAXIMUM AMOUNT OF
REGISTERED REGISTERED MAXIMUM AGGREGATE REGISTRATION
OFFERING OFFERING PRICE(1) FEE
PRICE PER
NOTE
-------------------------------------------- ------------------ --------------- ------------------- ----------------
5 3/4 % Convertible Subordinated Notes due $1,000,000,000 100% $1,000,000,000 $250,000
2008
Class A Common Stock, $.01 par value (2)(3) 23,100,023 -- -- --
(1) Equals the aggregate principal amount of the securities being registered
pursuant to Rule 457(9).
(2) Represents the number of shares of Class A Common Stock that are
issuable upon conversion of the convertible notes. Pursuant to Rule 416,
the Registrant is also registering such indeterminate number of shares
of Class A Common Stock as may be issuable upon conversion of the
convertible notes as a result of the antidilution provisions of the
convertible notes.
(3) Pursuant to Rule 457(i), no registration fee is required for these
shares.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
(ii)
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SUBJECT TO COMPLETION, DATED [ ]
ECHOSTAR COMMUNICATIONS CORPORATION
$1,000,000,000
5 3/4% CONVERTIBLE SUBORDINATED NOTES DUE 2008
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This prospectus relates to the offer and sale from time to time by
certain selling securityholders of our 5 3/4 % Convertible Subordinated Notes
due 2008 and the shares of our class A common stock into which the convertible
notes are convertible. The convertible notes and shares will be sold at market
prices prevailing at the time of sale or at privately negotiated prices.
EchoStar will not receive any of the proceeds from the sale by the selling
securityholders of the convertible notes by the selling securityholders or the
shares into which they are convertible.
THE CONVERTIBLE NOTES:
o Maturity: May 15, 2008
o Interest: The convertible notes will accrue interest as of the issue
date which will be payable semiannually in cash on May 15 and November
15, commencing on November 15, 2001
o Conversion: The convertible notes are convertible into shares of our
class A common stock at any time after 90 days following the date of
original issuance of the convertible notes at a conversion price of
$43.29, subject to adjustment in certain events. Our class A common
stock is quoted on the Nasdaq National Market under the symbol "DISH."
On August 21, 2001, the closing price of our class A common stock was
$27.12 per share.
o Redemption: We can redeem the convertible notes on or after May 15,
2004. Holders of the convertible notes may also require us to redeem
all or part of their convertible notes upon a change of control event.
o Ranking: The convertible notes are general unsecured obligations
ranking junior to all of our existing and future senior debt. The
convertible notes also effectively rank junior to all of our secured
debts to the extent of the value of the assets securing such debts and
to all of the existing and future debt and other liabilities of our
subsidiaries. In addition, they rank equal to our other convertible
notes. As of June 30, 2001, the convertible notes ranked junior to $3.0
billion of indebtedness and $1.3 billion of other liabilities of our
subsidiaries, and ranked equal to $1.0 billion of our other convertible
notes.
TRADING FORMAT:
o The convertible notes are eligible for trading in the PORTAL market of
the National Association of Securities Dealers, Inc. The convertible
notes are not expected to remain eligible for trading on the PORTAL
system and a trading market may not develop for the notes. EchoStar
does not intend to apply for listing of the convertible notes on any
securities exchange or for quotation through any automated quotation
system.
o Our class A common stock is traded on the Nasdaq National Market under
the symbol "DISH." On August 21, 2001, the last reported sale price of
our common stock on the Nasdaq National Market was $27.12 per share
We may amend or supplement this prospectus from time to time by filing
amendments or supplements as required. You should read this entire prospectus
and any amendments or supplements carefully before you make your investment
decision.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN RISKS YOU SHOULD CONSIDER
BEFORE YOU PURCHASE ANY CONVERTIBLE NOTES OR SHARES OF CLASS A COMMON STOCK.
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Neither the SEC nor any state securities commission has approved or determined
whether this prospectus is truthful or complete. Nor have they made, nor will
they make, any determination as to whether anyone should buy these securities.
Any representation to the contrary is a criminal offense.
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Prospectus dated August 29, 2001
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TABLE OF CONTENTS
Where you Can find more information.........................................3
Forward-looking statements..................................................3
Risk factors................................................................6
Ratio of earnings to fixed charges.........................................23
Description of convertible notes...........................................24
Registration rights........................................................36
Description of our capital stock...........................................38
Summary of certain United States federal income tax considerations.........40
Selling securityholders....................................................45
Plan of distribution.......................................................51
Legal matters..............................................................52
Independent accountants....................................................52
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS AND IN ANY ACCOMPANYING PROSPECTUS SUPPLEMENT. NO
ONE HAS BEEN AUTHORIZED TO PROVIDE YOU WITH DIFFERENT INFORMATION.
THE CONVERTIBLE NOTES AND SHARES OF CLASS A COMMON STOCK INTO WHICH
THEY ARE CONVERTIBLE ARE NOT BEING OFFERED IN ANY JURISDICTION WHERE THE OFFER
IS NOT PERMITTED.
YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS OR ANY
PROSPECTUS SUPPLEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE
FRONT OF THOSE DOCUMENTS.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document that we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available to you free of
charge at the SEC's web site at http://www.sec.gov.
Our class A common stock is traded as "National Market Securities" on the
Nasdaq National Market. Material filed by us can be inspected at the offices of
the National Association of Securities Dealers, Inc., Reports Section, 1735 K
Street, N.W., Washington, D.C. 20006.
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus, and information that we file later with the SEC
will automatically update and supersede previously filed information, including
information contained in this document.
We incorporate by reference the documents listed below and any future
filings we will make with the SEC under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until this offering has been completed:
o Our Annual Report on Form 10-K for the year ended December 31, 2000;
o Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001;
o Our Quarterly Report on Form 10-Q for the quarter ended June 30, 2001;
o Our Current Reports on Form 8-K dated May 22, 2001, May 24, 2001, June
14, 2001, July 12, 2001 and August 6, 2001; and
o The description of our common stock set forth in our Registration
Statement on Form 8-A filed on May 30, 1995.
You may request free copies of these filings by writing or telephoning us at
our principal offices, which are located at the following address:
EchoStar Communications Corporation
5701 South Santa Fe Drive
Littleton, Colorado 80120
Attention: David K. Moskowitz, Esq.
(303) 723-1000
FORWARD-LOOKING STATEMENTS
All statements contained in this prospectus, as well as statements made in
press releases and oral statements that may be made by us or by officers,
directors or employees acting on our behalf, that are not statements of
historical fact constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known or unknown risks, uncertainties and other factors that
could cause our actual results to be materially different from historical
results or from any future results expressed or implied by such forward-looking
statements. The "Risk Factors" section of this prospectus, commencing on page 6,
summarizes certain of the material risks and uncertainties that could cause our
actual results to differ materially. In addition to statements that explicitly
describe such risks and uncertainties, readers are urged to consider statements
that include the terms "believes," "belief," "expects," "plans," "anticipates,"
"intends" or the like to be uncertain and forward-looking. All cautionary
statements made herein should be read as being applicable to all forward-looking
statements wherever they appear. In this connection, investors should consider
the risks described herein and should not place undue reliance on any
forward-looking statements.
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ECHOSTAR COMMUNICATIONS CORPORATION
We are a leading provider of direct broadcast satellite, or DBS, television
services in the United States through our DISH Network business unit. We are
also an international supplier of digital satellite receiver systems and a
provider of other satellite services.
BUSINESS STRATEGY
Our primary objective is to continue to expand our DISH Network subscriber
base and to develop as an integrated, full-service satellite company. To achieve
this objective, we plan to:
o Leverage our significant share of the United States DBS spectrum to
offer more channels than any other video provider in the United States,
and to offer unique programming services that will differentiate us
from our competition. These services include satellite- delivered local
channels and niche and foreign language programming services;
o Offer marketing promotions that will enhance our position as a leading
provider of value-oriented programming services and receiver systems;
o Expand and improve DISH Network distribution channels;
o Emphasize one-stop shopping for DBS services and equipment and superior
customer service;
o Utilize our orbital assets and strategic relationships to provide
interactive and high speed Internet access to DISH Network customers
via one convenient source; and
o Develop our EchoStar Technologies Corporation and other businesses.
From time to time we evaluate opportunities for strategic investments or
acquisitions that would complement our current services and products, enhance
our technical capabilities or otherwise offer growth opportunities. As a result,
acquisition discussions and, in some cases, negotiations may take place and
future investments or acquisitions involving cash, debt or equity securities or
a combination thereof may result.
THE DISH NETWORK
We started offering subscription television services on the DISH Network in
March 1996. As of June 30, 2001, approximately 6.07 million households
subscribed to DISH Network programming services. From January 1, 2000 to
December 31, 2000, our market share of net new DBS customers was 55%. We now
have six DBS satellites in orbit which enable us to offer over 500 video and
audio channels, together with data services and high definition and interactive
TV services, to consumers across the continental United States through the use
of a small satellite dish. We believe that the DISH Network offers programming
packages that have a better "price-to-value" relationship than packages
currently offered by most other subscription television providers. As of June
30, 2001, approximately 17.1 million United States households subscribed to
direct broadcast satellite and other direct-to-home satellite services. We
believe that there continues to be significant unsatisfied demand for high
quality, reasonably priced television programming services.
NEW SERVICES AND STRATEGIC INVESTMENTS
We are continuing to expand our offerings to include interactive, Internet
and high-speed data services. During April 2001, we began offering DISH Network
customers an interactive digital receiver with a built-in hard disk drive
capable of storing up to 30 hours of programming, that permits viewers to pause
and record live programs without the need for video tape. We also intend to
offer set-top boxes with a wide variety of innovative interactive television
services and applications.
Through our strategic investment in StarBand Communications (formerly
Gilat-To-Home), we began offering consumers two-way, "always on," high-speed
satellite Internet access along with DISH Network satellite television
programming via a single dish in November 2000. We also have a strategic
investment in Wildblue Communications (formerly iSky, Inc.), which expects to
offer a similar service from Ka-band satellites in the future. We believe these
technologies are particularly well-suited for areas without cable or DSL
infrastructure. DISH Network customers will need an oblong dish, approximately
24 inches by 36 inches, and other equipment to take advantage of two-way
Internet satellite service.
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We are also seeking additional ways to expand our Internet and high-speed
data services that may include, but are not limited to, partnerships with third
parties who have particular expertise in the high speed transmission of digital
information. Although there can be no assurance, we believe we will be able to
increase our subscriber base and our average revenue per subscriber by offering
these and other similar services.
While Ka-band spot beam technology is currently in its infancy, and the
technology might not develop to the point where it is viable, we believe that
spot beam Ka-band satellites could become a cost effective way to offer
consumers high speed two way broadband access in the future. We believe that
Ka-band technology might play an important role in spanning the "digital divide"
between urban consumers with multiple choices for high-speed Internet access and
rural consumers with few, if any, choices for high-speed Internet access. We
believe the service might also be successfully offered in urban areas as well.
In an effort to continue to position ourselves to exploit this potential
opportunity, during November 2000, one of our wholly owned subsidiaries
purchased a 49.9% interest in VisionStar, Inc. VisionStar holds a Ka-band FCC
license, and is constructing a Ka-band satellite, to launch into the 113 degree
orbital location.
ECHOSTAR TECHNOLOGIES CORPORATION
In addition to supplying EchoStar satellite receiver systems for the DISH
Network, our EchoStar Technologies Corporation subsidiary supplies similar
digital satellite receivers to international satellite TV service operators. In
addition to the DISH Network, our two major customers are Via Digital, a
subsidiary of Telefonica, Spain's national telephone company, and Bell
ExpressVu, a subsidiary of Bell Canada, Canada's national telephone company.
RECENT DEVELOPMENTS
On August 5, 2001, we announced that we had made a proposal to General
Motors to combine Hughes Electronics Corporation with us in a stock-for-stock
transaction.
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RISK FACTORS
You should carefully consider all of the information contained in this
prospectus before deciding whether to invest in the convertible notes and, in
particular, the following factors:
RISKS PRIMARILY RELATED TO OUR BUSINESS
WE WILL HAVE SUBSTANTIAL DEBT OUTSTANDING AFTER THE OFFERING AND MAY INCUR
ADDITIONAL DEBT, SO WE MAY BE UNABLE TO PAY INTEREST OR PRINCIPAL ON THE
CONVERTIBLE NOTES
As of June 30, 2001, our total debt, including the debt of our subsidiaries,
was approximately $5.0 billion.
Our substantial debt could have significant consequences to you, including:
o making it more difficult to satisfy our obligations with respect to the
convertible notes;
o increasing our vulnerability to general adverse economic conditions,
including changes in interest rates;
o limiting our ability to obtain additional financing, including
financing to satisfy our obligations with respect to the convertible
notes;
o requiring us to devote a substantial portion of our available cash and
cash flow to make interest and principal payments on our debt, thereby
reducing the amount of available cash for other purposes;
o limiting our financial flexibility in responding to changing economic
and competitive conditions; and
o placing us at a competitive disadvantage compared to our competitors
that have less debt.
RESTRICTIVE COVENANTS UNDER OUR INDEBTEDNESS MAY LIMIT OUR ABILITY TO OPERATE
OUR BUSINESS
The indentures relating to the senior notes of our subsidiaries and our
other long-term indebtedness contain restrictive covenants that may inhibit our
ability to manage our business, engage in certain transactions that we believe
to be beneficial to holders of common stock and the convertible notes and to
react to changing market conditions. These restrictions, among other things,
limit the ability of our subsidiaries to:
o incur additional indebtedness;
o issue preferred stock;
o sell assets;
o create, incur or assume liens;
o merge, consolidate or sell assets;
o enter into transactions with affiliates; and
o pay dividends and make other distributions.
In particular, but without limitation, the indentures related to the
outstanding senior notes of our wholly owned subsidiary, EchoStar Broadband
Corporation, referred to as EBC, and EBC's wholly-owned subsidiary, EchoStar DBS
Corporation, referred to as EDBS, limit EBC's ability to pay dividends or make
distributions to us and EDBS' ability to pay dividends or make distributions to
EBC. Since we are a holding company with no significant net assets other than
our ownership in our subsidiaries, we will be dependent on the receipt of funds
from EBC, which is dependent on the receipt of funds from EDBS, to pay interest
and principal on the convertible notes and these limitations could adversely
affect our ability to make such payments on the convertible notes.
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INCREASED SUBSCRIBER TURNOVER COULD AFFECT OUR FINANCIAL PERFORMANCE
Our percentage churn for the six months ended June 30, 2001 increased
compared to our percentage churn for the same period in 2000. The increase in
our percentage churn during the second quarter of 2001 was due in part to price
increases in certain of our programming packages, which went into effect on
February 1, 2001. We believe that our percentage churn continues to be lower
than satellite and cable industry averages. While we have successfully managed
churn within a narrow range historically, we expect our percentage churn to be
in excess of our historical average percentage churn for the remainder of 2001
as a result of the slowing economy, significant piracy of our competitor's
product, bounty programs offered by competitors, our maturing subscriber base,
and other factors. Finally, impacts from our litigation with the networks in
Miami, new FCC rules governing the delivery of superstations and other factors,
could cause us to terminate delivery of distant network channels and
superstations to a material portion of our subscriber base, which could cause
many of those customers to cancel their subscription to our other services. Any
such terminations could result in a small reduction in average monthly revenue
per subscriber and could result in an increase in our percentage churn.
INCREASED SUBSCRIBER ACQUISITION COSTS COULD AFFECT OUR FINANCIAL PERFORMANCE
We subsidize the cost and installation of our receiver systems in order to
attract new DISH Network subscribers. Our average subscriber acquisition costs
were $384 per new subscriber activation during the three months ended June 30,
2001. Since we retain ownership of substantially all of the equipment, amounts
capitalized under our Digital Home Plan are not included in our calculation of
these subscriber acquisition costs. Our subscriber acquisition costs, both in
the aggregate and on a per new subscriber activation basis, may materially
increase to the extent that we continue or expand our current sales promotion,
or introduce other more aggressive promotions if we determine that they are
necessary to respond to competition, or for other reasons. Any material increase
in subscriber acquisition costs from current levels could have a material
adverse effect on our business and results of operations.
WE MAY BE UNABLE TO MANAGE RAPIDLY EXPANDING OPERATIONS
If we are unable to manage our growth effectively, it could materially
adversely affect our business and results of operations. To manage our growth
effectively, we must continue to develop our internal and external sales forces,
installation capability, customer service operations and information systems,
and maintain our relationships with third party vendors. We also need to
continue to expand, train and manage our employee base, and our management
personnel must assume even greater levels of responsibility. If we are unable to
continue to develop our installation capability and customer service operations
in a timely manner to effectively manage growth, we may experience a decrease in
subscriber growth and an increase in subscriber churn which could have a
material adverse effect on our business and results of operations.
WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE, IN ORDER TO CONTINUE
GROWING AND INCREASE EARNINGS AND TO MAKE PAYMENTS ON THE CONVERTIBLE NOTES
Our ability to increase earnings and to make interest and principal payments
on the convertible notes will depend, in part, on our ability to continue
growing our business by maintaining and increasing our subscriber base. This may
require significant additional capital that we cannot be certain will be
available to us.
Funds necessary to meet subscriber acquisition costs will be satisfied from
existing cash and investment balances to the extent available. We may, however,
be required to raise additional capital in the future to meet these
requirements. If we were required to raise capital today, a variety of debt and
equity funding sources would likely be available to us. However, there can be no
assurance that additional financing will be available on acceptable terms, or at
all, if needed in the future.
In addition to our DBS business plan, we have licenses, or applications
pending with the FCC, for a two satellite FSS Ku-band satellite system and a two
satellite FSS Ka-band satellite system. We will need to raise additional capital
to construct, launch, and insure satellites and complete these systems. During
February 2000, we announced agreements for the construction and delivery of
three new satellites. Two of these satellites, EchoStar VII and EchoStar VIII,
will be advanced, high-powered DBS satellites. The third satellite, EchoStar IX,
will be a hybrid Ku/Ka-band satellite. The launch and operation of all three of
these satellites require prior FCC approval, which we intend to request soon. We
cannot assure you that we will obtain FCC approval for the launch and operation
of these satellites. See also "Risk Factors -- Our business depends
substantially on FCC licenses that can expire or be revoked or modified and
applications that may not be granted."
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During November 2000, one of our wholly owned subsidiaries purchased a 49.9%
interest in VisionStar, Inc. VisionStar holds an FCC license, and is
constructing a Ka-band satellite, to launch into the 113 degree orbital
location. Together with VisionStar we have requested FCC approval to acquire
control over VisionStar by increasing our ownership of VisionStar to 90%, for a
total purchase price of approximately $2.8 million. See also, "Risk Factors --
Our business depends substantially on FCC licenses that can expire or be revoked
or modified and applications that may not be granted." We have also provided
loans to VisionStar totaling less than $10 million through June 30, 2001 for the
construction of their satellite and expect to provide additional funding to
VisionStar in the future. We are not obligated to finance the full remaining
cost to construct and launch the VisionStar satellite, but VisionStar's FCC
license currently requires construction of the satellite to be completed by
April 30, 2002 or the license could be revoked. We currently expect to continue
to fund loans and equity contributions for construction of the satellite in the
near term from cash on hand, and expect that we may spend approximately $79.5
million during 2001 for that purpose subject to, among other things, FCC action.
In the future we may fund construction, launch and insurance of the satellite
through cash from operations, public or private debt or equity financing, joint
ventures with others, or from other sources.
WE COMPETE WITH CABLE TELEVISION AND OTHER LAND-BASED SYSTEMS, WHICH COULD
AFFECT OUR ABILITY TO GROW AND INCREASE EARNINGS
We compete in the highly competitive subscription television service
industry against cable television and other land based system operators offering
video, audio and data programming and entertainment services. Many of these
competitors have substantially greater financial, marketing and other resources
than we have. Our ability to increase earnings depends, in part, on our ability
to compete with these operators.
We encounter substantial competition in the subscription television market
from cable television and other land-based systems. Cable television operators
have a large, established customer base, and many cable operators have
significant investments in, and access to, programming. Cable television service
is currently available to more than 90% of the approximately 100 million United
States television households, and approximately 68% of total United States
households currently subscribe to cable. Cable television operators currently
have an advantage relative to us by providing service to multiple television
sets within the same household at a lesser incremental cost to the consumer.
Cable operators may also obtain a competitive advantage through bundling their
analog video service with expanded digital video services delivered
terrestrially or via satellite, efficient 2-way high speed data transmission,
and telephone service on upgraded cable systems. As a result of these and other
factors, we may not be able to continue to expand our subscriber base or compete
effectively against cable television operators.
When fully deployed, new technologies could have a material adverse effect
on the demand for our direct broadcast satellite services. For example, new and
advanced local multi-point distribution services are still in the development
stage. In addition, entities such as regional telephone companies, which are
likely to have greater resources than we have, are implementing and supporting
digital video compression over existing telephone lines and digital "wireless
cable." Moreover, mergers, joint ventures, and alliances among franchise,
wireless or private cable television operators, regional Bell operating
companies and others may result in providers capable of offering bundled cable
television and telecommunications services in competition with us. For instance,
AT&T has acquired cable operators TCI and MediaOne. We may not be able to
compete successfully with existing competitors or new entrants in the market for
subscription television services.
WE FACE INTENSE COMPETITION FROM DIRECT BROADCAST SATELLITE AND OTHER SATELLITE
SYSTEM OPERATORS, WHICH COULD AFFECT OUR ABILITY TO GROW AND INCREASE EARNINGS
We compete in the highly competitive subscription television service
industry against direct broadcast satellite and other satellite system operators
offering video, audio and data programming and entertainment services. Many of
these competitors have substantially greater financial, marketing and other
resources than we have. Our ability to increase earning depends, in part, on our
ability to compete with these operators.
One competitor, DirecTV, has launched five high powered direct broadcast
satellites and has 46 direct broadcast satellite frequencies that are capable of
full coverage of the continental United States. DirecTV currently offers more
than 300 channels of combined video and audio programming and, as of June 30,
2001, had approximately 10.0 million subscribers. DirecTV is, and will be for
the foreseeable future, in an advantageous position with regard to market entry,
programming, such as DirecTV's exclusive sports programming and, possibly,
volume discounts for programming offers.
