424B3 1 a424b3_finalxprospectusx04.htm 424B3 Document

PROSPECTUS
HUGHES SATELLITE SYSTEMS CORPORATION
Offer to Exchange up to $750,000,000 aggregate principal amount of new 5.250% Senior Secured Notes due 2026 and
up to $750,000,000 aggregate principal amount of new 6.625% Senior Notes due 2026,
which have been registered under the Securities Act of 1933,
for any and all of its outstanding 5.250% Senior Secured Notes due 2026 and 6.625% Senior Notes due 2026, respectively,
Subject to the Terms and Conditions described in this Prospectus

The Exchange Offer will expire at 5:00 p.m., New York City time, on May 11, 2017,
unless extended

 
 
 
We are offering to exchange, upon the terms and subject to the conditions set forth in this prospectus and the accompanying letter of transmittal, our new 5.250% Senior Secured Notes due 2026 for all of our outstanding 5.250% Senior Secured Notes due 2026 and our new 6.625% Senior Notes due 2026 for all of our outstanding 6.625% Senior Notes due 2026. We refer to our outstanding 5.250% Senior Secured Notes due 2026 as the “Old Secured Notes,” our outstanding 6.625% Senior Notes due 2026 as the “Old Unsecured Notes” (together with the Old Secured Notes, the “Old Notes”), the new 5.250% Senior Secured Notes due 2026 issued in this offer as the “Secured Notes” and the new 6.625% Senior Notes due 2026 issued in this offer as the “Unsecured Notes” (together with the Secured Notes, the “Notes”). The Secured Notes and the Unsecured Notes are substantially identical to the Old Secured Notes and the Old Unsecured Notes, respectively, that we issued on July 27, 2016, except for certain transfer restrictions and registration rights provisions relating to the Old Notes. The CUSIP numbers for the Old Secured Notes are 444454 AC6 and U44473 AA1. The CUSIP numbers for the Old Unsecured Notes are 444454 AE2 and U44473 AB9.
MATERIAL TERMS OF THE EXCHANGE OFFER
•    You will receive an equal principal amount of Secured Notes for all Old Secured Notes that you validly tender and do not validly withdraw, and an equal principal amount of Unsecured Notes for all Old Unsecured Notes that you validly tender and do not validly withdraw.
•    The exchange should not be a taxable exchange for United States federal income tax purposes.
•    There has been no public market for the Old Notes and we cannot assure you that any public market for the Notes will develop. We do not intend to list the Notes on any securities exchange or to arrange for them to be quoted on any automated quotation system.
•    The terms of the Secured Notes and the Unsecured Notes are substantially identical to the Old Secured Notes and the Old Unsecured Notes, respectively, except for transfer restrictions and registration rights relating to the Old Notes.
•    If you fail to tender your Old Notes for the Notes, you will continue to hold unregistered securities and it may be difficult for you to transfer them.
 
 
 
Investing in the Notes involves risks. Consider carefully the “Risk Factors” beginning on page 16 of this prospectus.
 
 
 
We are not making this exchange offer in any state where it is not permitted.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined that this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 
 
 
The date of this prospectus is April 13, 2017.



    


TABLE OF CONTENTS

 
Page
F-1
 
 
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. This prospectus is an offer to exchange only the Notes offered by this prospectus and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is accurate only as of its date.


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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission (the “SEC”) a registration statement on Form S-4 under the Securities Act of 1933, as amended (the “Securities Act”), that registers the Notes that will be offered in exchange for the Old Notes. The registration statement, including the attached exhibits and schedules, contains additional relevant information about us and the Notes. The rules and regulations of the SEC allow us to omit from this document certain information included in the registration statement.
This prospectus incorporates by reference business and financial information about us that is not included in or delivered with this prospectus. This information is available without charge upon written or oral request directed to: Hughes Satellite Systems Corporation, 100 Inverness Terrace East, Englewood, CO 80112, Attention: General Counsel; telephone number: (303) 706-4000. To obtain timely delivery, you must request the information no later than May 4, 2017.
In addition, this prospectus contains summaries and other information that we believe are accurate as of the date hereof with respect to the terms of specific documents, but we refer to the actual documents for complete information with respect to those documents, copies of which will be made available without charge to you upon request. Statements contained in this prospectus as to the contents of any contract or other documents referred to in this prospectus do not purport to be complete. Where reference is made to the particular provisions of a contract or other document, the provisions are qualified in all respects by reference to all of the provisions of the contract or other document. Our data and industry data are approximate and reflect rounding in certain cases.
We and our parent company, EchoStar Corporation, each file reports, proxy statements (in the case of EchoStar Corporation) and other information with the SEC. These reports, proxy statements and other information may be inspected and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports and other information that we file electronically with the SEC. The address of that website is http://www.sec.gov. Our filings with the SEC and those of EchoStar Corporation are also accessible free of charge at our website, the address of which is http://www.echostar.com.
The Class A common stock, par value $0.001 per share (the “EchoStar Class A Shares”), of our parent company, EchoStar Corporation, is traded under the symbol “SATS” on the Nasdaq Global Select Market. EchoStar Corporation has not guaranteed and is not otherwise responsible for the Notes.

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains “forward-looking statements,” including but not limited to statements about our estimates, expectations, plans, objectives, strategies, and financial condition, expected impact of regulatory developments and legal proceedings, opportunities in our industries and businesses and other trends and projections for the next fiscal quarter and beyond. All statements, other than statements of historical facts, may be forward-looking statements. Forward-looking statements may also be identified by words such as “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “estimate,” “expect,” “predict,” “continue,” “future,” “will,” “would,” “could,” “can,” “may” and similar terms.  These forward-looking statements are based on information available to us as of the date of this prospectus (or, in the case of a document incorporated herein by reference, the date of such document) and represent management’s views and assumptions as of such respective date.  Forward-looking statements are not guarantees of future performance, events or results and involve potential known and unknown risks, uncertainties and other factors, many of which may be beyond our control and may pose a risk to our operating and financial condition.  Accordingly, actual performance, events or results could differ materially from those expressed or implied in the forward-looking statements due to a number of factors including, but not limited to:
•
our reliance on DISH Network Corporation and its subsidiaries (“DISH Network”), for a significant portion of our revenue;
•
our ability to implement our strategic initiatives;
•
significant risks related to the construction, launch and operation of our satellites, such as the risk of material malfunction on one or more of our satellites, risks resulting from delays or failures of launches of our satellites, changes in the space weather environment that could interfere with the operation of our satellites, and our general lack of commercial insurance coverage on our satellites;
•
our failure to adequately anticipate the need for satellite capacity or the inability to obtain satellite capacity for our Hughes segment;
•
the failure of third-party providers of components, manufacturing, installation services and customer support services to appropriately deliver the contracted goods or services;
•
our ability to bring advanced technologies to market to keep pace with our customers and competitors; and
•
risk related to our foreign operations and other uncertainties associated with doing business internationally, including changes in foreign exchange rates between foreign currencies and the United States dollar, economic instability and political disturbances.
Other factors that could cause or contribute to such differences include, but are not limited to, those discussed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this prospectus and those discussed in other documents we file with the 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 and uncertainties described herein and should not place undue reliance on any forward-looking statements. We do not undertake, and specifically disclaim, any obligation to publicly release the results of any revisions that may be made to any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Although we believe that the expectations reflected in any forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievements. We do not assume responsibility for the accuracy and completeness of any forward‑looking statements. We assume no responsibility for updating forward‑looking information contained or incorporated by reference herein or in any documents we file with the SEC except as required by law.
Should one or more of the risks or uncertainties described herein or in any documents we file with the SEC occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.


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SUMMARY
In this prospectus, the words “Company,” “we,” “our” and “us” refer to Hughes Satellite Systems Corporation (“HSS”) and its subsidiaries, unless otherwise stated or the context otherwise requires. “EchoStar” refers to EchoStar Corporation, our ultimate parent company, and its subsidiaries, including us. This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in the Notes. You should carefully read the entire prospectus, including the sections under the headings “Risk Factors” and “Disclosure Regarding Forward-Looking Statements.”
HUGHES SATELLITE SYSTEMS CORPORATION
Hughes Satellite Systems Corporation is a holding company and a subsidiary of EchoStar Corporation.  We are a global provider of satellite service operations, video delivery solutions, broadband satellite technologies and broadband services for home and small office customers. We deliver innovative network technologies, managed services, and various communications solutions for enterprise and government customers.
We were formed as a Colorado corporation in March 2011 to facilitate the acquisition (“Hughes Acquisition”) of Hughes Communications, Inc. and its subsidiaries (“Hughes Communications”) and related financing transactions.  In connection with our formation, EchoStar contributed the assets and liabilities of its satellite services business, including the principal operating subsidiary of its satellite services business, EchoStar Satellite Services L.L.C., to us.  A substantial majority of the voting power of the shares of EchoStar and DISH Network Corporation (“DISH”) is owned beneficially by Charles W. Ergen, our Chairman, and by certain trusts established by Mr. Ergen for the benefit of his family.
We currently operate in the following two business segments:
•
Hughes — which provides broadband satellite technologies and broadband services to home and small office customers and network technologies, managed services and communication solutions to domestic and international consumers and enterprise and government customers. The Hughes segment also provides managed services, hardware, and satellite services to large enterprises and government customers, and designs, provides and installs gateway and terminal equipment to customers for other satellite systems. In addition, our Hughes segment provides satellite ground segment systems and terminals to mobile system operators.
•
EchoStar Satellite Services (“ESS”) — which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite service operations and video delivery solutions on a full-time and occasional-use basis primarily to DISH Network, Dish Mexico, S. de R.L. de C.V. (“Dish Mexico”), a joint venture that EchoStar entered into in 2008, U.S. government service providers, internet service providers, broadcast news organizations, programmers, and private enterprise customers. We also manage satellite operations for several satellites owned by third parties.
Hughes Segment
Our Hughes segment is a global provider of broadband satellite technologies and broadband services for home and small office customers. We deliver network technologies, managed services, equipment, and communications solutions for domestic and international consumers and enterprise and government customers. In addition, our Hughes segment provides and installs gateway and terminal equipment and provides satellite ground segment systems and terminals for other satellite systems, including mobile system operators.
We continue to focus our efforts on growing our Hughes segment consumer revenue by maximizing utilization of our existing satellites while planning for new satellites to be launched. Our consumer revenue growth depends on our success in adding new subscribers and driving higher average revenue per subscriber across our wholesale and retail channels.
Our Hughes segment currently uses its three owned satellites, the SPACEWAY 3 satellite, the EchoStar XVII satellite and the EchoStar XIX satellite, and additional satellite capacity acquired from multiple third-party providers, to provide satellite broadband internet access and communications services to our customers. In December 2016, EchoStar launched the EchoStar XIX satellite, a next-generation, high throughput geostationary satellite, which will provide significant capacity for continued subscriber growth.  The EchoStar XIX satellite employs a multi-spot beam, bent pipe Ka-band architecture and will provide additional capacity for the Hughes broadband services to our customers in North America and added capacity in Mexico and certain Latin American countries and is expected to add capability for aeronautical, enterprise and international broadband services.  Capital expenditures associated with the construction and launch of the EchoStar XIX satellite have been incurred by EchoStar. EchoStar contributed the EchoStar XIX satellite to us in February 2017.

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In addition to our broadband consumer service offerings, our Hughes segment also provides network technologies, managed services, hardware, equipment and satellite services to large enterprise and government customers globally. Examples of such customers include lottery agencies, gas station operators and companies with multi-branch networks that rely on satellite or terrestrial networks for critical communication across wide geographies. Most of our enterprise customers have contracts with us for the services they purchase.
Developments toward the launch of next-generation satellite systems including low-earth orbit (“LEO”) and geostationary systems could provide additional opportunities to drive the demand for our network equipment and services. The growth of our enterprise and equipment businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies.
We continue our efforts to grow our consumer satellite services business outside of the U.S. In April 2014, we entered into a satellite services agreement pursuant to which Eutelsat do Brasil provides us Ka-band capacity into Brazil on the EUTELSAT 65 West A satellite for a 15-year term.  That satellite was launched in March 2016 and we began delivering high-speed consumer satellite broadband services in Brazil in July 2016. In September 2015, we entered into satellite services agreements pursuant to which affiliates of Telesat Canada (“Telesat”) will provide to us the Ka-band capacity on a satellite to be located at the 63 degree west longitude orbital location for a 15-year term. We expect the satellite to be launched in the second quarter of 2018 and plan to provide service in additional markets across South America once that capacity is available for commercial use.

We are tracking closely the developments in next-generation satellite businesses, and we are seeking to utilize our services, technologies and expertise to find new commercial opportunities for our business. In June 2015, EchoStar made an equity investment in WorldVu Satellites Limited (“OneWeb”), a global LEO satellite service company. In addition, our Hughes segment entered into an agreement with OneWeb to provide certain equipment and services in connection with the ground systems for OneWeb’s LEO satellites.
As of December 31, 2016, our Hughes segment had approximately 1,036,000 broadband subscribers.  These broadband subscribers include customers that subscribe to our HughesNet broadband services through retail, wholesale and small/medium enterprise service channels.  Gross subscriber additions increased by approximately 19,000 in the fourth quarter of 2016 when compared to the third quarter of 2016 primarily due to an increase in additions in our retail channel due to the launch of our broadband service in Brazil in the second quarter of 2016 offset partially by a decrease in additions in our wholesale channel due to our lack of free capacity due to satellite beams servicing certain areas reaching capacity. Our average monthly subscriber churn percentage for the fourth quarter of 2016 decreased as compared to the third quarter of 2016. As a result of higher gross subscriber additions and a decrease in churn, net subscribers for the quarter ended December 31, 2016 increased by approximately 30,000 when compared to the third quarter of 2016 with increases in retail and decreases in wholesale subscribers. Subscriber additions and churn include only subscribers through our retail and wholesale channels.
As of December 31, 2016, our Hughes segment had approximately $1.52 billion of contracted revenue backlog.  We define Hughes contracted revenue backlog as our expected future revenue under customer contracts that are non-cancelable, excluding agreements with customers in our consumer market. Of the total contracted revenue backlog as of December 31, 2016, we expect to recognize approximately $436.5 million of revenue in 2017.
For the year ended December 31, 2016, our Hughes segment recorded revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”) of approximately $1.39 billion and $427.8 million, respectively.
ESS Segment
Our ESS segment is a global provider of satellite service operations and video delivery solutions. We operate our business using our owned and leased in-orbit satellites.  We provide satellite services on a full-time and occasional-use basis primarily to DISH Network (our largest customer), Dish Mexico, U.S. government service providers, internet service providers, broadcast news organizations, programmers and private enterprise customers.
We depend on DISH Network for a significant portion of the revenue for our ESS segment, and we expect that DISH Network will continue to be the primary source of revenue for our ESS segment.  Therefore, the results of operations of our ESS segment are linked to changes in DISH Network’s satellite capacity requirements.  DISH Network’s capacity requirements have been driven by the addition of new channels and migration of programming to high-definition TV and video on demand services. The services that we provide to DISH Network are critical to its nationwide delivery of content to its customers across the U.S. While we expect to continue to provide satellite services to DISH Network, its satellite capacity requirements may change for a variety of reasons, including its ability to construct and launch its own satellites.  Any termination or reduction in the services we provide to DISH Network may cause us to have unused capacity on our satellites and require that we aggressively pursue alternative sources of revenue for this business.

