10-Q 1 a12-19364_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

Form 10-Q

 

(Mark One)

 

T         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2012

 

OR

 

£         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM                           TO                          .

 

Commission File Number:  001-33807

 

EchoStar Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada

 

26-1232727

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

100 Inverness Terrace East

 

 

Englewood, Colorado

 

80112-5308

(Address of Principal Executive Offices)

 

(Zip Code)

 

(303) 706-4000

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o No  x

 

As of November 1, 2012, the registrant’s outstanding common stock consisted of 39,691,808 shares of Class A common stock and 47,687,039 shares of Class B common stock.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

Disclosure Regarding Forward-Looking Statements

i

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

1

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011

1

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (Unaudited)

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

4

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

39

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

54

 

 

 

Item 4.

Controls and Procedures

56

 

 

 

PART II—OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

57

 

 

 

Item 1A.

Risk Factors

62

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

63

 

 

 

Item 3.

Defaults upon Senior Securities

None

 

 

 

Item 4.

Mine Safety Disclosures

None

 

 

 

Item 5.

Other Information

None

 

 

 

Item 6.

Exhibits

63

 



Table of Contents

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

We make “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 throughout this report.  Whenever you read a statement that is not simply a statement of historical fact (such as when we describe what we “believe,” “intend,” “plan,” “estimate,” “expect” or “anticipate” will occur and other similar statements), you must remember that our expectations may not be achieved, even though we believe they are reasonable.  We do not guarantee that any future transactions or events described herein will happen as described or that they will happen at all.  You should read this report completely and with the understanding that actual future results may be materially different from what we expect.  Whether actual events or results will conform with our expectations and predictions is subject to a number of risks and uncertainties.

 

The risks and uncertainties include, but are not limited to, the following:

 

General Risks Affecting Our Business

 

·                  We currently derive a substantial portion of our revenue from our two primary customers, DISH Network and Bell TV.  The loss of, or a significant reduction in, orders from, or a decrease in selling prices of digital set-top boxes, transponder leasing, provision of digital broadcast services, and/or other products or services to DISH Network or Bell TV would significantly reduce our revenue and adversely impact our results of operations.

·                  Economic weakness, including high unemployment and reduced consumer spending, may adversely affect our ability to grow or maintain our business.

·                  If we are unable to properly respond to technological changes, our business could be significantly harmed.

·                  Certain of our sales to DISH Network could be terminated or substantially curtailed on short notice, which would have a detrimental effect on us.

·                  We may be required to raise and refinance indebtedness during unfavorable market conditions.

·                  We may experience significant financial losses on our existing investments.

·                  We may pursue acquisitions and other strategic transactions to complement or expand our business, which may not be successful and we may lose up to the entire value of our investment in these acquisitions and transactions.

·                  We may not be aware of certain foreign government laws or regulations or changes to them which could have a significant adverse impact on our business.

·                  Our international sales and operations are subject to applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our operations.

·                  Our business depends on certain intellectual property rights and on not infringing the intellectual property rights of others.  The loss of or infringement of our intellectual property rights could have a significant adverse impact on our business.

·                  Any failure or inadequacy of our information technology infrastructure or those of our third-party service providers could harm our business.

·                  We are party to various lawsuits which, if adversely decided, could have a significant adverse impact on our business, particularly lawsuits regarding intellectual property.

·                  We have not been an independent company for a significant amount of time and we may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent company.

·                  We rely on key personnel and the loss of their services may negatively affect our businesses.

·                  We have substantial debt outstanding and may incur additional debt.

 

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Risks Affecting Our EchoStar Technologies Segment

 

·                  We depend on sales of digital set-top boxes for a substantial portion of our revenue and a decline in sales of our digital set-top boxes would have a material adverse effect on our financial position and results of operations.

·                  Our business may suffer if our customer base does not compete successfully with existing and emerging competition.

·                  Our future financial performance depends in part on our ability to penetrate new markets for digital set-top boxes.

·                  Component pricing may remain stable or be negatively affected by inflation, increased demand, decreased supply, or other factors, which could have a material adverse effect on our results of operations.

·                  The average selling price and gross margins of our digital set-top boxes has been decreasing and may decrease even further, which could negatively impact our financial position and results of operations.

·                  Our ability to sell our digital set-top boxes to other operators depends on our ability to obtain licenses to use the conditional access systems utilized by these other operators.

·                  Growth in our EchoStar Technologies segment likely requires expansion of our sales to international customers, and we may be unsuccessful in expanding international sales.

·                  If we are successful in growing sales of our digital set-top boxes to international customers, we may be subject to additional risks including, among other things, trade barriers and political instability abroad.

·                  The digital set-top box industry is extremely competitive.

·                  We expect to continue to face competition from new market entrants, principally located in Asia, that offer low cost set-top boxes.

·                  Our digital set-top boxes are highly complex and may experience quality or supply problems.

·                  If significant numbers of television viewers are unwilling to pay for pay-TV services that utilize digital set-top boxes, we may not be able to sustain our current revenue level.

·                  Our reliance on a single supplier or a limited number of suppliers for several components used in our digital set-top boxes could restrict production, result in higher digital set-top box costs and delay deliveries to customers.

·                  Our future growth depends on growing demand for advanced technologies.

·                  If the encryption and related security technology used in our digital set-top boxes is compromised, sales of our digital set-top boxes may decline.

 

Risks Affecting Our EchoStar Satellite Services and Hughes Segments

 

·                  We currently face competition from established competitors in the satellite service business and may face competition from others in the future.

·                  Our owned and leased satellites in orbit are subject to significant operational and environmental risks that could limit our ability to utilize these satellites.

·                  Our satellites have minimum design lives ranging from 12 to 15 years, but could fail or suffer reduced capacity before then.

·                  Our satellites under construction are subject to risks related to construction and launch that could limit our ability to utilize these satellites.

·                  Our business is subject to risks of adverse government regulation.

·                  Our business depends on Federal Communications Commission (“FCC”) licenses that can expire or be revoked or modified and applications for FCC licenses that may not be granted.

·                  Our use of certain satellites is often dependent on satellite coordination agreements, which may be difficult to obtain.

·                  Our dependence on outside contractors could result in delays related to the design, manufacture and launch of our new satellites, which could in turn adversely affect our operating results.

 

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·                  We generally do not have commercial insurance coverage on the satellites we use and could face significant impairment charges if one of our uninsured satellites fails.

·                  We currently have unused satellite capacity in our EchoStar Satellite Services segment, and our results of operations may be materially adversely affected if we are not able to lease more of this capacity to third parties.

·                  The enterprise network communications industry is highly competitive.  We may be unsuccessful in competing effectively against other terrestrial and satellite-based network providers in our enterprise groups.

·                  The consumer network communications market is highly competitive.  We may be unsuccessful in competing effectively against fiber, Digital Subscriber Line (“DSL”), cable service providers and other satellite broadband providers in the consumer market.

·                  We are dependent upon third-party providers for components, manufacturing, installation services, and customer support services, and our results of operations may be materially adversely affected if any of these third-party providers fail to appropriately deliver the contracted goods or services.

·                  The failure to adequately anticipate the need for transponder capacity or the inability to obtain transponder capacity for our Hughes segment could harm our results of operations.

·                  If our products contain defects, we could be subject to significant costs to correct such defects and our product and network service contracts could be delayed or cancelled, which could adversely affect our revenues.

·                  We may face difficulties in accurately assessing and collecting contributions towards the Universal Service Fund.

·                  Our foreign operations expose us to regulatory risks and restrictions not present in our domestic operations.

·                  Although we expect that the Hughes Acquisition (as defined below) will benefit us, those expected benefits may not occur because of the complexity of integration and other challenges.

 

Other Risks

 

·                  We may have potential conflicts of interest with DISH Network due to our common ownership and management.

·                  We cannot assure you that there will not be deficiencies leading to material weaknesses in our internal control over financial reporting.

·                  It may be difficult for a third party to acquire us, even if doing so may be beneficial to our shareholders, because of our capital structure.

·                  We are controlled by one principal stockholder who is our Chairman.

·                  We may face other risks described from time-to-time in periodic and current reports we file with the Securities and Exchange Commission (“SEC”).

 

All cautionary statements made herein should be read as being applicable to all forward-looking statements wherever they appear.  Investors should consider the risks described herein and should not place undue reliance on any forward-looking statements.  We assume no responsibility for updating forward-looking information contained or incorporated by reference herein or in other reports we file with the SEC.

 

In this report, the words “EchoStar,” the “Company,” “we,” “our” and “us” refer to EchoStar Corporation and its subsidiaries, unless the context otherwise requires.  “DISH Network” refers to DISH Network Corporation and its subsidiaries, unless the context otherwise requires.