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There have been reports of discussions and negotiations involving a possible
merger between the parent company of DirecTV and The News Corporation Limited.
News Corp. is one of the world's largest media companies with diversified global
operations including the production and distribution of motion pictures and
television programming and television, satellite and cable broadcasting. The
effect such a merger would have on our business is unclear.
In addition, other companies in the United States have conditional permits
or have leased transponders for a comparatively small number of direct broadcast
satellite assignments that can be used to provide service to portions of the
United States.
The FCC has proposed to allocate additional expansion spectrum for direct
broadcast satellite services, which could create significant additional
competition in the market for subscription television services.
OUR BUSINESS RELIES ON INTELLECTUAL PROPERTY, SOME OF WHICH IS OWNED BY THIRD
PARTIES, AND WE MAY INADVERTENTLY INFRINGE THEIR PATENTS AND PROPRIETARY RIGHTS
Many entities, including some of our competitors, now have and may in the
future obtain patents and other intellectual property rights that cover or
affect products or services directly or indirectly related to those that we
offer. In general, if a court determines that one or more of our products
infringes on intellectual property held by others, we would be required to cease
developing or marketing those products, to obtain licenses to develop and market
those products from the holders of the intellectual property, or to redesign
those products in such a way as to avoid infringing the patent claims. If a
competitor holds intellectual property rights, the entity might be predisposed
to exercise its right to prohibit our use of its intellectual property in our
products and services at any price, thus impacting our competitive position.
We cannot assure you that we are aware of all patents and other intellectual
property rights that our products may potentially infringe. In addition, patent
applications in the United States are confidential until the Patent and
Trademark Office issues a patent and, accordingly, we cannot evaluate the extent
to which our products may infringe claims contained in pending patent
applications. Further, it is often not possible to determine definitively
whether a claim of infringement is valid, absent protracted litigation.
We cannot estimate the extent to which we may be required in the future to
obtain licenses with respect to patents held by others and the availability and
cost of any such licenses. Those costs, and their impact on net income, could be
material. Damages in patent infringement cases can also include a tripling of
actual damages in certain circumstances. To the extent that we are required to
pay royalties to third parties to whom we are not currently making payments,
these increased costs of doing business could negatively affect our liquidity
and operating results. We are currently involved in five patent infringement
actions against us with the following entities: Starsight Telecast, Inc.;
Gemstar; Superguide Corp.; IPPV Enterprises, LLC; and MAAST, Inc. We cannot be
certain the courts will conclude these entities do not own the rights they
claim, our products do not infringe on these rights, that we would be able to
obtain licenses from these persons on commercially reasonable terms or, if we
were unable to obtain such licenses, that we would be able to redesign our
products to avoid infringement. Certain of the plaintiffs are demanding damages
in excess of $100 million.
SATELLITE PROGRAMMING SIGNALS HAVE BEEN PIRATED, WHICH COULD CAUSE US TO LOSE
SUBSCRIBERS AND REVENUE
The delivery of subscription programming requires the use of encryption
technology to assure only those who pay can receive the programming. It is
illegal to create, sell or otherwise distribute mechanisms or devices to
circumvent that encryption. Theft of cable and satellite programming has been
widely reported and our signal encryption has been pirated and could be further
compromised in the future. We continue to respond to compromises of our
encryption system with measures intended to make signal theft of our programming
commercially uneconomical. We utilize a variety of tools to continue to
accomplish this goal. Ultimately, if other measures are not successful, it could
be necessary to replace the credit card size card that controls the security of
each consumer set-top box at a material cost to us. If we can not promptly
correct a compromise in our encryption technology, it would adversely affect our
revenue and our ability to contract for video and audio services provided by
programmers.
IMPEDIMENTS TO RETRANSMISSION OF DISTANT AND LOCAL BROADCAST SIGNALS; OUR LOCAL
AND DISTANT PROGRAMMING STRATEGY FACES UNCERTAINTY
The Copyright Act, as amended by the Satellite Home Viewer Improvement Act
of 1999, permits satellite retransmission of distant network channels only to
"unserved households." Whether a household qualifies as "unserved" for the
purpose of eligibility to receive a distant network channel depends, in part, on
whether that household can receive a signal of "Grade B intensity" as defined by
the FCC. In February 1999, the FCC released a report and order on these matters.
Although the FCC declined to change the values of Grade B intensity, it adopted
a method for measuring it at particular households. The FCC also endorsed a
method for predicting Grade B intensity
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at particular households. In addition, the Satellite Home Viewer Improvement Act
enacted in November 1999, instructed the FCC to establish a predictive model
based on the model it had endorsed in February 1999, and also directed the FCC
to ensure that its predictive model takes account of terrain, building
structures and other land cover variations. The FCC issued a report and order
that does not adjust the model to reflect such variations for any VHF stations.
Failure to account for these variations could hamper our ability to retransmit
distant network and superstation signals.
The Satellite Home Viewer Improvement Act of 1999 has also established a
process whereby consumers predicted to be served by a local station may request
that this station waive the unserved household limitation so that the requesting
consumer may receive distant signals by satellite. If the waiver request is
denied, the Satellite Home Viewer Improvement Act of 1999 entitles the consumer
to request an actual test, with the cost to be borne by either the satellite
carrier, such as us, or the broadcast station depending on the results. The
testing process required by the statute can be very costly. The FCC staff has
informally raised questions about how we implement that process. We can provide
no assurance that the FCC will not find that our implementation of the process
is not in compliance with these requirements. Furthermore, the FCC has
identified a third party organization to examine and propose tester
qualification and other standards for testing. We cannot be sure that this
decision will not have an adverse effect on our ability to test whether a
consumer is eligible for distant signals.
In addition, the Satellite Home Viewer Improvement Act of 1999 could
adversely affect us in several other respects. The legislation prohibits us from
carrying more than two distant signals for each broadcasting network and leaves
the FCC's Grade B intensity standard unchanged without future legislation. The
FCC released a report recommending that only minor changes be made to the Grade
B standard, a recommendation that is unfavorable to us. While the Satellite Home
Viewer Improvement Act of 1999 reduces the royalty rate that we currently pay
for superstation and distant network signals, it directed the FCC to require us
(within one year from November 29, 1999) to delete substantial programming
(including sports programming) from these signals. The FCC has released rules
implementing that directive, which have become effective. These requirements may
significantly hamper our ability to retransmit distant network and superstation
signals, or may impose burdens upon us that are so onerous that we may be
required to substantially alter, or stop retransmitting, many or all
superstation signals. In addition, the FCC's sports blackout requirements, which
apply to all distant network signals, are very cumbersome and may require costly
upgrades to our system. We recently asked the FCC to reconsider several aspects
of these rules to make the rules less burdensome, but we cannot predict whether
the FCC will take any favorable action with respect to the request, and other
parties have asked for reconsideration to make the rules even more cumbersome.
For existing customers, the new legislation also permits hundreds of
thousands of consumers to continue to receive distant network channels who would
otherwise be required to be disconnected. The new law generally does not,
however, permit consumers predicted to receive a signal of "Grade A intensity"
to continue receiving distant network channels. As a result, we believe hundreds
of thousands of consumers have lost or could lose access to network channels by
satellite. In anticipation of passage of the legislation, and for other reasons,
we ceased providing distant network channels to tens of thousands of customers.
These turn offs, together with others, could result in a temporary material
increase in churn and a small reduction in revenue per subscriber. Further,
broadcasters could seek a permanent injunction on our sales of both distant and
local network channels, which would have a material adverse effect on our churn,
revenue, ability to attract new subscribers, and our business operations
generally.
The Satellite Home Viewer Improvement Act of 1999 generally gives satellite
companies a statutory copyright license to retransmit local-into-local network
programming, subject to obtaining the retransmission consent of the local
network station. Retransmission consent agreements are important to us because a
failure to reach such agreements with broadcasters who elect retransmission
consents instead of mandatory "must carry" carriage means we cannot carry these
broadcasters' signals, and could have an adverse effect on our strategy to
compete with cable and other satellite companies, which provide local signals.
The Satellite Home Viewer Improvement Act of 1999 requires broadcasters to
negotiate retransmission consent agreements in good faith. In accordance with
the requirements of the Satellite Home Viewer Improvement Act of 1999, the FCC
has promulgated rules governing broadcasters' good faith negotiation obligation.
These rules allow satellite providers to file complaints with the FCC against
broadcasters for violating the duty to negotiate retransmission consent
agreements in good faith. Currently, the degree to which the rules will be of
practical benefit to us in our efforts to obtain all necessary retransmission
consent agreements remains unclear. While we have been able to reach
retransmission consent agreements with most of the local network stations we
currently carry, our planned roll-out of local channels in more cities will
require additional agreements, and we cannot be sure that we will secure these
agreements or that we will secure new agreements upon the expiration of our
current retransmission consent agreements, some of which are short term. We have
been unable to conclude a long-term retransmission consent agreement with the
NBC station in San Francisco and the ABC station in Nashville and recently
discontinued transmission of those channels as a result. On March 1, 2001, we
filed with the FCC a retransmission consent complaint against the owner of these
stations,
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Young Broadcasting, Inc., asserting that Young has failed to negotiate a
retransmission consent agreement in good faith. Young has filed several
pleadings in opposition to our complaint, has asserted that we have abused the
FCC's processes, and has requested sanctions against us. The FCC recently ruled
against us in this proceeding, and we are considering our legal options.
Many other provisions of the Satellite Home Viewer Improvement Act of 1999
could adversely affect us. Among other things, the law includes the imposition
of "must carry" requirements on DBS providers. The "must carry" rules generally
would require that commencing in January 2002 satellite distributors carry all
the local broadcast stations in areas they choose to offer local programming,
not just four major networks. Since we have limited capacity, the number of
markets in which we can offer local programming would be reduced by the "must
carry" requirement to carry large numbers of stations in each market we serve.
The legislation also includes provisions which could expose us to material
monetary penalties, and permanent prohibitions on the sale of all local and
distant network channels, based on what could be considered even inadvertent
violations of the legislation, prior law, or the FCC rules. Imposition of these
penalties would have a material adverse effect on our churn, revenue, ability to
attract new subscribers, and our business operations generally. Consistent with
the requirements of the Satellite Home Viewer Improvement Act of 1999, the FCC
has now completed a rulemaking and adopted detailed "must carry" rules,
including obligations to also carry several non-commercial stations upon
request. We cannot be sure that the FCC rules will not have a further adverse
impact on our operations. We have challenged the FCC rules in an appellate court
and we and the Satellite Broadcasting & Communications Association, of which we
are a member, has challenged the constitutionality of the "must carry" law in
federal district court. These proceedings are all heavily contested and there
can be no assurance that they will result in any favorable judicial action. In
addition, while the FCC has decided for now not to impose dual digital/analog
carriage obligations -- i.e., additional requirements in connection with the
carriage of digital television stations that go beyond carriage of one signal
(whether analog or digital) for each station, the FCC has also issued a further
notice of proposed rulemaking on this matter. We cannot be sure that this
rulemaking will not result in further, even more onerous, digital carriage
requirements.
WE NEED TO INCREASE SATELLITE CAPACITY TO AVOID POTENTIAL DISRUPTIONS IN OUR
SERVICE CAUSED BY "MUST CARRY" REQUIREMENTS
"Spot beam" technology on EchoStar VII and EchoStar VIII is expected to
increase our existing satellite capacity. EchoStar VII is currently scheduled to
launch during December 2001. EchoStar VIII is currently expected to launch
during the first half of 2002. There is typically a 30 to 60 day testing period
between the launch of a satellite and the commencement of commercial operations
from that satellite. Commencing January 1, 2002, we will be required to comply
with the statutory requirement to carry substantially all over the air
television stations by satellite in any market where we carry any local network
channels by satellite. Any reduction in the number of markets we serve in order
to comply with "must carry" requirements for other markets, would adversely
effect our operations and could result in a temporary increase in churn. Failure
to comply with "must carry" requirements could result in substantial fines and
other sanctions. While there can be no assurance, based among other things on
the number of over the air television stations that have qualified for "must
carry" to date and on other available satellite capacity, we currently believe
we can meet statutory "must carry" requirements with few reductions, if any, in
the number of markets where we currently provide local channels by satellite.
However, until EchoStar VII and EchoStar VIII become operational we probably
will not be able to increase the number of markets where we provide local
network channels by satellite.
TV NETWORKS OPPOSE OUR STRATEGY OF DELIVERING DISTANT NETWORK SIGNALS
Until July 1998, we obtained distant broadcast network channels (ABC, NBC,
CBS and FOX) for distribution to our customers through PrimeTime 24. In December
1998, the United States District Court for the Southern District of Florida
entered a nationwide permanent injunction requiring PrimeTime 24 to shut off
distant network channels to many of its customers, and henceforth to sell those
channels to consumers in accordance with certain stipulations in the injunction.
In October 1998, we filed a declaratory judgment action against ABC, NBC,
CBS and FOX in Denver Federal Court. We asked the court to enter a judgment
declaring that our method of providing distant network programming did not
violate the Satellite Home Viewer Act and hence did not infringe the networks'
copyrights. In November 1998, the networks and their affiliate groups filed a
complaint against us in Miami Federal Court alleging, among other things,
copyright infringement. The court combined the case that we filed in Colorado
with the case in Miami and transferred it to the Miami court. The case remains
pending in Miami. While the networks have not sought monetary damages, they have
sought to recover attorney fees if they prevail.
In February 1999, the networks filed a "Motion for Temporary Restraining
Order, Preliminary Injunction and Contempt Finding" against DirecTV, Inc. in
Miami related to the delivery of distant network channels to DirecTV customers
by satellite. DirecTV settled this lawsuit with the networks. Under the terms of
the settlement between DirecTV and the networks, some DirecTV customers were
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scheduled to lose access to their satellite-provided distant network channels by
July 31, 1999, while other DirecTV customers were to be disconnected by December
31, 1999. Subsequently, PrimeTime 24 and substantially all providers of
satellite-delivered network programming other than EchoStar agreed to this
cut-off schedule, although we do not know if they adhered to this schedule.
In December 1998, the networks filed a Motion for Preliminary Injunction
against us in the Miami court, and asked the court to enjoin us from providing
network programming except under limited circumstances. A preliminary injunction
hearing was held on September 21, 1999. The court took the issues under
advisement to consider the networks' request for an injunction, whether to hear
live testimony before ruling upon the request, and whether to hear argument on
why the Satellite Home Viewer Act may be unconstitutional, among other things.
In March 2000, the networks filed an emergency motion again asking the court
to issue an injunction requiring us to turn off network programming to certain
of its customers. At that time, the networks also argued that our compliance
procedures violate the Satellite Home Viewer Improvement Act. We opposed the
networks' motion and again asked the court to hear live testimony before ruling
upon the networks' injunction request.
During September 2000, the Court granted the Networks' motion for
preliminary injunction, denied the Network's emergency motion and denied our
request to present live testimony and evidence. The Court's original order
required us to terminate network programming to certain subscribers "no later
than February 15, 1999," and contained other dates with which it would be
physically impossible to comply. The order imposes restrictions on our past and
future sale of distant ABC, NBC, CBS and Fox channels similar to those imposed
on PrimeTime 24 (and, we believe, on DirecTV and others). Some of those
restrictions go beyond the statutory requirements imposed by the Satellite Home
Viewer Act and the Satellite Home Viewer Improvement Act. For these and other
reasons we believe the Court's order is, among other things, fundamentally
flawed, unconstitutional and should be overturned. However, it is very unusual
for a Court of Appeals to overturn a lower court's order and there can be no
assurance whatsoever that it will be overturned.
On October 3, 2000, and again on October 25, 2000, the Court amended its
original preliminary injunction order in an effort to fix some of the errors in
the original order. The twice amended preliminary injunction order required us
to shut off, by February 15, 2001, all subscribers who are ineligible to receive
distant network programming under the court's order. We have appealed the
September 2000 preliminary injunction order and the October 3, 2000 amended
preliminary injunction order. On November 22, 2000, the United States Court of
Appeals for the Eleventh Circuit stayed the Florida Court's preliminary
injunction order pending our appeal. At that time, the Eleventh Circuit also
expedited its consideration of our appeal.
During November 2000, EchoStar filed its appeal brief with the Eleventh
Circuit. Oral argument before the Eleventh Circuit was held on May 24, 2001. At
the oral argument, the parties agreed to participate in a court supervised
mediation and that the mediator was to report back to the Eleventh Circuit on
July 11, 2001. The Eleventh Circuit indicated that it would not rule on the
pending appeal until after July 11, 2001. Since May 24, 2001, the parties
participated in the court supervised mediation. On July 11, 2001 the mediator
reported to the Eleventh Circuit the status of the parties' mediation efforts.
On July 16, 2001, the Eleventh Circuit issued an order for the parties to engage
in further mediation efforts until August 10, 2001. On August 8, 2001, the
parties participated in another court ordered mediation but were unable to reach
a resolution. On August 10, 2001, the mediator reported to the Eleventh Circuit
that despite the parties' extensive efforts, the parties were unable to resolve
their differences and that further efforts at mediation will not contribute to a
resolution of the dispute between the parties at this time. The mediator
therefore advised the Eleventh Circuit that it may rule upon our appeal.
We cannot predict when the Eleventh Circuit will rule on our appeal, but it
could be as early as August 2001. Our appeal effort may not be successful and we
may be required to comply with the Court's preliminary injunction order on short
notice. The preliminary injunction could force us to terminate delivery of
distant network channels to a substantial portion of our distant network
subscriber base, which could also cause many of these subscribers to cancel
their subscription to our other services. Management has determined that such
terminations would result in a small reduction in our reported average monthly
revenue per subscriber and could result in a temporary increase in churn. If we
lose the case at trial, the judge could, as one of many possible remedies,
prohibit all future sales of distant network programming by us, which would have
a material adverse affect on our business.
WE DEPEND ON THE CABLE ACT FOR ACCESS TO OTHERS' PROGRAMMING
Any change in the Cable Act and the FCC's rules that permit the cable
industry or cable-affiliated programmers to discriminate against competing
businesses, such as ours, in the sale of programming could adversely affect our
ability to acquire programming at all or to acquire programming on a
cost-effective basis. Under the Cable Act and the FCC's rules, cable-affiliated
programmers generally must offer
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programming they have developed to all multi-channel video programming
distributors on non-discriminatory terms and conditions. The Cable Act and the
FCC's rules also prohibit some types of exclusive programming contracts. We
purchase a substantial percentage of our programming from cable-affiliated
programmers. Some of these restrictions on cable-affiliated programmers will
expire in 2002 unless the FCC extends the rules. In addition, many of the FCC's
program access rules only apply to satellite-delivered programming, and some
programmers are delivering their programming terrestrially, which may make the
program access rules inapplicable to such programming. Generally, while we have
filed several complaints with the FCC alleging discrimination, exclusivity, or
refusals to deal, we have only had limited success in convincing the FCC to
grant us relief. The FCC has denied or dismissed many of our complaints, and we
believe has generally not shown a willingness to enforce the program access
rules strictly. As a result, we may be limited in our ability to obtain access
(or non-discriminatory access) to cable-affiliated programming. In addition, the
FCC modified certain of its attribution rules that determine whether a
programmer is affiliated with a cable operator and therefore subject to the
program access obligations. We do not yet know the implications or impact of
these modified rules.
WE EXPECT LOSSES THROUGH AT LEAST 2001 AND CANNOT BE CERTAIN THAT WE WILL
ACHIEVE OR SUSTAIN PROFITABILITY
Due to the substantial expenditures necessary to complete construction,
launch and deployment of our direct broadcast satellite system and to obtain and
service DISH Network customers, we have sustained significant losses. If we do
not have sufficient income or other sources of cash, it could eventually affect
our ability to service our debt and pay our other obligations. We had net losses
of $318 million and $165 million for the six months ended June 30, 2000 and
2001, respectively. Improvements in our results of operations depend largely
upon our ability to increase our customer base while maintaining our price
structure, effectively managing our costs and controlling churn. We cannot
assure you that we will be effective with regard to these matters. In addition,
we incur significant acquisition costs to obtain DISH Network subscribers. These
costs, which may continue to increase, magnify the negative effects of churn and
may otherwise have a material adverse effect on our results of operations. We
anticipate that we will continue to experience net losses through 2001. These
net losses may continue beyond 2001.
THE REGULATORY REGIME WE OPERATE UNDER COULD CHANGE ADVERSELY
The FCC imposes different rules for "subscription" and "broadcast" services.
We believe that because we offer a subscription programming service, we are not
subject to many of the regulatory obligations imposed upon broadcast licensees.
However, we cannot be certain whether the FCC will find in the future that we
should comply with regulatory obligations as a broadcast licensee with respect
to our current and future operations, and certain parties have requested that we
be treated as a broadcaster. If the FCC determined that we are a broadcast
licensee, the FCC may require us to comply with all regulatory obligations
imposed upon broadcast licensees, which are generally subject to more burdensome
regulation than subscription service providers like us.
Under a requirement of the Cable Act, the FCC imposed public interest
requirements on direct broadcast satellite licensees, such as us, to set aside
four percent of channel capacity exclusively for noncommercial programming for
which we must charge programmers below-cost rates and for which we may not
impose additional charges on subscribers. This could also displace programming
for which we could earn commercial rates and could adversely affect our
financial results. The FCC has not reviewed our methodology for computing the
channel capacity we must set aside or for determining the rates that we charge
public interest programmers, and we cannot be sure that, if the FCC were to
review these methodologies, it would find them in compliance with the public
interest requirements.
Under a requirement of the Telecommunications Act of 1996, the FCC recently
imposed upon broadcasters and certain multichannel video programming
distributors, including us, the responsibility of providing video description
for visually impaired persons. Video description involves the insertion into a
television program of narrated descriptions of settings and actions that are not
otherwise reflected in the dialogue, and is typically provided through the
Secondary Audio Programming (SAP) channel. Commencing April 12, 2002, affected
multichannel video programming distributors like us will be required to provide
video description for a minimum of 50 hours per calendar quarter (roughly four
hours per week) of prime time and/or children's programming on each of any of
the top five national non-broadcast networks they carry. In addition,
distributors will be required to "pass through" any video description they
receive from a broadcast station or non-broadcast network if the multichannel
video programming distributor has the technical capability necessary to do so
associated with the channel on which it distributes the programming with video
description. While the FCC acknowledged that programming networks, and not
multichannel video programming distributors, may actually describe the
programming, it declared that for ease of enforcement and monitoring compliance
it would hold distributors responsible for compliance. We cannot be sure that
these requirements will not impose an excessive burden on us.