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In August 2014, we entered into: (i) a construction contract with Airbus Defence and Space SAS for the construction of the EchoStar 105/SES-11 satellite with C-band, Ku-band and Ka-band payloads; (ii) an agreement with SES Satellite Leasing Limited for the procurement of the related launch services; and (iii) an agreement with SES Americom Inc. (“SES”) pursuant to which we will transfer the title to the C-band and Ka-band payloads to SES Satellite Leasing Limited at launch and transfer the title to the Ku-band payload to SES following in-orbit testing of the satellite. Simultaneously, SES will provide to us satellite service on the entire Ku-band payload on the EchoStar 105/SES-11 satellite for an initial ten-year term, with an option for us to renew the agreement on a year-to-year basis. Due to anomalies experienced by our launch provider, the expected launch date of the EchoStar 105/SES-11 satellite has been delayed.  We currently expect to launch the EchoStar 105/SES-11 satellite in the second or third quarter of 2017. Our Ku-band payload on the EchoStar 105/SES-11 satellite will replace and augment our current capacity on the AMC-15 satellite. As a result of this launch delay, we have incurred and expect to incur additional costs related to the lease of the AMC-15 satellite.
Revenue growth in our ESS segment depends largely on our ability to continuously make additional satellite capacity available for sale.  Once the EchoStar 105/SES-11 satellite is launched and placed into operation, we expect periodic revenue from the satellite to exceed the amount currently generated by the AMC-15 satellite. As a result of the launch delay, we expect a delay in revenue generated from the EchoStar 105/SES-11 satellite.
We continue to pursue expanding our business offerings by providing value added services such as telemetry, tracking, and control services to third parties, which leverages the ground monitoring networks and personnel currently within our ESS segment.
As of December 31, 2016, our ESS segment had contracted revenue backlog attributable to satellites currently in orbit of approximately $1.16 billion.  Of the total contracted revenue backlog as of December 31, 2016, we expect to recognize approximately $365.1 million of revenue in 2017.
For the year ended December 31, 2016, our ESS segment recorded revenue and EBITDA of $407.7 million and $339.5 million, respectively.
New Business Opportunities
Our industry is evolving with the increase in worldwide demand for broadband internet access for information, entertainment and commerce. In addition to fiber and wireless systems, other technologies such as geostationary high throughput satellites, LEO networks, balloons, and High Altitude Platform Systems have begun to play significant roles in enabling global broadband access, networks and services. We intend to use our expertise, technologies, capital, investments, global presence, relationships and other capabilities to continue to provide broadband internet systems, equipment, networks and services for information, entertainment and commerce in North America and internationally for consumers, enterprises and governments.
We continue to selectively explore opportunities to pursue partnerships, joint ventures and strategic acquisitions, domestically and internationally, that we believe may allow us to increase our existing market share, expand into new markets and new customers, broaden our portfolio of services, products and intellectual property, and strengthen our relationships with our customers. We may allocate significant resources for long-term initiatives that may not have a short or medium-term or any positive impact on our revenue, results of operations, or cash flow.
Share Exchange
On January 31, 2017, our parent company EchoStar Corporation and certain of our and its subsidiaries entered into a Share Exchange Agreement (the “Share Exchange Agreement”) among DISH, DISH Network L.L.C., an indirect wholly owned subsidiary of DISH (“DNLLC”), DISH Operating L.L.C., a direct wholly owned subsidiary of DNLLC (“DOLLC” and, collectively with DISH and DNLLC, the “DISH Parties”), EchoStar Corporation, EchoStar Broadcasting Holding Parent L.L.C., our direct wholly owned subsidiary (“EB LLC”), EchoStar Broadcasting Holding Corporation, a direct wholly owned subsidiary of EB LLC (“EB Corp”), EchoStar Technologies Holding Corporation, a direct wholly owned subsidiary of EchoStar Corporation (“ET Corp”), and EchoStar Technologies L.L.C., a direct wholly owned subsidiary of EchoStar Corporation.
Pursuant to the Share Exchange Agreement, on February 28, 2017, among other things: (i) EchoStar Corporation received all of the shares of the EchoStar tracking stock (described in Note 3 in the notes to our consolidated financial statements included elsewhere in this prospectus) (the “EchoStar Tracking Stock”) owned by DNLLC in exchange for 100% of the equity interests of ET Corp, which held that portion of the EchoStar Technologies business segment of EchoStar that (a) designed, developed and distributed secure end-to-end video technology solutions including digital set-top boxes and related products and technology, primarily for satellite TV service providers and telecommunications companies, (b) provided TV Anywhere technology through Slingbox® units directly to consumers via retail outlets and online, as well as to the pay-TV operator

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market, and (c) included EchoStar’s over-the-top, Streaming Video on Demand platform business, which included assets acquired from Sling TV Holding L.L.C. (formerly DISH Digital Holding L.L.C.) and primarily provided support services to DISH’s Sling TV™ operations, and (ii) EB LLC received all of the shares of HSS tracking stock (described in Note 3 in the notes to our consolidated financial statements included elsewhere in this prospectus) (the “HSS Tracking Stock”, and together with the EchoStar Tracking Stock, the “Tracking Stock”) owned by DOLLC in exchange for 100% of the equity interests of EB Corp, formerly a direct wholly owned subsidiary of EB LLC, which held EchoStar’s business of providing online video delivery and satellite video delivery for broadcasters and pay-TV operators, including satellite uplinking/downlinking, transmission services, signal processing, conditional access management and other services (the “Uplinking Businesses”) ((i) and (ii) collectively, the “Share Exchange”). The Share Exchange has been structured in a manner to be a tax-free exchange for each of EchoStar and DISH and their respective subsidiaries. Subsequent to the Share Exchange, EB LLC merged with and into HSS. As a result of the Share Exchange, the EchoStar Tracking Stock and the HSS Tracking Stock were retired and all agreements, arrangements and policy statements with respect to the Tracking Stock were terminated and are of no further effect.
Prior to consummation of the Share Exchange, EchoStar completed steps necessary for the transferring assets and liabilities to be owned by ET Corp and EB Corp and their respective subsidiaries. As part of these steps, HSS issued additional shares of common stock to a subsidiary of EchoStar Corporation and such shares were then distributed as a dividend to EchoStar Corporation.
Certain data center assets within the Uplinking Businesses were not included in the Share Exchange and, following the consummation of the Share Exchange, are owned by us. Cheyenne Data Center L.L.C., our subsidiary holding such data center assets, has been added as an additional guarantor under the indentures governing the Old Notes, the 6 1/2% Senior Secured Notes due 2019 (the “2011 Secured Notes”) and the 7 5/8% Senior Notes due 2021 (the “2011 Unsecured Notes,” and together with the 2011 Secured Notes, the “2011 Notes”) and as an additional pledgor of collateral under the indentures governing the Old Secured Notes, the Secured Notes and the 2011 Secured Notes and related security agreement.
In connection with the Share Exchange, EchoStar Corporation and DISH and certain of their subsidiaries (i) entered into certain customary agreements covering, among other things, matters relating to taxes, employees, intellectual property and the provision of transitional services, (ii) terminated certain previously existing agreements, and (iii) entered into agreements for new transactions pursuant to which EchoStar and DISH and certain of their respective subsidiaries, including HSS, will obtain certain products, services and rights from each other.

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ECHOSTAR CORPORATION CORPORATE STRUCTURE
The diagram below depicts, in simplified form, the corporate structure of EchoStar*:
s4image.jpg
Neither EchoStar Corporation nor any of its subsidiaries (other than HSS and its domestic subsidiaries that are Restricted Subsidiaries) will have any obligations or liability with respect to the Notes at any time.
* The diagram reflects EchoStar’s general corporate structure after giving effect to the consummation of the Share Exchange.
________________________________________________________________________________

Our principal executive offices are located at 100 Inverness Terrace East, Englewood, Colorado 80112, and our telephone number is (303) 706-4000.

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THE EXCHANGE OFFER
The exchange offer relates to the exchange of up to $750,000,000 aggregate principal amount of outstanding 5.250% Senior Secured Notes due 2026 and up to $750,000,000 aggregate principal amount of outstanding 6.625% Senior Notes due 2026, for an equal aggregate principal amount of the Secured Notes and the Unsecured Notes, respectively. The form and terms of the Secured Notes and the Unsecured Notes are identical in all material respects to the form and terms of the corresponding outstanding Old Secured Notes and Old Unsecured Notes, respectively, except that the Notes will be registered under the Securities Act, and therefore they will not bear legends restricting their transfer.
The Exchange Offer 
 
We are offering to exchange $1,000 principal amount of our Secured Notes that we have registered under the Securities Act for each $1,000 principal amount of outstanding Old Secured Notes, and $1,000 principal amount of our Unsecured Notes that we have registered under the Securities Act for each $1,000 principal amount of outstanding Old Unsecured Notes. Old Notes tendered in the exchange offer must be in minimum denominations of $2,000 principal amount and any integral multiples of $1,000 in excess thereof. In order for us to exchange your Old Notes, you must validly tender them to us and we must accept them. We will exchange all outstanding Old Notes that are validly tendered and not validly withdrawn.
Resale of the Notes 
 
Based on interpretations by the staff of the SEC set forth in no-action letters issued to other parties, we believe that you may offer for resale, resell and otherwise transfer your Notes without compliance with the registration and prospectus delivery provisions of the Securities Act if you are not our affiliate and you acquire the Notes issued in the exchange offer in the ordinary course.
You must also represent to us that you are not participating, do not intend to participate and have no arrangement or understanding with any person to participate in the distribution of the Notes we issue to you in the exchange offer.
Each broker-dealer that receives Notes in the exchange offer for its own account in exchange for Old Notes that it acquired as a result of market-making or other trading activities must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of the Notes issued in the exchange offer. You may not participate in the exchange offer if you are a broker-dealer who purchased such outstanding Old Notes directly from us for resale pursuant to Rule 144A or any other available exemption under the Securities Act.
Expiration date 
 
The exchange offer will expire at 5:00 p.m., New York City time, on May 11, 2017, unless we decide to extend the expiration date. We may extend the expiration date for any reason. If we fail to consummate the exchange offer, you will have certain rights against us under the registration rights agreement we entered into as part of the offering of the Old Notes.
Special procedures for beneficial owners 
 
If you are the beneficial owner of Old Notes and you registered your Old Notes in the name of a broker or other institution, and you wish to participate in the exchange, you should promptly contact the person in whose name you registered your Old Notes and instruct that person to tender the Old Notes on your behalf. If you wish to tender on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your outstanding Old Notes, either make appropriate arrangements to register ownership of the outstanding Old Notes in your name or obtain a properly completed bond power from the registered holder. The transfer of record ownership may take considerable time.
Guaranteed delivery procedures 
 
If you wish to tender your Old Notes and time will not permit your required documents to reach the exchange agent by the expiration date, or you cannot complete the procedure for book-entry transfer on time or you cannot deliver your certificates for registered Old Notes on time, you may tender your Old Notes pursuant to the procedures described in this prospectus under the heading “The Exchange Offer–How to use the guaranteed delivery procedures if you will not have enough time to send all documents to us.”
Withdrawal rights
 
You may withdraw the tender of your Old Notes at any time prior to the expiration date.
Material United States federal income tax consequences
 
An exchange of Old Notes for Notes should not be subject to United States federal income tax. See “Material United States Federal Income Tax Considerations.”

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Use of proceeds
 
We will not receive any proceeds from the issuance of Notes pursuant to the exchange offer. Old Notes that are validly tendered and exchanged will be retired and canceled. We will pay all of our expenses incident to the exchange offer.
Exchange Agent 
 
You can reach the Exchange Agent, U.S. Bank National Association at 60 Livingston Avenue, St. Paul, MN 55107 (Attention: Specialized Finance). For more information with respect to the exchange offer, you may call the Exchange Agent at (800) 934-6802; the fax number for the Exchange Agent is (651) 466-7372 (Attention: Specialized Finance).



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THE NOTES
The exchange offer applies to $750,000,000 aggregate principal amount of 5.250% Senior Secured Notes due 2026 and $750,000,000 aggregate principal amount of 6.625% Senior Notes due 2026. The form and terms of the Secured Notes and the Unsecured Notes are identical in all material respects to the form and terms of the corresponding outstanding Old Secured Notes and Old Unsecured Notes, respectively, except that the Notes will be registered under the Securities Act, and therefore they will not bear legends restricting their transfer. The Notes will be entitled to the benefits of the respective indentures governing the Notes. See “Description of the Secured Notes” and “Description of the Unsecured Notes.” As used in this summary of the Notes, “subsidiaries” refers to our direct and indirect subsidiaries, and the terms “HSS,” the “Company,” the “Issuer,” “we,” “us,” “our” or similar terms refer only to Hughes Satellite Systems Corporation and not to any of our subsidiaries.
Issuer

Hughes Satellite Systems Corporation.
Notes Offered 
$750,000,000 aggregate principal amount of 5.250% Senior Secured Notes due 2026; and
$750,000,000 aggregate principal amount of 6.625% Senior Notes due 2026.
Maturity

Secured Notes: August 1, 2026
Unsecured Notes: August 1, 2026
Interest Payment Dates

February 1 and August 1 of each year, starting on August 1, 2017
Security
The Secured Notes and related subsidiary guarantees will be secured by first-priority Liens (as defined herein) on substantially all existing and future tangible and intangible assets of HSS and the guarantors, subject to certain excluded assets and permitted liens (as further defined herein, the “Collateral”). Certain other pari passu lien obligations incurred after issuance may share in the Collateral equally and ratably with the Old Secured Notes, the Secured Notes and the guarantees thereof. In addition, the 2011 Secured Notes (as defined herein) and the guarantees thereof share in the Collateral equally and ratably with the Secured Notes, the Old Secured Notes and the guarantees thereof. As of December 31, 2016, there were $990.0 million aggregate principal amount of the 2011 Secured Notes outstanding.
For more information, see “Description of the Secured Notes — Security.”
It is possible that the Company and its subsidiaries may transfer or license all or a portion of their existing and future patents to one or more third parties, including EchoStar Corporation or a subsidiary of EchoStar Corporation other than the Company or its Restricted Subsidiaries (as defined herein). Any such transfer or license would be conducted in accordance with the terms of the indentures governing the Notes and the security agreement relating to the Secured Notes. If such transaction were to consist of a transfer, by sale or otherwise, any such patents would no longer form part of the Collateral with respect to the Secured Notes. 