 

iii



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1.  FINANCIAL STATEMENTS

 

ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

 694,464

 

$

614,035

 

Marketable investment securities

 

862,230

 

1,082,407

 

Trade accounts receivable, net of allowance for doubtful accounts of $15,530 and $18,484, respectively

 

227,136

 

212,960

 

Trade accounts receivable - DISH Network, net of allowance for doubtful accounts of zero

 

264,664

 

229,852

 

Inventory

 

74,122

 

68,707

 

Deferred tax assets

 

37,992

 

23,492

 

Other current assets

 

106,652

 

76,284

 

Total current assets

 

2,267,260

 

2,307,737

 

Noncurrent Assets:

 

 

 

 

 

Restricted cash and marketable investment securities

 

26,868

 

24,286

 

Property and equipment, net of accumulated depreciation of $2,247,522 and $2,003,875, respectively

 

2,571,130

 

2,453,546

 

Orbital rights, net

 

565,727

 

469,810

 

Goodwill

 

514,536

 

533,018

 

Other intangible assets, net

 

369,562

 

466,452

 

Marketable and other investment securities

 

178,221

 

140,439

 

Other noncurrent assets, net

 

163,361

 

148,449

 

Total noncurrent assets

 

4,389,405

 

4,236,000

 

Total assets

 

$

6,656,665

 

$

6,543,737

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Trade accounts payable

 

$

229,247

 

$

250,366

 

Trade accounts payable - DISH Network

 

16,149

 

16,374

 

Current portion of long-term debt and capital lease obligations

 

65,450

 

64,475

 

Deferred revenue and other

 

42,684

 

54,090

 

Accrued royalties

 

16,201

 

23,590

 

Accrued interest

 

41,407

 

6,353

 

Accrued expenses and other

 

177,616

 

168,474

 

Total current liabilities

 

588,754

 

583,722

 

Noncurrent Liabilities:

 

 

 

 

 

Long-term debt and capital lease obligations, net of current portion

 

2,431,894

 

2,464,180

 

Deferred tax liabilities

 

382,055

 

373,391

 

Long-term deferred revenue and other long-term liabilities

 

94,667

 

70,818

 

Total noncurrent liabilities

 

2,908,616

 

2,908,389

 

Total liabilities

 

3,497,370

 

3,492,111

 

Commitments and Contingencies (Note 12)

 

 

 

 

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

Preferred Stock, $.001 par value, 20,000,000 shares authorized, none issued and outstanding

 

 

 

Class A common stock, $.001 par value, 1,600,000,000 shares authorized, 45,159,775 and 44,500,440 shares issued, and 39,627,457 and 38,968,122 shares outstanding, respectively

 

45

 

45

 

Class B common stock, $.001 par value, 800,000,000 shares authorized, 47,687,039 shares issued and outstanding

 

48

 

48

 

Class C common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding

 

 

 

Class D common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding

 

 

 

Additional paid-in capital

 

3,389,024

 

3,360,301

 

Accumulated other comprehensive income (loss)

 

59,960

 

165,771

 

Accumulated earnings (deficit)

 

(200,663

)

(385,487

)

Treasury stock, at cost

 

(98,162

)

(98,162

)

Total EchoStar stockholders’ equity (deficit)

 

3,150,252

 

3,042,516

 

Noncontrolling interests

 

9,043

 

9,110

 

Total stockholders’ equity (deficit)

 

3,159,295

 

3,051,626

 

Total liabilities and stockholders’ equity (deficit)

 

$

6,656,665

 

$

6,543,737

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1



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ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

 (In thousands, except per share amounts)

(Unaudited)

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenue:

 

 

 

 

 

 

 

 

 

Equipment revenue - DISH Network

 

$

256,935

 

$

339,272

 

$

748,650

 

$

882,027

 

Equipment revenue - other

 

143,764

 

151,613

 

487,097

 

325,192

 

Services and other revenue - DISH Network

 

129,842

 

124,941

 

387,479

 

374,366

 

Services and other revenue - other

 

234,180

 

247,337

 

712,279

 

345,637

 

Total revenue

 

764,721

 

863,163

 

2,335,505

 

1,927,222

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

Cost of sales - equipment

 

342,230

 

415,784

 

1,046,423

 

1,026,462

 

Cost of sales - services and other

 

175,346

 

173,973

 

513,208

 

328,228

 

Selling, general and administrative expenses

 

93,871

 

102,790

 

282,357

 

190,505

 

General and administrative expenses - DISH Network

 

1,168

 

5,669

 

4,406

 

12,397

 

Research and development expenses

 

17,448

 

14,561

 

50,416

 

34,502

 

Depreciation and amortization (Notes 7 and 8)

 

110,778

 

128,120

 

339,472

 

256,193

 

Total costs and expenses

 

740,841

 

840,897

 

2,236,282

 

1,848,287

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

23,880

 

22,266

 

99,223

 

78,935

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

Interest income

 

2,697

 

2,394

 

8,864

 

7,206

 

Interest expense, net of amounts capitalized

 

(33,840

)

(33,061

)

(109,258

)

(45,381

)

Realized gains (losses) on marketable investment securities and other investments

 

21,216

 

4,169

 

149,443

 

13,875

 

Unrealized/realized gains (losses) on investments accounted for at fair value, net

 

 

2,483

 

 

10,281

 

Hughes Acquisition costs

 

7

 

(730

)

 

(35,230

)

Other, net

 

7,900

 

(2,504

)

35,244

 

18,430

 

Total other income (expense)

 

(2,020

)

(27,249

)

84,293

 

(30,819

)

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

21,860

 

(4,983

)

183,516

 

48,116

 

Income tax (provision) benefit, net

 

409

 

(13,864

)

704

 

(31,230

)

Net income (loss)

 

22,269

 

(18,847

)

184,220

 

16,886

 

Less: Net income (loss) attributable to noncontrolling interests

 

(285

)

270

 

(604

)

357

 

Net income (loss) attributable to EchoStar

 

$

22,554

 

$

(19,117

)

$

184,824

 

$

16,529

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding - Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic

 

87,279

 

86,507

 

87,031

 

86,100

 

Diluted

 

87,998

 

86,507

 

87,752

 

87,171

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share attributable to EchoStar

 

$

0.26

 

$

(0.22

)

$

2.12

 

$

0.19

 

Diluted net income (loss) per share attributable to EchoStar

 

$

0.26

 

$

(0.22

)

$

2.11

 

$

0.19

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

22,269

 

$

(18,847

)

$

184,220

 

$

16,886

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

2,868

 

(11,067

)

(667

)

(11,511

)

Unrealized holding gains (losses) on available-for-sale securities

 

6,536

 

(67,934

)

42,318

 

(43,474

)

Recognition of previously unrealized (gains) losses on available-for-sale securities in net income (loss)

 

(19,088

)

(4,168

)

(147,093

)

(6,617

)

Total other comprehensive income (loss), net of tax

 

(9,684

)

(83,169

)

(105,442

)

(61,602

)

Comprehensive income (loss)

 

12,585

 

(102,016

)

78,778

 

(44,716

)

Less: Comprehensive income (loss) attributable to noncontrolling interests

 

192

 

270

 

(235

)

357

 

Comprehensive income (loss) attributable to EchoStar

 

$

12,393

 

$

(102,286

)

$

79,013

 

$

(45,073

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Nine Months

 

 

 

Ended September 30,

 

 

 

2012

 

2011

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income (loss)

 

$

184,220

 

$

16,886

 

Adjustments to reconcile net income (loss) to net cash flows from operating activities:

 

 

 

 

 

Depreciation and amortization

 

339,472

 

256,193

 

Equity in losses (earnings) of affiliates

 

(5,029

)

(8,536

)

Realized losses (gains) on marketable investment securities and other investments

 

(149,443

)

(13,875

)

Unrealized/realized losses (gains) on investments accounted for at fair value, net

 

 

(10,281

)

Non-cash, stock-based compensation

 

14,361

 

11,558

 

Deferred tax expense (benefit)

 

(3,153

)

17,264

 

Other, net

 

9,940

 

(227

)

Change in noncurrent assets

 

(7,079

)

(36

)

Changes in current assets and current liabilities, net

 

(32,948

)

(30,755

)

Net cash flows from operating activities

 

350,341

 

238,191

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Purchases of marketable investment securities

 

(698,738

)

(1,578,463

)

Sales and maturities of marketable investment securities

 

929,179

 

1,749,278

 

Purchases of property and equipment

 

(371,385

)

(261,196

)

Change in restricted cash and marketable investment securities

 

(2,582

)

2,046

 

Acquisition of Hughes Communications, net of cash acquired of $98,900

 

 

(2,075,613

)

Acquisition of orbital rights

 

(82,477

)

 

Purchase of strategic investments included in marketable and other investment securities

 

(954

)

(72,774

)

Proceeds from sale of strategic investments

 

 

567,303

 

Other, net

 

(3,215

)

2,963

 

Net cash flows from investing activities

 

(230,172

)

(1,666,456

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

317

 

2,000,000

 

Repayment of long-term debt and capital lease obligations

 

(49,654

)

(43,010

)

Debt issuance costs

 

(229

)

(57,597

)

Net proceeds from Class A common stock options exercised and issued under the Employee Stock Purchase Plan

 

10,022

 

27,118

 

Other

 

(633

)

1,693

 

Net cash flows from financing activities

 

(40,177

)

1,928,204

 

 

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents

 

437

 

(947

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

80,429

 

498,992

 

Cash and cash equivalents, beginning of period

 

614,035

 

141,814

 

Cash and cash equivalents, end of period

 

$

694,464

 

$

640,806

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid for interest (including capitalized interest)

 

$

110,131

 

$

31,988

 

Capitalized interest

 

$

39,637

 

$

31,777

 

Cash received for interest

 

$

22,551

 

$

8,957

 

Cash paid for income taxes

 

$

8,754

 

$

3,637

 

Employee benefits paid in Class A common stock

 

$

4,282

 

$

4,046

 

Satellites and other assets financed under capital lease obligations

 

$

30,263

 

$

27,279

 

In-orbit incentive obligation for Echostar XVII

 

$

24,950

 

$

 

Reduction of capital lease obligations for AMC-16

 

$

12,599

 

$

6,616

 

Changes in capital expenditures included in accounts payable

 

$

(30,767

)

$

22,605

 

Orbital rights obligation included in accrued liabilities

 

$

16,000

 

$

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.                      Organization and Business Activities

 

Principal Business

 

We were organized in October 2007 as a corporation under the laws of the State of Nevada.  EchoStar Corporation is a holding company (together with its subsidiaries, “EchoStar,” the “Company,” “we,” “us” and/or “our”).  On June 8, 2011, we acquired all of the outstanding equity of Hughes Communications, Inc. (the “Hughes Acquisition”).  Following the Hughes Acquisition, we operate three primary business segments.

 

·                  EchoStar Technologies — which designs, develops and distributes digital set-top boxes and related products and technology, including our Slingbox “placeshifting” technology, primarily for satellite TV service providers, telecommunication and international cable companies and, with respect to Slingboxes, directly to consumers via retail outlets.  Our EchoStar Technologies segment also provides digital broadcast operations including satellite uplinking/downlinking, transmission services, signal processing, conditional access management and other services primarily to DISH Network.