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The FCC has also commenced an inquiry into distribution of high-speed
Internet access services and a rulemaking concerning interactive television
services. In both of those proceedings, the FCC is considering whether to impose
on distributors, including possibly satellite distributors like us, various
types of "open access" obligations (such as required carriage of independent
content providers). We cannot be sure that the FCC will not ultimately impose
such obligations, which could be very onerous, and could create a significant
strain on our capacity and ability to provide other services.
The FCC has commenced a rulemaking which seeks to streamline and revise its
rules governing direct broadcast satellite operators. This rulemaking concerns
many new possible direct broadcast satellite rules. There can be no assurance
about the content and effect of any new direct broadcast satellite rules passed
by the FCC, and the new rules may include expanded geographic service
requirements for Alaska, Hawaii and Puerto Rico. The FCC has also released a
notice of proposed rulemaking regarding the current restrictions on the
flexibility of DBS companies to provide services other than DBS, and may change
these restrictions.
The FCC has adopted a proposal to allow non-geostationary orbit fixed
satellite services to operate on a co-primary basis in the same frequency as DBS
and Ku-based FSS services, and is currently finalizing rules to govern these
services. These satellite operations could provide global high-speed data
services. In addition to possible interference concerns, this would, among other
things, create additional competition for satellite and other services. In the
same rulemaking, the FCC has been considering a terrestrial service originally
proposed by Northpoint Technology, Ltd. that would retransmit local television
or other video and data services to DBS subscribers or others in the same DBS
spectrum that we use throughout the United States. Furthermore, the Satellite
Home Viewer Improvement Act of 1999 required the FCC to make a determination by
November 29, 2000 regarding licenses for facilities that will retransmit
broadcast signals to underserved markets by using spectrum otherwise allocated
to commercial use, possibly including DBS spectrum. Northpoint had already been
allowed by the FCC to conduct experimental operations in Texas and Washington,
D.C.
We have submitted numerous pleadings jointly with DirecTV to the FCC
expressing concern over the Northpoint request, which in our view may cause
harmful and substantial interference to the service provided to DBS customers.
DirecTV and we have also jointly conducted tests of Northpoint's proposed
technology and have presented our test results, which in our view show harmful
interference from Northpoint's proposed service, and Northpoint has filed
oppositions to our submissions. Furthermore, other entities have now filed
applications similar to the one filed by Northpoint, and at least one other
entity has also obtained a license from the FCC to conduct experimental
operations. If Northpoint, or other entities become authorized to use our
spectrum, they could cause harmful and substantial interference into our
service.
On December 8, 2000, the FCC released a Report and Order and Further Notice
of Proposed Rulemaking in this proceeding. Despite our objections, the FCC
concluded that a terrestrial "point-to-multipoint" service can share the
spectrum with DBS on a no interference basis -- a conclusion that may have a
significant adverse impact on our operations. At the same time, the FCC
initiated a further notice of proposed rulemaking to determine the appropriate
interference standards and technical rules with which such a terrestrial service
must comply. The FCC also requested proposals on how to process applications for
licenses for the new service, and tentatively proposed excluding satellite
companies from such licenses. We have filed a petition for reconsideration of
the FCC's conclusion and comments on its proposals.
In addition, appropriations legislation that was recently enacted required
independent testing of the Northpoint technology, and creates rural loan
guarantees for providers of certain types of services. The independent tests
mandated by that law have been completed. MITRE, the independent testing entity,
concluded that: the new terrestrial service "poses a significant interference
threat to DBS operation in many realistic operational situations"; "a wide
variety of mitigation techniques exist that, if properly applied under
appropriate circumstances, can greatly reduce, or eliminate, the geographical
extent of the regions of potential . . . interference into DBS"; and that
"bandsharing appears feasible if and only if suitable mitigation measures are
applied." The independent study left open the question of whether the potential
costs of such mitigation measures together with the impact of residual
interference outweighed the benefit of allowing the new terrestrial service in
the band used by DBS. We and DirecTV have asserted to the FCC that MITRE's
findings constitute additional grounds for reconsidering the FCC's conclusion on
sharing, while Northpoint has argued that MITRE confirms Northpoint's ability to
share with DBS. We cannot be sure whether and when these processes will result
in the licensing of Northpoint and/or companies proposing a similar service to
operate in the spectrum licensed to us, what the interference standards will be,
and how significant the interference into our operations will be.
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OUR BUSINESS DEPENDS SUBSTANTIALLY ON FCC LICENSES THAT CAN EXPIRE OR BE REVOKED
OR MODIFIED AND APPLICATIONS THAT MAY NOT BE GRANTED
We have licenses to operate EchoStar I and EchoStar II at the 119 degree
orbital location, which both expire in 2006, a license to operate 11 frequencies
on EchoStar III at the 61.5 degree orbital location, which expires in 2008, and
10-year authorizations (whose term has started running) to launch and operate
EchoStar V and EchoStar VI at the 110 degree and 119 degree orbital locations,
respectively. Our authorization at the 148 degree orbital location requires us
to construct a satellite by December 20, 2000 and to utilize all of our
FCC-allocated frequencies at that location by December 20, 2002, or risk losing
those frequencies that we are not using. At the 61.5 degree orbital location we
utilize certain additional channels beyond our licensed channels, under special
temporary authority, which the FCC may refuse to renew, and which is subject to
several restrictive conditions. We also note that the FCC recently extended the
permit of another company to construct and launch a satellite that would use
most of these additional channels. If our special temporary authority to use the
channels assigned to that other company does not expire sooner, it will
certainly be terminated if that company does actually construct and launch a
satellite to the 61.5 degree orbital location. Third parties have opposed, and
we expect them to continue to oppose, some of our authorizations or pending and
future requests to the FCC for extensions, modifications, waivers and approvals.
Generally, all of our licenses are subject to expiration unless renewed by the
FCC, and our special temporary authorizations are granted for periods of 180
days or less, subject again to possible renewal by the FCC.
In conjunction with our plan to provide local-into-local broadcast service
as well as cable programming from the 110 degree orbital location, we moved
EchoStar IV to the 119 degree orbital location in early 2000. The move has
allowed us to transition some of the programming previously on EchoStar I and
EchoStar II to EchoStar IV, which can provide service to Alaska and Hawaii from
the orbital location. In connection with that plan, we have also petitioned the
FCC to declare that we have met our due diligence obligations for the 148 degree
orbital location, or alternatively to extend the December 20, 2000 milestone for
that location. The State of Hawaii has opposed that request and there is no
assurance that it will be granted by the FCC. If our request is not granted by
the FCC, our license for the 148 degree orbital location may be revoked or
canceled.
We have received FCC authorization to operate EchoStar IV and EchoStar VI at
the 119 degree orbital location. We have also moved EchoStar I from the 119
degree orbital location to the 148 degree orbital location. EchoStar VI
commenced commercial service during October 2000, and EchoStar II currently
operates as an in-orbit spare. In general, our plans have involved and still
involve the relocation of satellites either within or slightly outside the
"cluster" of a particular orbital location, or from one orbital location to
another where we have various types of authorizations. These changes require FCC
approval, and we cannot be sure that we will receive all needed approvals for
our current and future plans. Furthermore, the states of Alaska and Hawaii have
requested the FCC to impose conditions on the license for EchoStar VI, relating
to certain aspects of our service such as prices and equipment. While the FCC
denied these requests for conditions, it cautioned that it may impose similar
requirements as a result of a pending rulemaking. Such requirements could be
very onerous for us. In general, the states of Alaska and Hawaii have expressed
views that our service to these states from various orbital locations does not
comply with our FCC-imposed obligations to serve those states, and we cannot be
sure that the FCC will not accept these views. Such actions would have a
material adverse effect on our business. Moreover, because we cannot meet the
geographic service requirements from the 148 degree orbital location, we had to
request and obtain a conditional waiver of these requirements to allow operation
of EchoStar I at the location. As a result, our current authorization to operate
EchoStar I at the 148 degree orbital location is subject to several conditions
that may be onerous.
We have contracted for two additional DBS satellites, EchoStar VII and
EchoStar VIII, which are being constructed. We presently plan to operate these
satellites at the 119 and 110 degree orbital locations. The launch and operation
of these satellites requires prior FCC approval, which we recently requested for
EchoStar VII. We cannot be sure that these requests will not be opposed, that
they will be timely granted or that they will be granted at all by the FCC.
In a recent decision, the FCC approved a transfer of majority control over
E-Sat, a non-geostationary mobile satellite service license from us to another
company, but warned that this approval is without prejudice to its investigation
of certain complaints relating to E-Sat. We cannot be sure whether any such
investigation will have implications for E-Sat, in which we now have a minority
interest.
The telemetry, tracking and control operations of EchoStar I are in an area
of the spectrum called the "C-band." Although the FCC granted us conditional
authority to use these frequencies for telemetry, tracking and control, in
January 1996 a foreign government raised an objection to EchoStar I's use of
these frequencies. We cannot be certain whether that objection will subsequently
require us to relinquish the use of such C-band frequencies for telemetry,
tracking and control purposes. Further, EchoStar II's telemetry, tracking and
control operations are in the "extended" C-band. Our authorization to use these
frequencies expired on January 1, 1999. Although we have timely applied for
extension of that authorization to November 2006, we cannot be sure that the FCC
will grant our request. If we lose the ability to use these frequencies for
controlling either satellite, we would lose the satellite. Recently, the FCC
released a ruling in a rulemaking
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proceeding that will allow commercial terrestrial services and hamper future
satellite operations in the "extended" C-band frequencies. This ruling might
have negative implications for us.
All of our FCC authorizations are subject to conditions as well as to the
FCC's authority to modify, cancel or revoke them. In addition, all of our
authorizations for satellite systems that are not yet operational, are subject
to construction and progress obligations, milestones, reporting and other
requirements. The FCC has indicated that it may revoke, terminate, condition or
decline to extend or renew such authorizations if we fail to comply with
applicable Communications Act requirements. We have received conditional
licenses from the FCC to operate satellites in the Ka-band and Ku-band and have
an application pending for a system that would use extended Ku-band frequencies
(although that application has remained pending for years). Use of those
licenses and conditional authorizations are subject to certain due technical and
due diligence requirements, including the requirement to construct and launch
satellites. The granting of those licenses has been challenged by parties with
interests that are adverse to ours. Among other things, our conditional license
for a Ku-band satellite system is subject to still pending petitions for
reconsideration and cancellation. The construction, completion and launch
milestones for both Ku-band satellites have expired. We have filed a timely
request for the extension of these milestones for our Ku-band system. With
respect to our license for the Ka-band system, the FCC recently authorized our
operation of inter-satellite links for the system and assigned milestone
requirements for the construction, launch and operation of the satellite system.
If we fail to file adequate reports or to demonstrate progress in the
construction of our satellite systems, the FCC has stated that it may cancel our
authorizations for those systems. Our license for our Ka-band system allows us
to use only 500 MHz of Ka-band spectrum in each direction, while other licensees
have been authorized to use 1,000 MHz in each direction. The FCC recently denied
our modification application to use additional spectrum, and granted certain
Ka-band licenses that would preclude such expanded capacity for us.
Instead of the constructing Ka-band and Ku-band satellites for which we have
a license at the 121 degree orbital location, we are in the process of
constructing a "hybrid" Ku/Ka-band satellite. Launch and operation of this
satellite requires prior FCC approval, which we intend soon to request. We
cannot be sure that this request will not be opposed, that it will be timely
granted, or that it will be granted at all. That satellite does not currently
incorporate inter-satellite links, and one company has already argued to the FCC
that this makes us subject to more expedited milestones for our system, some of
which have lapsed. We have objected to this argument, but cannot be sure what
action the FCC will take.
We have also applied to the FCC for authority to obtain control over
VisionStar, Inc., a company that has a license for a Ka-band satellite at
another orbital location and in which we already have a minority interest.
Certain parties have asked the FCC to deny our application and hold VisionStar's
license invalid, and have argued that even our current interest in VisionStar
constitutes an improper transfer of control; we cannot be sure that the FCC will
not deny our application or agree with the other arguments made by these
parties. One company has also requested that the FCC restrict the number of
Ka-band orbital slots available to any one company, which would prevent us from
acquiring control over VisionStar or other Ka-band licensees.
If we successfully construct and launch Ku-band, extended Ku-band and low
Ka-band satellites, we might be able to use those satellites to complement the
DISH Network, or for a variety of other uses. It is possible that the Ku-band
and Ka-band orbital locations requested by us and others could permit
construction of satellites with sufficient power to allow reception of satellite
signals by relatively small dishes. As these projects are in the early stages of
development and are currently being challenged by several companies with
interests adverse to ours, there can be no assurance that the FCC will sustain
these licenses, or grant the pending applications, or that we will be able to
successfully capitalize on any resulting business opportunities.
WE DEPEND ON OTHERS TO PRODUCE PROGRAMMING
We depend on third parties to provide us with programming services. Our
programming agreements have remaining terms ranging from less than one and up to
ten years and contain various renewal and cancellation provisions. We may not be
able to renew these agreements on favorable terms or at all, or these agreements
may be canceled prior to expiration of their original term. If we are unable to
renew any of these agreements or the other parties cancel the agreements, we
cannot assure you that we would be able to obtain substitute programming, or
that such substitute programming would be comparable in quality or cost to our
existing programming. In particular, the cost of sports programming has been
rising rapidly. Our competitors currently offer much of the same programming
that we do. Our ability to compete successfully will depend on our ability to
continue to obtain desirable programming and offer it attractively to our
customers at competitive prices.
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OUR SATELLITES ARE SUBJECT TO RISKS DURING AND AFTER LAUNCH
Satellite launches are subject to significant risks, including launch
failure, which may result in incorrect orbital placement or improper commercial
operation. Approximately 15% of all commercial geostationary satellite launches
have resulted in a total or constructive total loss. The failure rate varies by
launch vehicle and satellite manufacturer. The loss, damage or destruction of
any of our satellites as a result of electrostatic storm or collision with space
debris would have a material adverse effect on our business.
During February 2001, we announced an agreement with Lockheed Martin's
International Launch Services division to provide launch services for the
EchoStar VII and EchoStar VIII satellites, which also includes options for
launch services for additional satellites. EchoStar VII is expected to launch in
the fourth quarter of 2001 on a Lockheed Martin Atlas IIIB launch vehicle from
Cape Canaveral, FL. EchoStar VIII is expected to launch during the first quarter
of 2002 on a Russian Proton K/Block DM launch vehicle from the Baikonur
Cosmodrome in Kazakhstan.
The first commercial Atlas IIIA launch successfully carried a Eutelsat
payload into geosynchronous transfer orbit during May 2000. The Atlas III launch
vehicle is available in a single engine centaur Atlas IIIA configuration and
with the dual engine centaur Atlas IIIB configuration that we will utilize. It
is expected that our satellite launch will be the first flight for the Atlas
IIIB. The risk of launch delay and the risk of launch failure are usually
greater when the rocket does not have a track record of previously successful
flights.
Meteoroid events pose a potential threat to all in orbit geosynchronous
satellites including our DBS satellites. While the probability that our
satellites will be damaged by meteoroids is very small, that probability
increases significantly when the Earth passes through the particulate stream
left behind by various comets.
Due to the current peak in the 11-year solar cycle, increased solar activity
is likely for the next year. Some of these solar storms pose a potential threat
to all in-orbit geosynchronous satellites, including our DBS satellites. The
probability that the effects from the storms will damage our satellites or cause
service interruptions is generally very small.
Some decommissioned spacecraft are in uncontrolled orbits which pass through
the geostationary belt at various points, and present hazards to operational
spacecraft, including our DBS satellites. The locations of these hazards are
generally well known and may require us to perform maneuvers to avoid
collisions.
OUR SATELLITES HAVE MINIMUM DESIGN LIVES OF 12 YEARS, BUT COULD FAIL BEFORE THEN
Our ability to earn revenue wholly depends on the usefulness of our
satellites. Each of our satellites has a limited useful life. A number of
factors affect the useful lives of the satellites, including the quality of
their construction, the durability of their component parts, the ability to
continue to maintain proper orbit and the efficiency of the launch vehicle used.
The minimum design life of each of EchoStar I, EchoStar II, EchoStar III,
EchoStar IV, EchoStar V and EchoStar VI is 12 years. We can provide no
assurance, however, as to the useful lives of the satellites. Anomalies EchoStar
IV has experienced have reduced its remaining useful life. As a result, in
January 2000, we reduced the total estimated useful life of EchoStar IV to
approximately 4 years as of such date. There can be no assurance, however, that
a total loss of use of this satellite will not occur in the more immediate
future. Our operating results would be adversely affected if the useful life of
any of our other satellites were significantly shorter than 12 years. The
satellite construction contracts for our satellites contain no warranties if
EchoStar I, EchoStar II, EchoStar III, EchoStar IV, EchoStar V or EchoStar VI
fails following launch. The satellite construction contracts for the satellites
under construction contain no warranties if EchoStar VII, EchoStar VIII, or
EchoStar IX fails following launch, except in the event that the relevant
failure is caused by the gross negligence or willful misconduct of the
manufacturer. Additionally, moving any of these satellites, either temporarily
or permanently, to another orbital location decreases the orbital life of the
satellite by up to six months per movement.
In the event of a failure or loss of any of our satellites, we may relocate
another satellite and use it as a replacement for the failed or lost satellite.
Such a relocation would require prior FCC approval and, among other things, a
showing to the FCC that the replacement satellite would not cause additional
interference compared to the failed or lost satellite. We cannot be certain that
we could obtain such FCC approval. If we choose to use a satellite in this
manner, we cannot assure that this use would not adversely affect our ability to
meet the operation deadlines associated with our permits. Failure to meet those
deadlines could result in the loss of such permits, which would have an adverse
effect on our operations.
INSURANCE COVERAGE OF OUR SATELLITES IS LIMITED AND WE MAY BE UNABLE TO SETTLE
OUTSTANDING CLAIMS WITH INSURERS
As a result of the failure of EchoStar IV solar arrays to fully deploy and
the failure of 28 transponders to date, a maximum of approximately 14 of the 44
transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar
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arrays, the number of available transponders will further decrease over time. In
addition to the transponder and solar array failures, EchoStar IV experienced
anomalies affecting its thermal systems and propulsion system. There can be no
assurance that further material degradation, or total loss of use, of EchoStar
IV will not occur in the immediate future.
In September 1998, we filed a $219.3 million insurance claim for a
constructive total loss under the launch insurance policies covering EchoStar
IV. The satellite insurance consists of separate identical policies with
different carriers for varying amounts which, in combination, create a total
insured amount of $219.3 million.
The insurance carriers offered us a total of approximately $88 million, or
40% of the total policy amount, in settlement of the EchoStar IV insurance
claim. The insurers allege that all other impairment to the satellite occurred
after expiration of the policy period and is not covered. We strongly disagree
with the position of the insurers and have filed an arbitration claim against
them for breach of contract, failure to pay a valid insurance claim and bad
faith denial of a valid claim, among other things. There can be no assurance
that we will receive the amount claimed or, if we do, that we will retain title
to EchoStar IV with its reduced capacity.
At the time we filed our claim in 1998, we recognized an impairment loss of
$106 million to write-down the carrying value of the satellite and related
costs, and simultaneously recorded an insurance claim receivable for the same
amount. We continue to believe we will ultimately recover at least the amount
originally recorded and do not intend to adjust the amount of the receivable
until there is greater certainty with respect to the amount of the final
settlement.
As a result of the thermal and propulsion system anomalies, we reduced the
estimated remaining useful life of EchoStar IV to approximately 4 years during
January 2000. We will continue to evaluate the performance of EchoStar IV and
may modify our loss assessment as new events or circumstances develop.
The in-orbit insurance policies for EchoStar I, EchoStar II, and EchoStar
III expired July 25, 2000. The insurers have to date refused to renew insurance
on EchoStar I, EchoStar II and EchoStar III on reasonable terms. Based on, among
other things, the insurance carriers' unanimous refusal to negotiate reasonable
renewal insurance coverage, we believe that the carriers colluded and conspired
to boycott us unless we accept their offer to settle the EchoStar IV claim for
$88 million.
Based on the carriers' actions, we have added causes of action in our
EchoStar IV demand for arbitration for breach of the duty of good faith and fair
dealing, and unfair claim practices. Additionally, we filed a lawsuit against
the insurance carriers in the United States District Court for the District of
Colorado asserting causes of action for violation of Federal and State Antitrust
laws. While we believe we are entitled to the full amount claimed under the
EchoStar IV insurance policy and believe the insurance carriers are in violation
of Antitrust laws and have committed further acts of bad faith in connection
with their refusal to negotiate reasonable insurance coverage on our other
satellites, there can be no assurance as to the outcome of these proceedings.
During March 2001, we voluntarily dismissed the antitrust lawsuit without
prejudice. We have the right to re-file an antitrust action against the insurers
again in the future.
The indentures related to the senior notes of EBC and EDBS contain
restrictive covenants that require us to maintain satellite insurance with
respect to at least half of the satellites we own. Insurance coverage is
therefore required for at least three of our six satellites currently in orbit.
We had procured normal and customary launch insurance for EchoStar VI, which
expired on July 14, 2001. As a result, we are currently self-insuring EchoStar
I, EchoStar II, EchoStar III, EchoStar IV, EchoStar V and EchoStar VI. During
2000, to satisfy insurance covenants related to the outstanding senior notes of
EBC and EDBS, we reclassified an amount equal to the depreciated cost of two of
our satellites from cash and cash equivalents to cash reserved for satellite
insurance on our balance sheet. As of June 30, 2001, cash reserved for satellite
insurance totaled approximately $74 million. Cash reserved for satellite
insurance increased by approximately $60 million on July 14, 2001 as a result of
the expiration of the EchoStar VI launch insurance policy. The reclassifications
will continue until such time, if ever, as we can again insure our satellites on
acceptable terms and for acceptable amounts. We believe we have in-orbit
satellite capacity sufficient to expeditiously recover transmission of most
programming in the event one of our in-orbit satellites fails. However, the cash
reserved for satellite insurance is not adequate to fund the construction,
launch and insurance for a replacement satellite in the event of a complete loss
of a satellite. Programming continuity could not be assured in the event of
multiple satellite losses.