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Ranking

The Notes are HSS’ senior indebtedness, and rank pari passu in right of payment with all of its existing and future senior debt.
Indebtedness under the Secured Notes and related subsidiary guarantees will be secured by the Collateral and will rank effectively senior to any of HSS’ and the subsidiary guarantors’ future senior unsecured debt to the extent of the Collateral securing the Secured Notes and related subsidiary guarantees (which Collateral also secures the 2011 Secured Notes, the Old Secured Notes and related subsidiary guarantees).
The Secured Notes will rank effectively junior to obligations of HSS and the subsidiary guarantors that are secured by assets that do not constitute Collateral, to the extent of such collateral. As of December 31, 2016, the Old Secured Notes ranked effectively junior to $80.0 million of debt and other obligations secured by assets not constituting Collateral or assets that secure such other debt and other obligations on a higher priority basis.
Indebtedness under the Unsecured Notes will be unsecured senior obligations of HSS and the guarantors and will rank effectively junior to HSS’ and the guarantors’ existing and future senior secured indebtedness and other obligations to the extent of the collateral securing such debt and other obligations. As of December 31, 2016, the Old Unsecured Notes ranked effectively junior to $1.82 billion of debt and other obligations, including the Old Secured Notes and $990.0 million aggregate principal amount of the 2011 Secured Notes.
Guarantees
The Notes will be fully and unconditionally guaranteed, on a joint and several basis, by the same subsidiaries that currently guarantee the 2011 Secured Notes, the 2011 Unsecured Notes and the Old Notes and by any other parties that become guarantors of the Notes after the issue date.
As of or for the year ended December 31, 2016, our non-guarantor subsidiaries accounted for $158.4 million, or 8.8% of our total revenues, $505.1 million, or 7.9%, of our consolidated assets and $181.0 million, or 3.9%, of our consolidated liabilities (in each case before intercompany eliminations and before giving effect to the Share Exchange).
Neither EchoStar Corporation nor any of its subsidiaries (other than HSS and its domestic subsidiaries that are guarantors) will have any obligations or liability with respect to the Notes.
Optional Redemption
We may redeem the Old Secured Notes and the Secured Notes, in whole or in part, at any time at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest, if any. In addition, we may redeem up to 10% of the aggregate outstanding Old Secured Notes and Secured Notes per year at any time prior to August 1, 2020 at a redemption price equal to 103% of the principal amount thereof plus accrued and unpaid interest, if any. For more information, see “Description of the Secured Notes — Optional Redemption.”
We may redeem the Old Unsecured Notes and Unsecured Notes, in whole or in part, at any time at a redemption price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest, if any. For more information, see “Description of the Unsecured Notes — Optional Redemption.”

11


Optional Redemption
After Equity Offering
At any time (which may be more than once) before August 1, 2019, we may redeem up to 35% of the aggregate principal amount of the Old Secured Notes and Secured Notes outstanding with the net proceeds that we raise in one or more equity offerings, as long as at least $487.5 million aggregate principal amount of Old Secured Notes and Secured Notes (such amount representing at least 65% of the aggregate principal amount of the Old Secured Notes that were initially issued) remains outstanding afterwards. For more information, see “Description of the Secured Notes — Redemption with the Proceeds of Certain Capital Contributions or Equity Offerings.”
At any time (which may be more than once) before August 1, 2019, we may redeem up to 35% of the aggregate principal amount of the Old Unsecured Notes and Unsecured Notes outstanding with the net proceeds that we raise in one or more equity offerings, as long as at least $487.5 million aggregate principal amount of Old Unsecured Notes and Unsecured Notes (such amount representing at least 65% of the aggregate principal amount of the Old Unsecured Notes that were initially issued) remains outstanding afterwards. For more information, see “Description of the Unsecured Notes — Redemption with the Proceeds of Certain Capital Contributions or Equity Offerings.”
Change of Control

If a Change of Control occurs, as that term is defined in “Description of the Secured Notes — Certain Definitions” and “Description of the Unsecured Notes — Certain Definitions,” holders of Notes will have the right, subject to certain conditions, to require us to repurchase their Notes at a purchase price equal to 101% of the aggregate principal amount of Notes repurchased plus accrued and unpaid interest, if any, to (but excluding) the date of repurchase. See “Description of the Secured Notes — Change of Control Offer” and “Description of the Unsecured Notes — Change of Control Offer”.
Certain Covenants

The indentures governing the Notes, among other things, limit our ability and the ability of our restricted subsidiaries to:
•    pay dividends or distributions, repurchase equity, prepay subordinated debt or make certain investments;
•    incur additional debt or issue certain disqualified stock and preferred stock;
•    incur liens on assets;
•    merge or consolidate with another company or sell all or substantially all assets;
•    enter into transactions with affiliates; and
•    allow to exist certain restrictions on the ability of the guarantors to pay dividends or make other payments to us.
These covenants are subject to important exceptions and qualifications as described under “Description of the Secured Notes — Certain Covenants” and “Description of the Unsecured Notes — Certain Covenants.”
Registration Rights
We have agreed, pursuant to a registration rights agreement with the initial purchaser, to file an exchange offer registration statement with respect to the Notes, and to use our reasonable best efforts to cause such registration statement to be declared effective by July 27, 2017. In the event that we do not comply with this obligation or certain timing requirements for completion of the exchange offer, we may be required to pay additional interest to each holder of “transfer restricted securities” (as defined in the registration rights agreement) affected thereby. See “Registration Rights.”

12


Risk Factors
Investing in the Notes involves substantial risks. You should carefully consider all the information contained in this prospectus prior to investing in the Notes. In particular, we urge you to carefully consider the information set forth in the section under the heading “Risk Factors” for a description of certain risks you should consider before investing in the Notes.
No Prior Market
There can be no assurance that a market for the Notes will develop or as to the liquidity of any market that may develop.

Indentures
The Secured Notes will be issued under an indenture, dated as of July 27, 2016, with U.S. Bank National Association, as trustee, and Wells Fargo Bank, N.A., as collateral agent. The rights of holders of the Secured Notes, including rights with respect to default, waivers and amendments will be governed by that indenture.
The Unsecured Notes will be issued under an indenture, dated as of July 27, 2016, with U.S. Bank National Association, as trustee. The rights of holders of the Unsecured Notes, including rights with respect to default, waivers and amendments will be governed by that indenture.
Governing Law
The indentures are, and the Notes will be, governed by the laws of the State of New York.


13


SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables present the summary historical consolidated financial data of HSS and its subsidiaries at the dates and for the periods indicated. We derived these summary historical consolidated financial data from our audited consolidated financial statements. This summary historical consolidated financial data does not include any adjustments that may be necessary as a result of the Share Exchange.
You should read this data in conjunction with, and it is qualified by reference to, the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the notes thereto included elsewhere in this prospectus.

 
For the Years Ended December 31,

 
2016
 
2015
 
2014
 
2013
 
2012

 
(dollars in thousands)
Revenue:
 


 


 


 


 


Services and other revenue – DISH Network
 
$
449,547

 
$
518,853

 
$
487,985

 
$
291,924

 
$
211,560

Services and other revenue – other
 
1,103,127

 
1,095,249

 
1,077,101

 
987,023

 
941,804

Equipment revenue - DISH Network
 
8,840

 
10,752

 
31,943

 
69,119

 
23,757

Equipment revenue - other
 
238,279

 
212,278

 
210,948

 
194,825

 
255,636

Total revenue
 
1,799,793

 
1,837,132

 
1,807,977

 
1,542,891

 
1,432,757

Costs and Expenses:
 


 


 


 


 


Cost of sales – services and other (exclusive of depreciation and amortization)
 
517,957

 
525,471

 
535,918

 
502,134

 
480,040

Cost of sales – equipment (exclusive of depreciation and amortization)
 
204,753

 
195,537

 
209,022

 
237,103

 
232,690

Selling, general and administrative expenses
 
281,048

 
276,616

 
264,610

 
239,264

 
222,986

Research and development expenses
 
31,170

 
26,377

 
20,192

 
21,845

 
21,264

Depreciation and amortization
 
414,133

 
430,127

 
452,138

 
403,476

 
352,367

Impairments of long-lived assets
 
—

 
—

 
—

 
34,664

 
22,000

Total costs and expenses
 
1,449,061

 
1,454,128

 
1,481,880

 
1,438,486

 
1,331,347

Operating income
 
350,732

 
383,004

 
326,097

 
104,405

 
101,410

Other Income (Expense):
 


 


 


 


 


Interest income
 
12,598

 
4,416

 
3,234

 
7,487

 
2,212

Interest expense, net of amounts capitalized
 
(187,198
)
 
(169,150
)
 
(191,258
)
 
(197,062
)
 
(153,955
)
Other, net
 
19,348

 
(6,922
)
 
4,604

 
14,822

 
27,212

Total other income (expense)
 
(155,252
)
 
(171,656
)
 
(183,420
)
 
(174,753
)
 
(124,531
)
Income (loss) before income taxes
 
195,480

 
211,348

 
142,677

 
(70,348
)
 
(23,121
)
Income tax benefit (provision), net
 
(73,759
)
 
(72,364
)
 
(40,095
)
 
35,525

 
10,895

Net income (loss)
 
121,721

 
138,984

 
102,582

 
(34,823
)
 
(12,226
)
Less: Net income (loss) attributable to noncontrolling interests
 
1,706

 
1,617

 
1,389

 
876

 
(35
)
Net income (loss) attributable to HSS
 
$
120,015

 
$
137,367

 
$
101,193

 
$
(35,699
)
 
$
(12,191
)


14


 
 
As of December 31,
 
 
2016
 
2015
 
 
(dollars in thousands)
Balance Sheet Data:
 
 
 
 
Cash and cash equivalents
 
$
2,070,964

 
$
382,990

Total assets
 
$
6,381,534

 
$
4,571,279

Total liabilities
 
$
4,626,511

 
$
3,029,639

Total shareholders’ equity
 
$
1,755,023

 
$
1,541,640


 
 
For the Years Ended December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
(dollars in thousands)
Other Data:
 
 
 
 
 
 
 
 
 
 
EBITDA(1)
 
$
782,507

 
$
804,592

 
$
781,450

 
$
521,827

 
$
481,024

Net cash flows from:
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
565,871

 
$
575,490

 
$
653,572

 
$
322,048

 
$
292,581

Investing activities
 
$
(365,889
)
 
$
(277,033
)
 
$
(547,713
)
 
$
(246,616
)
 
$
(302,291
)
Financing activities
 
$
1,487,809

 
$
(137,893
)
 
$
(49,127
)
 
$
(50,571
)
 
$
16,661

__________
(1)
EBITDA is defined as “Net income” excluding “Interest expense, net of amounts capitalized,” “Interest income,” “Income tax provision, net,” and “Depreciation and amortization.”  EBITDA is not a measure determined in accordance with GAAP (as defined herein). This non-GAAP measure is reconciled to “Net Income” below. EBITDA should not be considered in isolation or as a substitute for operating income, net income or any other measure determined in accordance with GAAP. EBITDA is used by our management as a measure of operating efficiency and overall financial performance for benchmarking against our peers and competitors. Management believes EBITDA provides meaningful supplemental information regarding the underlying operating performance of our business. Management also believes that EBITDA is useful to investors because it is frequently used by securities analysts, investors, and other interested parties to evaluate the performance of companies in our industry.

The following table reconciles EBITDA to net income (loss), the most directly comparable United States Generally Accepted Accounting Principles (“GAAP”) measure:
 
 
For the Years Ended December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
(dollars in thousands)
Net income (loss)
 
$
121,721

 
$
138,984

 
$
102,582

 
$
(34,823
)
 
$
(12,226
)
 
 
 
 
 
 


 
 
 
 
Interest income and expense, net
 
174,600

 
164,734

 
188,024

 
189,575

 
151,743

Income tax provision (benefit)
 
73,759

 
72,364

 
40,095

 
(35,525
)
 
(10,895
)
Depreciation and amortization
 
414,133

 
430,127

 
452,138

 
403,476

 
352,367

Net income attributable to noncontrolling interests
 
(1,706
)
 
(1,617
)
 
(1,389
)
 
(876
)
 
35

EBITDA
 
$
782,507

 
$
804,592

 
$
781,450

 
$
521,827

 
$
481,024



15


RISK FACTORS
Investing in the Notes involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before deciding whether to invest in the Notes. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently believe to be immaterial, may also become important factors that affect us. We may face other risks described from time to time in periodic and current reports we file with the SEC.
If any of the following events occur, our business, financial condition, results of operations, prospects or ability to invest capital in our business could be materially and adversely affected. In that case, the value of the Notes could decline and you may lose some or all of your investment.
GENERAL RISKS AFFECTING OUR BUSINESS
We currently derive a significant portion of our revenue from DISH Network.  The loss of, or a significant reduction in, orders from, or a decrease in selling prices of broadband equipment and services, provision of satellite services and digital broadcast services, and/or other products, or services to DISH Network would significantly reduce our revenue and materially adversely impact our results of operations.
DISH Network accounted for 25.5%, 28.8% and 28.8% of our total revenue for the years ended December 31, 2016, 2015 and 2014, respectively.  Our ESS segment provides satellite services to DISH Network and DISH Network is also a wholesale distributor and sales agent of the Hughes satellite internet service, and in connection with such wholesale distribution and our sales agency arrangement, purchases certain broadband equipment from us to support the sale of the Hughes service.  Any material reduction in or termination of our sales to DISH Network or reduction in the prices it pays for the products and services it purchases from us could have a material adverse effect on our business, results of operations, and financial position. 
DISH Network has only certain obligations to continue to purchase certain of our services from our ESS segment.  Therefore, our relationship with DISH Network could be terminated or substantially curtailed with little or no advance notice.  In addition, because a significant portion of the revenue of our ESS segment is derived from DISH Network, the success of our ESS segment also depends to a significant degree on the continued success of DISH Network in attracting new subscribers and marketing programming packages and other services.
Furthermore, if we lose DISH Network as a customer, it may be difficult for us to replace, in whole or in part, our historical revenue from DISH Network because there are a relatively small number of potential customers for our products and services, and we have had limited success in attracting such potential new customers in the past.  Historically, many potential customers of our ESS segment have perceived us as a competitor due to our affiliation with DISH Network. There can be no assurance that we will be successful in entering into any commercial relationships with potential new customers who are competitors of DISH Network (particularly if we continue to be perceived as affiliated with DISH Network as a result of common ownership and certain shared services).  If we do not develop relationships with new customers, we may not be able to expand our customer base or maintain or increase our revenue.
Our strategic initiatives may not be successfully implemented, may not elicit the expected customer response in the market and may result in competitive reactions.
The successful implementation of our strategic initiatives requires an investment of time, talent and money and is dependent upon a number of factors some of which are not within our control.  Those factors include the ability to execute such initiatives in the market, the response of existing and potential new customers, and the actions or reactions of competitors.  We may allocate significant resources for long-term initiatives that may not have a short or medium term or any positive impact on our revenue, results of operations, or cash flow.  If we fail to properly execute or deliver products or services that address customers’ expectations, it may have an adverse effect on our ability to retain and attract customers and may increase our costs and reduce our revenue.  Similarly, competitive actions or reactions to our initiatives or advancements in technology or competitive products or services could impair our ability to execute those strategic initiatives or advancements.  In addition, new strategic initiatives may face barriers to entering existing markets with established competitors.  There can be no assurance that we will successfully implement these strategic initiatives or that, if successfully pursued, they will have the desired effect on our business or results of operations.