 

·                  EchoStar Satellite Services — which uses 9 of our 11 owned and leased in-orbit satellites and related Federal Communications Commission (“FCC”) licenses to lease capacity on a full-time and occasional-use basis primarily to DISH Network, and secondarily to Dish Mexico, S. de R.L. de C.V. (“Dish Mexico”), United States government service providers, state agencies, Internet service providers, broadcast news organizations, programmers and private enterprise customers.

 

·                  Hughes — which provides satellite broadband Internet access to North American consumers and broadband network services and systems to the domestic and international enterprise markets.  The Hughes segment also provides managed services to large enterprises and networking systems solutions to customers for mobile satellite and wireless backhaul systems.  Hughes became a new segment as a result of the Hughes Acquisition and the operating results of Hughes Communications, Inc. and its subsidiaries (“Hughes Communications”) are included in our results effective June 9, 2011.  See Note 11 for further discussion of the Hughes Acquisition.

 

Effective January 1, 2008, DISH Network completed its distribution to us (the “Spin-off”) of its digital set-top box business and certain infrastructure and other assets, including certain of its satellites, uplink and satellite transmission assets, real estate and other assets and related liabilities.  Since the Spin-off, we and DISH Network have operated as separate publicly-traded companies, and neither entity has any ownership interest in the other.  However, a substantial majority of the voting power of the shares of both companies is owned beneficially by Charles W. Ergen, our Chairman, or by certain trusts established by Mr. Ergen for the benefit of his family.

 

Note 2.                      Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying (a) condensed balance sheet as of December 31, 2011, which has been derived from our audited financial statements, and (b) unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information.  Accordingly, these financial statements do

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

not include all of the information and notes required for complete financial statements prepared under GAAP.  In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.  For further information, refer to the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.  Certain prior period amounts have been reclassified to conform to the current period presentation.

 

Our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2011 include the operating results of Hughes Communications after June 8, 2011, the date of the Hughes Acquisition.

 

Principles of Consolidation

 

We consolidate all majority owned subsidiaries, investments in entities in which we have controlling influence and variable interest entities where we are the primary beneficiary.  Non-majority owned investments are accounted for using the equity method when we have the ability to significantly influence the operating decisions of the investee.  When we do not have the ability to significantly influence the operating decisions of an investee, the cost method is used.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense for each reporting period.  Estimates are used in accounting for, among other things, deferred revenue and deferred subscriber acquisition cost amortization periods, percentage-of-completion related to revenue recognition, allowances for doubtful accounts, allowances for sales returns/rebates, warranty obligations, self-insurance obligations, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, fair value of financial instruments, fair value of options granted under our stock-based compensation plans, fair value of assets and liabilities acquired in business combinations, capital leases, asset impairments, useful lives of property, equipment and intangible assets, and royalty obligations.  Weakened economic conditions may increase the inherent uncertainty in the estimates and assumptions indicated above.  We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances.  Due to the inherent uncertainty involved in making estimates, actual results may differ from previously estimated amounts, and such differences may be material to our Condensed Consolidated Financial Statements.  Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in the period they occur.

 

Fair Value Measurements

 

We determine fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  Market or observable inputs are the preferred source of values, followed by unobservable inputs or assumptions based on hypothetical transactions in the absence of market inputs.  We apply the following hierarchy in determining fair value:

 

·                  Level 1, defined as observable inputs being quoted prices in active markets for identical assets;

 

·                  Level 2, defined as observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

·                  Level 3, defined as unobservable inputs for which little or no market data exists, consistent with reasonably available assumptions made by other participants therefore requiring assumptions based on the best information available.

 

As of September 30, 2012 and December 31, 2011, the carrying value of our cash and cash equivalents, current marketable investment securities, trade accounts receivable, net of allowance for doubtful accounts, and accrued liabilities were equal to or approximated fair value due to their short-term nature or proximity to current market rates.

 

Fair values for our publicly traded debt securities are based on quoted market prices.  The fair value of our private debt and orbital incentive obligations is estimated at their carrying value based on current rates (Level 2).  See Note 9 for the fair value of our long-term debt.  As of September 30, 2012 and December 31, 2011, the fair values of our orbital incentive obligations, based on measurements categorized within Level 2 of the fair value hierarchy, approximated their carrying values of $30 million and $6 million, respectively. We use fair value measurements from time-to-time in connection with impairment testing and the assignment of purchase consideration to assets and liabilities of acquired companies.   Those fair value measurements typically include significant unobservable inputs and are categorized within Level 3 of the fair value hierarchy.

 

Note 3.                      Basic and Diluted Net Income (Loss) Per Share

 

We present both basic earnings per share (“EPS”) and diluted EPS.  Basic EPS excludes potential dilution and is computed by dividing “Net income (loss) attributable to EchoStar” by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if stock awards were exercised.

 

The potential dilution from stock awards was computed using the treasury stock method based on the average market value of our Class A common stock.  The following table presents EPS amounts for all periods and the basic and diluted weighted-average shares outstanding used in the calculation.

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands, except per share amounts)

 

Net income (loss) attributable to EchoStar

 

$

22,554

 

$

(19,117

)

$

184,824

 

$

16,529

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding - Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic

 

87,279

 

86,507

 

87,031

 

86,100

 

Dilutive impact of stock awards outstanding

 

719

 

 

721

 

1,071

 

Diluted

 

87,998

 

86,507

 

87,752

 

87,171

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share attributable to EchoStar

 

$

0.26

 

$

(0.22

)

$

2.12

 

$

0.19

 

Diluted net income (loss) per share attributable to EchoStar

 

$

0.26

 

$

(0.22

)

$

2.11

 

$

0.19

 

 

As of September 30, 2012 and 2011, there were stock awards to purchase 5.0 million and 3.9 million shares, respectively, of our Class A common stock outstanding, not included in the weighted-average common shares outstanding above, as their effect is anti-dilutive.

 

Vesting of options and rights to acquire shares of our Class A common stock granted pursuant to a performance-based stock incentive plan (“Restricted Performance Units”) is contingent upon meeting a certain company goal which was not probable of being achieved as of September 30, 2012 and 2011.  As a result, the following awards were outstanding and were not included in the diluted EPS calculation.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

 

 

As of September 30,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Performance-based options

 

632

 

673

 

Restricted Performance Units

 

65

 

90

 

Total

 

697

 

763

 

 

Note 4.                      Other Comprehensive Income (Loss) and Related Tax Effects

 

We have not recognized any tax effects on foreign currency translation adjustments because they are not expected to result in future taxable income or deductions.  We have not recognized any tax effects on unrealized gains or losses on available-for-sale securities to the extent the gains or losses would affect the amount of existing capital loss carryforwards for which the related deferred tax asset has been fully offset by a valuation allowance.

 

Note 5.                      Marketable Investment Securities, Restricted Cash and Cash Equivalents, and Other Investment Securities

 

Our marketable investment securities, restricted cash and cash equivalents, and other investment securities consisted of the following:

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Marketable investment securities—current:

 

 

 

 

 

VRDNs

 

$

52,895

 

$

218,665

 

Strategic

 

103,423

 

216,090

 

Other

 

705,912

 

647,652

 

Total marketable investment securities—current

 

862,230

 

1,082,407

 

Restricted marketable investment securities (1)

 

6,729

 

3,939

 

Total

 

868,959

 

1,086,346

 

 

 

 

 

 

 

Restricted cash and cash equivalents (1)

 

20,139

 

20,347

 

 

 

 

 

 

 

Marketable and other investment securities—noncurrent:

 

 

 

 

 

Cost method

 

26,192

 

26,193

 

Equity method

 

152,029

 

114,246

 

Total marketable and other investment securities—noncurrent

 

178,221

 

140,439

 

Total marketable investment securities, restricted cash and cash equivalents, and other investment securities

 

$

1,067,319

 

$

1,247,132

 

 


(1)          Restricted marketable investment securities and restricted cash and cash equivalents are included in “Restricted cash and marketable investment securities” on our Condensed Consolidated Balance Sheets.

 

Marketable Investment Securities

 

Our marketable investment securities portfolio consists of various debt and equity instruments, all of which are classified as available-for-sale.

 

Variable rate demand notes (“VRDNs”)

 

VRDNs are long-term floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest.  All of the put options are secured by a pledged liquidity source.  Our VRDN portfolio is comprised of investments in municipalities and corporations, which are backed by financial institutions

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

or other highly rated companies that serve as the pledged liquidity source.  While they are classified as marketable investment securities, the put option allows VRDNs to be liquidated generally on a same day or on a five business day settlement basis.

 

Strategic

 

Our strategic investment portfolio consists of investments in shares of common stock of public companies, which are highly speculative and have experienced and continue to experience volatility.  The value of our investment portfolio depends on the value of such shares of common stock.

 

Other

 

Our other current marketable investment securities portfolio includes investments in various debt instruments including corporate and government bonds.

 

Restricted Cash and Marketable Investment Securities

 

As of September 30, 2012 and December 31, 2011, our restricted marketable investment securities, together with our restricted cash, included amounts required as collateral for our letters of credit or surety bonds.

 

Marketable and Other Investment Securities—Noncurrent

 

We have several strategic investments in certain equity securities that are accounted for using either the equity or the cost method of accounting.  Our ability to realize value from our strategic investments in companies that are not publicly traded depends on the success of those companies’ businesses and their ability to obtain sufficient capital to execute their business plans.  Because 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 we will not be able to obtain fair value for them.

 

As of September 30, 2012, our equity method investments included a $32 million investment in DISH Digital Holding L.L.C. (“DISH Digital”), a joint venture between us and DISH Network.  The carrying amount of our investment reflects the $37 million aggregate carrying amount of certain noncash assets that we contributed to DISH Digital upon its formation on July 1, 2012 in exchange for a one-third equity interest in DISH Digital, less $5 million for our equity in the net loss of DISH Digital for the three months ended September 30, 2012.  See Note 14 for additional information about our investment in DISH Digital.

 

Realized Gains on Marketable Investment Securities and Other Investments

 

We recognized realized gains on our marketable investment securities and other investments of $21.2 million and $4.2 million for the three months ended September 30, 2012 and 2011, respectively, and $149.4 million and $13.9 million for the nine months ended September 30, 2012 and 2011, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

Unrealized Gains (Losses) on Marketable Investment Securities

 

The components of our available-for-sale investments are summarized in the table below.