We may not be able to obtain commercial insurance covering the launch and/or
in-orbit operation of EchoStar VII and/or EchoStar VIII at reasonable rates
and/or for the full amount necessary to construct, launch and insure replacement
satellites. In that event, we will be forced to self-insure all or a portion of
the launch and/or in-orbit operation of each of the affected satellite(s).
Further, there is no guarantee that we will have sufficient resources to
self-insure all or any portion of the launch and/or in-orbit operation of the
affected satellite(s). The manufacturers of EchoStar VII and EchoStar VIII are
contractually obligated to use their reasonable best efforts to obtain
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commercial insurance for the launch and in-orbit operation of EchoStar VII and
EchoStar VIII for a period of in-orbit operation to be determined and in an
amount up to $225 million. There is no guarantee that they or we will be able to
obtain commercial insurance for the launch and/or in-orbit operation of EchoStar
VII and/or EchoStar VIII at reasonable rates and/or for the full replacement
cost of those satellites. Any launch vehicle failure, or loss or destruction of
EchoStar VII and/or EchoStar VIII, for which we do not have commercial insurance
for the full replacement cost of such satellites, could have a material adverse
effect on our ability to comply with "must carry" and other regulatory
obligations and on our financial condition. See also, "Risk Factors -- We need
to increase satellite capacity to avoid potential disruptions in our service
caused by "must carry" requirements."
WE HAVE MADE SIGNIFICANT STRATEGIC INVESTMENTS WHICH MAY NOT BE REALIZABLE
We have made strategic equity investments in certain non-marketable
investment securities including Wildblue Communications, StarBand
Communications, VisionStar, Inc. and Replay TV, and may make additional
strategic investments in other debt and equity securities in the future. The
original cost basis of our investments in these non-marketable investment
securities totaled approximately $116 million. The securities of these companies
are not publicly traded. Our ability to create realizable value for our
strategic investments in companies that are not public is dependent on the
success of their business plans. Among other things, there is relatively greater
risk that those companies may not be able to raise sufficient capital to fully
finance their business plans and ability to obtain sufficient capital to execute
their business plans. Since private markets are not as liquid as public markets,
there is also increased risk that we will not be able to sell these investments,
or that when we desire to sell them that we will be able to obtain full value
for them. StarBand and Wildblue cancelled their planned initial public stock
offerings. As a result of the cancellation of those offerings and other factors,
during the six months ended June 30, 2001, we recorded a non-recurring charge of
approximately $59.4 million to reduce the carrying value of certain of our
non-marketable investment securities to their estimated fair values. StarBand
and Wildblue need to obtain significant additional capital in the near term.
Absent such funding among other things, additional write-downs of our
investments could be necessary. We intend to increase our equity stake in
StarBand to approximately 32% and acquire four out of seven seats on the
StarBand Board of Directors. In exchange, we would invest an additional $50
million in StarBand. Further, we would lease transponder capacity to StarBand
from a next generation satellite. In accordance with the agreement and subject
to customary regulatory approvals, our equity stake would increase to
approximately 60% upon commencement of the construction of the next generation
satellite.
WE MAY BECOME LIABLE IN A PENDING FEE DISPUTE
We had a contingent fee arrangement with the attorneys who represented us in
prior litigation with News Corporation. The contingent fee arrangement provides
for the attorneys to be paid a percentage of any net recovery obtained by us in
the News Corporation litigation. The attorneys have asserted that they may be
entitled to receive payments totaling hundreds of millions of dollars under this
fee arrangement.
During mid-1999, we initiated litigation against the attorneys in the
Arapahoe County, Colorado, District Court arguing that the fee arrangement is
void and unenforceable. In December 1999, the attorneys initiated an arbitration
proceeding before the American Arbitration Association. The litigation has been
stayed while the arbitration is ongoing. The arbitration hearing commenced April
2, 2001 and continued through April 13, 2001. The hearing could not be completed
during that time period and continued August 7, 2001. The presentation of
evidence at the arbitration hearing concluded on August 17, 2001. Post-Hearing
briefs are due October 1, 2001, with closing arguments scheduled for October 15,
2001. While there can be no assurance that the attorneys will not continue to
claim a right to hundreds of millions of dollars, the damage model the attorneys
presented during the arbitration was for $56 million. We believe that even that
amount significantly overstates the amount the attorneys should reasonably be
entitled to receive under the fee agreement but it is not possible for us to
predict what the decision of the three person arbitrator panel will be with any
degree of certainty. We continue to vigorously contest the attorneys'
interpretation of the fee arrangement, which we believe significantly overstates
the magnitude of liability.
COMPLEX TECHNOLOGY USED IN OUR BUSINESS COULD FAIL OR BECOME OBSOLETE
New applications and adaptations of existing and new technology, including
compression, conditional access, on screen guides interactivity and other
matters, and significant software development, are integral to our direct
broadcast satellite system and may, at times, not function as we expect.
Technology in the satellite television industry is in a rapid and continuing
state of change as new technologies develop. We cannot assure you that we and
our suppliers will be able to keep pace with technological developments. In
addition, delays in the delivery of components or other unforeseen problems in
our direct broadcast satellite system may occur that could adversely affect
performance or operation of our direct broadcast satellite system and could have
an adverse effect on our business. Further, if a competitive
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satellite receiver technology becomes commonly accepted as the standard for
satellite receivers in the United States, we would be at a significant
technological disadvantage.
WE DEPEND PRIMARILY ON A SINGLE RECEIVER MANUFACTURER
SCI Technology, Inc., a high-volume contract electronics manufacturer, is
the primary manufacturer of our receiver systems. JVC and VTech also manufacture
some of our receiver systems. If any of these vendors are unable for any reason
to produce receivers in a quantity sufficient to meet our requirements, it would
impair our ability to add additional DISH Network subscribers and grow our
technology business unit. Likewise, it would adversely affect our results of
operations.
WE HAVE FEWER DISTRIBUTION CHANNELS THAN OUR LARGEST DIRECT BROADCAST SATELLITE
COMPETITOR
We do not have manufacturing agreements or arrangements with consumer
products manufacturers other than JVC and VTech. As a result, our receivers, and
consequently our programming services, are less well known to consumers than
those of our largest direct broadcast satellite competitor, DirecTV. Our largest
competitor's direct broadcast satellite systems are sold in significantly more
consumer electronics retailers than our receiver systems, which, among other
things, results in us having a competitive marketing disadvantage compared to
DirecTV.
WE RELY ON KEY PERSONNEL
We believe that our future success will depend to a significant extent upon
the performance of Charles W. Ergen, our Chairman and Chief Executive Officer.
The loss of Mr. Ergen could have an adverse effect on our business. We do not
maintain "key man" insurance. Although all of our executives have executed
agreements limiting their ability to work for or consult with competitors if
they leave us, we do not have any employment agreements with any of our
executive officers.
WE ARE CONTROLLED BY ONE PRINCIPAL STOCKHOLDER
Charles W. Ergen, our Chairman and Chief Executive Officer, currently
beneficially owns approximately 51% of our total equity securities, assuming
exercise of vested employee stock options, and possesses approximately 91% of
the total voting power. Thus, Mr. Ergen has the ability to elect a majority of
our directors and to control all other matters requiring the approval of our
stockholders. In addition, pursuant to a voting agreement among Mr. Ergen, News
Corporation and MCI WorldCom, News Corporation and MCI WorldCom have agreed to
vote their shares in accordance with the recommendation of our Board of
Directors for five years. For Mr. Ergen's total voting power to be reduced to
below 51%, his percentage ownership of our equity securities would have to be
reduced to below 10%.
FOREIGN OWNERSHIP RESTRICTIONS COULD AFFECT OUR BUSINESS PLAN
The Communications Act, and the FCC's implementing regulations, provide that
when subsidiaries of a holding company hold certain types of FCC licenses,
foreign nationals or their representatives may not own or vote more than 25% of
the total equity of the holding company, except upon an FCC public interest
determination. Although the FCC's International Bureau has ruled that these
limitations do not apply to providers of subscription direct broadcast satellite
services like us, the ruling is under challenge. Furthermore, the limitations
will apply to our licenses for fixed satellite service if we hold ourselves out
as a common carrier or if the FCC decides to treat us as such a carrier. The FCC
has noted that we have proposed to operate one of our authorized fixed satellite
service systems on a common carrier as well as a non-common carrier basis. We
have recently informed the FCC that we have no common carrier plans with respect
to that system.
Currently, a subsidiary of News Corporation, an Australian corporation, owns
approximately 5.5% of our total outstanding stock, having 1% of our total voting
power. This ownership has increased the possibility that foreign ownership of
our stock may exceed the foreign ownership limitations if they apply. In
connection with the MCI WorldCom authorization that we received in connection
with our transactions with News Corporation, the FCC has decided to waive any
foreign ownership limitations to the extent applicable. Nevertheless, we cannot
foreclose the possibility that, in light of any subsequent FCC decisions or
policy changes, we may in the future need a separate FCC determination that
foreign ownership in excess of any applicable limits is consistent with the
public interest in order to avoid a violation of the Communications Act or the
FCC's rules.
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RISKS PRIMARILY RELATED TO THE CONVERTIBLE NOTES
THE CONVERTIBLE NOTES ARE SUBORDINATED TO OTHER DEBT AND NOT SECURED BY ANY OF
OUR ASSETS
The convertible notes are general unsecured obligations ranking junior to
all our existing and future "Senior Debt," as that term is defined in the
indenture. See "Description of Convertible Notes -- Definitions." In addition,
the convertible notes are effectively junior to all our existing and future
secured indebtedness to the extent of the value of the assets securing that
indebtedness. As a result of such subordination, in the event of our bankruptcy,
liquidation or reorganization or certain other events, our assets will be
available to pay obligations on the convertible notes only after all of our
Senior Debt and all of our secured debt, to the extent of the value of the
assets securing that debt, has been paid in full. Consequently, there may not be
sufficient assets remaining to pay amounts due on any or all of the convertible
notes then outstanding. In addition, to the extent our assets cannot satisfy in
full the secured indebtedness, the holders of the secured indebtedness would
have a claim for any shortfall that would rank senior in right of payment with
respect to the convertible notes, if such secured debt were "Senior Debt," or
would rank equally in right of payment with the convertible notes if such
secured debt were not so classified. The indenture governing the convertible
notes does not prohibit or limit our or our subsidiaries' incurrence of
additional debt, including Senior Debt or secured debt, and the incurrence of
any such additional indebtedness could adversely affect our ability to pay our
obligations on the convertible notes. As of June 30, 2001, the convertible notes
ranked junior to $3.0 billion of indebtedness and $1.3 billion of other
liabilities of our subsidiaries, and ranked equal to $1.0 billion of our other
convertible notes.
WE HAVE SUBSTANTIAL INDEBTEDNESS AND ARE DEPENDENT ON OUR SUBSIDIARIES' EARNINGS
TO MAKE PAYMENTS ON OUR INDEBTEDNESS
We have substantial debt service requirements which make us vulnerable to
changes in general economic conditions. The indentures governing our
subsidiaries' debt restrict their ability to incur additional debt. Thus it is,
and will continue to be, difficult for our subsidiaries to obtain additional
debt if required or desired in order to implement our business strategy. Since
we conduct substantially all of our operations through our subsidiaries, our
ability to service our debt obligations is dependent upon the earnings of our
subsidiaries and the payment of funds by our subsidiaries to us in the form of
loans, dividends or other payments. We have no significant net assets other than
the capital stock of our subsidiaries. Our subsidiaries are separate legal
entities and they have not guaranteed repayment of the convertible notes.
Furthermore, our subsidiaries are not obligated to make funds available to us,
and creditors of our subsidiaries have a superior claim to our subsidiaries'
assets. In addition, our subsidiaries' ability to make any payments to us
depends on their earnings, the terms of their indebtedness, business and tax
considerations and legal restrictions. The outstanding EBC senior notes
currently restrict EBC's ability to pay any dividends or make other
distributions to us and the outstanding EDBS senior notes currently restrict
EDBS' ability to pay any dividends or make other distributions to EBC. We cannot
assure you that EBC, EDBS or our other subsidiaries will be able to pay
dividends or otherwise distribute or contribute funds to us in an amount
sufficient to pay the principal of or interest on the indebtedness owed by us.
OUR SUBSIDIARIES HAVE SUBSTANTIAL INDEBTEDNESS WHICH EFFECTIVELY RANKS SENIOR TO
THE CONVERTIBLE NOTES
As of June 30, 2001, our subsidiaries had outstanding debt of approximately
$3.0 billion and also had $1.3 billion of other liabilities. Our subsidiaries
may incur significant indebtedness in the future. In the event of bankruptcy,
liquidation or dissolution of any of our subsidiaries, the claims of debtholders
and other creditors of such subsidiary would effectively rank senior to our
claims as a stockholder of such subsidiary with respect to such subsidiary's
assets. Accordingly, such debts and other obligations would have to be satisfied
in full prior to any payments being made to us, and there might be insufficient
assets available to satisfy your claims as a holder of the convertible notes.
FUTURE SALES OF OUR CLASS A COMMON STOCK MAY DEPRESS OUR STOCK PRICE
Sales of a substantial number of our shares of class A common stock in the
public market in connection with this offering, or other offerings by us, could
cause the market price of our class A common stock to decline. During October
1999, we filed a registration statement registering for sale up to 68,824,928
shares of our class A common stock by News America Incorporated and MCI WorldCom
Network Services, Inc. During December 1999, News America Incorporated and MCI
WorldCom Network Services, Inc. sold 27.6 million of these shares pursuant to an
underwritten offering. Within the past year, News America and MCI WorldCom sold
a total of 10.6 million additional shares on the open market, pursuant to SEC
Rule 144. As of the date of this prospectus, News America can sell approximately
7.6 million class A shares. As of June 25, 2001, News America and MCI WorldCom
together may sell approximately 30.6 million shares. Any sale of shares by News
America or other large stockholders subsequent to the date of this prospectus
may affect the market price of our class A common stock.
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WE MAY BE UNABLE TO REPAY OR REPURCHASE THE CONVERTIBLE NOTES UPON A CHANGE OF
CONTROL
There is no sinking fund with respect to the convertible notes, and the
entire outstanding principal amount of the convertible notes will become due and
payable at maturity. If we experience a change of control, as defined, you may
require us to repurchase all or a portion of your convertible notes prior to
maturity. See "Description of Convertible Notes -- Repurchase at the option of
holders." We may not have sufficient funds or be able to arrange for additional
financing to repay the convertible notes at maturity or to repurchase
convertible notes tendered to us following a change of control.
Borrowing arrangements or agreements relating to other indebtedness to which
we may become a party may contain restrictions on or prohibitions against our
repurchase of the convertible notes. If we were prohibited from repurchasing the
convertible notes under such financing arrangements and could not obtain the
necessary waivers or refinance the applicable borrowings, we would be unable to
repurchase the convertible notes. Our failure to repurchase any tendered
convertible notes or convertible notes due upon maturity would constitute an
event of default of the convertible notes.
THERE MAY BE NO PUBLIC MARKET FOR THE CONVERTIBLE NOTES
The convertible notes are a new issue of securities with limited trading
activity. Although the initial purchaser has advised us that it currently
intends to make a market in the convertible notes, it has no obligation to do so
and may discontinue any market making at any time without notice. In addition,
any market making activity is subject to the limits imposed by the Securities
Act and the Securities Exchange Act of 1934 and may be limited during the
pendency of any registration statement. Accordingly, we cannot assure you that
any market for the convertible notes will develop or, if it does develop, that
it will be maintained. If a trading market is established, various factors could
have a material adverse effect on the trading of the convertible notes,
including fluctuations in the prevailing interest rates. We expect the
convertible notes will be eligible for trading in the PORTAL Market. We do not
intend to apply for a listing of any of the convertible notes on any security
exchange or for quotation through the Nasdaq National Market.
OUR STOCK PRICE MAY BE VOLATILE
The price at which our class A common stock trades may be volatile and may
fluctuate substantially due to competition and changes in the subscription
television industry, regulatory changes, launch and satellite failures,
operating results below expectations, our strategic investments and
acquisitions, and other factors. In addition, price and volume fluctuations in
the stock market may affect market prices for our class A common stock for
reasons unrelated to our operating performance.
THE SHARES OF CLASS A COMMON STOCK RECEIVED UPON CONVERSION OF THE CONVERTIBLE
NOTES HAVE LIMITED VOTING RIGHTS
Our equity securities consist of common stock and preferred stock. Our
common stock has been divided into three classes with different voting rights.
Holders of class A common stock, which is the class issuable upon conversion of
the convertible notes, and holders of class C common stock are entitled to one
vote per share on all matters submitted to a vote of stockholders. Holders of
class B common stock are entitled to ten votes per share. No class C common
stock or other series of preferred stock is currently outstanding. However, upon
a change of control of us, any holder of class C common stock would be entitled
to ten votes per share. Holders of common stock generally vote together as a
single class on matters submitted to stockholders. Although the class A common
stock represents approximately 50% of our total common and preferred shares
outstanding, it represents only 9% of our total voting power. Holders of class A
common stock received upon conversion of the convertible notes will therefore
not be able to meaningfully participate in our affairs absent a restructuring of
our capital stock or the conversion of the outstanding class B common stock into
class A common stock.
WE DO NOT EXPECT TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE
We have never declared or paid any cash dividends on any class of our common
stock and we do not expect to declare dividends on our common stock in the
foreseeable future. Payment of any future dividends will depend upon our
earnings and capital requirements, restrictions in our debt facilities and other
factors our Board of Directors considers appropriate. We currently intend to
retain our earnings, if any, to support future growth and expansion. We may
also, in the future, enter into arrangements that limit our ability to pay
dividends.
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RATIO OF EARNINGS TO FIXED CHARGES
Six Months
Year Ended December 31, Ended
---------------------------------------------------------------------- June 30,
1996 1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- ---------- ----------
Ratio of earnings
to fixed charges -- -- -- -- -- --
========== ========== ========== ========== ========== ==========
Deficiency of
available
earnings to
fixed charges $ (185,066) $ (346,947) $ (272,862) $ (512,986) $ (615,291) $ (169,648)
========== ========== ========== ========== ========== ==========
For purposes of computing the ratio of earnings to fixed charges, and the
deficiency of earnings to fixed charges, earnings consist of earnings from
continuing operations before income taxes, plus fixed charges. Fixed charges
consist of interest incurred on all indebtedness and the imputed interest
component of rental expense under non-cancelable operating leases. For the years
ended December 31, 1996, 1997, 1998, 1999 and 2000 and the six months ended June
30, 2001, earnings were insufficient to cover the fixed charges.
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DESCRIPTION OF CONVERTIBLE NOTES
GENERAL
The convertible notes were issued under an indenture, to which we and U.S.
Bank Trust National Association, as trustee, are parties. The following
description is a summary of the material provisions of the indenture. It does
not restate the indenture in its entirety. We urge you to read the indenture and
the registration rights agreement because they, and not this description, define
your rights as a holder of the convertible notes. Copies of the indenture and
the registration rights agreement are available to you upon request.
You can find the definitions of certain terms used in this description under
the subheading "Definitions." In this section of the prospectus entitled
"Description of Convertible Notes" when we use the terms "we," "us," "our" or
similar terms, we are referring only to EchoStar Communications Corporation, the
issuer of the convertible notes, and not to any of our subsidiaries.
The convertible notes are our general unsecured obligations, subordinated in
right and priority of payment to all of our existing and future Senior Debt as
described under the subheading "Subordination of convertible notes" and
convertible into our class A common stock as described under the subheading
"Conversion." The indenture does not contain any financial covenants or
restrictions on the payment of dividends, the incurrence of Senior Debt, the
incurrence of other obligations, including debt, ranking equal to the
convertible notes or issuance or repurchase of our securities. The indenture
contains no covenants or other provisions to afford protection to holders of the
convertible notes in the event of a highly leveraged transaction, except to the
extent described under the subheading "Repurchase at the option of holders." The
convertible notes are not guaranteed by any of our subsidiaries.
We conduct substantially all of our operations through our subsidiaries. We
are dependent upon the cash flow of our subsidiaries to meet our obligations,
including our obligations under the convertible notes. As a result, the
convertible notes are subordinated to all existing and future indebtedness and
other liabilities and commitments of our subsidiaries with respect to the cash
flow and assets of those subsidiaries.
PRINCIPAL, MATURITY AND INTEREST
We issued convertible notes with a maximum aggregate principal amount of
$1,000,000,000. The convertible notes will mature on May 15, 2008. Interest on
the convertible notes will accrue at a rate of 5 3/4% per annum from the date of
original issuance and will be payable semiannually in cash on May 15 and
November 15, commencing on November 15, 2001. We will make each interest payment
to the holders of record of the convertible notes on the immediately preceding
May 1 and November 1. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. All references herein to a payment of
principal shall include any premium that may be payable.
We are required to pay special interest on the convertible notes under
certain circumstances, all as further described under the caption "Registration
Rights." All references herein to interest on the convertible notes shall
include any such special interest that may be payable.
The convertible notes are payable both as to principal and interest on
presentation of such convertible notes if in certificate form at our offices or
agencies maintained for such purpose or, at our option, payment of interest may
be made by check mailed to the holders of the convertible notes at their
respective addresses listed in the register of holders of convertible notes or,
if a holder who holds an aggregate principal amount of at least $5.0 million of
convertible notes so requests, by wire transfer of immediately available funds
to an account previously specified in writing by such holder to us and the
trustee. Until we designate otherwise, our office or agency is the office of the
trustee maintained for this purpose. The convertible notes have been issued in
registered form, without coupons, and in denominations of $1,000 and integral
multiples of $1,000.
CONVERSION
The holder of any convertible note has the right, exercisable at any time
after 90 days following the date of their original issuance and prior to
maturity, to convert the principal amount thereof (or any portion thereof that
is an integral multiple of $1,000) into shares of our class A common stock at a
conversion price of $43.29 per share, subject to adjustment as described below
(the "Conversion Price"), except that if a convertible note is called for
redemption, the conversion right will terminate at the close of business on the
business day immediately preceding the date fixed for redemption.