16


We could face decreased demand and increased pricing pressure to our products and services due to competition.
Our business operates in an intensely competitive, consumer-driven and rapidly changing environment and competes with a growing number of companies that provide products and services to consumers.  Risks to our business from competition include, but are not limited to, the following:
•
Our ESS segment competes against larger, well-established satellite service companies, such as Intelsat S.A., SES S.A., Telesat Canada, and Eutelsat Communications S.A.  Because the satellite services industry is relatively mature, our growth strategy depends largely on our ability to displace current incumbent providers, which often have the benefit of long-term contracts with customers.  These long-term contracts and other factors result in relatively high costs for customers to change service providers, making it more difficult for us to displace customers from their current relationships with our competitors.  In addition, the supply of satellite capacity available in the market has increased in recent years, which makes it more difficult for us to sell our services in certain markets and to price our capacity at acceptable levels.  Competition may cause downward pressure on prices and further reduce the utilization of our capacity, both of which could have an adverse effect on our financial performance.  Our ESS segment also competes with both fiber optic cable and terrestrial delivery systems, which may have a cost advantage, particularly in point-to-point applications where such delivery systems have been installed, and with new delivery systems being developed, which may have lower latency and other advantages.
•
In our consumer market, we face competition primarily from digital subscriber line (“DSL”), fiber and cable internet service providers.  Also, other telecommunications, satellite and wireless broadband companies have launched or are planning the launch of consumer internet access services in competition with our service offerings in North America and Brazil.  Some of these competitors offer consumer services and hardware at lower prices than ours.  In addition, terrestrial alternatives do not require our external dish, which may limit customer acceptance of our products.  We may be unsuccessful in competing effectively against DSL, fiber and cable internet service providers and other satellite broadband providers, which could harm our business, operating results and financial condition.
•
In our enterprise network communications market, we face competition from providers of terrestrial-based networks, such as fiber, DSL, cable modem service, multiprotocol label switching and internet protocol-based virtual private networks, which may have advantages over satellite networks for certain customer applications.  Although we also sell terrestrial services to this market, we may not be as cost competitive and it may become more difficult for us to compete.  The network communications industry is characterized by competitive pressures to provide enhanced functionality for the same or lower price with each new generation of technology.  Terrestrial-based networks are offered by telecommunications carriers and other large companies, many of which have substantially greater financial resources and greater name recognition than us.  As the prices of our products decrease, we will need to sell more products and/or reduce the per-unit costs to improve or maintain our results of operations.  The costs of a satellite network may exceed those of a terrestrial-based network or other networks, especially in areas that have experienced significant DSL and cable internet build-out.  It may become more difficult for us to compete with terrestrial and other providers as the number of these areas increases and the cost of their network and hardware services declines.  Terrestrial networks also have a competitive edge because of lower latency for data transmission.
We may have available satellite capacity in our ESS segment, and our results of operations may be materially adversely affected if we are not able to provide satellite services on this capacity to third parties, including DISH Network.
We have available satellite capacity in our ESS segment.  While we are currently evaluating various opportunities to make profitable use of our available satellite capacity (including, but not limited to, supplying satellite capacity for new international ventures), there can be no assurance that we can successfully develop these business opportunities.  If we are unable to utilize our available satellite capacity for providing satellite services to third parties, including DISH Network, our margins could be negatively impacted, and we may be required to record impairments related to our satellites.
The failure to adequately anticipate the need for satellite capacity or the inability to obtain satellite capacity for our Hughes segment could harm our results of operations.
Our Hughes segment has made substantial contractual commitments for satellite capacity based on our existing customer contracts and backlog.  If our existing customer contracts were to be terminated prior to their respective expiration dates, we may be committed to maintaining excess satellite capacity for which we will have insufficient revenue to cover our costs, which would have a negative impact on our margins and results of operations.  Alternatively, we may not have sufficient satellite capacity to meet demand.  We have satellite capacity commitments, generally for two to five year terms, with third parties to cover different geographical areas or support different applications and features; therefore, we may not be able to quickly or easily adjust our capacity to changes in demand.  We generally only purchase satellite capacity based on existing contracts and

17


bookings.  Therefore, capacity for certain types of coverage in the future may not be readily available to us, and we may not be able to satisfy certain needs of our customers, which could result in a loss of possible new business and could negatively impact the margins for those services.  Our ability to provide additional capacity for subscriber growth in our North American consumer market could also be adversely affected by regulations in the U.S. recently adopted by the FCC that enable the use of a portion of the frequency bands, including without limitation, the Ka-band, where we operate our broadband gateway earth stations, for 5G mobile terrestrial services, which could limit our flexibility to change the way in which we use the Ka-band in the future. In addition, the fixed satellite service (“FSS”) industry has seen consolidation in the past decade, and today, the main FSS providers in North America and a number of smaller regional providers own and operate the current satellites that are available for our capacity needs.  The failure of any of these FSS providers to replace existing satellite assets at the end of their useful lives or a downturn in their industry as a whole could reduce or interrupt the satellite capacity available to us.  If we are not able to renew our capacity leases at economically viable rates, or if capacity is not available due to problems experienced by these FSS providers, our business and results of operations could be adversely affected.
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.
We are dependent upon third-party services and products provided to us, including the following:
•
Components.  A limited number of suppliers manufacture, and in some cases a single supplier manufactures, some of the key components required to build our products. These key components may not be continually available and we may not be able to forecast our component requirements sufficiently in advance, which may have a detrimental effect on supply.  If we are required to change suppliers for any reason, we would experience a delay in manufacturing our products if another supplier is not able to meet our requirements on a timely basis.  In addition, if we are unable to obtain the necessary volumes of components on favorable terms or prices on a timely basis, we may be unable to produce our products at competitive prices and we may be unable to satisfy demand from our customers.  Our reliance on a single or limited group of suppliers, particularly foreign suppliers, and our reliance on subcontractors, involves several risks.  These risks include a potential inability to obtain an adequate supply of required components, reduced control over pricing, quality, and timely delivery of these components, and the potential bankruptcy, lack of liquidity or operational failure of our suppliers.  We do not generally maintain long-term agreements with any of our suppliers or subcontractors for our products.  An inability to obtain adequate deliveries or any other circumstances requiring us to seek alternative sources of supply could affect our ability to ship our products on a timely basis, which could damage our relationships with current and prospective customers and harm our business, resulting in a loss of market share, and reduced revenue and income.
•
Commodity Price Risk.  Fluctuations in pricing of raw materials can affect our product costs.  To the extent that component pricing does not decline or increases, whether due to inflation, increased demand, decreased supply or other factors, we may not be able to pass on the impact of increasing raw materials prices, component prices or labor and other costs, to our customers, and we may not be able to operate profitably.  Such changes could have an adverse impact on our product costs.
•
Manufacturing.  While we develop and manufacture prototypes for certain of our products, we use contract manufacturers to produce a significant portion of our hardware.  If these contract manufacturers fail to provide products that meet our specifications in a timely manner, then our customer relationships and revenue may be harmed.
•
Installation and customer support services.  Some of our products and services, such as our North American and international operations, utilize a network of third-party installers to deploy our hardware.  In addition, a portion of our customer support and management is provided by offshore call centers.  A decline in levels of service or attention to the needs of our customers could adversely affect our reputation, renewal rates and ability to win new business.
Our foreign operations expose us to regulatory risks and restrictions not present in our domestic operations.
Our sales outside the U.S. accounted for approximately 18.3%, 17.4% and 18.7% of our revenue for the years ended December 31, 2016, 2015 and 2014, respectively.  Collectively, we expect our foreign operations to continue to represent a significant portion of our business.  Over the last 10 years, we have sold products in over 100 countries.  Our foreign operations involve varying degrees of risk and uncertainties inherent in doing business abroad.  Such risks include:
•
Complications in complying with restrictions on foreign ownership and investment and limitations on repatriation.  We may not be permitted to own our operations in some countries and may have to enter into partnership or joint venture relationships.  Many foreign legal regimes restrict our repatriation of earnings to the U.S. from our subsidiaries

18


and joint venture entities.  Applicable law in such foreign countries may also limit our ability to distribute or access our assets in certain circumstances.  In such event, we will not have access to the cash flow and assets of our subsidiaries and joint ventures.
•
Difficulties in following a variety of laws and regulations related to foreign operations.  Our international operations are subject to the laws and regulations of many different jurisdictions that may differ significantly from U.S. laws and regulations.  For example, local political or intellectual property law may hold us responsible for the data that is transmitted over our network by our customers.  In addition, we are subject to the Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions that generally prohibit companies and their intermediaries from making improper payments or giving or promising to give anything of value to foreign officials and other individuals for the purpose of obtaining or retaining business or gaining a competitive advantage.  Our policies mandate compliance with these laws.  However, we operate in many parts of the world that have experienced corruption to some degree.  Compliance with these laws may lead to increased operations costs or loss of business opportunities.  Violations of these laws could result in fines or other penalties or sanctions, which could have a material adverse impact on our business, financial condition, and results of operations.
•
Restrictions on space station landing/terrestrial rights.  Satellite market access and landing rights and terrestrial wireless rights are dependent on the national regulations established by foreign governments, including, but not limited to obtaining national authorizations or approvals and meeting other regulatory, coordination and registration requirements for satellites.  Because regulatory schemes vary by country, we may be subject to laws or regulations in foreign countries of which we are not presently aware.  Non-compliance with these requirements may result in the loss of the authorizations and licenses to conduct business in these countries, as well as fines or other financial and non-financial penalties for non-compliance with regulations.  If that were to be the case, we could be subject to sanctions and/or other actions by a foreign government that could materially and adversely affect our ability to operate in that country.  There is no assurance that any current regulatory approvals held by us are, or will remain, sufficient in the view of foreign regulatory authorities, or that any additional necessary approvals will be granted on a timely basis or at all, in all jurisdictions in which we wish to operate new satellites, or that applicable restrictions in those jurisdictions will not be unduly burdensome.  Violations of laws or regulations may result in various sanctions including fines, loss of authorizations and the denial of applications for new authorizations or for the renewal of existing authorizations, and the failure to obtain or comply with the authorizations and regulations governing our international operations could have a material adverse effect on our ability to generate revenue and our overall competitive position.
•
Financial and legal constraints and obligations.  Operating pursuant to foreign licenses subjects us to certain financial constraints and obligations, including, but not limited to: (a) tax liabilities that may or may not be dependent on revenue; (b) the burden of creating and maintaining additional entities, branches, facilities and/or staffing in foreign jurisdictions; and (c) legal regulations requiring that we make certain satellite capacity available for “free,” which may impact our revenue.  In addition, if we need to pursue legal remedies against our customers or our business partners located outside of the U.S., it may be difficult for us to enforce our rights against them.
•
Compliance with applicable export control laws and regulations in the U.S. and other countries.  We must comply with all applicable export control and trade sanctions laws and regulations of the U.S. and other countries.  U.S. laws and regulations applicable to us include the Arms Export Control Act, ITAR, EAR and the trade sanctions laws and regulations administered by OFAC.  The export of certain hardware, technical data and services relating to satellites is regulated by BIS under EAR.  Other items are controlled for export by the DDTC under ITAR.  We cannot provide equipment or services to certain countries subject to U.S. trade sanctions unless we first obtain the necessary authorizations from OFAC.  Violations of these laws or regulations could result in significant sanctions including fines, more onerous compliance requirements, debarments from export privileges, or loss of authorizations needed to conduct aspects of our international business.  A violation of ITAR or the other regulations enumerated above could materially adversely affect our business, financial condition and results of operations.
•
Changes in exchange rates between foreign currencies and the U.S. dollar.  We conduct our business and incur cost in the local currency of a number of the countries in which we operate.  Accordingly, our applicable results of operations are reported in the relevant local currency and then translated to U.S. dollars at the applicable currency exchange rate for inclusion in our financial statements.  In addition, we sell our products and services and acquire supplies and components from countries that historically have been, and may continue to be, susceptible to recessions or currency devaluation.  These fluctuations in currency exchange rates, recessions and currency devaluations have affected, and may in the future affect, revenue, profits and cash earned on international sales.