 

 

 

As of

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Marketable

 

 

 

 

 

 

 

Marketable

 

 

 

 

 

 

 

 

 

Investment

 

Unrealized

 

Investment

 

Unrealized

 

 

 

Securities

 

Gains

 

Losses

 

Net

 

Securities

 

Gains

 

Losses

 

Net

 

 

 

(In thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

52,895

 

$

 

$

 

$

 

$

218,665

 

$

 

$

 

$

 

Other (including restricted)

 

712,641

 

1,048

 

(661

)

387

 

651,591

 

253

 

(2,715

)

(2,462

)

Equity securities - strategic

 

103,423

 

74,591

 

 

74,591

 

216,090

 

182,214

 

 

182,214

 

Total marketable investment securities

 

$

868,959

 

$

75,639

 

$

(661

)

$

74,978

 

$

1,086,346

 

$

182,467

 

$

(2,715

)

$

179,752

 

 

As of September 30, 2012, restricted and non-restricted marketable investment securities included debt securities of $621 million with contractual maturities of one year or less and $145 million with contractual maturities greater than one year.  We may realize proceeds from certain investments prior to contractual maturity as a result of our ability to sell these securities prior to their contractual maturity.

 

Marketable Investment Securities in a Loss Position

 

The following table reflects the length of time that our available-for-sale debt securities have been in an unrealized loss position.  We do not intend to sell these debt securities before they recover, and it is more likely than not that we will hold these debt securities until they recover or mature.  In addition, we are not aware of any specific factors indicating that the underlying issuers of these debt securities would not be able to pay interest as it becomes due or repay the principal at maturity.  Therefore, we believe that these changes in the estimated fair values of these debt securities are primarily related to temporary market fluctuations.

 

 

 

As of

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

 

 

(In thousands)

 

Less than 12 months

 

$

192,882

 

$

(649

)

$

507,925

 

$

(2,709

)

12 months or more

 

20,274

 

(12

)

3,931

 

(6

)

Total

 

$

213,156

 

$

(661

)

$

511,856

 

$

(2,715

)

 

Fair Value Measurements

 

Our current marketable investment securities were measured at fair value on a recurring basis as summarized in the table below.  As of September 30, 2012 and December 31, 2011, we did not have investments that were categorized within Level 3 of the fair value hierarchy.

 

 

 

As of

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Total

 

Level 1

 

Level 2

 

Total

 

Level 1

 

Level 2

 

 

 

(In thousands)

 

Cash equivalents (including restricted)

 

$

577,145

 

$

15,147

 

$

561,998

 

$

543,243

 

$

16,197

 

$

527,046

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

52,895

 

$

 

$

52,895

 

$

218,665

 

$

 

$

218,665

 

Other (including restricted)

 

712,641

 

 

712,641

 

651,591

 

 

651,591

 

Equity securities - strategic

 

103,423

 

103,423

 

 

216,090

 

216,090

 

 

Total marketable investment securities

 

$

868,959

 

$

103,423

 

$

765,536

 

$

1,086,346

 

$

216,090

 

$

870,256

 

 

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Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

During the nine months ended September 30, 2012, we did not have investments that were accounted for using the fair value method.  During the nine months ended September 30, 2011, we held investments that were accounted for using the fair value method, and we reported realized and unrealized gains and losses on such investments in “Unrealized/realized gains (losses) on investments accounted for at fair value, net” in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).  Certain unrealized gains and losses on investments accounted for using the fair value method were based on fair value measurements categorized within Level 3 of the fair value hierarchy.  Changes in such investments for the nine months ended September 30, 2011 were as follows:

 

 

 

Amount

 

 

 

(In thousands)

 

Balance as of December 31, 2010

 

$

608,955

 

Net unrealized gains included in earnings

 

3,507

 

Purchases

 

51,936

 

Issuances

 

27,313

 

Settlements

 

(551,865

)

Balance as of September 30, 2011

 

$

139,846

 

 

Investment in TerreStar

 

In February 2008, we completed several transactions under a Master Investment Agreement between us, TerreStar Corporation and TerreStar Networks Inc. (“TerreStar”).  Under the Master Investment Agreement, we acquired, among other things, $50 million in aggregate principal amount of TerreStar’s 6 1/2% Senior Exchangeable Paid-in-Kind Notes due June 15, 2014 (“Exchangeable Notes”).  TerreStar and certain of its affiliates filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code on October 19, 2010.  The United States Bankruptcy Court for the Southern District of New York confirmed TerreStar’s Chapter 11 plan of reorganization (the “TerreStar Plan”) on February 15, 2012.

 

Effective March 29, 2012, the Exchangeable Notes were cancelled pursuant to the TerreStar Plan.  In satisfaction of our claims against TerreStar under the Exchangeable Notes, we have a right to receive a distribution, along with other general unsecured creditors, in accordance with the terms of the TerreStar Plan.  The amount of any distribution we ultimately receive will vary depending upon and will be impacted by, among other things, the outcome of any claim objections, and will be substantially less than the amount we paid for the Exchangeable Notes.  Any proceeds received on this investment will be recognized in “Unrealized/realized gains (losses) on investments accounted for at fair value, net” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and will directly impact our profitability.  As of September 30, 2012, we had no investment in TerreStar.

 

Note 6.                      Inventory

 

Our inventory consisted of the following:

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Finished goods

 

$

47,899

 

$

49,038

 

Raw materials

 

14,510

 

11,212

 

Work-in-process

 

11,713

 

8,457

 

Total inventory

 

$

74,122

 

$

68,707

 

 

10


 


Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

Note 7.                     Property and Equipment

 

Depreciation and amortization expense consisted of the following:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Satellites

 

$

35,443

 

$

29,455

 

$

109,561

 

$

77,172

 

Furniture, fixtures, equipment and other

 

48,761

 

49,838

 

149,291

 

106,982

 

Intangible assets and other

 

23,379

 

45,975

 

71,025

 

65,699

 

Buildings and improvements

 

3,195

 

2,852

 

9,595

 

6,340

 

Total depreciation and amortization

 

$

110,778

 

$

128,120

 

$

339,472

 

$

256,193

 

 

As a result of an accelerated amortization method used for certain of our intangible assets acquired in the Hughes Acquisition, higher amortization expense was recognized for the three months ended September 30, 2011 compared to the same period in 2012.  The increase in our depreciation and amortization expense for the nine months ended September 30, 2012 compared to the same period in 2011 was due to depreciation expense recognized on assets acquired in June 2011 in connection with the Hughes Acquisition.

 

Depreciation and amortization expense is reported separately from cost of sales and other expense categories included in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

 

Satellites

 

As of September 30, 2012, we utilized 10 of our 11 owned and leased satellites in geostationary orbit approximately 22,300 miles above the equator, including the SPACEWAY 3 satellite, which was added to our satellite fleet as a result of the Hughes Acquisition in 2011, and the recently launched EchoStar XVII satellite in July 2012.  Four of these satellites are accounted for as capital leases and are depreciated over the terms of the satellite service agreements.  Beginning October 2012, we introduced HughesNet Gen4 broadband Internet services to our customers in North America on the EchoStar XVII satellite.  We depreciate our owned satellites on a straight-line basis over the estimated useful life of each satellite.

 

In addition, we also own EchoStar XVI, which is currently under construction and is expected to be launched in the fourth quarter of 2012.

 

EchoStar XVII Orbital Incentives Obligation

 

Pursuant to the terms and conditions of the construction agreement for EchoStar XVII, we are obligated to commence payment of in-orbit incentives totaling $25 million (the “Orbital incentive”) upon the completion of the in-orbit testing, which occurred in September 2012. In addition, we are required to make interest payments on the Orbital incentive, at an annual rate of 10%, of approximately $33 million. The Orbital incentive payments, including interest, are required to be paid quarterly over a 15-year period, subject to prepayment at our option; however, these payments are subject to reduction in the event of future satellite failures.  As of September 30, 2012, the Orbital incentive was capitalized in “Property and equipment, net” and included in “Long-term deferred revenue and other long-term liabilities” on our Condensed Consolidated Balance Sheets.

 

Satellite Anomalies

 

Certain of our satellites have experienced anomalies, some of which have had a significant adverse impact on their remaining useful life and/or commercial operation.  There can be no assurance that future anomalies will not further impact the remaining useful life and commercial operation of any of the satellites in our fleet.  See “Long-Lived Satellite Assets” below for further discussion of evaluation of impairment.  In addition, there can be no assurance that we can recover critical transmission capacity in the event one or more of our in-orbit satellites were to fail.  We

 

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Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

generally do not carry in-orbit insurance on any of our satellites, other than SPACEWAY 3, EchoStar XVI and EchoStar XVII, and therefore, we bear the risk of any uninsured in-orbit failures.  However, pursuant to the terms of the agreements governing certain portions of our indebtedness, we are required, subject to certain limitations on coverage, to maintain launch insurance for EchoStar XVI and to maintain in-orbit insurance for EchoStar XVI, EchoStar XVII and SPACEWAY 3.  Satellite anomalies with respect to certain of our satellites are discussed below.

 

Owned Satellites

 

EchoStar III.  EchoStar III, which is currently an in-orbit spare, was designed to meet a minimum 12-year useful life.  During the first quarter of 2012, EchoStar III experienced a solar array anomaly which did not impact commercial operation of the satellite; however, there can be no assurance that future anomalies will not impact its commercial operation.  EchoStar III was fully depreciated in 2009.

 

EchoStar VI.  EchoStar VI was designed to meet a minimum 12-year useful life.  Prior to 2012, this satellite experienced solar array anomalies and the loss of traveling wave tube amplifiers (“TWTAs”) that did not reduce its useful life; however, the solar array anomalies impacted the commercial operation of the satellite.  During the first quarter of 2012, we determined that EchoStar VI experienced the loss of two additional TWTAs increasing the total number of TWTAs lost on the satellite to five.  During the second quarter of 2012, EchoStar VI lost an additional solar array string reducing the total power available for use by the spacecraft.  The recent losses of TWTAs and the solar array string did not reduce the estimated useful life of the satellite and did not impact the current commercial operation of the satellite; however, there can be no assurance that future anomalies will not reduce its useful life or impact its commercial operation.  EchoStar VI was fully depreciated in August 2012.