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If any convertible notes are converted during the period after any record
date but before the next interest payment date, interest on such convertible
notes will be paid on the next interest payment date, notwithstanding such
conversion, to the holder of record on the record date of those convertible
notes. Any convertible notes that are, however, delivered to us for conversion
after any record date but before the next interest payment date must, except as
described in the next sentence, be accompanied by a payment equal to the
interest payable on such interest payment date on the principal amount of
convertible notes being converted. We will not require the payment to us
described in the preceding sentence if, during that period between a record date
and the next interest payment date, a conversion occurs on or after the date
that we have issued a redemption notice and prior to the date of redemption. If
any convertible notes are converted after an interest payment date but on or
before the next record date, no interest will be paid on those convertible
notes. No fractional shares will be issued upon conversion, but a cash
adjustment will be made for any fractional shares.
The conversion price is subject to adjustment upon the occurrence of certain
events, including:
(1) the issuance of shares of class A common stock as a dividend or
distribution on our common stock;
(2) the subdivision or combination of our outstanding class A common
stock;
(3) the issuance to substantially all holders of our class A common
stock of rights or warrants to subscribe for or purchase class A common
stock (or securities convertible into class A common stock) at a price per
share less than the then current market price per share, as defined;
(4) the distribution of shares of our capital stock (other than class A
common stock), evidences of indebtedness or other assets (excluding
dividends in cash, except as described in paragraph 5 below) to all holders
of our class A common stock;
(5) the distribution, by dividend or otherwise, of cash to all holders
of our class A common stock in an aggregate amount that, together with the
aggregate of any other distributions of cash that did not trigger a
Conversion Price adjustment to all holders of our class A common stock
within the 12 months preceding the date fixed for determining the
stockholders entitled to such distribution and all Excess Payments in
respect of each tender offer or other negotiated transaction by us or any of
our subsidiaries for our class A common stock concluded within the preceding
12 months not triggering a Conversion Price adjustment, exceeds 15% of the
product of the current market price per share (determined as set forth
below) on the date fixed for the determination of stockholders entitled to
receive such distribution times the number of shares of our class A common
stock outstanding on that date;
(6) payment of an Excess Payment in respect of a tender offer or other
negotiated transaction by us or any of our subsidiaries for our class A
common stock, if the aggregate amount of such Excess Payment, together with
the aggregate amount of cash distributions made within the preceding 12
months not triggering a Conversion Price adjustment and all Excess Payments
in respect of each tender offer or other negotiated transaction by us or any
of our subsidiaries for our class A common stock concluded within the
preceding 12 months not triggering a Conversion Price adjustment, exceeds
15% of the product of the current market price per share on the expiration
of such tender offer or the consummation of such other negotiated
transaction, as the case may be, times the number of shares of our class A
common stock outstanding on that date; and
(7) the distribution to substantially all holders of our class A common
stock of rights or warrants to subscribe for securities (other than those
referred to in paragraph 3 above). In the event of a distribution to
substantially all holders of our class A common stock of rights to subscribe
for additional shares of our capital stock (other than those referred to in
paragraph 3 above), we may, instead of making any adjustment in the
Conversion Price, make proper provision so that each holder of a convertible
note who converts that convertible note after the record date for such
distribution and prior to the expiration or redemption of such rights will
be entitled to receive upon such conversion, in addition to shares of class
A common stock, an appropriate number of such rights. No adjustment of the
Conversion Price will be made until cumulative adjustments amount to one
percent or more of the Conversion Price as last adjusted.
If we reclassify or change our outstanding class A common stock, or
consolidate with or merge into or transfer or lease all or substantially all of
our assets to any person, or are a party to a merger that reclassifies or
changes our outstanding class A common stock, the convertible notes will become
convertible into the kind and amount of securities, cash or other assets which
the holders
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of the convertible notes would have owned immediately after the transaction if
the holders had converted their convertible notes immediately before the
effective date of the transaction.
The indenture provides that if rights, warrants or options expire
unexercised, the Conversion Price shall be readjusted to take into account the
actual number of such warrants, rights or options, which were exercised.
In the indenture, the "current market price" per share of class A common
stock on any date means the average of the daily market prices for the shorter
of (i) ten consecutive business days ending on the last full trading day on the
exchange or market referred to in determining such daily market prices prior to
the time of determination (as defined in the indenture) or (ii) the period
commencing on the date next succeeding the first public announcement of the
issuance of such rights or warrants or such distribution through such last full
trading day prior to the time of determination.
We are permitted to make such reductions in the Conversion Price as we, in
our discretion, determine to be advisable in order that any stock dividend,
subdivision of shares, distribution of rights to purchase stock or securities or
distribution of securities convertible into or exchangeable for stock which we
make to our stockholders will not be taxable to the recipients.
SUBORDINATION OF CONVERTIBLE NOTES
The convertible notes are subordinated in right and priority of payment to
all of our existing and future Senior Debt. The indenture does not prohibit or
limit the amount of indebtedness, including Senior Debt and secured debt, that
we or any of our subsidiaries may incur. As of June 30, 2001, the convertible
notes ranked junior to $3.0 billion of indebtedness and $1.3 billion of other
liabilities of our subsidiaries, and ranked equal to $1.0 billion of our other
convertible notes.
The payment of the principal of, interest on or any other amounts due on the
convertible notes is subordinated in right and priority of payment to the prior
payment in full of all of our Senior Debt. No payment on account of principal
of, redemption of, interest on or any other amounts due on the convertible
notes, including, without limitation, any payments on the Change of Control
Offer, and no redemption, purchase or other acquisition of the convertible notes
may be made unless (i) full payment of amounts then due on all Senior Debt have
been made or duly provided for under the terms of the instrument governing such
Senior Debt, and (ii) at the time for, or immediately after giving effect to,
any such payment, redemption, purchase or other acquisition, there shall not
exist under any Senior Debt or any agreement pursuant to which any Senior Debt
has been issued, any default which shall not have been cured or waived and which
shall have resulted in the full amount of such Senior Debt being declared due
and payable. In addition, the indenture provides that if we and the trustee are
notified by any of the holders of any issue of Senior Debt (the "Payment
Blockage Notice") that a default has occurred giving the holders of such Senior
Debt the right to accelerate the maturity thereof, no payment on account of
principal, redemption, interest, special interest, if any, or any other amounts
due on the convertible notes and no purchase, redemption or other acquisition of
the convertible notes will be made for the period (the "Payment Blockage
Period") commencing on the date notice is received and ending on the earlier of
(A) the date on which such event of default shall have been cured or waived or
(B) 180 days from the date notice is received. Notwithstanding the foregoing,
only one Payment Blockage Notice with respect to the same event of default or
any other events of default existing and unknown to the person giving such
notice at the time of such notice on the same issue of Senior Debt may be given
during any period of 360 consecutive days unless such event of default or such
other events of default have been cured or waived for a period of not less than
90 consecutive days. No new Payment Blockage Period may be commenced by the
holders of Senior Debt during any period of 360 consecutive days unless all
events of default which triggered the preceding Payment Blockage Period have
been cured or waived.
Upon any distribution of our assets in connection with any dissolution,
winding-up, liquidation or reorganization or acceleration of the principal
amount due on the convertible notes because of any event of default, all Senior
Debt must be paid in full before the holders of the convertible notes are
entitled to any payments whatsoever.
As a result of these subordination provisions, in the event of our
insolvency, holders of the convertible notes may recover ratably less than our
general creditors.
If the payment of the convertible notes is accelerated because of an event
of default, we or the trustee shall promptly notify the holders of Senior Debt
or the trustee(s) for such Senior Debt of the acceleration. We may not pay the
convertible notes until five
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days after such holders or trustee(s) of Senior Debt receive notice of such
acceleration and, thereafter, may pay the convertible notes only if the
subordination provisions of the indenture otherwise permit payment at that time.
If the trustee or any holder of convertible notes receives any payment or
distribution of our assets of any kind in contravention of any of the terms of
the indenture, whether in cash, property or securities, including, without
limitation by way of set-off or otherwise, in respect of the convertible notes
before all Senior Debt is paid in full, then such payment or distribution will
be held by the recipient in trust for the benefit of holders of Senior Debt, and
will be immediately paid over or delivered to the holders of Senior Debt or
their representative or representatives to the extent necessary to make payment
in full of all Senior Debt remaining unpaid, after giving effect to any
concurrent payment or distribution, or provision therefor, to or for the holder
of Senior Debt.
We are the exclusive obligors on the convertible notes. Since our operations
are conducted wholly through our subsidiaries, our ability to service debt,
including the convertible notes, is dependent upon the earnings of our
subsidiaries and the distribution of those earnings to, or upon loans or other
payments of funds by those subsidiaries to, us. The payment of dividends to us
and the making of loans and advances to us by our subsidiaries may be subject to
statutory or contractual restrictions, is dependent upon the earnings of those
subsidiaries and may be subject to various business considerations. The
outstanding senior notes of EBC currently restrict EBC from paying dividends or
making distributions to us. EBC is an intermediate holding company and its
ability to pay dividends or make other distributions to us is dependent upon the
earnings of its subsidiary, EDBS. The outstanding senior notes of EDBS currently
restrict EDBS from paying dividends or making other distributions to EBC.
Any right that we have to receive assets of any of our subsidiaries upon
their liquidation or reorganization (and the consequent right of the holders of
the convertible notes to participate in those assets) is effectively
subordinated to the claims of that subsidiary's creditors (including trade
creditors), except to the extent that we ourselves are recognized as a creditor
of such subsidiary, in which case our claims would still be subordinate to any
security interests in the assets of such subsidiary and any indebtedness of such
subsidiary senior to that held by us.
The indenture does not prohibit or limit the amount of additional
indebtedness and other liabilities, including Senior Debt, which we can create,
incur, assume or guarantee, nor does the indenture prohibit or limit the amount
of indebtedness and other liabilities which any subsidiary can create, incur,
assume or guarantee.
OPTIONAL REDEMPTION
We may not redeem the convertible notes prior to May 15, 2004. Thereafter,
the convertible notes are subject to redemption at our option, in whole or in
part, upon not less than 30 nor more than 60 days notice, at the redemption
prices set forth below, expressed as percentages of principal amount plus
accrued and unpaid interest thereon, in each case, to the applicable redemption
date, if redeemed during the twelve-month period beginning on May 15 of the
years indicated below:
Year Percentage
---- ----------
2004 103.286%
2005 102.464%
2006 101.643%
2007 100.821%
2008 100.000%
MANDATORY REDEMPTION AND REPURCHASE
We are not required to make mandatory redemption or sinking fund payments
with respect to the convertible notes. We are, however, required to make a
Change of Control Offer with respect to a repurchase of the convertible notes
under the circumstances described under the subheading "Repurchase at the option
of holders."
SELECTION AND NOTICE
If less than all of the convertible notes are to be redeemed at any time,
selection of convertible notes for redemption will be made by the trustee in
compliance with the requirements of any securities exchange on which the
convertible notes are listed. In the absence of any requirements of any
securities exchange or if the convertible notes are not listed, selection of the
convertible notes to be redeemed will be made on a pro rata basis, provided that
no convertible notes of $1,000 or less may be redeemed in part. Notice of
redemption will be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each
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holder of convertible notes to be redeemed at its registered address. If any
convertible note is to be redeemed in part only, the notice of redemption that
relates to that convertible note shall state the portion of the principal amount
thereof to be redeemed. A new convertible note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof upon
cancellation of the original convertible note. On and after the redemption date,
interest ceases to accrue on convertible notes or portions of them called for
redemption.
REPURCHASE AT THE OPTION OF HOLDERS
If a Change of Control occurs, each holder of convertible notes will have
the right to require us to repurchase all or any part of that holder's
convertible notes equal to $1,000 or an integral multiple of $1,000, pursuant to
the Change of Control Offer at a purchase price equal to 101% of the principal
amount, plus accrued and unpaid interest, if any, as of the date of repurchase.
The payment will be referred to as the Change of Control Payment. Within 40 days
following any Change of Control, we will mail a notice to each holder, stating:
(1) that the Change of Control Offer is being made pursuant to the
covenant entitled "Change of Control" and that all convertible notes
tendered will be accepted for payment;
(2) the purchase price and the purchase date, which shall be no earlier
than 30 days nor later than 40 days from the date such notice is mailed.
This date is referred to as the Change of Control Payment Date;
(3) that interest will continue to accrue on any convertible notes not
tendered, as provided in the convertible notes;
(4) that, unless we default in the payment of the Change of Control
Payment, with respect to all convertible notes accepted for payment pursuant
to the Change of Control Offer, interest will cease to accrue after the
Change of Control Payment Date;
(5) that holders electing to have any convertible notes purchased
pursuant to a Change of Control Offer will be required to surrender the
convertible notes, with the form entitled Option of Holder to Elect Purchase
on the reverse of the convertible notes completed, to the paying agent at
the address specified in the notice prior to the close of business on the
third Business Day preceding the Change of Control Payment Date;
(6) that holders will be entitled to withdraw their election if the
paying agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter stating the name of the holder, the
principal amount of convertible notes delivered for purchase, and a
statement that the holder is withdrawing the election to have such
convertible notes purchased; and
(7) that holders whose convertible notes are being purchased only in
part will be issued new convertible notes equal in principal amount to the
unpurchased portion of the convertible notes surrendered, which unpurchased
portion must be equal to $1,000 in principal amount or an integral multiple
of $1,000.
We will comply with the requirements of Rules 13e-4 and 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent those laws and regulations are applicable in connection with the
repurchase of the convertible notes in connection with a Change of Control.
On the Change of Control Payment Date, we will, to the extent lawful:
(1) accept for payment convertible notes or portions of convertible
notes tendered pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all convertible notes or portions of
convertible notes so tendered; and
(3) deliver or cause to be delivered to the trustee the convertible
notes so accepted together with an officers' certificate stating the
convertible notes or portions of convertible notes that have been tendered.
The paying agent shall promptly mail to each holder of convertible notes so
accepted, or, if a holder requests, wire transfer immediately available funds to
an account previously specified in writing by the holder to us and the paying
agent, payment in an amount equal to the purchase price for such convertible
notes. The trustee shall promptly authenticate and mail to each holder a new
convertible note equal in principal amount to any unpurchased portion of the
convertible notes surrendered, if any; provided that each new convertible note
shall be in a principal amount of $1,000 or an integral multiple of $1,000. We
will publicly announce the results of the Change of Control Offer on or as soon
as practicable after the Change of Control Payment Date.
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Except as described above with respect to a Change of Control, the indenture
does not contain any other provision that permits the holders of the convertible
notes to require that we repurchase or redeem the convertible notes in the event
of a takeover, recapitalization or similar restructuring. The Change of Control
Offer requirement of the convertible notes may, in certain circumstances, make
more difficult or discourage a takeover, and, thus, the removal of incumbent
management. Management has not entered into any agreement or plan involving a
Change of Control, although it is possible that we could decide to do so in the
future. Subject to the limitations discussed below, we could, in the future,
enter into various transactions including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect our capital structure or credit ratings.
Our ability to pay cash to the holders of convertible notes pursuant to a
Change of Control Offer may be limited by our then existing financial resources.
See "Risk Factors." Any future credit facilities or other agreements relating to
our or our subsidiaries' indebtedness may contain prohibitions or restrictions
on our ability to effect a Change of Control Payment or may also require a
similar offer to which we or our subsidiaries may be required to allocate
resources, such as with EBC's and EDBS' outstanding senior notes. If a Change of
Control occurs at a time when such prohibitions or restrictions are in effect,
we could seek the consent of our lenders to the purchase of convertible notes
and other indebtedness containing change of control provisions or could attempt
to refinance the borrowings that contain such prohibitions or restrictions. If
we do not obtain such consents or repay such borrowings, we will be effectively
prohibited from purchasing the convertible notes. In such case, our failure to
purchase tendered convertible notes would constitute an event of default under
the indenture. Moreover, the events that constitute a Change of Control under
the indenture may constitute events of default under our future debt instruments
or credit agreements of us or our subsidiaries, and certain events that
constitute a Change of Control under our subsidiaries indebtedness may not
constitute a Change of Control under the indenture. Such events of default may
permit the lenders under those debt instruments or credit agreements to
accelerate the debt and, if the debt is not paid or repurchased, to enforce
their security interests in what may be all or substantially all of the assets
of our subsidiaries. Therefore, our ability to raise cash to repay or repurchase
the convertible notes may be limited.
"Change of Control" means
(a) any transaction or series of transactions (including, without
limitation, a tender offer, merger or consolidation) the result of which is
that the Principal and his Related Parties or an entity controlled by the
Principal and his Related Parties (and not controlled by any person other
than the Principal or his Related Parties) sell, transfer or otherwise
dispose of more than 50% of the total Equity Interests in us beneficially
owned (as defined in Rule 13(d)(3) under the Exchange Act, but without
including any Equity Interests which may be deemed to be owned solely by
reason of the existence of any voting arrangements) by such persons on the
date of the indenture (as adjusted for stock splits and dividends and other
distributions payable in Equity Interests);
(b) the first day on which a majority of the members of our Board of
Directors are not Continuing Directors; or
(c) the sale, lease or transfer of all or substantially all of our
assets to any person or "group," within the meaning of Section 13(d)(3) and
14(d)(2) of the Exchange Act or any successor provision to either of the
foregoing, including any group acting for the purpose of acquiring, holding
or disposing of securities within the meaning of Rule 13d-5(b)(1) under the
Exchange Act, other than the Principal and his Related Parties.
Notwithstanding the foregoing, a Change of Control will not be deemed to
have occurred if, in case of a merger, consolidation, tender offer, share
exchange, sale, lease or transfer of all or substantially all of our assets or
similar transaction or group of related transactions (each, a "Transaction"),
not less than 70% of the consideration in the Transaction (excluding cash
payments for fractional shares issued in connection with the Transaction, and
excluding debt and other liabilities assumed in the Transaction) constituting
the Change of Control as defined in (a), (b) and (c) above, consists of common
stock traded on a United States national securities exchange or quoted on the
Nasdaq National Market (or which will be so traded or quoted when issued or
exchanged in connection with such Change of Control) and as a result of such
transaction or transactions, the convertible notes become convertible into such
common stock or remain convertible into class A common stock.
"Principal" means Charles W. Ergen.
"Related Party" means, with respect to the Principal, (a) the spouse and
each immediate family member of the Principal and (b) each trust, corporation,
partnership or other entity of which the Principal beneficially holds an 80% or
more controlling interest.
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COVENANTS
SALE OF ASSETS
The indenture provides that we may not sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of our properties or assets in
any one or more related transactions to another corporation, person or entity
unless:
o The entity or person to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state
thereof or the District of Columbia;
o The entity or person to which such sale, assignment, transfer, lease,
conveyance or other disposition will have been made assumes all
obligations pursuant to a supplemental indenture, in a form reasonably
satisfactory to the trustee, under the convertible notes and the
indenture; and
o Immediately after such transaction no default or event of default
exists.
LIMITATION ON STATUS AS INVESTMENT COMPANY
The indenture provides that we will not, and will not permit any subsidiary
to, conduct our or its business in a fashion that would cause us to be required
to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended).
REPORTS
Whether or not required by the rules and regulations of the SEC, so long as
any convertible notes are outstanding, we will furnish to the holders of
convertible notes all quarterly and annual financial information required to be
contained in a filing with the SEC on Forms 10-Q and 10-K, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report by our
certified independent accountants.
EVENTS OF DEFAULT AND REMEDIES
The indenture provides that each of the following constitutes an event of
default:
(1) default for 30 days in the payment when due of interest on the
convertible notes;
(2) a default in the payment of principal of any convertible note when
due at its stated maturity, upon optional redemption, in connection with a
Change of Control Offer, upon declaration, or otherwise;
(3) our failure to comply for 30 days after notice with any of our
obligations under the covenants described under "Repurchase at the option of
holders" and "Sale of assets" (in each case, other than a failure to
purchase convertible notes in connection with a Change of Control Offer);
(4) our failure for 60 days after notice to comply with certain other
covenants and agreements contained in the indenture or the convertible
notes;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by us or any of our subsidiaries that is a
"Significant Subsidiary" or any group of two or more subsidiaries that,
taken as a whole, would constitute a Significant Subsidiary, or the payment
of which is guaranteed by us or any of our subsidiaries that is a
Significant Subsidiary or any group of two or more subsidiaries that, taken
as a whole, would constitute a Significant Subsidiary, whether such
Indebtedness or guarantee now exists, or is created after the issuance date,
which default:
(a) is caused by a failure to pay when due principal or interest on
such Indebtedness within the grace period provided in such Indebtedness,
which payment default continues beyond any applicable grace period; or
(b) results in the acceleration of such Indebtedness prior to its
express maturity; and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a payment default or the maturity of
which has been so accelerated, aggregates $50 million or more;
(6) failure by us or any subsidiary of ours that is a Significant
Subsidiary or any group of two or more subsidiaries that, taken as a whole,
would constitute a Significant Subsidiary to pay final judgments for the
payment of money (other than any judgment as to which a reputable insurance
company has accepted liability subject to customary terms) aggregating in
excess of $75 million, which judgments are not paid, wired, discharged or
stayed within 60 days after their entry;
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(7) certain events of bankruptcy or insolvency with respect to us or
any subsidiary of ours that is a Significant Subsidiary or any group of two
or more subsidiaries that, taken as a whole, would constitute a Significant
Subsidiary; and
(8) the approval by our shareholders of any merger, amalgamation or
consolidation by us (whether or not we are the surviving corporation) and
whether or not such merger, amalgamation or consolidation is in one or more
related transactions if, (i) the successor corporation, person or entity (A)
does not assume all the obligations, pursuant to a supplemental indenture in
a form reasonably satisfactory to the trustee, under the convertible notes
and the indenture (to the extent any such supplemental indenture may be
necessary, in the opinion of the trustee, to evidence our continuing
obligations under the indenture) and (B) is not a corporation, person or
entity organized or existing under the laws of the United States, any state
thereof or the District of Columbia or (ii) immediately after the
transaction, any default or event of default exists.