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Greater exposure to the possibility of economic instability, the disruption of operations from labor and political disturbances, expropriation or war.  As we conduct operations throughout the world, we could be subject to regional or national economic downturns or instability, acts of terrorism, labor or political disturbances or conflicts of various sizes, including wars.  Any of these disruptions could detrimentally affect our sales in the affected region or country or lead to damage to, or expropriation of, our property or danger to our personnel.
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Competition with large or state-owned enterprises and/or regulations that effectively limit our operations and favor local competitors.  Many of the countries in which we conduct business have traditionally had state owned or state granted monopolies on telecommunications services that favor an incumbent service provider.  We face competition from these favored and entrenched companies in countries that have not deregulated.  The slower pace of deregulation in these countries, particularly in Asia and Latin America, has adversely affected the growth of our business in these regions.
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Customer credit risks.  Customer credit risks are exacerbated in foreign operations because there is often little information available about the credit histories of customers in certain of the foreign countries in which we operate.
We may experience loss from some of our customer contracts.
We provide access to our telecommunications networks to customers that use a variety of platforms such as satellite, wireless 3G and 4G, cable, fiber optic and DSL.  These customer contracts may require us to provide services at a fixed price for the term of the contract.  To facilitate the provision of this access, we may enter into contracts with terrestrial platform providers.  Our agreements with these subcontractors may allow for prices to be changed during the term of the contracts.  We assume greater financial risk on these customer contracts than on other types of contracts because if we do not estimate costs accurately and there is an increase in our subcontractors’ prices, our net profit may be significantly reduced or there may be a loss on the contracts.
We may experience significant financial losses on our existing investments.
We have entered into certain strategic transactions and investments.  These investments involve a high degree of risk and could diminish our financial condition or our ability to invest capital in our business.  The overall sustained economic uncertainty, as well as financial, operational and other difficulties encountered by certain companies in which we have invested increases the risk that the actual amounts realized in the future on our debt and equity investments will differ significantly from the fair values currently assigned to them.  In addition, the companies in which we invest or with whom we partner may not be able to compete effectively or there may be insufficient demand for the services and products offered by these companies.  These investments could also expose us to significant financial losses and may restrict our ability to make other investments or limit alternative uses of our capital resources.  If our investments suffer losses, our financial condition could be materially adversely affected.
We may pursue acquisitions, capital expenditures and other strategic transactions to complement or expand our business, which may not be successful and we may lose a portion or all of our investment in these acquisitions and transactions.
Our future success may depend on the existence of, and our ability to capitalize on, opportunities to acquire or develop other businesses or technologies or partner with other companies that could complement, enhance or expand our current business, services or products or that may otherwise offer us growth opportunities.  We may pursue acquisitions, joint ventures or other business combination or development activities to complement or expand our business.  Any such acquisitions, transactions or investments that we are able to identify and complete which may become substantial over time, involve a high degree of risk, including, but not limited to, the following:
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the diversion of our management’s attention from our existing business to integrate the operations and personnel of the acquired or combined business, technology or joint venture;
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the ability and capacity of our management team to carry out all of our business plans, including with respect to our existing businesses and any businesses we acquire or embark on in the future;
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possible adverse effects on our and our targets’ and partners’ business, financial condition or operating results during the integration process;
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exposure to significant financial losses if the transactions, investments and/or the underlying ventures are not successful; and/or we are unable to achieve the intended objectives of the transaction or investment;

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the inability to obtain in the anticipated time frame, or at all, any regulatory approvals required to complete proposed acquisitions, transactions or investments;
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the risks associated with complying with regulations applicable to the acquired or developed business or technologies which may cause us to incur substantial expenses;
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the inability to realize anticipated benefits or synergies from an acquisition; and
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the disruption of relationships with employees, vendors or customers.
New acquisitions, investments, joint ventures and other transactions may require the commitment of significant capital that may otherwise be directed to investments in our existing businesses.  Commitment of this capital may cause us to defer or suspend any share repurchases or capital expenditures that we otherwise may have made.
We may not be able to generate cash to meet our debt service needs or fund our operations.
As of December 31, 2016, our total indebtedness was approximately $3.66 billion.  Our ability to make payments on or to refinance our indebtedness and to fund our operations will depend on our ability to generate cash in the future, which is subject in part to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.  We may need to raise additional debt in order to fund ongoing operations or to capitalize on business opportunities.  We may not be able to generate sufficient cash flow from operations and future borrowings may not be available in amounts sufficient to enable us to service our indebtedness or to fund our operations or other liquidity needs.  If we are unable to generate sufficient cash, we may be forced to take actions such as revising or delaying our strategic plans, reducing or delaying capital expenditures, selling assets, restructuring or refinancing our debt or seeking additional equity capital.  We may not be able to implement any of these actions on satisfactory terms, or at all.  The indentures governing our indebtedness limit our ability to dispose of assets and use the proceeds from such dispositions.  Therefore, we may not be able to consummate those dispositions on satisfactory terms, or at all, or to use those proceeds in a manner we may otherwise prefer.
In addition, conditions in the financial markets could make it difficult for us to access capital markets at acceptable terms or at all.  Instability or other conditions in the equity markets could make it difficult for us to raise equity financing without incurring substantial dilution to our existing shareholders.  In addition, sustained or increased economic weaknesses or pressures or new economic conditions may limit our ability to generate sufficient internal cash to fund investments, capital expenditures, acquisitions, and other strategic transactions.  We cannot predict with any certainty whether or not we will be impacted by economic conditions.  As a result, these conditions make it difficult for us to accurately forecast and plan future business activities because we may not have access to funding sources necessary for us to pursue organic and strategic business development opportunities.
Covenants in our indentures restrict our business in many ways.
The indentures governing the 2011 Notes, the Old Notes and the Notes contain various covenants, subject to certain exceptions, that limit our ability and/or our restricted subsidiaries’ ability to, among other things:
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incur additional debt;
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pay dividends or make distributions on our capital stock or repurchase our capital stock;
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make certain investments;
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create liens or enter into sale and leaseback transactions;
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enter into transactions with affiliates;
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merge or consolidate with another company;
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transfer and sell assets; and
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allow to exist certain restrictions on the ability of certain of our subsidiaries to pay dividends, make distributions, make other payments, or transfer assets to us or our subsidiaries.
Failure to comply with these and certain other financial covenants, if not cured or waived, may result in an event of default under the indentures, which could have a material adverse effect on our business, financial condition, results of operations or

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prospects.  If an event of default occurs and is continuing under the respective indenture, the trustee under that indenture or the requisite holders of the notes under that indenture may declare all such notes to be immediately due and payable and, in the case of the indentures governing any of our secured notes, could proceed against the collateral that secures the applicable secured notes. We and certain of our subsidiaries have pledged a significant portion of our assets as collateral to secure the 2011 Secured Notes and the Old Secured Notes (and following this offering, the Secured Notes).  If we do not have enough cash to service our debt or fund other liquidity needs, we may be required to take actions such as requesting a waiver from the holders of the notes, reducing or delaying capital expenditures, selling assets, restructuring or refinancing all or part of the existing debt, or seeking additional equity capital.  We cannot assure you that any of these remedies can be implemented on commercially reasonable terms or at all, which could result in the trustee declaring the notes to be immediately due and payable and/or foreclosing on the collateral.
We rely on key personnel and the loss of their services may negatively affect our businesses.
We believe that our future success will depend to a significant extent upon the performance of Mr. Charles W. Ergen, our Chairman, and certain other key executives.  The loss of Mr. Ergen or of certain other key executives or of the ability of Mr. Ergen or certain other key executives to devote sufficient time and effort to our business could have a material adverse effect on our business, financial condition and results of operations.  Although most of our key executives have agreements limiting their ability to work for or consult with competitors, under certain circumstances, we generally do not have employment agreements with them.  To the extent Mr. Ergen or other officers are performing services to both DISH Network and us, their attention may be diverted away from our business and therefore adversely affect our business.
We may be subject to risks relating to the referendum of the United Kingdom’s membership of the European Union.
In June 2016, the United Kingdom (the “U.K.”) held a referendum in which voters approved an exit from the European Union and its member states (“EU”), commonly referred to as the “Brexit.” As a result of the referendum, it is expected that the U.K. government has begun negotiating the terms of the U.K.’s future relationship with the EU. Although it is unknown what those terms will be, it is possible that there will be greater restrictions on imports and exports between the U.K. and EU countries.  Additionally, with the U.K. no longer being a part of the EU, we anticipate that there may be certain regulatory changes that may impact the regulatory regime under which we operate in both the U.K. and the EU.  These and other changes, implications and consequences of the Brexit may adversely affect our business and results of operations.
A natural disaster could diminish our ability to provide service to our customers.
Natural disasters could damage or destroy our ground stations, resulting in a disruption of service to our customers.  We currently have backup systems and technology in place to safeguard our antennas and protect our ground stations during natural disasters such as tornadoes, but the possibility still exists that our ground facilities could be impacted during a major natural disaster.  If a future natural disaster impairs or destroys any of our ground facilities, we may be unable to provide service to our customers in the affected area for a period of time which may adversely affect our business and results of operations.
We may have additional tax liabilities.
We are subject to income taxes in the United States and foreign jurisdictions.  Significant judgments are required in determining our provisions for income taxes.  In the course of preparing our tax provisions and returns, we must make calculations where the ultimate tax determination may be uncertain.  Our tax returns are subject to examination by the Internal Revenue Service (“IRS”), state, and foreign tax authorities.  There can be no assurance as to the outcome of these examinations.  If the ultimate determination of taxes owed is for an amount in excess of amounts previously accrued, our operating results, cash flows, and financial condition could be adversely affected.
RISKS RELATED TO OUR SATELLITES
Our owned and leased satellites in orbit are subject to significant operational and environmental risks that could limit our ability to utilize these satellites.
Satellites are subject to significant operational risks while in orbit.  These risks include malfunctions, commonly referred to as anomalies, which have occurred and may occur in the future in our satellites and the satellites of other operators as a result of various factors, such as satellite design and manufacturing defects, problems with the power systems or control systems of the satellites and general failures resulting from operating satellites in the harsh environment of space.
Although we work closely with the satellite manufacturers to determine and eliminate the cause of anomalies in new satellites and provide for redundancies of many critical components in the satellites, we may not be able to prevent anomalies from

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occurring and may experience anomalies in the future, whether of the types described above or arising from the failure of other systems or components.
Any single anomaly or series of anomalies could materially and adversely affect our ability to utilize the satellite, our operations and revenue as well as our relationships with current customers and our ability to attract new customers.  In particular, future anomalies may result in, among other things, the loss of individual transponders/beams on a satellite, a group of transponders/beams on that satellite or the entire satellite, depending on the nature of the anomaly. Anomalies may also reduce the expected capacity or useful life of a satellite, thereby reducing the revenue that could be generated by that satellite, or create additional expenses due to the need to provide replacement or back-up satellites or satellite capacity earlier than planned.
The loss of a satellite or other satellite malfunctions or anomalies could have a material adverse effect on our financial performance, which we may not be able to mitigate by using available capacity on other satellites.  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.  In addition, the loss of a satellite or other satellite malfunctions or anomalies could affect our ability to comply with FCC and other regulatory obligations and our ability to fund the construction or acquisition of replacement satellites for our in-orbit fleet in a timely fashion, or at all.  There can be no assurance that anomalies will not impact the remaining useful life and/or the commercial operation of any of the satellites in our fleet.  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.
Meteoroid events pose a potential threat to all in-orbit satellites.  The probability that meteoroids will damage those satellites increases significantly when the Earth passes through the particulate stream left behind by comets.  Occasionally, increased solar activity also poses a potential threat to all in-orbit satellites.
Some decommissioned spacecraft are in uncontrolled orbits, which pass through the geostationary belt at various points and present hazards to operational spacecraft, including our satellites.  We may be required to perform maneuvers to avoid collisions and these maneuvers may prove unsuccessful or could reduce the useful life of the satellite through the expenditure of fuel to perform these maneuvers.  The loss, damage or destruction of any of our satellites as a result of an electrostatic storm, collision with space debris, malfunction or other event could have a material adverse effect on our business, financial condition and results of operations.
We historically have not carried in-orbit insurance on our satellites because we assessed that the cost of insurance was uneconomical relative to the risk of failures. If one or more of our in-orbit uninsured satellites fail, we could be required to record significant impairment charges for the satellite.
Our satellites have minimum design lives ranging from 12 to 15 years, but could fail or suffer reduced capacity before then.
Generally, the minimum design life of each of our satellites ranges from 12 to 15 years.  We can provide no assurance, however, as to the actual operational lives of our satellites, which may be shorter or longer than their design lives.  Our ability to earn revenue depends on the continued operation of our satellites, each of which has a limited useful life.  A number of factors affect the useful lives of the satellites, including, among other things, the quality of their design and construction, the durability of their component parts, the ability to continue to maintain proper orbit and control over the satellite’s functions, the efficiency of the launch vehicle used, and the remaining on-board fuel following orbit insertion. In addition, continued improvements in satellite technology may make obsolete our existing satellites, or any satellites we may acquire in the future, prior to the end of their design lives.
In the event of a failure or loss of any of our satellites, we may relocate another satellite and use it as a replacement for the failed or lost satellite, which could have a material adverse effect on our business, financial condition and results of operations.  Additionally, such relocation would require governmental approval.  We cannot be certain that we could obtain such governmental approval.  In addition, we cannot guarantee that another satellite will be available for use as a replacement for a failed or lost satellite, or that such relocation can be accomplished without a substantial utilization of fuel.  Any such utilization of fuel would reduce the operational life of the replacement satellite.
Our satellites under construction are subject to risks related to construction and launch that could limit our ability to utilize these satellites.
Satellite construction and launch are subject to significant risks, including delays, anomalies, launch failure and incorrect orbital placement.  Certain launch vehicles that may be used by us have either unproven track records or have experienced launch failures in the past.  The risks of launch delay, launch anomalies and launch failure are usually greater when the launch vehicle

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does not have a track record of previous successful flights.  Launch anomalies and failures can result in significant delays in the deployment of satellites because of the need both to construct replacement satellites, which can take more than three years, and to obtain other launch opportunities.  Such significant delays could materially and adversely affect our business, expenses and results of operations, our ability to meet regulatory or contractual required milestones, the availability and our use of other or replacement satellite resources and our ability to provide services to customers as capacity becomes full on existing satellites.  In addition, significant delays in a satellite program could give customers who have purchased or reserved capacity on that satellite a right to terminate their service contracts relating to the satellite.  We may not be able to accommodate affected customers on other satellites until a replacement satellite is available.  A customer’s termination of its service contracts with us as a result of a launch delay or failure would reduce our contracted backlog and our ability to generate revenue.  One of our launch services providers is a Russian Federation state-owned company.  Recent ongoing political events have created uncertainty as to the stability of U.S. and Russian Federation relations.  This could add to risks relative to scheduling uncertainties and timing.  Historically, we have not always carried launch insurance for the launch of our satellites. If a launch delay, anomaly or failure were to occur, it could result in the revocation of the applicable license to operate the satellite, undermine our ability to implement our business strategy or develop or pursue existing or future business opportunities with applicable licenses and otherwise have a material adverse effect on our business, expenses, assets, revenue, results of operations and ability to fund future satellite procurement and launch opportunities.  In addition, the occurrence of launch anomalies and failures, whether on our satellites or those of others, may significantly reduce our ability to place launch insurance for our satellites or make launch insurance uneconomical.
Our use of certain satellites is often dependent on satellite coordination agreements, which may be difficult to obtain.
Satellite transmissions and the use of frequencies often are dependent on coordination with other satellite systems operated by U.S. or foreign satellite operators, including governments, and it can be difficult to determine the outcome of these coordination agreements with these other entities and governments.  The impact of a coordination agreement may result in the loss of rights to the use of certain frequencies or access to certain markets.  The significance of such a loss would vary and it can therefore be difficult to determine which portion of our revenue will be impacted.
Furthermore, the satellite coordination process is conducted under the guidance of the ITU radio regulations and the national regulations of the satellites involved in the coordination process.  These rules and regulations could be amended and could therefore materially adversely affect our business, financial condition and results of operations.
We may face interference from other services sharing satellite spectrum.
The FCC and other regulators have adopted rules or may adopt rules in the future that allow non-geostationary orbit satellite services to operate on a co-primary basis in the same frequency band as DBS and FSS.  The FCC has also authorized the use of multichannel video and data distribution service (“MVDDS”) in the DBS band.  Several MVDDS systems are now being commercially deployed.  Despite regulatory provisions designed to protect DBS and FSS operations from harmful interference, there can be no assurance that operations by other satellites or terrestrial communication services in the DBS and FSS bands will not interfere with our DBS and FSS operations and adversely affect our business.
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.
There are a limited number of manufacturers that are able to design and build satellites according to the technical specifications and standards of quality we require, including Airbus Defence and Space, Boeing Satellite Systems, Lockheed Martin, SS/L and Thales Alenia Space.  There are also a limited number of launch service providers that are able to launch such satellites, including International Launch Services, Arianespace, Lockheed Martin Commercial Launch Services and Space Exploration.  The loss of any of our manufacturers or launch service providers could increase the cost and result in the delay of the design, construction or launch of our satellites.  Even if alternate suppliers for such services are available, we may have difficulty identifying them in a timely manner or we may incur significant additional expense in changing suppliers, and this could result in difficulties or delays in the design, construction or launch of our satellites.  Any delays in the design, construction or launch of our satellites could have a material adverse effect on our business, financial condition and results of operations.
RISKS RELATED TO OUR PRODUCTS AND TECHNOLOGY
If we are unable to properly respond to technological changes, our business could be significantly harmed.
Our business and the markets in which we operate are characterized by rapid technological changes, evolving industry standards and frequent product and service introductions and enhancements.  If we or our suppliers are unable to properly respond to or keep pace with technological developments, fail to develop new technologies, or if our competitors obtain or