 

EchoStar XII.  Prior to 2012, EchoStar XII experienced anomalies resulting in the loss of electrical power available from its solar arrays.  During September 2012 and November 2012, EchoStar XII experienced additional solar array anomalies, which could further reduce the electrical power available to operate EchoStar XII.  An investigation of the anomalies is continuing.  We currently operate EchoStar XII in spot beam mode.  If we continue to operate the satellite in the spot beam mode, as a result of this loss of electrical power, we are still able to maintain our current operational requirements.  Additional solar array anomalies are likely to continue to degrade operational capability in all of the possible modes.  Since the number of useable transponders on EchoStar XII depends on, among other things, whether EchoStar XII is operated in CONUS, spot beam, or hybrid CONUS/spot beam mode, we are unable to determine at this time the actual number of transponders that will be available at any given time or how many transponders can be used during the remaining estimated life of the satellite.  Additionally, there can be no assurance that future anomalies will not cause further losses, which could impact the remaining useful life or commercial operation of EchoStar XII.

 

Leased Satellites

 

EchoStar I. During 2009, we entered into a satellite capacity agreement pursuant to which we leased certain satellite capacity from DISH Network on EchoStar I.  During the first quarter of 2012, EchoStar I experienced a communications receiver anomaly, which had no impact on the commercial operation of the satellite.  Effective July 1, 2012, we and DISH Network mutually agreed to terminate this satellite capacity agreement.

 

AMC-16.  In February 2012 and April 2012, AMC-16 experienced two solar-power anomalies, causing a partial power loss that reduced its capacity.  Pursuant to the governing satellite services agreement, we are entitled to a reduction of our monthly recurring payment in the event of a partial loss of satellite capacity.  In connection with the February 2012 anomaly, we reduced our capital lease obligation and recognized a corresponding gain of $5 million in the second quarter of 2012.  In connection with the April 2012 anomaly, we reduced our capital lease obligation and recognized a corresponding gain of approximately $8 million in the third quarter of 2012. The gains were recorded in “Other, net” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).  There can be no assurance that these anomalies or any future anomalies will not reduce its useful life or further impact its commercial operations.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

Long-Lived Satellite Assets

 

We evaluate our satellites for impairment and test for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.  This evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.  Certain of the anomalies discussed above, and previously disclosed, may be considered to represent a significant adverse change in the physical condition of a particular satellite.  However, based on the redundancy designed within each satellite, these anomalies are not considered to be significant events that would require a test of recoverability because the projected cash flows have not been significantly affected by these anomalies.

 

Note 8.                     Goodwill, Orbital Rights and Other Intangible Assets

 

Goodwill

 

During the nine months ended September 30, 2012, we adjusted our goodwill as follows:

 

 

 

Goodwill

 

 

 

(In thousands)

 

Balance as of December 31, 2011

 

$

533,018

 

Hughes acquisition adjustment

 

(12,025

)

Contribution to DISH Digital

 

(6,457

)

Balance as of September 30, 2012

 

$

514,536

 

 

In connection with our final purchase price allocation of the Hughes Acquisition, we made adjustments to increase deferred tax assets by $12 million with a corresponding adjustment to goodwill in 2012.  In July 2012, we agreed to contribute all of the equity of our wholly-owned subsidiary, EchoStar Advanced Technologies L.L.C., cash and certain other assets in exchange for a one-third ownership interest in DISH Digital, a joint venture between us and DISH Network.  As a result, related goodwill of $6.5 million was transferred to our investment in DISH Digital during the three months ended September 30, 2012.  See Note 14 for additional information about our investment in DISH Digital.

 

Goodwill as of September 30, 2012 included $504.2 million that was recognized in connection with the Hughes Acquisition and has been assigned to reporting units of our Hughes segment.  We performed step one of our annual two-step test of impairment of such goodwill as of April 1, 2012.  Step one involves a comparison of the estimated fair value of the reporting unit with its carrying amount, including goodwill.  We estimated fair value of the reporting units using discounted cash flow techniques, which included significant assumptions about prospective financial information, terminal value and discount rates.  Based on this quantitative test, we determined that the estimated fair values of the Hughes reporting units were in excess of the corresponding carrying amounts, including goodwill.  Accordingly, we concluded that goodwill assigned to the Hughes segment was not impaired and it was not necessary to perform step two of the two-step goodwill impairment test.

 

Orbital Rights

 

Orbital rights consisted of the following:

 

 

 

As of

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Cost

 

Accumulated

 

Cost

 

Accumulated

 

 

 

Basis

 

Amortization

 

Basis

 

Amortization

 

 

 

(In thousands)

 

Indefinite lives

 

$

495,810

 

$

 

$

469,810

 

$

 

Definite lives

 

71,506

 

(1,589

)

 

 

Total orbital rights

 

$

567,316

 

$

(1,589

)

$

469,810

 

$

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

Most of our orbital rights have indefinite useful lives due to their non-depleting nature.  In May 2012, we acquired the right to use the 45 degree west longitude orbital location from ANATEL, the Brazilian communications regulatory authority (the “Brazil authorization”).  The Brazil authorization is amortized on a straight-line basis over the license term of 15 years.

 

Other Intangible Assets

 

Other intangible assets, which are subject to amortization, consisted of the following:

 

 

 

As of

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Cost

 

Accumulated

 

Cost

 

Accumulated

 

 

 

Basis

 

Amortization

 

Basis

 

Amortization

 

 

 

(In thousands)

 

Customer relationships

 

$

293,933

 

$

(104,472

)

$

295,327

 

$

(77,560

)

Contract-based

 

255,366

 

(170,469

)

255,366

 

(145,406

)

Technology-based

 

126,317

 

(61,971

)

153,185

 

(49,307

)

Trademark portfolio

 

29,700

 

(1,980

)

32,191

 

(1,364

)

Favorable leases

 

4,707

 

(1,569

)

4,707

 

(687

)

Total other intangible assets

 

$

710,023

 

$

(340,461

)

$

740,776

 

$

(274,324

)

 

These intangible assets are amortized on a straight-line basis over periods primarily ranging from approximately one to twenty years or in relation to the estimated cash flows over the life of the intangible asset.  Amortization expense, including the Brazil authorization, was $23 million and $46 million for the three months ended September 30, 2012 and 2011, respectively, and was $71 million and $66 million for the nine months ended September 30, 2012 and 2011, respectively.

 

In connection with the joint venture between us and DISH Network, we contributed certain of our intangible assets to DISH Digital.  See Note 14 for additional information about our investment in DISH Digital.

 

Future Amortization

 

Estimated future amortization of our intangible assets, including the Brazil authorization, as of September 30, 2012 is as follows:

 

 

 

Amount

 

 

 

(In thousands)

 

For the Years Ending December 31,

 

 

 

2012 (remaining three months)

 

$

23,407

 

2013

 

73,669

 

2014

 

82,351

 

2015

 

67,628

 

2016

 

47,030

 

Thereafter

 

145,394

 

Total

 

$

439,479

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

Note 9.                     Debt

 

Fair Value

 

The following table summarizes the carrying and fair values of our debt:

 

 

 

As of

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Carrying

 

 

 

Carrying

 

 

 

 

 

Value

 

Fair Value

 

Value

 

Fair Value

 

 

 

(In thousands)

 

6 1/2% Senior Secured Notes due 2019

 

$

1,100,000

 

$

1,193,500

 

$

1,100,000

 

$

1,138,500

 

7 5/8% Senior Notes due 2021

 

900,000

 

1,003,500

 

900,000

 

936,000

 

Other

 

652

 

652

 

1,037

 

1,037

 

Subtotal

 

2,000,652

 

$

2,197,652

 

2,001,037

 

$

2,075,537

 

Capital lease obligations (1)

 

496,692

 

 

 

527,618

 

 

 

Total debt and capital lease obligations

 

$

2,497,344

 

 

 

$

2,528,655

 

 

 

 


(1) Disclosure regarding fair value of capital leases is not required.

 

We estimated the fair value of our publicly traded long-term debt using market prices in less active markets (Level 2).

 

Note 10.              Stock-Based Compensation

 

Stock Incentive Plans

 

We maintain stock incentive plans to attract and retain officers, directors and key employees.  Stock awards under these plans include both performance and non-performance based stock incentives.  As of September 30, 2012, we had outstanding stock options to acquire 8.4 million shares of our Class A common stock and 0.1 million restricted stock units under the stock incentive plans.  Stock options granted prior to and on September 30, 2012 were granted with exercise prices equal to or greater than the market value of our Class A common stock at the date of grant and with a maximum term of ten years.  While historically we have issued stock awards subject to vesting, typically at the rate of 20% to 33% per year, some stock awards have been granted with immediate vesting and other stock awards vest only upon the achievement of certain company-wide objectives.  As of September 30, 2012, we had 4.8 million shares of our Class A common stock available for future grant under our stock incentive plans.

 

In connection with the Spin-off, as permitted by DISH Network’s existing stock incentive plans and consistent with the Spin-off exchange ratio, each DISH Network stock option was converted into two stock options as follows:

 

·                  an adjusted DISH Network stock option for the same number of shares that were exercisable under the original DISH Network stock option, with an exercise price equal to the exercise price of the original DISH Network stock option multiplied by 0.831219.

·                  a new EchoStar stock option for one-fifth of the number of shares that were exercisable under the original DISH Network stock option, with an exercise price equal to the exercise price of the original DISH Network stock option multiplied by 0.843907.

 

Similarly, holders of DISH Network restricted stock units retained their DISH Network restricted stock units and received one EchoStar restricted stock unit for every five DISH Network restricted stock units that they held.  Consequently, the fair value of the DISH Network stock award and the new EchoStar stock award immediately following the Spin-off was equivalent to the fair value of such stock award immediately prior to the Spin-off.