If any event of default occurs and is continuing, the trustee or the holders
of at least 25% in principal amount of the then outstanding convertible notes
may declare all the convertible notes to be due and payable immediately, subject
to the provisions limiting payment described under the subheading "Subordination
of convertible notes." Notwithstanding the foregoing, if a default occurs from
(i) the events described in paragraph 8 above regarding merger, amalgamation or
consolidation or (ii) certain events of bankruptcy or insolvency, with respect
to us or any significant subsidiary, all outstanding convertible notes will
become immediately due and payable without further action or notice. Holders of
the convertible notes may not enforce the indenture or the convertible notes
except as provided in the indenture. Subject to certain limitations, holders of
a majority in principal amount of the then outstanding convertible notes may
direct the trustees in its exercise of any trust or power. The trustee may
withhold from holders of the convertible notes notice of any continuing default
or event of default, except a default or event of default relating to the
payment of principal or interest, if it determines that withholding notice is in
their interest.
If the convertible notes are accelerated because an event of default has
occurred and is continuing as a result of the acceleration of any Indebtedness
described in paragraph 5 above, the acceleration shall be automatically annulled
if:
o the holders of any Indebtedness described in such paragraph 5, above,
have rescinded the declaration of acceleration in respect of such
Indebtedness within 30 days after the date of such declaration;
o the annulment of the acceleration of the convertible notes would not
conflict with any judgment or decree of a court of competent
jurisdiction; and
o all existing events of default, except for nonpayment of principal of
or interest on the convertible notes that became due solely because of
the acceleration of the convertible notes, have been cured or waived.
The holders of a majority in aggregate principal amount of the then
outstanding convertible notes by notice to the trustee may on behalf of all of
the holders waive any existing default or event of default and its consequences
under the indenture except a continuing default or event of default in the
payment of interest on or the principal of the convertible notes.
We are required to deliver to the trustee annually a statement regarding
compliance with the indenture, and we are required, upon becoming aware of any
default or event of default, to deliver to the trustee a statement specifying
that default or event of default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of ours, as
such, shall have any liability for any of our obligations under the convertible
notes or the indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each holder of the convertible notes by
accepting a convertible note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the convertible notes.
Such waiver may not be effective to waive liabilities under the federal
securities laws, and it is the view of the SEC that a waiver of such liabilities
is against public policy.
UNCLAIMED MONEY; PRESCRIPTION
If money deposited with the trustee or paying agent for the payment of
principal or interest remains unclaimed for two years, the trustee and the
paying agent shall pay the money back to us at our written request. After that,
holders of convertible notes entitled to the money must look to us for payment
unless an abandoned property law designates another person and all liability of
the trustee and the paying agent shall cease. Other than as described in this
paragraph, the indenture does not provide for any prescription period for the
payment of interest and principal on the convertible notes.
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BOOK ENTRY
The convertible notes were issued in the form of a global security issued in
reliance on Rule 144A under the Securities Act and a global security issued in
reliance on Regulation S under the Securities Act. Upon the issuance of a global
security, the depository or its nominee credited the accounts of persons holding
through it with the respective principal amounts of the convertible notes
represented by such global security. Such accounts were designated by the
initial purchaser with respect to convertible notes placed by the initial
purchaser for us. Ownership of beneficial interests in a global security are
limited to persons that have accounts with the depository ("participants") or
persons that may hold interests through participants. Ownership of beneficial
interests by participants in a global security are shown on, and the transfer of
that ownership interest will be effected only through, records maintained by the
depository for such global security. Ownership of beneficial interests in such
global security by persons that hold through participants are shown on, and the
transfer of that ownership interest through such participant are effected only
through, records maintained by such participant. The foregoing may impair the
ability to transfer beneficial interests in a global security.
Payment of all amounts due on convertible notes represented by any such
global security are made to the depository or its nominee, as the case may be,
as the sole holder of the convertible notes represented thereby for all purposes
under the indenture. None of us, the trustee, any of our agents or the trustee
or the initial purchaser have any responsibility or liability for any aspect of
the depository's records relating to or payments made on account of beneficial
ownership interests in any global security representing any convertible notes or
for maintaining, supervising or reviewing any of the depository's records
relating to such beneficial ownership interests.
We have been advised by the depository that, upon receipt of any payment on
any global security, the depository will immediately credit, on its book-entry
registration and transfer system, the accounts of participants with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of such global security as shown on the records of the depository.
Payments by participants to owners of beneficial interests in a global security
held through such participants will be governed by standing instructions and
customary practices as is now the case with securities held for customer
accounts registered in "street name," and will be the sole responsibility of
such participants.
A global security may not be transferred except as a whole by the depository
for such global security to a nominee of such depository or by a nominee of such
depository to such depository or another nominee of such depository or by such
depository or any such nominee to a successor of such depository or a nominee of
such successor. If the depository is at any time unwilling or unable to continue
as depository and a successor depository is not appointed by us or the
depository within 90 days, we will issue convertible notes in definitive form in
exchange for the global security. In either instance, an owner of a beneficial
interest in the global security will be entitled to have convertible notes equal
in principal amount to such beneficial interest registered in its name and will
be entitled to physical delivery of such convertible notes in definitive form.
Convertible notes so issued in definitive form will be issued in denominations
of $1,000 and integral multiples thereof and will be issued in registered form
only, without coupons. Amounts due on the convertible notes will payable, and
the convertible notes may be presented for registration of transfer or exchange,
at the offices of the trustee.
So long as the depository for a global security, or its nominee, is the
registered owner of such global security, such depository or such nominee, as
the case may be, will be considered the sole holder of the convertible notes
represented by such global security for the purposes of receiving payment on the
convertible notes, receiving notices and for all other purposes under the
indenture and the convertible notes. Beneficial interests in convertible notes
are evidenced only by, and transfers thereof are effected only through, records
maintained by the depository and its participants. Cede & Co. has been appointed
as the nominee of the depository. Except as provided above, owners of beneficial
interests in a global security are not entitled to certificates and are not
considered the holders thereof for any purposes under the indenture. Accordingly
any such person owning a beneficial interest in such a global security must rely
on the procedures of the depository, and, if any such person is not a
participant, on the procedures of the participant through which such person owns
its interest, to exercise any rights of a holder under the indenture. The
indenture will provide that the depository may grant proxies and otherwise
authorize participants to give or to take any request, demand, authorization,
direction, notice, consent, waiver or other action which a holder is entitled to
give or take under the indenture. We understand that under existing industry
practices, in the event that we request any action of holders or that an owner
of a beneficial interest in such a global security desires to give or take any
action which a holder is entitled to give or take under the indenture, the
depository would authorize the participants holding the relevant beneficial
interest to give or take such action and such participants would authorize
beneficial owners owning through such participants to give or take such action
or would otherwise act upon the instructions of beneficial owners owning through
them.
The Depository Trust Company ("DTC") has been appointed as the initial
depository. DTC has advised us that it is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code, and a "clearing agency" registered under the
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Exchange Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (including the initial purchaser), banks, trust companies, clearing
corporations and certain other organizations, some of whom (and/or their
representatives) own the depository. Access to DTC's book-entry system is also
available to others, such as banks, brokers, dealers and trust companies, that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
Beneficial interests in any global security may be exchanged for beneficial
interests in any other global security only in connection with a transfer of
such interest. Such transfers are subject to compliance with customary
certification requirements which are set forth in the indenture.
Any beneficial interest in one of the global securities that is exchanged
for an interest in any other global security will cease to be an interest in
such global security and will become an interest in such other global security.
Accordingly, such interest will thereafter be subject to all transfer
restrictions and other procedures applicable to beneficial interests in such
other global security for as long as it remains such an interest. Any exchange
of a beneficial interest in one global security for a beneficial interest in any
other global security will be effected by DTC by means of an instruction
originated by the trustee through its Deposit/Withdraw at Custodian ("DWAC")
system. Accordingly, in connection with any such exchange, appropriate
adjustments will be made in the records of the registrar to reflect a decrease
in the principal amount of such global security and a corresponding increase in
the principal amount of such other global security.
PAYMENTS OF PRINCIPAL AND INTEREST
The indenture requires that payments in respect of the convertible notes
held of record by DTC or its nominee (including convertible notes evidenced by
the global securities) be made in same day funds. Payments in respect of the
convertible notes held of record by holders other than DTC may, at our option,
be made by check and mailed to such holders of record as shown on the register
for the convertible notes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraph, the indenture or the
convertible notes may be amended or supplemented with the consent of the holders
of at least a majority in aggregate principal amount of the then outstanding
convertible notes, as applicable, including consents obtained in connection with
a tender offer or exchange offer for the convertible notes, and any existing
default or compliance with any provision of the indenture or the convertible
notes may be waived with the consent of the holders of a majority in aggregate
principal amount of then outstanding convertible notes, including consents
obtained in connection with a tender offer or exchange offer for the convertible
notes.
Without the consent of each holder affected, an amendment or waiver may not:
o reduce the amount of convertible notes whose holders must consent to an
amendment, supplement or waiver;
o reduce the principal of or change the fixed maturity of any convertible
note or alter the provisions with respect to the redemption of the
convertible notes, except for provisions, including relevant
definitions, relating to repurchases of the convertible notes pursuant
to the covenant described above under the subheading "Repurchase at the
option of holders;"
o reduce the rate of or change the time for payment or accrual of
interest on any convertible note;
o waive a default in the payment of principal of or interest on any
convertible notes, except a rescission of acceleration of the
convertible notes by the holders of at least a majority in aggregate
principal amount of the convertible notes and a waiver of the payment
default that resulted from such acceleration;
o make any convertible note payable in money other than that stated in
the convertible notes;
o make any change in the provisions of the indenture relating to waivers
of past defaults or the rights of holders of convertible notes to
receive payments of principal of or interest on the convertible notes;
o waive a redemption payment with respect to any convertible note;
o impair the right to convert the convertible notes into class A common
stock;
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o modify the conversion or subordination provision of the indenture in a
manner adverse to the holders of the convertible notes; or
o make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of
convertible notes, we and the trustee may amend or supplement the indenture or
the convertible notes to cure any ambiguity, defect or inconsistency, to provide
for uncertificated convertible notes in addition to or in place of certificated
convertible notes, to provide for the assumption of our obligations to holders
of the convertible notes in the case of a merger or consolidation or certain
transfers or leases, to make any change that would provide any additional rights
or benefits to the holders of the convertible notes or that does not adversely
affect the legal rights under the indenture of any such holder, or to comply
with requirements of the SEC in order to maintain the qualification of the
indenture under the Trust Indenture Act.
GOVERNING LAW AND JUDGMENTS
The convertible notes and the indenture are governed exclusively by and
construed in accordance with the laws of the State of New York without giving
effect to applicable principles of conflicts of laws to the extent that the
application of the law of another jurisdiction would be required thereby.
We will submit to the jurisdiction of the United States federal and New York
state courts located in the borough of Manhattan, City and State of New York for
purposes of all legal actions and proceedings instituted in connection with the
convertible notes and indenture.
CONCERNING THE TRUSTEE
The indenture contains limitations on the rights of the trustee, should it
become a creditor of ours, to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security or
otherwise. The trustee may engage in other transactions; however, if it acquires
any conflicting interest it must eliminate that conflict within 90 days, apply
to the SEC for permission to continue or resign.
The holders of the majority in aggregate principal amount of the then
outstanding convertible notes have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
trustee under the indenture, subject to certain exceptions. The indenture
provides that in case an event of default shall occur, which shall not be cured
or waived, the trustee is required, in the exercise of its power, to use the
degree of care of a prudent man in the conduct of his own affairs. Subject to
such provisions, the trustee is under no obligation to exercise any of its
rights or powers under the indenture at the request of any holder of convertible
notes, unless the holder shall have offered to the trustee security and
indemnity satisfactory to it against any loss, liability or expense.
DEFINITIONS
The following are selected defined terms that are used in the indenture.
Reference is made to the indenture for a full definition of all terms, as well
as certain other terms used in this description of the convertible notes for
which no definition is provided.
"Capital Stock" means any and all shares, interests, participations, rights
or other equivalents, however designated, of corporate stock, including, without
limitation, partnership interests.
"Continuing Director" means, as of any date of determination, any member of
our Board of Directors who:
(a) was a member of such Board of Directors on the date of the
indenture; or
(b) was nominated for election or elected to such Board of Directors
with the affirmative vote of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election or was
nominated for election or elected by the Principal and his Related Parties.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock, but excluding any Indebtedness that is
convertible into, or exchangeable for, Capital Stock.
"Excess Payment" means the excess of (A) the aggregate of the cash and value
of other consideration paid by us or any of our subsidiaries with respect to our
shares acquired in a tender offer or other negotiated transaction over (B) the
market value of such acquired shares after giving effect to the completion of a
tender offer or other negotiated transaction.
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"Exchange Rate Contract" means, with respect to any person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange rate insurance and other
agreements or arrangements, or combination thereof, the principal purpose of
which is to provide protection against fluctuations in currency exchange rates.
An Exchange Rate Contract may also include an Interest Rate Agreement.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession,
which are in effect on the Issuance Date and are applied on a consistent basis.
"Guarantee" means a guarantee, other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner, including, without limitation, letters of credit and
reimbursement agreements in respect thereof, of all or any part of any
Indebtedness.
"Indebtedness" means, with respect to any person, any indebtedness of such
person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof), or representing the balance
deferred and unpaid of the purchase price of any property (which purchase price
is due more than six months after the placing into service or delivery of such
property) including pursuant to capital leases and sale-and-leaseback
transactions, or representing any hedging obligations under an Exchange Rate
Contract or an Interest Rate Agreement, except any such balance that constitutes
an accrued expense or trade payable, if and to the extent any of the foregoing
indebtedness, other than obligations under an Exchange Rate Contract or an
Interest Rate Agreement, would appear as a liability upon a balance sheet of
such person prepared in accordance with GAAP, and also includes, to the extent
not otherwise included, the Guarantee of items which would be included within
this definition. The amount of any Indebtedness outstanding as of any date shall
be the accreted value thereof, in the case of any Indebtedness issued with
original issue discount. Indebtedness shall not include liabilities for taxes of
any kind.
"Interest Rate Agreement" means, with respect to any person, any interest
rate swap agreement, interest rate cap agreement, interest rate collar agreement
or other similar agreement the principal purpose of which is to protect the
party indicated therein against fluctuations in interest rates.
"Issuance Date" means the date on which the convertible notes are first
authenticated and issued.
"Senior Debt" means the principal of, interest on and other amounts due on
(i) our Indebtedness, whether outstanding on the date of the indenture or
thereafter created, incurred, assumed or guaranteed by us, for money borrowed
from banks or other financial institutions; (ii) Indebtedness, whether
outstanding on the date of the indenture or thereafter created, incurred,
assumed or guaranteed by us; (iii) our Indebtedness under interest rate swaps,
caps or similar hedging agreements and foreign exchange contracts, currency
swaps or similar agreements; unless, in the instrument creating or evidencing or
pursuant to which Indebtedness under (i) or (ii) is outstanding, it is expressly
provided that such Indebtedness is not senior in right of payment to the
convertible notes. Senior Debt includes, with respect to the obligations
described in clauses (i) and (ii) above, interest accruing, pursuant to the
terms of such Senior Debt, on or after the filing of any petition in bankruptcy
or for reorganization relating to us, whether or not post-filing interest is
allowed in such proceeding, at the rate specified in the instrument governing
the relevant obligation. Notwithstanding anything to the contrary in the
foregoing, Senior Debt shall not include: (a) Indebtedness of or amounts owed by
us for compensation to employees, or for goods or materials purchased in the
ordinary course of business, or for services; and (b) Indebtedness which we owe
to any of our subsidiaries.
"Significant Subsidiary" means any subsidiary of ours which is a
"significant subsidiary" as defined in Rule 1-02(v) of Regulation S-X under the
Securities Act and the Exchange Act, as such regulation is in effect on the date
of the indenture.
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REGISTRATION RIGHTS
The following summary of the registration rights provided in the
registration rights agreement and the convertible notes is not complete. You
should refer to the registration rights agreement and the convertible notes for
a full description of the registration rights that apply to the convertible
notes and the class A common stock issuable upon conversion thereof.
Pursuant to a registration rights agreement we have agreed for the benefit
of the holders of the convertible notes, that (i) we will, at our cost, within
90 days after the closing of the sale of the convertible notes (the "Closing"),
file a shelf registration statement (the "Shelf Registration Statement") with
the SEC with respect to resales of the convertible notes and the class A common
stock issuable upon conversion thereof, (ii) we will use our best efforts to
cause such Shelf Registration Statement to be declared effective by the SEC
within 270 days after the Closing, and (iii) we will use our best efforts to
keep such Shelf Registration Statement continuously effective under the
Securities Act until, subject to certain exceptions specified in the
registration rights agreement, the second anniversary of the date of the
Closing. We will be permitted to delay the filing of the Shelf Registration
Statement (for a period not to exceed 60 days), which delay shall not be
considered a "Registration Default," as defined below, or suspend use of the
prospectus that is part of the Shelf Registration Statement during certain
periods of time and in certain circumstances relating to pending corporate
developments and public filings with the SEC and similar events as determined in
our sole discretion, which suspension shall not be considered a "Registration
Default," as defined below, unless it continues for a period in excess of 90
consecutive days. Except as provided above, if (a) we fail to file the Shelf
Registration Statement required by the registration rights agreement on or
before 90 days after Closing, (b) such Shelf Registration Statement is not
declared effective by the SEC on or prior to 270 days after Closing (the
"Effectiveness Target Date") or (c) the Shelf Registration Statement is
effective but thereafter ceases to be effective or usable in connection with
resales of Transfer Restricted Securities (as defined below) during the periods
specified in the registration rights agreement (each such event referred to in
clauses (a) through (c) above a "Registration Default"), then we will pay
special interest to each holder of convertible notes, with respect to the first
90 consecutive-day period immediately following the occurrence of such
Registration Default, an amount equal to an increase in the annual interest on
the convertible notes of 0.25% and with respect to each subsequent 90
consecutive-day period, an amount equal to an increase in the annual interest
rate on the convertible notes of 0.25% until all Registration Defaults have been
cured up to a maximum increase in the annual rate of interest on the convertible
notes equal to 1.0%. All accrued special interest will be paid by us on each
subsequent interest payment date in cash. Such payment will be made to the
holder of the convertible note by wire transfer of immediately available funds
or by federal funds check. Following the cure of all Registration Defaults, the
accrual of special interest will cease.
For purposes of the foregoing, "Transfer Restricted Securities" means each
convertible note and the class A common stock issuable upon conversion thereof
until (i) the date on which such convertible note or the class A common stock
issuable upon conversion thereof has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement, (ii) the date on which such convertible note or the class A common
stock issuable upon conversion thereof is distributed to the public pursuant to
Rule 144 under the Securities Act (or any similar provision then in effect) or
is saleable pursuant to Rule 144(k) under the Act or (iii) the date on which
such convertible note or the class A common stock issuable upon the conversion
thereof ceases to be outstanding.
If we expect to file and obtain the effectiveness of a Shelf Registration
Statement within 30 days of the effective date of the Registration Rights
Agreement (an "Expedited Filing"), we shall (x) mail, as promptly as reasonably
practicable after the effective date of the Registration Rights Agreement to the
holders of Transfer Restricted Securities, a Notice and Questionnaire, in
substantially the form attached hereto as Appendix A (a "Notice and
Questionnaire"), with a response deadline of 30 days from the date of such
notice (the "Expedited Filing Questionnaire Deadline"), and (y) as promptly as
practicable after the response deadline but in any event no later than 30 days
thereafter, prepare a prospectus supplement (and if required file an amendment
or a supplement to the Shelf Registration Statement) or take such other
measures, if any, as are necessary to include in the Shelf Registration
Statement the Transfer Restricted Securities of Electing Holders (as defined
below). If we do not intend to make an Expedited Filing, we shall mail the
Notice and Questionnaire to the holders of Transfer Restricted Securities not
less than 20 business days prior to the time we intend in good faith to have the
Shelf Registration Statement declared effective (the "Effective Time"). No
holder of Transfer Restricted Securities shall be entitled to be named as a
selling security holder in the Shelf Registration Statement as of the effective
time of such Shelf Registration Statement (or in the first prospectus supplement
filed thereafter in the case of the Expedited Filing), and no holder of Transfer
Restricted Securities shall be entitled to use the prospectus forming a part
thereof for offers and resales of Transfer Restricted Securities at any time,
unless such holder has returned a completed and signed Notice and Questionnaire
to us by the deadline for response set forth therein.
We shall not be required to take any action to name such holder as a selling
securityholder in the Shelf Registration Statement until such holder has
returned a completed and signed Notice and Questionnaire to us. Following our
receipt of such Notice and Questionnaire, we will as promptly as possible, but
not prior to the next required amendment or supplement to the Shelf Registration
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Statement, include the Transfer Restricted Securities covered thereby in the
Shelf Registration Statement (if not previously included). The term "Electing
Holder" shall mean any holder of Transfer Restricted Securities that has
returned a completed and signed Notice and Questionnaire to us in accordance
with the preceding two paragraphs.
We will provide to each registered holder of convertible notes, or the class
A common stock issuable upon conversion of the convertible notes, who is named
in the prospectus and who so requests in writing, copies of the prospectus which
will be a part of such Shelf Registration Statement, notify each such holder
when such Shelf Registration Statement for the convertible notes or the class A
common stock issuable upon conversion of the convertible notes has become
effective and take certain other actions as required to permit unrestricted
resales of the convertible notes or the class A common stock issuable upon
conversion of the convertible notes. A holder of the convertible notes or the
class A common stock issuable upon conversion of the convertible notes that
sells such securities pursuant to a Shelf Registration Statement generally will
be required to be named as a selling securityholder in the related prospectus
and to deliver a prospectus to purchasers, will be subject to certain of the
civil liability provisions under the Securities Act in connection with such
sales and will be bound by the provisions of the registration rights agreement
which are applicable to such holder, including certain indemnification and
contribution rights and obligations.
Upon the initial sale of convertible notes or class A common stock issuable
upon conversion of the convertible notes, each selling holder will be required
to deliver a notice of such sale to the trustee and us. The notice will, among
other things, identify the sale as a transfer pursuant to the Shelf Registration
Statement, certify that the prospectus delivery requirements, if any, of the
Securities Act have been complied with, and certify that the selling holder and
the aggregate principal amount of securities owned by such holder are identified
in the related prospectus in accordance with the applicable rules and
regulations under the Securities Act.