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develop proprietary technologies that are perceived by the market as being superior to ours, our existing products and services may become obsolete and demand for our products and services may decline.  Even if we keep up with technological innovation, we may not meet the demands of the markets we serve.  Furthermore, after we have incurred substantial research and development costs, one or more of the technologies under our development, or under development by one or more of our strategic partners, could become obsolete prior to its introduction.  If we are unable to respond to or keep pace with technological advances on a cost-effective and timely basis, or if our products, applications or services are not accepted by the market, then our business, financial condition and results of operations would be adversely affected.
Our response to technological developments depends, to a significant degree, on the work of technically skilled employees.  Competition for the services of such employees is intense.  Although we strive to attract, retain and motivate these employees, we may not succeed in these respects.
We have made and will continue to make significant investments in research, development, and marketing for new products, services and related technologies, as well as entry into new business areas.  Investments in new technologies and business areas are inherently speculative and commercial success thereof depends on numerous factors including innovativeness, quality of service and support, and effectiveness of sales and marketing.  We may not achieve revenue or profitability from such investments for a number of years, if at all.  Moreover, even if such products, services, technologies and business areas become profitable, their operating margins may be minimal.
Our business depends on certain intellectual property rights and on not infringing the intellectual property rights of others.  The loss of our intellectual property rights or our infringement of the intellectual property rights of others could have a significant adverse impact on our business.
We rely on our patents, copyrights, trademarks and trade secrets, as well as licenses and other agreements with our vendors and other parties, to use our technologies, conduct our operations and sell our products and services.  Legal challenges to our intellectual property rights and claims by third parties of intellectual property infringement could require that we enter into royalty or licensing agreements on unfavorable terms, incur substantial monetary liability or be enjoined preliminarily or permanently from further use of the intellectual property in question or from the continuation of our businesses as currently conducted, which could require us to change our business practices or limit our ability to compete effectively or could otherwise have an adverse effect on our business, financial condition, results of operations or prospects.  Even if we believe any such challenges or claims are without merit, they can be time-consuming and costly to defend and may divert management’s attention and resources away from our business.
Moreover, due to the rapid pace of technological change, we rely in part on technologies developed or licensed by third parties, and if we are unable to obtain or continue to obtain licenses or other required intellectual property rights from these third parties on reasonable terms, our business, financial position and results of operations could be adversely affected.  Technology licensed from third parties may have undetected errors that impair the functionality or prevent the successful integration of our products or services.  As a result of any such changes or loss, we may need to incur additional development costs to ensure continued performance of our products or suffer delays until replacement technology, if available, can be obtained and integrated.
In addition, we work with third parties such as vendors, contractors and suppliers for the development and manufacture of components that are integrated into our products and our products may contain technologies provided to us by these third parties.  We may have little or no ability to determine in advance whether any such technology infringes the intellectual property rights of others.  Our vendors, contractors and suppliers may not be required to indemnify us in the event that a claim of infringement is asserted against us, or they may be required to indemnify us only up to a maximum amount, above which we would be responsible for any further costs or damages.  Legal challenges to these intellectual property rights may impair our ability to use the products and technologies that we need in order to operate our business and may materially and adversely affect our business, financial condition and results of operations.
We are, and may become, party to various lawsuits which, if adversely decided, could have a significant adverse impact on our business, particularly lawsuits regarding intellectual property.
We are, and may become, subject to various legal proceedings and claims, which arise in the ordinary course of our business.  Many entities, including some of our competitors, have or may in the future obtain patents and other intellectual property rights that cover or affect products or services related to those that we offer.  In general, if a court determines that one or more of our products or services infringes valid intellectual property rights held by others, we may be required to cease developing or marketing those products or services, to obtain licenses from the holders of the intellectual property at a material cost, or to redesign those products or services in such a way as to avoid infringement.  If those intellectual property rights are held by a competitor, we may be unable to license the necessary intellectual property rights at any price, which could adversely affect our competitive position.

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We may not be aware of all patents and other intellectual property rights that our products and services may potentially infringe.  In addition, patent applications in the U.S. and foreign countries are confidential until the Patent and Trademark Office either publishes the application or issues a patent (whichever arises first) and, accordingly, our products may infringe claims contained in pending patent applications of which we are not aware.  Further, the process of determining definitively whether a patent claim is valid and whether a particular product infringes a valid patent claim often involves expensive and protracted litigation, even if we are ultimately successful on the merits.
We cannot estimate the extent to which we may be required in the future to obtain licenses with respect to intellectual property rights held by others and the availability and cost of any such licenses.  Those costs, and their impact on our results of operations, could be material.  Damages in patent infringement cases can be substantial, and in certain circumstances, can be trebled.  To the extent that we are required to pay unanticipated royalties to third parties, these increased costs of doing business could negatively affect our liquidity and operating results.  We are currently defending multiple patent infringement actions and may assert our own actions against parties we suspect of infringing our patents and trademarks.  We cannot be certain the courts will conclude these companies do not own the rights they claim, that these rights are not valid, or that our products and services do not infringe on these rights.  We also cannot be certain that we will be able to obtain licenses from these persons on commercially reasonable terms or, if we were unable to obtain such licenses, that we would be able to redesign our products and services to avoid infringement.  The legal costs associated with defending patent suits and pursuing patent claims against others may be borne by us if we are not awarded reimbursement through the legal process.  See further discussion under “Business—Legal Proceedings”.
Future litigation or governmental proceedings could result in material adverse consequences, including judgments or settlements.
We may become involved in lawsuits, regulatory inquiries, consumer claims and governmental and other legal proceedings arising from of our business, including new products and services that we may offer.  Some of these proceedings may raise difficult and complicated factual and legal issues and can be subject to uncertainties and complexities.  The timing of the final resolutions to lawsuits, regulatory inquiries, and governmental and other legal proceedings is typically uncertain.  Additionally, the possible outcomes of, or resolutions to, these proceedings could include adverse judgments, settlements or liabilities, any of which could require substantial payments or have other adverse impacts on our revenue, results of operations or cash flow.
We rely on network and information systems and other technologies and a disruption, cyber-attack, failure or destruction of such networks, systems or technologies may disrupt or harm our business and damage our reputation, which could have a material adverse effect on our financial condition and operating results.
The capacity, reliability and security of our information technology hardware and software infrastructure are important to the operation of our business, which would suffer in the event of system disruptions or failures, such as computer hackings, cyber-attacks, computer viruses or other destructive or disruptive software, process breakdowns, denial of service attacks or other malicious activities.  Security breaches, attacks, unauthorized access and other malicious activities have significantly increased in recent years, and some of them have involved sophisticated and highly targeted attacks on computer networks.  Our networks, systems and technologies and those of our third-party service providers and our customers may also be vulnerable to such security breaches, attacks, malicious activities and unauthorized access, resulting in misappropriation, misuse, leakage, corruption, unscheduled downtime, falsification and accidental or intentional release or loss of information maintained on our and our third party service providers’ information technology systems and networks, including but not limited to customer, personnel and vendor data.  If such risks were to materialize, we could be exposed to significant costs and interruptions, delays or malfunctions in our operations, any of which could damage our reputation and credibility and have a material adverse effect on our business, financial condition and results of operations.  We may also be required to expend significant resources to protect against these threats or to alleviate problems, including reputational harm and litigation, caused by any breaches.  Although we have significantly invested in and continue to implement generally recognized security measures, these measures may prove to be inadequate and we could be subject to regulatory penalties, fines, sanctions, enforcement actions, remediation obligations, and/or private litigation by parties whose information was improperly accessed, disclosed or misused which could have a material adverse effect on our business, financial condition and results of operations.  Furthermore, the amount and scope of insurance that we maintain against losses resulting from these events may not be sufficient to compensate us adequately for any disruptions to our business or otherwise cover our losses, including reputational harm and negative publicity as well as any litigation liability.  In addition, our ability to expand and update our information technology infrastructure in response to our growth and changing needs is important to the continued implementation of our new service offering initiatives.  A security breach or attack could impact our ability to expand or upgrade our technology infrastructure which could have adverse consequences, including the delayed implementation of new offerings, product or service interruptions, and the diversion of development resources.

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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 revenue.
The products and the networks we deploy are highly complex, and some may contain defects when first introduced or when new versions or enhancements are released, despite testing and our quality control procedures.  For example, our products may contain software “bugs” that can unexpectedly interfere with their operation.  Defects may also occur in components and products that we purchase from third parties.  In addition, many of our products and network services are designed to interface with our customers’ existing networks, each of which has different specifications and utilize multiple protocol standards.  Our products and services must interoperate with the other products and services within our customers’ networks, as well as with future products and services that might be added to these networks, to meet our customers’ requirements.  There can be no assurance that we will be able to detect and fix all defects in the products and networks we sell.  The occurrence of any defects, errors or failures in our products or network services could result in: (i) additional costs to correct such defects; (ii) cancellation of orders and lost revenue; (iii) a reduction in revenue backlog; (iv) product returns or recalls; (v) diversion of our resources; (vi) the issuance of credits to customers and other losses to us, our customers or end-users; (vii) liability for harm to persons and property caused by defects in or failures of our products or services; and (viii) harm to our reputation if we fail to detect or effectively address such issues through design, testing or warranty repairs.  Any of these occurrences could also result in the loss of or delay in market acceptance of our products and services and loss of sales, which would harm our reputation and our business and materially adversely affect our revenue and profitability.
RISKS RELATED TO THE REGULATION OF OUR BUSINESS
Our business is subject to risks of adverse government regulation.
Our business is subject to varying degrees of regulation in the U.S. by the FCC, and other federal, state and local entities, and in foreign countries by similar entities and internationally by the ITU.  These regulations are subject to the administrative and political process and do change, for political and other reasons, from time to time.  For example, the FCC recently adopted an order in its “Spectrum Frontiers” proceeding under which a portion of the Ka-band, in which we operate our broadband gateway earth stations, has been enabled for 5G mobile terrestrial services, which could limit our flexibility to change the way in which we use Ka-band in the future. Other countries in which we currently, or may in the future, operate are also considering regulations that could limit access to the Ka-band or other frequency bands. The FCC has also opened a proceeding on non-geostationary satellites, which may adversely impact our ability to use certain spectrum for user terminals. Moreover, a substantial number of foreign countries in which we have, or may in the future make, an investment, regulate, in varying degrees, the ownership of satellites and other telecommunication facilities/networks and foreign investment in telecommunications companies.  Violations of laws or regulations may result in various sanctions including fines, loss of authorizations and the denial of applications for new authorizations or for the renewal of existing authorizations.  Further material changes in law and regulatory requirements may also occur, and there can be no assurance that our business and the business of our subsidiaries and affiliates will not be adversely affected by future legislation, new regulation or deregulation.  The failure to obtain or comply with the authorizations and regulations governing our operations could have a material adverse effect on our ability to generate revenue and our overall competitive position and could result in our suffering serious harm to our reputation.
Our business depends on regulatory authorizations issued by the FCC and state and foreign regulators that can expire, be revoked or modified, and applications for licenses and other authorizations that may not be granted.
Generally all satellite, earth stations and other licenses granted by the FCC and most other countries are subject to expiration unless renewed by the regulatory agency.  Our satellite licenses are currently set to expire at various times.  In addition, we occasionally receive special temporary authorizations that are granted for limited periods of time (e.g., 180 days or less) and subject to possible renewal.  Generally, our licenses and special temporary authorizations have been renewed on a routine basis, but there can be no assurance that this will continue.  There can be no assurance that the FCC or other regulators will continue granting applications for new licenses or for the renewal of existing ones.  If the FCC or other regulators were to cancel, revoke, suspend, or fail to renew any of our licenses or authorizations, or fail to grant our applications for FCC or other licenses, it could have a material adverse effect on our business, financial condition and results of operations.  Specifically, loss of a frequency authorization would reduce the amount of spectrum available to us, potentially reducing the amount of services we provide to our customers.  The significance of such a loss of authorizations would vary based upon, among other things, the orbital location, the frequency band and the availability of replacement spectrum.  In addition, the legislative and executive branches of the U.S. government and foreign governments often consider legislation and regulatory requirements that could affect us, as could the actions that the FCC and foreign regulatory bodies take.  We cannot predict the outcomes of these legislative or regulatory proceedings or their effect on our business.

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In addition, third parties have or may oppose some of our license applications and pending and future requests for extensions, modifications, waivers and approvals of our licenses.  Even if we have fully complied with all of the required reporting, filing and other requirements in connection with our authorizations, it is possible a regulator could decline to grant certain of our applications or requests for authority, or could revoke, terminate, condition or decline to modify, extend or renew certain of our authorizations or licenses.
We may face difficulties in accurately assessing and collecting contributions towards the Universal Service Fund.
Because our customer contracts often include both telecommunications services, which create obligations to contribute to the USF, and other goods and services, which do not, it can be difficult to determine what portion of our revenue forms the basis for our required contribution to the USF and the amount that we can recover from our customers.  If the FCC, which oversees the USF, or a court or other governmental entity were to determine that we computed our USF contribution obligation incorrectly or passed the wrong amount onto our customers, we could become subject to additional assessments, liabilities, or other financial penalties.  In addition, the FCC is considering substantial changes to its USF contribution and distribution rules.  These changes could impact our future contribution obligations and those of third parties that provide communication services to our business.  Any such change to the USF contribution rules could adversely affect our costs of providing service to our customers.  In addition, changes to the USF distribution rules could intensify the competition we face by offering subsidies to competing firms and/or technologies.
RISKS RELATED TO THE SHARE EXCHANGE
We might not be able to engage in certain strategic transactions because we have agreed to certain restrictions to comply with U.S. federal income tax requirements for a tax-free split-off.