 

15



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

The following stock awards were outstanding:

 

 

 

As of September 30, 2012

 

 

 

EchoStar Awards

 

DISH Network Awards

 

 

 

Stock
Options

 

Restricted
Stock
Units

 

Stock
Options

 

Restricted
Stock
Units

 

Held by EchoStar employees

 

7,249,944

 

76,730

 

2,415,698

 

94,999

 

Held by DISH Network employees

 

1,181,965

 

45,620

 

 

 

Total outstanding stock awards

 

8,431,909

 

122,350

 

2,415,698

 

94,999

 

 

We are responsible for fulfilling all stock awards related to EchoStar common stock and DISH Network is responsible for fulfilling all stock awards related to DISH Network common stock, regardless of whether such stock awards are held by our employees or DISH Network’s employees.  Notwithstanding the foregoing, our stock-based compensation expense, resulting from stock awards outstanding at the Spin-off date, is based on the stock awards held by our employees regardless of whether such stock awards were issued by EchoStar or DISH Network.  Accordingly, stock-based compensation that we recognize with respect to DISH Network stock awards was included in “Additional paid-in capital” on our Condensed Consolidated Balance Sheets.

 

Stock Award Activity

 

Our stock option activity was as follows:

 

 

 

For the Nine Months

 

 

 

Ended September 30, 2012

 

 

 

Options

 

Weighted-
Average
Exercise
Price

 

Total options outstanding, beginning of period

 

8,778,413

 

$

27.22

 

Granted

 

356,000

 

$

26.84

 

Exercised

 

(359,264

)

$

20.00

 

Forfeited and cancelled

 

(343,240

)

$

25.41

 

Total options outstanding, end of period

 

8,431,909

 

$

27.58

 

Performance-based options outstanding, end of period (1)

 

632,100

 

$

25.28

 

Exercisable at end of period

 

3,791,075

 

$

26.60

 

 


(1)         These stock options are included in the caption “Total options outstanding, end of period.”  See discussion of the 2005 LTIP below.

 

We realized tax benefits from stock awards exercised as follows:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Tax benefit from stock awards exercised

 

$

992

 

$

329

 

$

2,814

 

$

5,205

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

Based on the closing market price of our Class A common stock on September 30, 2012, the aggregate intrinsic value of our stock options was as follows:

 

 

 

As of September 30, 2012

 

 

 

Options
Outstanding

 

Options
Exercisable

 

 

 

(In thousands)

 

Aggregate intrinsic value

 

$

32,057

 

$

14,235

 

 

Our restricted stock unit activity was as follows:

 

 

 

For the Nine Months

 

 

 

Ended September 30, 2012

 

 

 

Restricted
Stock
Units

 

Weighted-
Average
Grant Date
Fair Value

 

Total restricted stock units outstanding, beginning of period

 

144,226

 

$

29.22

 

Vested

 

(12,210

)

$

36.43

 

Forfeited and cancelled

 

(9,666

)

$

25.84

 

Total restricted stock units outstanding, end of period

 

122,350

 

$

28.77

 

Restricted Performance Units outstanding, end of period (1)

 

64,610

 

$

26.72

 

 


(1)         These Restricted Performance Units are included in the caption “Total restricted stock units outstanding, end of period.”  See discussion of the 2005 LTIP below.

 

Long-Term Performance-Based Plans

 

2005 LTIP.  During 2005, DISH Network adopted a long-term, performance-based stock incentive plan (the “2005 LTIP”).  The 2005 LTIP provides stock options and restricted stock units, either alone or in combination, which vest over seven years at the rate of 10% per year during the first four years, and at the rate of 20% per year thereafter.  Exercise of the stock awards is subject to the foregoing vesting schedule and a performance condition that a company-specific goal is achieved by March 31, 2015.

 

Contingent compensation related to the 2005 LTIP will not be recorded in our financial statements unless and until the achievement of the performance condition is probable.  The competitive nature of our industry and certain other factors can significantly impact achievement of the goal.  While it was determined that achievement of the goal was not probable as of September 30, 2012, this assessment could change in the future.

 

If all of the stock awards under the 2005 LTIP were vested and the goal had been met, or if we had determined that achievement of the goal was probable as of September 30, 2012, we would have recorded total non-cash, stock-based compensation expense for our employees as indicated in the table below.  If the goal is met and there are unvested stock awards at that time, the vested amounts would be expensed immediately on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), with the unvested portion recognized ratably over the remaining vesting period.

 

 

 

2005 LTIP

 

 

 

 

 

Vested

 

 

 

Total

 

Portion (1)

 

 

 

(In thousands)

 

DISH Network awards held by EchoStar employees

 

$

16,293

 

$

16,159

 

EchoStar awards held by EchoStar employees

 

2,947

 

2,920

 

Total

 

$

19,240

 

$

19,079

 

 


(1)         Represents the amount of this award that has met the foregoing vesting schedule and would therefore vest upon achievement of the performance condition.

 

17



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

Of the 8.4 million stock options and 0.1 million restricted stock units outstanding under our stock incentive plans, the following awards were outstanding pursuant to the 2005 LTIP:

 

 

 

As of September 30, 2012

 

 

 

Number of
Awards

 

Weighted-
Average
Exercise
Price

 

Stock options

 

632,100

 

$

25.28

 

Restricted performance units

 

64,610

 

$

26.72

 

Total outstanding awards

 

696,710

 

 

 

 

Stock-Based Compensation

 

During December 2011, DISH Network paid a dividend in cash of $2.00 per share on its outstanding Class A and Class B common stock to shareholders of record on November 17, 2011.  In light of such dividend, during January 2012, the exercise price of approximately 2.6 million DISH Network stock options held by 194 of our employees was reduced by $2.00 per share (“DISH Network’s 2012 Stock Option Adjustment”).  During the first quarter of 2012, we incurred $3 million of additional non-cash, stock-based compensation expense in connection with DISH Network’s 2012 Stock Option Adjustment.  Total non-cash, stock-based compensation expense for all of our employees is shown in the following table and was assigned to the same expense categories as the base compensation for such employees:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(In thousands)

 

Research and development expenses

 

$

697

 

$

564

 

$

2,564

 

$

1,776

 

Selling, general and administrative expenses

 

3,051

 

4,452

 

11,797

 

9,782

 

Total non-cash, stock-based compensation

 

$

3,748

 

$

5,016

 

$

14,361

 

$

11,558

 

 

As of September 30, 2012, total unrecognized compensation cost related to our non-performance based unvested stock awards was $36.7 million, including compensation expense that we will recognize for DISH Network stock awards held by our employees as a result of the Spin-off.  This cost is based on an estimated future forfeiture rate of approximately 2.2% per year and will be recognized over a weighted-average period of approximately two years.  Share-based compensation expense is recognized based on stock awards ultimately expected to vest and is reduced for estimated forfeitures.  Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  Changes in the estimated forfeiture rate can have a significant effect on share-based compensation expense since the effect of adjusting the rate is recognized in the period the forfeiture estimate is changed.

 

18


 


Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

Valuation

 

The fair value of each stock option for the nine months ended September 30, 2012 and 2011 was estimated at the date of the grant using a Black-Scholes option valuation model with the following assumptions:

 

 

 

For the Nine Months

 

 

 

Ended September 30,

 

Stock Options

 

2012

 

2011

 

Risk-free interest rate

 

0.82% - 1.33%

 

1.19% - 2.57%

 

Volatility factor

 

40.36% - 41.06%

 

34.68% - 38.68%

 

Expected term of options in years

 

6.0

 

5.1 - 6.0

 

Weighted-average fair value of options granted

 

$10.60 - $11.40

 

$8.59 - $14.42

 

 

We do not currently intend to pay dividends on our common stock and accordingly, the dividend yield percentage used in the Black-Scholes option valuation model is set at zero for all periods.  The Black-Scholes option valuation model was developed for use in estimating the fair value of traded stock options which have no vesting restrictions and are fully transferable.  Consequently, our estimate of fair value may differ from other valuation models.  Further, the Black-Scholes option valuation model requires the input of subjective assumptions.  Changes in the subjective input assumptions can materially affect the fair value estimate.

 

We will continue to evaluate the assumptions used to derive the estimated fair value of our stock options as new events or changes in circumstances become known.

 

Note 11.     Hughes Acquisition

 

On June 8, 2011, we completed the Hughes Acquisition, pursuant to an agreement and plan of merger (the “Hughes Agreement”) by and between us, certain of our subsidiaries, including EchoStar Satellite Services L.L.C., and Hughes Communications, Inc.  Pursuant to the Hughes Agreement, 100% of the issued and outstanding shares of common stock and vested stock options of Hughes Communications, Inc. were converted into the right to receive $60.70 (minus any applicable exercise price) in cash and substantially all of the outstanding debt of Hughes Communications, Inc. was repaid.  In addition, each share of unvested restricted stock and unvested stock option of Hughes Communications, Inc. was converted into the right to receive $60.70 (minus any applicable exercise price) in cash on the vesting date of the stock award.

 

A summary of the purchase price and opening balance sheet for the Hughes Acquisition at the June 8, 2011 acquisition date is presented in the following table.  The opening balance sheet presented below reflects our final purchase price allocation.

 

 

 

Amount

 

 

 

(In thousands)

 

Cash

 

$

98,900

 

Marketable investment securities

 

22,148

 

Other current assets

 

282,471

 

Property and equipment

 

930,426

 

Other intangible assets

 

420,907

 

Goodwill (non-deductible)

 

504,173

 

Orbital rights

 

400,000

 

Other noncurrent assets

 

61,463

 

Current liabilities

 

(293,029

)

Deferred tax liabilities

 

(220,928

)

Long-term liabilities

 

(22,239

)

Noncontrolling interests

 

(9,679

)

Total purchase price

 

$

2,174,613

 

 

19



Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

The following unaudited pro forma condensed consolidated operating results for the nine months ended September 30, 2011 give effect to the Hughes Acquisition as if it occurred on January 1, 2010.  These pro forma amounts are not necessarily indicative of the operating results that would have occurred if the Hughes Acquisition had occurred on such date and should not be used as a predictive measure of our future financial position, results of operations or liquidity.  The pro forma adjustments are based on currently available information and certain assumptions that we believe are reasonable.