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DESCRIPTION OF OUR CAPITAL STOCK
GENERAL
Our authorized capital stock currently consists of:
o 3,200,000,000 shares of common stock, of which 1,600,000,000 shares are
designated class A common stock, 800,000,000 shares are designated
class B common stock and 800,000,000 shares are designated class C
common stock; and
o 20,000,000 shares of preferred stock
As of August 24, 2001, 240,522,465 shares of class A common stock were
issued and outstanding and held of record by 6,389 stockholders, 238,435,208
shares of class B common stock were issued and outstanding and held of record by
Charles W. Ergen, our Chairman and Chief Executive Officer, and no shares of
class C common stock were issued and outstanding. All outstanding shares of the
class A common stock and class B common stock are fully paid and nonassessable.
A summary of the powers, preferences and rights of the shares of each class of
common stock and each series of preferred stock is described below.
The transfer agent for our capital stock, including the class A common
stock, is Computershare Investor Services, formerly known as American Securities
Transfer & Trust, Inc.
CLASS A COMMON STOCK
Each holder of class A common stock is entitled to one vote for each share
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 and the class C common stock on all matters submitted to a
vote of stockholders. Subject to the preferential rights of any outstanding
series of preferred stock and to any restrictions on the payment of dividends
imposed under the terms of our indebtedness, the holders of class A common stock
are entitled to such dividends as may be declared from time to time by our Board
of Directors from legally available funds and, together with the holders of the
class B common stock, are entitled, after payment of all prior claims, to
receive pro rata all of our assets upon a liquidation. 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 and the class C common 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 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 and class C 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 as otherwise required by law, the class C common stock votes together
with class A common stock and the class B common stock on all matters submitted
to a vote of 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 and
class B common stock. Upon a change of control of our company, 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. We do not currently
intend to issue any shares of class C common stock. Under current National
Association of Securities Dealers rules, we are not able to issue class C common
stock so long as the class A common stock is quoted on the Nasdaq National
Market.
PREFERRED STOCK
Our 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 of the series, including the
dividend rights, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, sinking fund provisions, the number of shares
constituting the
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series and the designation of such series. Our Board of Directors may, without
stockholder approval, issue additional preferred stock of existing or new series
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.
SERIES C PREFERRED STOCK
Effective July 6, 2001, we redeemed, for cash, all of our remaining
outstanding 6 3/4% Series C Cumulative Convertible Preferred Stock at a
redemption price of $51.929 per share.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our articles of incorporation provide that our directors are not personally
liable to us or our stockholders for monetary damages for any breach of
fiduciary duty as a director, except in certain cases where liability is
mandated by Nevada corporate law. The provision has no effect on any
non-monetary remedies that may be available to us or our stockholders and does
not relieve us or our directors from complying with federal or state securities
laws. Our articles of incorporation and by-laws provide for indemnification, to
the fullest extent permitted by Nevada corporate law, 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 our
company, or is or was serving at our request 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. However, no indemnification may be made for 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 such person's duty to us.
NEVADA LAW AND LIMITATIONS ON CHANGES IN CONTROL
The Nevada Revised Statutes prevent an "interested stockholder" defined
generally as a person owning 10% or more of a corporation's outstanding voting
stock, from engaging in a "combination" 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 our Board of Directors to issue preferred stock
without stockholder approval and the provisions of the Nevada Revised Statutes
relating to combinations with interested stockholders could have the effect of
delaying, deferring or preventing a change in our control or the removal of our
existing management. Each of the indentures relating to the senior notes of EBC
and EDBS and the indentures relating to the previously issued convertible notes
and the convertible notes in this offering also contain provisions with respect
to a change of control. The Series C preferred stock certificate of designation
also contains certain change of control provisions.
Charles W. Ergen, our Chairman and Chief Executive Officer, owns 238,435,208
shares of class B common stock, which constitute all of the outstanding class B
shares. These shares are transferable to other persons, subject to securities
laws limitations. If Mr. Ergen transferred a substantial portion 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 our company. In addition,
any such change in control would result in an obligation on the part of EBC and
EDBS to offer to purchase at a premium all of their outstanding senior notes and
for us to purchase the previously issued convertible notes and the convertible
notes offered in this offering.
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SUMMARY OF CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain United States federal income tax
considerations that may be relevant to the purchase, ownership and disposition
of the convertible notes and the class A common stock into which the convertible
notes may be converted, but does not purport to be a complete analysis of all
the potential tax considerations relating thereto. This summary deals only with
holders that hold convertible notes and class A common stock as capital assets
and does not address tax considerations applicable to investors that may be
subject to special tax rules such as dealers in securities, financial
institutions, insurance companies, tax-exempt entities, persons holding the
convertible notes as part of a hedging or conversion transaction, a straddle or
a constructive sale, persons whose functional currency is not the United States
dollar, and holders of convertible notes that did not acquire the convertible
notes in the initial distribution thereof at their original issue price. In
addition, this discussion does not consider the effect of any estate, gift or
other tax laws.
As used in this summary:
o A "United States Holder" means a beneficial owner of the convertible
notes or the class A common stock into which the convertible notes may
be converted, who or that:
o is a citizen or resident of the United States;
o is a corporation, partnership or other entity created or organized in
or under the laws of the United States or political subdivision
thereof;
o is an estate the income of which is subject to United States federal
income taxation regardless of its source; or
o is a trust if (a) a United States court is able to exercise supervision
over the administration of the trust and one or more United States
fiduciaries have authority to control all substantial decisions of the
trust, or (b) the trust has a valid election in effect under applicable
United States treasury regulations to be treated as a United States
Person;
o A "Foreign Holder" is a beneficial owner of convertible notes or class
A common stock that is not a United States Holder;
o "Code" means the United States Internal Revenue Code of 1986, as
amended to date; and
o "IRS" means the United States Internal Revenue Service.
THE DISCUSSION OF THE UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS BELOW
IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, THE APPLICABLE TREASURY
REGULATIONS PROMULGATED AND PROPOSED UNDER THE CODE, JUDICIAL DECISIONS AND
ADMINISTRATIVE INTERPRETATIONS, ALL OF WHICH ARE SUBJECT TO CHANGE, POSSIBLY ON
A RETROACTIVE BASIS. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER YOU ARE
STRONGLY URGED TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO YOUR PARTICULAR TAX
SITUATION AND THE PARTICULAR TAX EFFECTS OF ANY STATE, LOCAL NON-UNITED STATES
OR OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
UNITED STATES HOLDER
CONVERTIBLE NOTES
Stated interest. A United States Holder will be required to include in gross
income the stated interest on a convertible note at the time that such interest
accrues or is received, in accordance with the United States Holder's regular
method of accounting for federal income tax purposes.
Sale, exchange or redemption of the convertible notes. A United States
Holder's tax basis in a convertible note will be its cost. A United States
Holder generally will recognize gain or loss on the sale, exchange or retirement
(including a redemption by us) of a convertible note in an amount equal to the
difference between the amount of cash plus the net fair market value of any
property received, other than any such amount received in respect to accrued
interest (which will be taxable as such if not previously included in income),
and the United States Holder's tax basis in the convertible note. Gain or loss
recognized on the sale, exchange or retirement of a convertible note generally
will be a capital gain or loss. In the case of a non-corporate United States
Holder, the federal tax rate applicable to capital gains will depend upon the
United States Holder's holding period for the convertible notes, with a
preferential rate available for convertible notes held for more than one year,
and upon the United States Holder's marginal tax rate for ordinary income. The
deductibility of capital losses is subject to limitations.
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CONVERSION OF THE CONVERTIBLE NOTES
A United States Holder generally will not recognize any income, gain, or
loss upon conversion of a convertible note into class A common stock (except
with respect to cash received in lieu of a fractional share of class A common
stock). Such United States Holder's basis in the class A common stock received
on conversion of a convertible note will be the same as such United States
Holder's tax basis in the convertible note at the time of conversion (reduced by
any basis allocable to a fractional share interest as described below), and the
holding period for the class A common stock received on conversion will include
the holding period of the convertible note.
Cash received in lieu of a fractional share of class A common stock will be
treated as a payment in exchange for the fractional share interest in the class
A common stock. Accordingly, the receipt of cash in lieu of a fractional share
of class A common stock will generally result in capital gain or loss (measured
by the difference between the cash received for the fractional share and the
United States Holder's basis in the fractional share).
CONSTRUCTIVE DIVIDENDS
The conversion price of the convertible notes is subject to adjustment under
specified circumstances. Under Section 305 of the Code and applicable treasury
regulations, adjustments or the failure to make adjustments to the Conversion
Price of the convertible notes may result in a taxable constructive dividend to
United States Holders, resulting in ordinary income to the extent of our
earnings and profits, if, and to the extent that, the adjustments in the
Conversion Price increase the proportionate interest of a United States Holder
of a convertible note in our fully diluted stock, class A common stock, whether
or not the United States Holder ever converts the convertible notes into our
class A common stock.
DIVIDENDS ON CLASS A COMMON STOCK
Dividends paid on class A common stock generally will be includible in the
income of a United States Holder as ordinary income to the extent of our current
or accumulated earnings and profits. Subject to certain limitations, a corporate
taxpayer holder of class A common stock that receives dividends thereon
generally will be eligible for a dividends-received deduction equal to 70% of
the dividends received.
SALE, EXCHANGE OR REDEMPTION OF CLASS A COMMON STOCK
Upon the sale, exchange or redemption of class A common stock, a United
States Holder generally will recognize capital gain or loss equal to the
difference between the amount realized on the sale, exchange or redemption and
the United States Holder's adjusted basis in the class A common stock. In the
case of a non-corporate United States Holder, the federal tax rate applicable to
capital gains will depend upon the United States Holder's holding period for the
class A common stock, with a preferential rate available for class A common
stock held for more than one year, and upon the United States Holder's marginal
tax rate for ordinary income. The deductibility of capital loss is subject to
limitations.
FOREIGN HOLDERS
CONVERTIBLE NOTES
Stated Interest. Payments of interest on a convertible note to a Foreign
Holder will not be subject to United States federal withholding tax provided
that:
o the holder does not actually or constructively own 10% or more of the
total combined voting power of all classes of our stock entitled to
vote (treating, for such purpose, convertible notes held by a holder as
having been converted into our class A common stock);
o the holder is not a controlled foreign corporation that is related to
us through stock ownership; and
o either (a) the beneficial owner of the convertible note, under
penalties of perjury, provides us or our agent with its name and
address and certifies that it is not a United States person or (b) a
securities clearing organization, bank, or other financial institution
that holds customers' securities in the ordinary course of its trade or
business (a "financial institution") certifies to us or our agent,
under penalties of perjury, that such a statement has been received
from the beneficial owner by it or another financial institution and
furnishes to us or our agent a copy thereof.
For purposes of this summary, we refer to this exemption from United States
federal withholding tax as the "Portfolio Interest Exemption." Under United
States treasury regulations, which generally are effective for payments made
after December 31, 2000,
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subject to certain transition rules, the certification under penalties of
perjury described above may also be provided by a qualified intermediary on
behalf of one or more beneficial owners or other intermediaries, provided that
such intermediary has entered into a withholding agreement with the IRS and
certain other conditions are met.
The gross amount of payments to a Foreign Holder of interest that does not
qualify for the Portfolio Interest Exemption and that is not effectively
connected to a United States trade or business will be subject to United States
federal withholding tax at the rate of 30%, unless a United States income tax
treaty applies to reduce or eliminate withholding.
A Foreign Holder will generally be subject to tax in the same manner as a
United States Holder with respect to payments of interest if such payments are
effectively connected with the conduct of a trade or business by the Foreign
Holder in the United States and, if an applicable tax treaty so provides, such
gain is attributable to a United States permanent establishment maintained by
the Foreign Holder. Such effectively connected income received by a Foreign
Holder, which is a corporation, may in certain circumstances be subject to an
additional "branch profits tax" at a 30% rate or, if applicable, a lower treaty
rate.
To claim the benefit of a tax treaty or to claim exemption from withholding
because the income is effectively connected with a United States trade or
business, the Foreign Holder must provide a properly executed United States
Treasury Form W-8 BEN or Form W-8 ECI (or a suitable substitute form), as
applicable, prior to the payment of interest. These forms must be periodically
updated. United States treasury regulations, which generally are effective for
payments made after December 31, 2000, subject to certain transition rules,
require Foreign Holders or, under certain circumstances, a qualified
intermediary to file a withholding certificate with our withholding agent to
obtain the benefit of an applicable tax treaty providing for a lower rate of
withholding tax. Such certificate must contain, among other information, the
name and address of the Foreign Holder.
Foreign Holders should consult their own tax advisors regarding applicable
income tax treaties, which may provide different rules.
Sale, exchange or redemption of the convertible notes. A Foreign Holder
generally will not be subject to United States federal income tax or withholding
tax on gain realized on the sale or exchange of convertible notes unless (1) the
holder is an individual who was present in the United States for 31 days or more
during the calendar year and for an aggregate of 183 days during a three year
period ending in the current calendar year (which 183 day period includes all
days present in the current calendar year, one-third of the days present in the
preceding calendar year, and one-sixth of the days present in the second
preceding calendar year), and certain other conditions are met ("United States
Resident"), (2) the gain is effectively connected with the conduct of a trade or
business of the holder in the United States and, if an applicable tax treaty so
provides, such gain is attributable to a United States permanent establishment
maintained by such holder ("Effectively Connected Income") or (3) we are or have
been a "United States real property holding corporation" (a "USRPHC") within a
specified time period, as described below under "-- Sale, exchange or redemption
of class A common stock," and the holder owns or has owned (actually or
constructively) more than 5% of the total value of the convertible notes at any
time during the shorter of the five-year period preceding the date of the
disposition or the holder's holding period (in which case the gain will be
treated as Effectively Connected Income). Effectively Connected Income received
by a Foreign Holder which is a corporation may in certain circumstances be
subject to an additional "branch profits tax" at a 30% rate or, if applicable, a
lower treaty rate. Additionally, for USRPHC purposes, it is possible that a
Foreign Holder that initially owns 5% or less of the total value of the
convertible notes may subsequently be considered to own more than 5% of the
total value of the convertible notes due to other holders' conversion of
convertible notes into class A common stock. Regardless of whether a disposition
of any convertible note is taxable to the seller pursuant to the rules regarding
USRPHCs, the withholding requirements of Section 1445 of the Code generally will
not be applicable to a purchaser of the convertible notes or a financial
intermediary involved in any such transaction.
CONVERSION OF THE CONVERTIBLE NOTES
In general, no United States federal income tax or withholding tax will be
imposed upon the conversion of a convertible note into class A common stock by a
Foreign Holder except (1) to the extent the class A common stock is considered
attributable to accrued interest not previously included in income, which may be
taxable under the rules set forth in "Foreign Holders -- Stated Interest," (2)
with respect to the receipt of cash in lieu of fractional shares by Foreign
Holders upon conversion of a convertible note, in each case (and in the case of
both (1) and (2) the Foreign Holder is a United States Resident or the income is
Effectively Connected Income), or (3) we are a USRPHC as discussed below, the
Foreign Holder owns or has owned (actually or constructively) more than 5% of
the value of the convertible notes at any time during the shorter of the
five-year period preceding the date of conversion of the Foreign Holder's
holding period, and certain other conditions apply. For purposes of (3), it is
possible that a Foreign Holder that initially owns 5% or less of the total value
of the convertible notes may subsequently be considered to own more than 5% of
the total value of the convertible notes due to other holders' conversion of
convertible notes into class A
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common stock. Regardless of whether a conversion of any convertible note is
taxable to the seller pursuant to the rules regarding USRPHCs, the withholding
requirements of Section 1445 of the Code generally will not be applied to us or
a financial intermediary involved in any such transaction.
SALE, EXCHANGE OR REDEMPTION OF CLASS A COMMON STOCK
A Foreign Holder will generally not be subject to United States federal
income tax or withholding tax on the sale or exchange of class A common stock
unless either of the conditions described in (1) or (2) above under "Foreign
Holders -- Sale, exchange or redemption of the convertible notes" is satisfied
or we are or have been a USRPHC, for United States federal income tax purposes
at any time within the shorter of the five-year period preceding such
disposition or such Foreign Holder's holding period. We do not believe we are,
nor do we believe we have ever been a USRPHC. Further, we do not expect in the
foreseeable future to become a USRPHC. If we are, or become, a USRPHC, so long
as the class A common stock continues to be regularly traded on an established
securities market within the meaning of Section 897(c)(3) of the Code, only a
Foreign Holder who holds or held directly, indirectly or constructively, at any
time during the shorter of the five-year period preceding the date of
disposition or the Foreign Holder's holding period, more than 5% of the class A
common stock will be subject to United States federal income tax on the
disposition of the class A common stock. For purposes of the ownership test
described above, a Foreign Holder of convertible notes will be considered as
constructively owning the class A common stock into which such convertible notes
are convertible. Regardless of whether a disposition of class A common stock is
taxable to the seller pursuant to the rules regarding USRPHCs, the withholding
requirements of Section 1445 of the Code generally will not be applicable to a
purchaser of the class A common stock or a financial intermediary involved in
any such transaction.
DISTRIBUTIONS ON CLASS A COMMON STOCK
Distributions by us with respect to the class A common stock that are
treated as dividends paid or deemed paid (including a deemed distribution on the
convertible notes or class A common stock as described above under "United
States Holders -- Constructive dividends") to a Foreign Holder, excluding
dividends that are effectively connected with the conduct of a trade or business
in the United States by such Foreign Holder which are taxable as described
below, will be subject to United States federal withholding tax at a 30% rate,
or lower rate provided under any applicable income tax treaty. Except to the
extent that an applicable tax treaty otherwise provides, a Foreign Holder will
be subject to tax in the same manner as a United States Holder on dividends paid
or deemed paid that are effectively connected with the conduct of a trade or
business in the United States by the Foreign Holder. If such Foreign Holder is a
foreign corporation, it may in certain circumstances also be subject to a United
States "branch profits tax" on such effectively connected income at a 30% rate
or such lower rate as may be specified by an applicable income tax treaty. Even
though such effectively connected dividends are subject to income tax, and may
be subject to the branch profits tax, they will not be subject to United States
withholding tax if the Foreign Holder delivers United States Treasury Form W-8,
ECI to the payor.
Under current United States treasury regulations, dividends paid to an
address in a foreign country are presumed to be paid to a resident of that
country, unless the payor has knowledge to the contrary, for purposes of the
withholding discussed above, and under the current interpretation of United
States treasury regulations, for purposes of determining the applicability of a
tax treaty rate. Under United States treasury regulations which generally are
effective for payments made after December 31, 2000, subject to certain
transition rules, however, a Foreign Holder of class A common stock who wishes
to claim the benefit of an applicable treaty rate would be required to satisfy
applicable certification requirements. In addition, under current United States
treasury regulations, in the case of class A common stock held by a foreign
partnership, or other fiscally transparent entities, the certification
requirement would generally be applied to the partners of the partnership and
the partnership would be required to provide certain information, including a
United States taxpayer identification number. The treasury regulations also
provide look-through rules for tiered partnerships.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments of
principal, premium, if any, and interest on a convertible note, dividends on
class A common stock, and payments of the proceeds of the sale of a convertible
note or class A common stock to certain non-corporate United States Holders, and
a 31% backup withholding tax may apply to such payment if the United States
Holder (1) fails to furnish or certify his correct taxpayer identification
number to the payer in the manner required, (2) is notified by the IRS that he
has failed to report payments of interest or dividends properly or (3) under
certain circumstances, fails to certify that he has not been notified by the IRS
that he is subject to backup withholding for failure to report interest or
dividend payments.
Information reporting requirements will apply to payments of interest or
dividends to Foreign Holders where such interest or dividends are subject to
withholding or are exempt from United States withholding tax pursuant to a tax
treaty, or where such
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interest is exempt from United States tax under the Portfolio Interest Exemption
discussed above. Copies of these information returns may also be made available
under the provisions of a specific treaty or agreement to the tax authorities of
the country in which the Foreign Holder resides.
Treasury regulations provide that backup withholding and information
reporting will not apply to payments of principal on the convertible notes by us
to a Foreign Holder if the Foreign Holder certifies as to its status as a
Foreign Holder under penalties of perjury or otherwise establishes an exemption
(provided that neither we nor our paying agent has actual knowledge that the
Foreign Holder is a United States person or that the conditions of any other
exemption are not, in fact, satisfied).
The payment of the proceeds from the disposition of convertible notes or
class A common stock to or through the United States office of any broker,
United States or foreign, will be subject to information reporting and possible
backup withholding unless the owner certifies as to its non-United States status
under penalty of perjury or otherwise establishes an exemption, provided that
the broker does not have actual knowledge that the Foreign Holder is a United
States person or that the conditions of any other exemption are not, in fact,
satisfied. The payment of the proceeds from the disposition of a convertible
note or class A common stock to or through a non-United States office of a
non-United States broker that is not a United States related person will not be
subject to information reporting or backup withholding. For this purpose, a
"United States related person" is:
o a "controlled foreign corporation" for United States federal income tax
purposes; or
o a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year
preceding the payment, or for such part of the period that the broker
has been in existence, is derived from activities that are effectively
connected with the conduct of a United States trade or business.
In the case of the payment of proceeds from the disposition of convertible
notes or class A common stock to or through a non-United States office of a
broker that is either a United States person or a United States related person,
treasury regulations require information reporting on the payment unless the
broker has documentary evidence in its files that the owner is a Foreign Holder
and the broker has no knowledge to the contrary.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
United States treasury regulations, which generally are effective for
payments made after December 31, 2000, subject to certain transition rules, will
generally expand the circumstances under which information reporting and backup
withholding may apply. Holders of convertible notes should consult their tax
advisors regarding the application of the information and reporting and backup
withholding rules, including such treasury regulations.
THE ABOVE SUMMARY DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF CONVERTIBLE NOTES
IN LIGHT OF HIS, HER OR ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION.
EACH HOLDER OF CONVERTIBLE NOTES SHOULD CONSULT HIS, HER OR ITS TAX ADVISOR AS
TO THE SPECIFIC TAX CONSEQUENCES TO THE HOLDER OF THE OWNERSHIP AND DISPOSITION
OF THE CONVERTIBLE NOTES INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS, OR SUBSEQUENT REVISIONS OF THESE TAX LAWS.