To preserve the intended tax-free treatment of the Share Exchange, EchoStar has undertaken to comply with certain restrictions under current U.S. federal income tax laws for split-offs, including (i) refraining from engaging in certain transactions that would result in a fifty percent or greater change by vote or by value in EchoStar’s stock ownership, (ii) continuing to own and manage EchoStar’s historic businesses, and (iii) limiting sales or redemptions of EchoStar’s and our common stock. If these restrictions, among others, are not followed, the Share Exchange could be taxable to us, EchoStar and possibly EchoStar’s stockholders.

OTHER RISKS
Our parent, EchoStar, is controlled by one principal stockholder who is our Chairman.
Charles W. Ergen, our Chairman, beneficially owns approximately 43.2% of EchoStar’s total equity securities (assuming conversion of only the Class B common stock, par value $.001 per share, of EchoStar (“EchoStar Class B Shares”) held by Mr. Ergen into EchoStar Class A Shares and giving effect to the exercise of options held by Mr. Ergen that are either currently exercisable or may become exercisable within 60 days of March 6, 2017) and possesses approximately 63.6% of the total voting power of all classes of shares (assuming no conversion of the EchoStar Class B Shares and giving effect to the exercise of options held by Mr. Ergen that are either currently exercisable or may become exercisable within 60 days of March 6, 2017).  Mr. Ergen’s beneficial ownership of EchoStar excludes 1,640 shares of EchoStar Class A Shares and 14,493,094 shares of EchoStar Class A Shares issuable upon conversion of shares of EchoStar Class B Shares, in each case, currently held by certain trusts established by Mr. Ergen for the benefit of his family.  These trusts beneficially own approximately 23.5% of EchoStar’s total equity securities (assuming conversion of only the EchoStar Class B Shares held by such trusts into EchoStar Class A Shares) and possess approximately 27.7% of EchoStar’s total voting power of all classes of shares (assuming no conversion of the EchoStar Class B Shares).  Thus, Mr. Ergen has the ability to elect a majority of EchoStar’s directors and to control all other matters requiring the approval of EchoStar’s stockholders.  As a result of Mr. Ergen’s voting power, EchoStar is a “controlled company” as defined in the Nasdaq listing rules and, therefore, is not subject to Nasdaq requirements that would otherwise require EchoStar to have (i) a majority of independent directors; (ii) a nominating committee composed solely of independent directors; (iii) compensation of our executive officers determined by a majority of the independent directors or a compensation committee composed solely of independent directors; and (iv) director nominees selected, or recommended for the Board’s selection, either by a majority of the independent directors or a nominating committee composed solely of independent directors.
 

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We have potential conflicts of interest with DISH Network due to EchoStar and DISH Network’s common ownership.
Questions relating to conflicts of interest may arise between DISH Network and us in a number of areas relating to our past and ongoing relationships.  Areas in which conflicts of interest between DISH Network and us could arise include, but are not limited to, the following:
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Cross officerships, directorships and stock ownership.  We have certain overlap in our directors and Chairman position with DISH Network, which may lead to conflicting interests.  EchoStar’s board of directors includes persons who are officers or members of the board of directors of DISH Network, including Charles W. Ergen, who serves as the Chairman of and is employed by both companies.  Our Chairman, the members of EchoStar’s board of directors and executive officers who overlap with DISH Network also have fiduciary duties to DISH Network’s shareholders.  Therefore, these individuals may have actual or apparent conflicts of interest with respect to matters involving or affecting each company.  For example, there is potential for a conflict of interest when we or DISH Network look at acquisitions and other corporate opportunities that may be suitable for both companies.  In addition, many of EchoStar’s directors and officers own DISH Network stock and options to purchase DISH Network stock, certain of which they acquired or were granted prior to the spin-off of EchoStar from DISH on January 1, 2008 (the “Spin-off”), including Mr. Ergen.  These ownership interests could create actual, apparent or potential conflicts of interest when these individuals are faced with decisions that could have different implications for our company and DISH Network.
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Intercompany agreements with DISH Network.  We and EchoStar have entered into various agreements with DISH Network.  Pursuant to certain agreements, DISH Network and we or EchoStar provide certain professional services to the other for which we and EchoStar or DISH Network, as applicable, pay an amount equal to cost plus a fixed margin.  Certain other intercompany agreements cover matters such as tax sharing and EchoStar’s responsibility for certain liabilities previously undertaken by DISH Network for certain of EchoStar’s businesses.  We and EchoStar have also entered into certain commercial agreements with DISH Network.  The terms of certain of these agreements were established while EchoStar was a wholly-owned subsidiary of DISH Network and were not the result of arm’s length negotiations.  The allocation of assets, liabilities, rights, indemnifications and other obligations between DISH Network and EchoStar under the separation and ancillary agreements EchoStar entered into with DISH Network did not necessarily reflect what two unaffiliated parties might have agreed to.  Had these agreements been negotiated with unaffiliated third parties, their terms may have been more favorable, or less favorable, to EchoStar.  In addition, DISH Network or its affiliates will continue to enter into transactions with EchoStar or its subsidiaries, us or our subsidiaries, or other affiliates.  Although the terms of any such transactions will be established based upon negotiations between DISH Network and us and, when appropriate, subject to the approval of EchoStar’s audit committee and committee of the non-interlocking directors or in certain instances non-interlocking management, there can be no assurance that the terms of any such transactions will be as favorable to us or our subsidiaries or affiliates as may otherwise be obtained in negotiations between unaffiliated third parties.
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Competition for business opportunities.  DISH Network retains its interests in various companies that have subsidiaries or controlled affiliates that own or operate domestic or foreign services that may compete with services offered by our businesses.  In addition, pursuant to: (i) a distribution agreement, DISH Network has the right, but not the obligation, to market, sell and distribute our Hughes segment’s satellite broadband internet service under the dishNET brand which could compete with sales by our Hughes segment and (ii) a master services agreement, DISH Network has the right, but not the obligation, to market, sell, install and distribute our Hughes segment’s satellite broadband internet service and related equipment.  DISH Network also has a distribution agreement with ViaSat, a competitor of our Hughes segment, to sell services similar to those offered by our Hughes segment.  We may also compete with DISH Network when we participate in auctions for spectrum or orbital slots for our satellites.
We may not be able to resolve any potential conflicts of interest with DISH Network and, even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated party. We do not have any agreements not to compete with DISH Network.  However, many of our potential customers who compete with DISH Network have historically perceived us as a competitor due to our affiliation with DISH Network.  There can be no assurance that we will be successful in entering into any commercial relationships with potential customers who are competitors of DISH Network (particularly if we continue to be perceived as affiliated with DISH Network as a result of common ownership, certain shared management services and other arrangements with DISH Network).
We are a wholly owned subsidiary of EchoStar and do not operate as an independent company.
We rely on EchoStar for a substantial portion of our administrative and management functions and services including human resources-related functions, accounting, tax administration, legal, external reporting, treasury administration, internal audit and

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insurance functions, information technology and telecommunications services and other support services.  We do not have systems and resources in place to perform all of these functions or services. Instead, we generally receive these services pursuant to an arrangement between us and EchoStar.  EchoStar in turn receives certain of these services from DISH Network pursuant to a professional services agreement entered into between them.  We anticipate continuing to rely upon DISH Network to provide some of these services.  If our intercompany arrangement with EchoStar were to terminate, or if EchoStar no longer receives certain services from DISH Network, we would need to obtain agreements with third-party service providers or obtain additional internal resources, neither of which may be available on acceptable terms or at all.
Changes in GAAP could adversely affect our reported financial results and may require significant changes to our internal accounting systems and processes.
We prepare our consolidated financial statements in conformity with GAAP. These principles are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the SEC and various bodies formed to interpret and create appropriate accounting principles and guidance.
The FASB is currently working together with the International Accounting Standards Board to converge certain accounting principles and facilitate more comparable financial reporting between companies that are required to follow GAAP and those that are required to follow International Financial Reporting Standards. In connection with this initiative, the FASB issued new accounting standards for revenue recognition and accounting for leases. For information regarding new accounting standards, please refer to Note 2 in the notes to consolidated financial statements included in this prospectus under the heading “New Accounting Pronouncements.” These and other such standards may result in different accounting principles, which may significantly impact our reported results or could result in volatility of our financial results. In addition, we may need to significantly change our customer and vendor contracts, accounting systems and processes. The cost and effect of these changes may adversely impact our results of operations.
RISKS RELATED TO THE NOTES AND THE EXCHANGE OFFER
We have substantial debt outstanding and may incur additional debt.
As of December 31, 2016, our total debt and capital lease obligations (including current portion), including the debt of our subsidiaries, outstanding was approximately $3.66 billion. Our debt levels could have significant consequences, including:
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making it more difficult to satisfy our obligations;
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a dilutive effect on our outstanding equity capital or future earnings;
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increasing our vulnerability to general adverse economic conditions, including changes in interest rates;
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requiring us to devote a substantial portion of our cash to make interest and principal payments on our debt, thereby reducing the amount of cash available for other purposes;
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limiting our financial and operating flexibility in responding to changing economic and competitive conditions;
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limiting our ability to raise additional debt because it may be more difficult for us to obtain debt financing on attractive terms; and
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placing us at a disadvantage compared to our competitors that are less leveraged.
In addition, we may incur substantial additional debt in the future. The terms of the indentures governing the 2011 Notes, the Old Notes and the Notes offered hereby permit us to incur substantial additional debt and allow us to issue additional secured debt under certain circumstances which will also be guaranteed by the guarantors and will share in the Collateral that will secure the Secured Notes and the guarantees thereof, and, in some cases, such debt can be secured by a lien on the Collateral that is pari passu with the lien on certain Collateral securing the Secured Notes. The indentures also allow our foreign subsidiaries to incur additional debt, which would be structurally senior to the Notes. In addition, the indentures do not prevent us from incurring other liabilities that do not constitute indebtedness. See “Description of the Secured Notes” and “Description of the Unsecured Notes.” This may have the effect of reducing the amount of proceeds paid to you. If new debt is added to our current debt levels, the risks we now face could intensify.

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We may be required to raise and refinance indebtedness during unfavorable market conditions.
Our business plans may require that we raise additional debt to capitalize on our business opportunities. Developments in the financial markets have in the past made, and may from time to time in the future make, it more difficult for issuers of high yield indebtedness such as us to access capital markets at reasonable rates. Although we have not been materially impacted by events in the current credit market, we cannot predict with any certainty whether or not we will be impacted in the future by developments in the financial markets that may adversely affect our ability to secure additional financing to support our growth initiatives.
We depend upon our subsidiaries’ earnings to make payments on our indebtedness.
We have substantial debt service requirements that make us vulnerable to changes in general economic conditions. Our indentures governing the 2011 Notes and governing the Old Notes and the Notes offered hereby restrict our and certain of our subsidiaries’ ability to incur additional debt. It may therefore be difficult for us to obtain additional debt if required or desired in order to implement our business strategy.
Since we conduct substantial operations through subsidiaries, our ability to service our debt obligations may depend upon the earnings of our subsidiaries and the payment of funds by our subsidiaries to us in the form of loans, dividends or other payments. We have few assets of significance other than the capital stock of our subsidiaries. Our subsidiaries are separate legal entities. Furthermore, our subsidiaries are not obligated to make funds available to us, and creditors of our subsidiaries will have a superior claim to certain of our subsidiaries’ assets. In addition, our subsidiaries’ ability to make any payments to us will depend on their earnings, the terms of their indebtedness, business and tax considerations and legal restrictions. We cannot assure you that our subsidiaries will be able to pay dividends or that EchoStar or our subsidiaries will be able to otherwise contribute or distribute funds to us in an amount sufficient to pay the principal of or interest on the indebtedness owed by us.
The Secured Notes will rank effectively junior to obligations of HSS and the subsidiary guarantors that are secured by assets that do not constitute Collateral, to the extent of such collateral. As of December 31, 2016, the Old Secured Notes ranked effectively junior to $80.0 million of debt and other obligations secured by assets not constituting Collateral or assets that secure such other debt and other obligations on a higher priority basis. Indebtedness under the Unsecured Notes will be unsecured senior obligations of HSS and the guarantors and rank effectively junior to HSS’ and the guarantors’ existing and future senior secured indebtedness and other obligations to the extent of the collateral securing such debt and other obligations. As of December 31, 2016, the Old Unsecured Notes ranked effectively junior to $1.82 billion of debt and other obligations, including the Old Secured Notes and $990.0 million aggregate principal amount of the 2011 Secured Notes.
The Unsecured Notes will be effectively subordinated to any existing and future secured debt.
The Unsecured Notes are unsecured and will rank equal in right of payment with our existing and future unsecured and unsubordinated senior debt, including the 2011 Unsecured Notes and any Old Unsecured Notes. Our indentures governing the 2011 Notes and governing the Old Notes and the Notes offered hereby permit us to incur significant secured indebtedness and other obligations. The Unsecured Notes will be effectively subordinated to any future secured obligations to the extent of the value of the assets that secure such obligations. As of December 31, 2016, the Old Unsecured Notes ranked effectively junior to $1.82 billion of debt and other obligations, including the Old Secured Notes and $990.0 million aggregate principal amount of the 2011 Secured Notes. In the event of our bankruptcy, liquidation or reorganization or upon acceleration of the Unsecured Notes, payment on the Unsecured Notes could be less, ratably, than on any secured indebtedness. We may not have sufficient assets remaining after payment to our secured creditors to pay amounts due on any or all of the Unsecured Notes then outstanding.
The guarantees of the Notes by our subsidiaries may be subject to challenge.
Our obligations under the Notes will be guaranteed jointly and severally by our domestic subsidiaries that currently guarantee the 2011 Notes and the Old Notes. It is possible that if the creditors of the subsidiary guarantors challenge the subsidiary guarantees as a fraudulent conveyance under relevant federal and state statutes, under certain circumstances (including a finding that a subsidiary guarantor was insolvent at the time its guarantee of the Notes was issued), a court could hold that the obligations of a subsidiary guarantor under a subsidiary guarantee may be voided or are subordinate to other obligations of a subsidiary guarantor. In addition, it is possible that the amount for which a subsidiary guarantor is liable under a subsidiary guarantee may be limited. The measure of insolvency for purposes of the foregoing may vary depending on the law of the jurisdiction that is being applied. Generally, however, a company would be considered insolvent if the sum of its debts is greater than all of its property at a fair valuation or if the present fair saleable value of its assets is less than the amount that will be required to pay its probable liability on its existing debts as they become absolute and mature. The indentures governing the Notes provide that the obligations of the subsidiary guarantors under the subsidiary guarantees will be limited to amounts that