 

 

 

For the Three

 

For the Nine

 

 

 

Months Ended

 

Months Ended

 

Supplemental pro forma financial information (Unaudited) 

 

September 30, 2011

 

September 30, 2011

 

 

 

(In thousands, except per share amounts)

 

Total revenue

 

$

862,671

 

$

2,392,511

 

Net income (loss) attributable to EchoStar

 

$

3,130

 

$

16,220

 

Basic net income (loss) per share attributable to EchoStar

 

$

0.04

 

$

0.19

 

Diluted net income (loss) per share attributable to EchoStar

 

$

0.04

 

$

0.18

 

 

Effective June 9, 2011, revenue and expenses associated with the Hughes Acquisition are included within the Hughes segment in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

 

Note 12.     Commitments and Contingencies

 

Commitments

 

EchoStar XVI.  During November 2009, we entered into a contract for the construction of EchoStar XVI, a direct broadcast satellite (“DBS”), which is expected to be launched in the fourth quarter of 2012 and will operate at the 61.5 degree west longitude orbital location.  DISH Network has agreed to lease all of the capacity on this satellite from us for a portion of its useful life.  As of September 30, 2012, the remaining obligation related to EchoStar XVI was approximately $42.9 million, which includes the launch contract, launch insurance and one year of in-orbit insurance.

 

EchoStar XVII.  We successfully launched EchoStar XVII in July 2012 and introduced HughesNet Gen4 broadband Internet services to our customers in North America in October 2012.  Pursuant to the terms and conditions of the construction agreement for EchoStar XVII, we are obligated to commence payment of in-orbit incentives totaling $25 million plus interest, at an annual rate of 10%, of approximately $33 million.  The Orbital incentive payments, including interest, are required to be paid quarterly over a 15-year period, subject to prepayment at our option; however, these payments are subject to reduction in the event of future satellite failures.   In addition, as of September 30, 2012, we had other remaining obligations of $28.3 million related to the construction and launch of EchoStar XVII.

 

Contingencies

 

Separation Agreement

 

In connection with the Spin-off, we entered into a separation agreement with DISH Network that provides, among other things, for the division of certain liabilities, including liabilities resulting from litigation.  Under the terms of the separation agreement, we have assumed certain liabilities that relate to our business including certain designated liabilities for acts or omissions that occurred prior to the Spin-off.  Certain specific provisions govern intellectual property related claims under which, generally, we will only be liable for our acts or omissions following the Spin-off and DISH Network will indemnify us for any liabilities or damages resulting from intellectual property claims relating to the period prior to the Spin-off as well as DISH Network’s acts or omissions following the Spin-off.

 

20



Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

 

Litigation

 

We are involved in a number of legal proceedings (including those described below) concerning matters arising in connection with the conduct of our business activities.  Many of these proceedings are at preliminary stages, and many of these proceedings seek an indeterminate amount of damages.  We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss or an additional loss may have been incurred and to determine if accruals are appropriate.  If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of the possible loss or range of possible loss can be made.

 

For certain cases described below, management is unable to provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons, (i) the proceedings are in various stages; (ii) damages have not been sought; (iii) damages are unsupported and/or exaggerated; (iv) there is uncertainty as to the outcome of pending appeals or motions; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties (as with many patent-related cases).  For these cases, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material adverse effect on our financial condition, though the outcomes could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.

 

Cyberfone Systems, LLC (f/k/a LVL Patent Group, LLC)

 

On September 15, 2011, LVL Patent Group, LLC filed a complaint against us and our wholly-owned subsidiary, EchoStar Technologies L.L.C., as well as DISH Network L.L.C. a wholly-owned subsidiary of DISH Network, and DirecTV, Inc. in the United States District Court for the District of Delaware alleging infringement of United States Patent No. 6,044,382, which is entitled “Data Transaction Assembly Server.” DirecTV was dismissed from the case on January 4, 2012.  On July 12, 2012, Cyberfone Systems, LLC (f/k/a LVL Patent Group, LLC) filed the operative second amended complaint making the same claim.

 

We intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe the asserted patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

E-Contact Technologies, LLC

 

On February 22, 2012, E-Contact Technologies, LLC (“E-Contact”) filed suit against two of our subsidiaries, Hughes Communications, Inc. and Hughes Network Systems, LLC, in the United States District Court for the Eastern District of Texas alleging infringement of United States Patent No. 5,347,579, which is entitled “Personal Computer Diary.”  E-Contact appears to assert that some portion of HughesNet email services infringe that patent.  HughesNet email services are provided by a third-party service provider, who has assumed indemnification obligations for the case.  On May 31, 2012, E-Contact filed a first amended complaint.  The amended complaint removed the original complaint’s requests for a finding of willfulness and entry of an injunction.

 

We, along with the third-party service provider, intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe the asserted patent, we may be subject to substantial damages.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

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The Hopper Litigation

 

On May 24, 2012, DISH Network L.L.C., filed a lawsuit in the United States District Court for the Southern District of New York against American Broadcasting Companies, Inc., CBS Corporation, Fox Entertainment Group, Inc., Fox Television Holdings, Inc., Fox Cable Network Services, L.L.C. and NBCUniversal Media, LLC.  The lawsuit seeks a declaratory judgment that DISH Network L.L.C is not infringing any defendant’s copyright, or breaching any defendant’s retransmission consent agreement, by virtue of the PrimeTime Anytime™ and AutoHop™ features in Hopper™ set-top boxes.  The PrimeTime Anytime feature allows a user of a Hopper set-top box, at his or her option, to record certain primetime programs airing on ABC, CBS, Fox, and/or NBC up to every night, and to store those recordings for up to eight days.  The AutoHop feature allows a subscriber, at his or her option, to watch certain recordings the subscriber made with our PrimeTime Anytime feature, commercial-free, if played back the next day after the show’s original airing.

 

Later on May 24, 2012, (i) Fox Broadcasting Company, Twentieth Century Fox Film Corp. and Fox Television Holdings, Inc. filed a lawsuit against DISH Network Corporation and DISH Network L.L.C. (collectively, “DISH”) in the United States District Court for the Central District of California, alleging that the PrimeTime Anytime feature, the AutoHop feature, as well as DISH’s use of Sling place-shifting functionality infringe their copyrights and breach their retransmission consent agreements, (ii) NBC Studios LLC, Universal Network Television, LLC, Open 4 Business Productions LLC and NBCUniversal Media, LLC filed a lawsuit against DISH in the United States District Court for the Central District of California, alleging that the PrimeTime Anytime feature and the AutoHop feature infringe their copyrights, and (iii) CBS Broadcasting Inc., CBS Studios Inc. and Survivor Productions LLC filed a lawsuit against DISH in the United States District Court for the Central District of California, alleging that the PrimeTime Anytime feature and the AutoHop feature infringe their copyrights.  The Central District of California matters have been assigned to a single judge.

 

As a result of certain parties’ competing venue-related motions brought in both the New York and California actions, and certain networks filing various amended complaints, the claims are presently pending in the following venues:  (1) the copyright and contract claims regarding the ABC parties are pending in New York; (2) the copyright and contract claims regarding the CBS parties are pending in New York; (3) the copyright and contract claims regarding the Fox parties are pending in California; and (4) the copyright claims regarding the NBC parties are pending in California, while the contract claims involving NBC are venued in both New York and California.  Additional venue-related motions are still pending in the NBC actions in New York and California.

 

On September 21, 2012, the California court heard the Fox plaintiffs’ motion for a preliminary injunction to enjoin the Hopper’s PrimeTime Anytime and AutoHop features.  The Court has not yet ruled on that motion.

 

On August 17, 2012, the NBC plaintiffs filed a first amended complaint in their California action adding us and our wholly-owned subsidiary EchoStar Technologies L.L.C. to the NBC litigation, alleging various claims of copyright infringement.  We and our subsidiary answered on September 18, 2012.  On October 9, 2012, the ABC plaintiffs filed copyright counterclaims in the New York action against EchoStar Technologies, L.L.C., with the CBS plaintiffs filing similar copyright counterclaims in the New York action against EchoStar Technologies L.L.C. on October 12, 2012.

 

We intend to vigorously prosecute and defend our position in these cases.  In the event that a court ultimately determines that we infringe the asserted copyrights, we may be subject to substantial damages, and/or an injunction that could require us to materially modify certain features that we currently offer to DISH.  An adverse decision against DISH Network could decrease the number of Sling enabled set-top boxes we sell to DISH Network, which could have an adverse impact on the business operations of our EchoStar Technologies segment.  In addition, to the extent that DISH Network experiences fewer gross new subscriber additions, sales of our digital set-top boxes and related components to DISH Network may further decline, which in turn could have a material adverse effect on our financial position and results of operations.  We cannot predict with any degree of certainty the outcome of these suits or determine the extent of any potential liability or damages.

 

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Joao Control & Monitoring Systems

 

During December 2010, Joao Control & Monitoring Systems (“Joao”) filed suit against Sling Media Inc., our indirect wholly owned subsidiary, ACTI Corporation, ADT Security, Alarmclub.Com, American Honda Motor Company, BMW, Byremote, Drivecam, Honeywell, Iveda Corporation, Magtec Products, Mercedes-Benz, On-Net Surveillance, OnStar, SafeFreight Technology, Skyway Security, SmartVue Corporation, Toyota Motor Sales, Tyco, UTC Fire and Xanboo in the United States District Court for the Central District of California alleging infringement of United States Patent Nos. 6,549,130 and 6,587,046.  The abstracts of the patents state that the claims are directed to the remote control of devices and appliances.  Joao is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.  During 2011, the case was transferred to the Northern District of California.

 

We intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe any of the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

Nazomi Communications, Inc.