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SELLING SECURITYHOLDERS
The convertible notes were originally issued by EchoStar and sold by
the initial purchasers in transactions not requiring registration under the
Securities Act or applicable state securities laws. The initial purchasers of
the convertible notes offered and sold the convertible notes to persons they
reasonably believed to be qualified institutional buyers in reliance on Rule
144A under the Securities Act and to a limited number of other "accredited
investors"(as defined in Rule 501(a)(1)(, (2) or (7) of the Securities Act).
Selling securityholders, which includes their transferees, pledgees or donees
and their successors, may from time to time offer and sell pursuant to this
prospectus any or all of the convertible notes or shares of class A common stock
into which they are convertible.
The following table provides information, as of the date of this
prospectus, regarding the principal amount of the convertible notes and shares
of class A common stock beneficially owned that may be offered and sold by each
selling securityholder. The information is based upon information provided to us
by each selling securityholder. The selling securityholders may have sold,
transferred or otherwise disposed of all or any portion of their convertible
notes or acquired additional convertible notes since the date on which they
provided information to us. Any of the foregoing would have been pursuant to
transactions not requiring registration under the Securities Act or applicable
state securities laws.
Because the selling securityholders may offer all or some portion of
the convertible notes and shares of class A common stock into which they are
convertible, we cannot estimate the amount of convertible notes or the number of
shares of class A common stock that will be held by the selling securityholders
upon termination of such sales.
PRINCIPAL AMOUNT OF SHARES OF CLASS A
CONVERTIBLE NOTES COMMON STOCK SHARES OF CLASS A
BENEFICIALLY OWNED OWNED PRIOR TO THE COMMON STOCK
NAME AND OFFERED HEREBY OFFERING(1)(2) OFFERED HEREBY(2)
Abele, John $ 100,000 2,310
AFTRA Health Fund $ 190,000 4,389
AIG/National Union Fire Insurance $ 875,000 20,213
AK Steel Master Pension Trust $4,520,000 104,412
Alexandra Global Investment Fund(1), Ltd $2,000,000 46,200
Allstate Insurance Company $6,400,000 147,840
Allstate Life Insurance Company $1,600,000 36,960
American Investors Life Insurance Company $ 400,000 9,240
Amerus Life Insurance Company $ 500,000 11,550
(Amerus Multi-Fund Convertible Account)
Bank of Austria Cayman Island, Ltd $7,500,000 173,250
Bankers Trust Company $1,065,360 24,610
Bear Stearns & Co. Inc. $3,600,000 83,160
Black Diamond Offshore Ltd. $1,180,000 27,258
45
48
PRINCIPAL AMOUNT OF SHARES OF CLASS A
CONVERTIBLE NOTES COMMON STOCK SHARES OF CLASS A
BENEFICIALLY OWNED OWNED PRIOR TO THE COMMON STOCK
NAME AND OFFERED HEREBY OFFERING(1)(2) OFFERED HEREBY(2)
BNY Hamilton Equity Income Fund $ 6,000,000 138,600
BTES - Convertible ARB $ 2,000,000 46,200
BTPO - Growth VS Value $ 4,000,000 92,400
California Public Employees' Retirement System $20,000,000 462,000
Cannizaro, Salvatore $ 55,000 1,271
Canyon Capital Arbitrage Master Hedge Fund Ltd. $15,000,000 346,500
Canyon MAC 18 LTD (RMF) $ 7,000,000 161,700
Canyon Value Realization Fund (Cayman), Ltd. $40,000,000 924,001
CFFX, LCC $ 3,000,000 69,300
Chase Manhattan Private Bank & Trust $ 55,000 1,271
Chrysler Corporation Master Retirement Trust $ 475,000 10,973
Cinader, Arthur $ 105,000 2,426
Citi-SAM Fund Ltd. $ 4,300,000 99,330
Convertible Securities Fund $ 150,000 3,465
Crusade for Family Prayer $ 90,000 2,079
Delta Airlines Master Trust $ 95,000 2,195
Delta Pilots D& S Trust $ 100,000 2,310
Deutsche Banc Alex Brown Inc. $27,500,000 635,251
Double Black Diamond Offshore LDC $ 5,512,000 127,327
Educational Trust $ 5,000 116
Elizabeth College $ 130,000 3,003
Enron North America Corp. $ 6,000,000 138,600
Fidelity Advisor Series I; Fidelity Advisor $ 4,750,000 109,725
Dividend Growth Fund
Fidelity Advisor Series VII: Fidelity Advisor $ 5,700,000 131,670
Telecommunications & Utilities Growth Fund
Fidelity Charles Street Trust: Fidelity Asset $34,160,000 789,097
Manager
46
49
PRINCIPAL AMOUNT OF SHARES OF CLASS A
CONVERTIBLE NOTES COMMON STOCK SHARES OF CLASS A
BENEFICIALLY OWNED OWNED PRIOR TO THE COMMON STOCK
NAME AND OFFERED HEREBY OFFERING(1)(2) OFFERED HEREBY(2)
Fidelity Charles Street Trust: Fidelity Asset $17,360,000 401,016
Manager: Growth
Fidelity Financial Trust: Fidelity $ 5,000,000 115,500
Convertible Securities Fund
Fidelity Hastings Street Trust: Fidelity Fund $14,620,000 337,722
Fidelity Hastings Street Trust: Fidelity Growth $ 2,760,000 63,756
Income II Portfolio
Fidelity Management Trust Company $ 380,000 8,778
Fidelity Trend Fund: Fidelity Trend Fund $ 1,000,000 23,100
Fidelity Securities Fund: Fidelity Dividend $33,730,000 779,164
Growth Fund
Fidelity Select Portfolios: Multimedia Portfolio $ 2,000,000 46,200
Fidelity Select Portfolios: Telecommunications $ 3,700,000 85,470
Portfolio
Fidelity Summer Street Trust: Fidelity Capital & $20,000,000 462,000
Income Fund
Fleetwood Retirement Plan $ 395,000 9,125
GCG Mid Cap Growth Series (Novelty & Co.) $29,680,000 685,609
Goldman Sachs and Company $ 100,000 2,310
Golub Corporation Employee Retirement Plan $ 165,000 3,812
Guidepost - A Church Corporation $ 125,000 2,888
Hamilton Partners Limited $10,000,000 231,000
HFR TQA Master Trust $ 200,000 4,620
IL Annuity and Insurance Company $ 750,000 17,325
IMF Convertible Fund $ 900,000 20,790
Investcorp-SAM Fund Ltd $ 3,800,000 87,780
Island Holdings $ 50,000 1,155
Jersey (IMA) Ltd. $ 550,000 12,705
JMG Capital Partners, L.P. $11,000,000 254,100
JMG Triton Offshore FD Ltd. $11,000,000 254,100
LDG Limited $ 465,000 10,742
47
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PRINCIPAL AMOUNT OF SHARES OF CLASS A
CONVERTIBLE NOTES COMMON STOCK SHARES OF CLASS A
BENEFICIALLY OWNED OWNED PRIOR TO THE COMMON STOCK
NAME AND OFFERED HEREBY OFFERING(1)(2) OFFERED HEREBY(2)
Leonardo L.P. $ 13,000,000 300,300
LibertyView Fund LLC $ 100,000 2,310
LibertyView Funds L.P. $ 1,850,000 42,735
Lipper Convertibles, L.P. $ 2,000,000 46,200
Lipper Convertibles, L.P. (Class B) $ 1,000,000 23,100
Lipper Convertibles Series II, L.P. $ 1,000,000 23,100
Lipper Offshore Convertibles, L.P. $ 2,000,000 46,200
Lipper Offshore Convertibles, L.P. #2 $ 1,000,000 23,100
Liz Claiborne Foundation $ 45,000 1,040
Long Island Trust c/o Klukwan, Inc. $ 5,000 116
Mainstay Convertible Fund $ 2,680,000 61,908
Mainstay VP Convertible Portfolio $ 760,000 17,556
MFS Mid Cap Growth Fund $100,000,000 2,310,002
MFS/Sunlife Trust-Mid Cap Growth Series $ 1,380,000 31,878
MFS Total Return Fund $ 5,000,000 115,500
MFS VIT-MFS Mid Cap Growth Series $ 620,000 14,322
Morgan Stanley & Co. $ 10,000,000 231,000
Motion Picture Industry Health Plan - Active Member $ 40,000 924
Fund
Nations Convertible Securities Fund $ 5,850,000 135,135
New York Life Separate Account #7 $ 370,000 8,547
Northwestern Mutual Life Insurance Company $ 5,000,000 115,500
Ohio National Growth & Income $ 1,000,000 23,100
Ondeo Nalco $ 220,000 5,082
Paloma Securities, LLC $ 10,000,000 231,000
Partner Reinsurance Company Ltd. $ 80,000 1,848
Penn Capital Strategic High Yield Fund $ 510,000 11,781
Penn High Yield Fund $ 630,000 14,553
R(2)Investments, LDC $ 50,000,000 1,155,001
Ramius Capital Group $ 500,000 11,550
RCG Latitude Master Fund $ 2,500,000 57,750
Rhapsody Fund, L.P. $ 5,400,000 124,740
48
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PRINCIPAL AMOUNT OF SHARES OF CLASS A
CONVERTIBLE NOTES COMMON STOCK SHARES OF CLASS A
BENEFICIALLY OWNED OWNED PRIOR TO THE COMMON STOCK
NAME AND OFFERED HEREBY OFFERING(1)(2) OFFERED HEREBY(2)
Rogers Corp. DB Pension Plan $ 40,000 924
Rogers Corp. Employees' Pension Plan $ 20,000 462
RS Midcap Opportunities Fund $ 1,000,000 23,100
Ruth Berry Trust DTD $ 50,000 1,155
Sage Capital $ 2,000,000 46,200
Sandler Associates $ 4,350,000 100,485
Sandler Internet Partners $ 1,800,000 41,580
Shell Pension Trust $ 515,000 11,897
Sherman Fairchild Foundation, Inc. $ 330,000 7,623
Sloane, Carl S. and Toby M. $ 40,000 924
Southern Farm Bureau Life Insurance $ 450,000 10,395
St. Albans Partners $ 5,000,000 115,500
State Employees' Retirement Fund of the State of $ 180,000 4,158
Delaware
State of Connecticut Combined Investment Funds $ 345,000 7,970
Sun America/MFS Mid Cap Growth Portfolio $ 7,630,000 176,253
Susquehanna Capitol Group $ 1,400,000 32,340
TQA Master Fund Ltd. $ 6,138,000 141,788
Travelers Mid Cap Growth Portfolio $ 6,590,000 152,229
UBS AG $ 34,500,000 796,951
UBS AG London Branch $ 10,000,000 231,000
UBS WAREBURG LLC $ 170,715,000 3,943,520
University of Chicago $ 1,215,000 28,067
Value Realization Fund, LP $ 25,000,000 577,501
Vanguard Convertible Securities Fund, Inc. $ 685,000 15,824
Variable Insurance Products Fund III: Growth & $ 21,240,000 490,644
Income Portfolio
West Jersey Health and Hospital Foundation $ 45,000 1,040
West Jersey Health System Reserve Fund $ 220,000 5,082
White River Securities L.L.C. $ 2,500,000 57,750
Worldwide Transactions Ltd. $ 308,000 7,115
Zola Partners, LP $ 250,000 5,775
Zurich Institutional Benchmarks Master Fund $ 200,000 4,620
Other current and future holders of convertible $ 84,861,640 1,960,306
notes (3)
TOTALS $1,000,000,000 23,100,023
49
52
----------
(1) Includes shares of class A common stock into which the notes are
convertible.
(2) Assumes a conversion price of $43.29 per share and the payment of cash
in lieu of fractional shares.
(3) Information concerning other selling securityholders, including current
holders of convertible notes for which we have not received information
regarding their holdings of convertible notes and class A common stock,
will be included in supplements to this prospectus, if required. For
purposes of this table, we have assumed that such holders do not
beneficially own any other shares of class A common stock, other than
the shares issuable upon conversion of the convertible notes.
None of the selling securityholders has had any material relationship
with EchoStar or its affiliates within the past three years.
Information concerning the selling securityholders may change from time
to time and any such changed information will be set forth in supplements to
this prospectus if and when necessary. In addition, the conversion price of the
convertible notes may be adjusted under certain circumstances which will change
the number of shares of class A common stock received upon their conversion.
50
53
PLAN OF DISTRIBUTION
The selling securityholders and their successors (which term includes
their transferees, pledgees or donees of their successors) may sell the
convertible notes and the class A common stock into which they are convertible
directly to purchasers or through underwriters, broker-dealers or agents, who
may receive compensation in the form of discounts, concessions or commissions
from the selling securityholders or the purchasers (which discounts, concessions
or commissions as to any particular underwriter, broker-dealer or agent may be
in excess of those customary in the types of transactions involved).
The convertible notes and the class A common stock into which they are
convertible may be sold in one or more transactions at fixed prices, at
prevailing market prices at the time of sale, at prices related to such
prevailing market prices, at varying prices determined at the time of sale, or
at negotiated prices. Such sales may be effected in transactions (which may
involve crosses or block transactions) (1) on any national securities exchange
or quotation service on which the notes or the class A common stock may be
listed or quoted at the time of sale, (2) in the over-the-counter market, (3) in
transactions otherwise than on such exchanges or services or in the
over-the-counter market, (4) through the writing of options (whether such
options are listed on an options exchange or otherwise), or (5) through the
settlement of short sales. In connection with the sale of the convertible notes
and the class A common stock received upon their conversion or otherwise, the
selling securityholders may enter into hedging transactions with broker-dealers
or other financial institutions which may in turn engage in short sales of the
notes or the class A common stock, into which they are convertible and deliver
these securities to close out such short positions, or loan or pledge the notes
or the class A common stock into which they are convertible to broker-dealers
that in turn may sell these securities.
The aggregate proceeds to the selling securityholders from the sale of
the convertible notes or class A common stock into which they are convertible
offered by them hereby will be the purchase price of such notes or common stock
less discounts and commissions, if any. Each of the selling securityholders
reserves the right to accept and, together with their agents from time to time,
to reject, in whole or in part, any proposed purchase of notes or common stock
to be made directly or through agents. We will not receive any of the proceeds
from this offering.
Our outstanding class A common stock is listed for trading on Nasdaq
National Market. We do not intend to list the convertible notes for trading on
any national securities exchange or on the Nasdaq National market and can give
no assurance about the development of any trading market for the notes.
In order to comply with the securities laws of some states, if
applicable, the convertible notes and class A common stock into which they are
convertible may be sold in such jurisdictions only through registered or
licensed brokers or dealers. In addition, in some states the convertible notes
and class A common stock into which they are convertible may not be sold unless
they have been registered or qualified for sale or an exemption from
registration or qualification requirements is available and is complied with.
The selling securityholders and any underwriters, broker-dealers or
agents that participate in the sale of the notes and common stock into which
they are convertible may be "underwriters" within the meaning of Section 2(11)
of the Securities Act. Any discounts, commissions, concessions or profit they
earn on any resale or the shares may be underwriting discounts and commissions
under the Securities Act. Selling securityholders who are "underwriters" within
the meaning of Section 2(11) of the Securities Act will be subject to the
prospectus delivery requirements of the Securities Act. The selling
securityholders have acknowledged that they understand their obligations to
comply with the provisions of the Exchange Act and the rules thereunder relating
to stock manipulation, particularly Regulation M, and have agreed that they will
not engage in any transaction in violation of such provisions.
In addition, any securities covered by this prospectus which qualify
for sale pursuant to Rule 144 or Rule 144A of the Securities Act may be sold
under Rule 144 or Rule 144A rather than pursuant to this prospectus. A selling
securityholder may not sell any convertible notes or class A common stock
described herein and may not transfer, devise or gift such securities by other
means not described in this prospectus.
To the extent required, the specific convertible notes or shares of
class A common stock to be sold, the names of the selling securityholders, the
respective purchase prices and public offering prices, the names of any agent,
dealer or underwriter, and any applicable commissions or discounts with respect
to a particular offer will be set forth in an accompanying prospectus supplement
or, if appropriate, a post-effective amendment to the registration statement of
which this prospectus is a part.
51
54
LEGAL MATTERS
Friedlob Sanderson Paulson & Tourtillott, LLC, Denver, Colorado, will pass
on the validity of the convertible notes and the class A common stock issuable
upon their conversion. Mr. Friedlob, a member of the firm, is also a member of
our Board of Directors and currently owns options to acquire 38,000 shares of
class A common stock. Friedlob Sanderson Paulson & Tourtillott, LLC will rely on
an opinion of Hale Lane Peek Dennison Howard and Anderson, Reno, Nevada, as to
matters of Nevada law.
Certain legal matters will be passed upon for the initial purchaser by Paul,
Hastings, Janofsky & Walker LLP, New York, New York.
INDEPENDENT ACCOUNTANTS
The audited financial statements incorporated by reference in this
prospectus and elsewhere in this registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are incorporated by reference in reliance upon
the authority of said firm as experts in giving said report.
52
55
================================================================================
August 29, 2001
ECHOSTAR COMMUNICATIONS CORPORATION
$1,000,000,000
5 3/4% Convertible Subordinated Notes Due 2008
----------
PROSPECTUS
----------
--------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in the prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted. The information contained in this prospectus is correct
only as of the date of this prospectus, regardless of the time of the delivery
of this prospectus or any sale of these securities.
--------------------------------------------------------------------------------
53
56
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than any
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the securities being registered. All amounts are estimates
except the SEC registration fee.
SEC registration fee $250,000
Legal fees and expenses 50,000
Printing fees 25,000
Accounting fees and expenses 15,000
Transfer agent fees 50
Miscellaneous 950
--------
Total $341,000
========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Chapter 78.7502(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
78.7502(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(2) 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 and
Article IX of EchoStar's by-laws. 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 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, 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.
II-1
57
ITEM 16. EXHIBITS
4.1 INDENTURE, DATED AS OF MAY 31, 2001 BETWEEN ECHOSTAR COMMUNICATIONS
CORPORATION AND U.S. BANK TRUST NATIONAL ASSOCIATION, AS TRUSTEE,
INCLUDING THE FORM OF 5 3/4% CONVERTIBLE SUBORDINATED NOTE DUE 2008
ATTACHED AS EXHIBIT A THERETO*
4.2 REGISTRATION RIGHTS AGREEMENT, DATED AS OF MAY 31, 2001, BY AND AMONG
ECHOSTAR COMMUNICATIONS CORPORATION AND THE INITIAL PURCHASERS*
5.1 OPINION OF HALE LANE PEEK DENNISON HOWARD AND ANDERSON
5.2 OPINION OF FRIEDLOB SANDERSON PAULSON & TOURTILLOTT, LLC
12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHANGES
23.1 CONSENT OF ARTHUR ANDERSEN LLP
23.2 CONSENT OF HALE LANE PEEK DENNISON HOWARD AND ANDERSON (INCLUDED IN
EXHIBIT 5.1)
23.3 CONSENT OF FRIEDLOB SANDERSON PAULSON & TOURTILLOTT, LLC (INCLUDED IN
EXHIBIT 5.2)
24.1 POWER OF ATTORNEY (INCLUDED ON PAGE II-4 OF THIS REGISTRATION
STATEMENT)
25.1 FORM T-1 STATEMENT OF ELIGIBILITY OF U.S. BANK TRUST NATIONAL
ASSOCIATION TO ACT AS TRUSTEE UNDER THE INDENTURE
----------
* PREVIOUSLY FILED ON JULY 19, 2001 ON FORM 10-Q
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this registration
statement or any material change to such information in this
registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the 1933
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) For purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to Section 13(a)
or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-2
58
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 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 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.
(6) To file an application for the purpose of determining the
eligibility of the trustee to act under Section 310 of the Trust Indenture Act
in accordance with the rules and regulations prescribed by the Commission under
Section 305(b)(2) of the Act.
II-3
59
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Littleton, State of Colorado on August 29, 2001.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ Michael R. McDonnell
---------------------------------------------
Michael R. McDonnell
Senior Vice President and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Charles W. Ergen, Michael R. McDonnell
and David K. Moskowitz, and each of them, his attorney-in-fact, for him in any
and all capacities, to sign any amendments to this registration statement, and
any related registration statement filed pursuant to Rule 462(b), and to file
the same, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact, or his substitute, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Charles W. Ergen Chairman and Chief Executive Officer August 29, 2001
----------------------- (Principal Executive Officer)
Charles W. Ergen
/s/ Michael McDonnell Chief Financial Officer August 29, 2001
----------------------- (Principal Financial Officer)
Michael McDonnell
/s/ Cantey M. Ergen Director August 29, 2001
-----------------------
Cantey M. Ergen
/s/ David K. Moskowitz Director August 29, 2001
-----------------------
David K. Moskowitz
/s/ Raymond L. Friedlob Director August 29, 2001
-----------------------
Raymond L. Friedlob
/s/ O. Nolan Daines Director August 29, 2001
-----------------------
O. Nolan Daines
/s/ James DeFranco Director August 29, 2001
-----------------------
James DeFranco
/s/ Peter A. Dea Director August 29, 2001
-----------------------
Peter A. Dea
II-4
60
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.1 Indenture, dated as of May 31, 2001, between EchoStar
Communications Corporation and U.S. Bank Trust National
Association, as trustee, including the form of 5 3/4%
Convertible Subordinated Note Due 2007 attached as Exhibit A
thereto*
4.2 Registration Rights Agreement, dated as of May 31, 2001, by
and among EchoStar Communications Corporation and the initial
purchasers*
5.1 Opinion of Hale Lane Peek Dennison Howard and Anderson
5.2 Opinion of Friedlob Sanderson Paulson & Tourtillott, LLC
12.1 Computation of Ratio of Earnings to Fixed Changes
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Hale Lane Peek Dennison Howard and Anderson
(included in Exhibit 5.1)
23.3 Consent of Friedlob Sanderson Paulson & Tourtillott, LLC
(included in Exhibit 5.2)
24.1 Power of Attorney (included on page II-4 of this registration
statement)
25.1 Form T-1 Statement of Eligibility of U.S. Bank Trust National
Association to act as trustee under the Indenture
* Previously filed on July 19, 2001 on Form 10-Q
II-5