 

On February 10, 2010, Nazomi Communications, Inc. (“Nazomi”) filed suit against Sling Media, Inc. (“Sling”), our indirect wholly owned subsidiary, Nokia Corp, Nokia Inc., Microsoft Corp., Amazon.com Inc., Western Digital Corp., Western Digital Technologies, Inc., Garmin Ltd., Garmin Corp., Garmin International, Inc., Garmin USA, Inc., Vizio Inc. and iOmega Corp in the United States District Court for the Central District of California alleging infringement of United States Patent No. 7,080,362 (the “362 patent”) and United States Patent No. 7,225,436 (the “436 patent”).  The 362 patent and the 436 patent relate to Java hardware acceleration.  The suit alleges that the Slingbox-Pro-HD product infringes the 362 patent and the 436 patent because the Slingbox-PRO HD allegedly incorporates an ARM926EJ-S processor core capable of Java hardware acceleration.  During 2010, the case was transferred to the Northern District of California.  On August 14, 2012, the Court entered an order granting Sling’s motion for summary judgment of non-infringement.  The Court has not yet entered final judgment in Sling’s favor.

 

We intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe any of the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

NorthPoint Technology, Ltd.

 

On July 2, 2009, NorthPoint Technology, Ltd. (“NorthPoint”) filed suit against us, DISH Network, and DirecTV in the United States District Court for the Western District of Texas alleging infringement of United States Patent No.  6,208,636 (the “636 patent”).  The 636 patent relates to the use of multiple low-noise block converter feedhorns, or LNBFs, which are antennas used for satellite reception.  On April 21, 2011, the United States Patent and Trademark Office issued an order granting reexamination of the 636 patent.  On June 21, 2011, the District Court entered summary judgment in our favor, finding that all asserted claims of the 636 patent are invalid.  NorthPoint appealed and, on May 11, 2012, the United States Court of Appeals for the Federal Circuit affirmed the District Court’s judgment.  The deadline for NorthPoint to file a further appeal has passed, and the matter is now closed.

 

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Personalized Media Communications, Inc.

 

During 2008, Personalized Media Communications, Inc. (“PMC”) filed suit against us, DISH Network and Motorola Inc. in the United States District Court for the Eastern District of Texas alleging infringement of United States Patent Nos. 5,109,414, 4,965,825, 5,233,654, 5,335,277, and 5,887,243, which relate to satellite signal processing.  PMC is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.  Subsequently, Motorola Inc. settled with PMC, leaving DISH Network and us as defendants.  On July 18, 2012, pursuant to a Court order, PMC filed a Second Amended Complaint that added Rovi Guides, Inc. (f/k/a/ Gemstar-TV Guide International, Inc.) and TVG-PMC, Inc. (collectively, “Gemstar”) as a party, and added a new claim against all defendants seeking a declaratory judgment as to the scope of Gemstar’s license to the patents in suit, under which DISH Network and we are sublicensees.  The Court vacated the August 20, 2012 trial date and has not yet set a new trial date.

 

We intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe any of the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers.  We are being indemnified by DISH Network for any potential liability or damages resulting from this suit relating to the period prior to the effective date of the Spin-off.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

Premier International Associates, LLC

 

On August 3, 2012, Premier International Associates, LLC (“Premier International Associates”) filed a complaint against us, our wholly-owned subsidiary EchoStar Technologies L.L.C. and DISH Network and its wholly owned subsidiaries, DISH DBS and DISH Network L.L.C., in the United States District Court for the Northern District of Illinois alleging infringement of United States Patent No. 6,243,725 (the “’725 patent”), which is entitled “List Building System.” The ’725 patent relates to a system for building an inventory of audio/visual works.  Premier International Associates is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.

 

We intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe the asserted patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features of our products.  We are being indemnified by DISH Network for any potential liability or damages resulting from this suit relating to the period prior to the effective date of the Spin-off.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

Semiconductor Ideas to the Market BV

 

On March 16, 2012, Semiconductor Ideas to the Market BV (“ITOM”) filed suit against our subsidiary Hughes Network Systems, LLC, as well as Texas Instruments, Inc., Qualcomm, Inc., Broadcom Corp., Samsung Electronics America, Inc., Samsung Telecommunications America, LLC, Dell Inc., Apple Inc., Ford Motor Company, Buffalo Technology (USA) Inc., Amazon.com, Inc., Hughes Telematics, Inc., Motorola Mobility, Inc., Motorola Solutions, Inc., Honeywell International Inc., Koninklijke Philips Electronics N.V., and Philips Consumer Lifestyle International B.V.  The suit was brought in the United States District Court for the Eastern District of Texas alleging infringement of United States Patent No. 7,299,018 which is entitled “Receiver comprising a digitally controlled capacitor bank” and United States Patent No. 7,072,614 which is entitled “Communication device.”  ITOM alleged infringement through use of various third-party chipsets in unspecified products and/or systems.  A joint motion to dismiss Hughes Network Systems, LLC was granted on July 13, 2012.

 

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Technology Development and Licensing L.L.C.

 

On January 22, 2009, Technology Development and Licensing L.L.C. (“TDL”) filed suit against us and DISH Network in the United States District Court for the Northern District of Illinois alleging infringement of United States Patent No. Re. 35,952, which relates to certain favorite channel features.  TDL is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.  In July 2009, the Court granted our motion to stay the case pending two reexamination petitions before the United States Patent and Trademark Office.

 

We intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe the asserted patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers.  We are being indemnified by DISH Network for any potential liability or damages resulting from this suit relating to the period prior to the effective date of the Spin-off.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

TQP Development, LLC

 

On October 11, 2012, TQP Development LLC (“TQP”) filed suit against our indirectly wholly owned subsidiary Sling Media, Inc. in the United States District Court of the Eastern District of Texas, alleging infringement of United States Patent No. 5,412,730, which is entitled “Encrypted Data Transmission System Employing Means for Randomly Altering the Encryption Keys.”  TQP is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.

 

We intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe the asserted patent, we may be subject to substantial damages, which may include treble damages.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

Vigilos, LLC

 

On February 23, 2011, Vigilos, LLC (“Vigilos”) filed suit against us, two of our subsidiaries, Sling Media, Inc. and EchoStar Technologies L.L.C., and Monsoon Multimedia, Inc. in the United States District Court for the Eastern District of Texas alleging infringement of United States Patent No. 6,839,731, which is entitled “System and Method for Providing Data Communication in a Device Network.”  Subsequently in 2011, Vigilos added DISH Network L.L.C., a wholly owned subsidiary of DISH Network, as a defendant in its First Amended Complaint and the case was transferred to the Northern District of California.  Later in 2011, Vigilos filed a Second Amended Complaint that added claims for infringement of a second patent, United States Patent No. 7,370,074, which is entitled “System and Method for Implementing Open-Protocol Remote Device Control.” Vigilos is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.

 

We intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

Other

 

In addition to the above actions, we are subject to various other legal proceedings and claims which arise in the ordinary course of business.  In our opinion, the amount of ultimate liability with respect to any of these actions is unlikely to materially affect our financial position, results of operations or liquidity, though the outcomes could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.

 

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Note 13.     Segment Reporting

 

Operating segments are components of an enterprise for which separate financial information is available and regularly evaluated by the chief operating decision-maker(s) of an enterprise.  Total assets by segment have not been specified because the information is not provided to our chief operating decision-maker on a regular basis.  Under this definition, we operate three primary business segments.

 

·                  EchoStar Technologies — which designs, develops and distributes digital set-top boxes and related products and technology, including our Slingbox “placeshifting” technology, primarily for satellite TV service providers, telecommunication and international cable companies and, with respect to Slingboxes, directly to consumers via retail outlets.  Our EchoStar Technologies segment also provides digital broadcast operations including satellite uplinking/downlinking, transmission services, signal processing, conditional access management and other services primarily to DISH Network.

 

·                  EchoStar Satellite Services — which uses 9 of our 11 owned and leased in-orbit satellites and related FCC licenses to lease capacity on a full-time and occasional-use basis primarily to DISH Network, and secondarily to Dish Mexico, United States government service providers, state agencies, Internet service providers, broadcast news organizations, programmers and private enterprise customers.

 

·                  Hughes — which provides satellite broadband Internet access to North American consumers and broadband network services and systems to the domestic and international enterprise markets.  The Hughes segment also provides managed services to large enterprises and networking systems solutions to customers for mobile satellite and wireless backhaul systems.  Hughes became a new segment as a result of the Hughes Acquisition and the operating results of Hughes Communications are included in our results effective June 9, 2011.  See Note 11 for further discussion of the Hughes Acquisition.

 

The “All Other and Eliminations” category consists of revenue and net income (loss) attributable to EchoStar from other operations including our corporate investment portfolio for which segment disclosure requirements do not apply.  In addition, this category includes interest expense related to our 6 1/2% Senior Secured Notes due 2019 and our 7 5/8% Senior Notes due 2021 (collectively, the “Notes”), net of capitalized interest.  Transactions between segments were not significant.

 

The following table reports our operating segment results and reconciles earnings before interest, taxes, depreciation and amortization (“EBITDA”) to reported “Net income (loss) attributable to EchoStar” in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss):

 

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EchoStar

 

 

 

All

 

 

 

 

 

EchoStar

 

Satellite

 

 

 

Other and

 

Consolidated

 

 

 

Technologies

 

Services

 

Hughes

 

Eliminations

 

Total

 

 

 

(In thousands)

 

For the Three Months Ended September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

416,120

 

$

65,682

 

$

285,974

 

$

(3,055

)

$

764,721

 

EBITDA (1)

 

$

25,211

 

$

57,065

 

$

75,634

 

$

6,156

 

$

164,066

 

Interest income

 

 

(57

)

89

 

2,665

 

2,697

 

Interest expense, net of amounts capitalized

 

(17

)

(12,569

)

(110

)

(21,144

)

(33,840

)

Income tax benefit (provision), net

 

(2,301

)

(6,242

)

(7,896

)

16,848

 

409

 

Depreciation and amortization

 

(21,280

)

(29,838

)

(55,460

)

(4,200

)

(110,778

)

Net income (loss) attributable to EchoStar

 

$

1,613

 

$

8,359

 

$

12,257

 

$

325

 

$

22,554

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

497,625

 

$

68,491

 

$

287,861