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will not result in the subsidiary guarantees being a fraudulent conveyance under applicable law. See “Description of the Secured Notes—Guarantees” and “Description of the Unsecured Notes—Guarantees.”
Certain subsidiaries are not included as guarantor subsidiaries.
The guarantors of the Notes include only certain of our direct and indirect subsidiaries. Because some of our business is conducted by non-guarantor subsidiaries, our cash flow and our ability to service debt, including our and the guarantor subsidiaries’ ability to pay the interest on and principal of the Notes when due, are dependent to some extent upon interest payments, cash dividends and distributions or other transfers from the non-guarantor subsidiaries. In addition, any payment of interest, dividends, distributions, loans or advances by the non-guarantor subsidiaries to us and to the guarantor subsidiaries, as applicable, could be subject to restrictions on dividends or repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency exchange regulations in the jurisdictions in which those non-guarantor subsidiaries operate. Moreover, payments to us and the guarantor subsidiaries by the non-guarantor subsidiaries will be contingent upon non-guarantor subsidiaries’ earnings. For the year ended December 31, 2016, our non-guarantor subsidiaries accounted for $158.4 million, or 8.8% of our total revenues, $505.1 million, or 7.9%, of our consolidated assets and $181.0 million, or 3.9%, of our consolidated liabilities (in each case before intercompany eliminations and before giving effect to the Share Exchange).
Our non-guarantor subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the Notes or the guarantees or to make any funds available therefore, whether by dividends, loans, distributions or other payments. Any right that we or the subsidiary guarantors have to receive any assets of any of the non-guarantor subsidiaries upon the liquidation or reorganization of those subsidiaries, and the consequent rights of holders of notes to realize proceeds from the sale of any of those subsidiaries’ assets, will be effectively subordinated to the claims of that subsidiary’s creditors, including trade creditors and holders of debt of that subsidiary.
Although the indentures governing the Notes include covenants that restrict us from taking certain actions, the terms of these covenants include important exceptions which you should review carefully before investing in the Notes.
Notwithstanding the covenants in the indentures governing the Notes, we expect that we will continue to be able to incur substantial additional indebtedness and to make significant investments, distributions and other restricted payments without significant restrictions under the indentures governing the Notes, including actions which may adversely affect our ability to perform our obligations under the indentures governing the Notes. We are able to incur additional indebtedness based on a multiple of our Consolidated Cash Flow (as defined in “Description of the Secured Notes” and “Description of the Unsecured Notes” below) for the most recent four fiscal quarters, and we are able to make restricted payments (including dividends and investments) in an amount that is based in part upon our cumulative Consolidated Cash Flow since June 1, 2011. We analyze our available funds and the use of funds from time to time, including the payment of dividends to our parent. We have not paid dividends to our parent in the past five years. We may from time to time make cash distributions or dividends to our parent. Our use of funds, including any payment of dividends or distributions to our parent, may change in the future depending on, among other things, our expectations as to future cash needs as well as our operations, earnings and general financial condition, as well as other internal and external factors that we may deem relevant. See “Description of the Secured Notes—Certain Covenants” and “Description of the Unsecured Notes—Certain Covenants.”
We may be unable to repay or repurchase the Notes upon a change of control.
There is no sinking fund with respect to the Notes, and the entire outstanding principal amount of the Notes will become due and payable on the maturity date. If we experience a Change of Control, as defined in the indentures governing the Notes, you may require us to repurchase all or a portion of your Notes prior to maturity. See “Description of the Secured Notes—Change of Control Offer” and “Description of the Unsecured Notes—Change of Control Offer.” We may not have sufficient funds or be able to arrange for additional financing to repay the Notes at maturity or to repurchase Notes tendered to us following a change of control.
The terms of our 2011 Notes and Old Notes may require us to offer to repurchase those securities upon a change of control, limiting the amount of funds available to us, if any, to repurchase the Notes. If we have insufficient funds to redeem all Notes that holders tender for purchase upon the occurrence of a change of control, and we are unable to raise additional capital, an event of default could occur under the indentures governing the Notes. An event of default could cause any other debt that we have to become automatically due, further exacerbating our financial condition and diminishing the value and liquidity of the Notes. We cannot assure you that additional capital would be available to us on acceptable terms, or at all.

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There may be no public market for the Notes.
The Notes will be a new issue of securities with no established trading market. We cannot assure you that any market for the Notes will develop or, if it does develop, that it will be maintained. If a trading market is established, various factors could have a material adverse effect on the trading of the Notes, including fluctuations in the prevailing interest rates. We do not intend to apply for a listing of the Notes on any securities exchange.
ADDITIONAL RISKS RELATED TO THE SECURED NOTES
The Collateral securing the Secured Notes is subject to priority liens held by holders of indebtedness secured by priority liens and holders of other indebtedness secured by permitted prior liens. If there is a default, such Collateral may not be sufficient to repay both the holders of such priority liens and the holders of the Secured Notes.
The indentures governing the 2011 Notes, the Old Notes and the Notes permit us to issue and permit to exist additional indebtedness, including without limitation, indebtedness secured by Permitted Liens, that may be secured on a first-priority or equal and ratable basis by liens on the Collateral securing the Secured Notes. The holders of indebtedness secured by priority liens on the Collateral will be entitled to receive proceeds from any realization of their Collateral to repay their obligations in full before the holders of the Secured Notes will be entitled to any recovery from the Collateral. Thus, there can be no assurance that holders of the Secured Notes will realize any proceeds from the Collateral.
The Secured Notes will rank effectively junior to obligations of HSS and the subsidiary guarantors that are secured by assets that do not constitute Collateral. As of December 31, 2016, the Old Secured Notes ranked effectively junior to $80.0 million of debt and other obligations secured by assets not constituting Collateral or assets that secure such other debt and other obligations on a higher priority basis.
State law may limit the ability of the Collateral Agent and the noteholders to foreclose on the real property and improvements included in the Collateral.
The Secured Notes will be secured by, among other things, liens on owned and, to the extent applicable, certain leased or otherwise held real property and related improvements. State law may limit the ability of the Collateral Agent (as defined in “Description of the Secured Notes” below) or the noteholders to foreclose on the improved real property Collateral located in those states. The perfection, enforceability and foreclosure of mortgage liens against real property interests that secure debt obligations such as the Secured Notes are generally governed by the laws of those states where the Collateral is located. In addition, these laws may impose procedural requirements for foreclosure different from and necessitating a longer time period for completion than the requirements for foreclosure of security interests in personal property. Debtors may have the right to reinstate defaulted debt (even if it is has been accelerated) before the foreclosure date by paying the past due amounts and a right of redemption after foreclosure. Governing laws may also impose security first and one form of action rules which can affect the ability to foreclose or the timing of foreclosure on real and personal property collateral regardless of the location of the Collateral and may limit the right to recover a deficiency following a foreclosure.
The Collateral Agent and the noteholders also may be limited in their ability to enforce a breach of the “no liens” covenant. Some decisions of state courts have placed limits on a lender‘s ability to accelerate debt secured by real property upon breach of covenants prohibiting the creation of certain junior liens or leasehold estates, and the Collateral Agent and the noteholders may need to demonstrate that enforcement is reasonably necessary to protect against impairment of the lender’s security or to protect against an increased risk of default. Although the foregoing court decisions may have been preempted, at least in part, by certain federal laws, the scope of such preemption, if any, is uncertain. Accordingly, a court could prevent the trustee and the holders of the Secured Notes from declaring a default and accelerating the notes by reason of a breach of this covenant, which could have a material adverse effect on the ability of such holders to enforce the covenant.
We may not be able to grant you a collateral interest in our leased satellites.

We currently lease certain of our satellites and may in the future lease additional satellites. In connection with the 2011 Secured Notes, under the Security Agreement (as defined in “Description of the Secured Notes” below), to the extent permitted by the Communications Laws (as defined in “Description of the Secured Notes” below), we agreed to use our commercially reasonable efforts to have the owners of leased satellites consent to our granting a security interest in our rights as lessee under such leases to the Collateral Agent for the benefit of the holders of the 2011 Secured Notes prior to 180 days after the escrow release date (June 8, 2011) relating to the issuance of the 2011 Secured Notes. We have also agreed, so long as the 2011 Secured Notes are outstanding, to use commercially reasonable efforts to obtain consents with respect to new leases within 180 days after entering into a new lease for a satellite. We have not received any consents to date regarding any lease for a satellite under the indenture governing the 2011 Secured Notes and no leases form part of the collateral securing the Secured Notes, Old

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Secured Notes and/or the 2011 Secured Notes. We cannot assure that the owners of such satellites will consent to our grant of a security interest in such leases to the Collateral Agent for the benefit of the noteholders. In the event they do not consent to our grant of such a security interest, the noteholders will not have a collateral interest in such leased satellite.
The value of the Collateral securing the Secured Notes may not be sufficient to satisfy our obligations under the Secured Notes or to secure post-petition interest under U.S. federal bankruptcy law.
The value of the Collateral is subject to fluctuations based on factors that include general economic conditions, the actual fair market value of the Collateral at such time, the timing and the manner of the sale and availability of buyers and similar factors. By its nature, some or all of the Collateral may be illiquid and may have no readily ascertainable market value. We cannot assure you that the Collateral will be saleable or, if saleable, that there will not be substantial delays in its liquidation. Further, to the extent that liens, rights and easements granted to third parties encumber assets located on property owned by us or the guarantors or constitute senior or pari passu or subordinate liens on the Collateral, those third parties have or may exercise rights and remedies with respect to the property subject to such encumbrances (including rights to require marshalling of assets) that could adversely affect the value of the Collateral located at a particular site and the ability of the Collateral Agent to realize or foreclose on the Collateral at that site. Further, the Collateral Agent‘s rights to foreclose on certain Collateral consisting of equity interests in our first-tier foreign subsidiaries will be subject to local law, and the Collateral Agent may not be able to realize or foreclose on such Collateral due to foreign law restrictions.
As a result, liquidating the Collateral may not produce proceeds in an amount sufficient to pay any amounts due on the Old Secured Notes, the Secured Notes, the 2011 Secured Notes and any Additional Secured Obligations (as defined in “Description of the Secured Notes” below). In the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding, the bankruptcy trustee, the debtor-in-possession or competing creditors could possibly assert that the fair market value of the Collateral on the date of the bankruptcy filing was less than the then-current principal amount of the Old Secured Notes, the Secured Notes, the 2011 Secured Notes and any Additional Secured Obligations. If a bankruptcy court determines that the Secured Notes are under-collateralized, a claim in the bankruptcy proceeding with respect to a Secured Note would be bifurcated between a secured claim and unsecured claim, and the unsecured claim would not be entitled to the benefits of security in the Collateral and may not receive other — adequate protection, including any post-petition interest, under U.S. federal bankruptcy laws. See “U.S. federal bankruptcy laws may significantly impair noteholders’ ability to realize value from the Collateral.”
In addition, in the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding against us or the guarantors, noteholders will be entitled to post-petition interest under Title 11 of the U.S. Code (the “Bankruptcy Code”) only if the value of their security interest in the Collateral is greater than their pre-bankruptcy claim. Further, if any payments of post-petition interest were made at the time of such a finding of under-collateralization, such payments could be recharacterized by the bankruptcy court as a reduction of the principal amount of the secured claim with respect to the Old Secured Notes, the Secured Notes, the 2011 Secured Notes and any Additional Secured Obligations.
We therefore cannot assure you of the value of the Collateral or of the amount of gross proceeds that would be received upon a sale or liquidation of the Collateral.
The ability of the Trustee to foreclose on certain of the collateral securing the Secured Notes may be limited by U.S. law.
The ability to foreclose on, or to exercise certain rights or remedies with respect to, certain of the Collateral requires prior approval from the FCC to the extent it would result in an assignment or change of control of the FCC Licenses (as defined herein) of the combined company or any subsidiary (whether as a matter of law or fact). Equity and voting rights in certain of the collateral, and control over such collateral, must remain with the combined company even in the event of default until the FCC gives its consent to the exercise of security holder rights by a purchaser at a public or private sale of such Collateral or to the exercise of such rights by a receiver, trustee, conservator, or other agent duly appointed pursuant to applicable law. There is no assurance that any such required FCC approval can be obtained on a timely basis or at all. In addition, applicable foreign ownership restrictions could prevent non-United States citizens from foreclosing on certain of the collateral securing the Secured Notes.
The pledge of the capital stock, other securities and similar items of our subsidiaries that secure the Secured Notes will automatically be released from the lien on them and no longer constitute Collateral for so long as the pledge of such capital stock or such other securities would require the filing of separate financial statements with the SEC for that subsidiary.
The Secured Notes and the guarantees of the Secured Notes will be secured by a pledge of the stock of some of our subsidiaries. Under the SEC regulations in effect as of the issue date of the Secured Notes, if the par value, book value as

34


carried by us or market value (whichever is greatest) of the capital stock, other securities or similar items of a subsidiary pledged as part of the Collateral is greater than or equal to 20% of the aggregate principal amount of the Secured Notes then outstanding, such a subsidiary would be required to provide separate financial statements to the SEC. Therefore, the indenture and the collateral documents provide that any capital stock and other securities of any of our subsidiaries will be excluded from the Collateral for so long as the pledge of such capital stock or other securities to secure the Secured Notes would cause such subsidiary to be required to file separate financial statements with the SEC pursuant to Rule 3-16 of Regulation S-X (as in effect from time to time).
As a result, holders of the Secured Notes could lose a portion or all of their security interest in the capital stock or other securities of those subsidiaries during such period. It may be more difficult, costly and time-consuming for holders of the Secured Notes to foreclose on the assets of a subsidiary than to foreclose on its capital stock or other securities, so the proceeds realized upon any such foreclosure could be significantly less than those that would have been received upon any sale of the capital stock or other securities of such subsidiary. See “Description of the Secured Notes — Security.”
Foreclosing on any of the Collateral located outside the United States may be difficult due to the laws of certain jurisdictions.
Some of the Collateral securing the Secured Notes may be located outside of the United States. We cannot assure you that the Collateral or the guarantors will be located in a jurisdiction having effective or favorable foreclosure procedures and lien priorities. Any foreclosure proceedings could be subject to lengthy delays, resulting in increased custodial costs, deterioration in the condition of the Collateral and substantial reduction of the value of such Collateral. In addition, some jurisdictions may not provide a legal remedy for the enforcement of mortgages on the Collateral. Such laws may vary significantly from jurisdiction to jurisdiction. Furthermore, all or some of those laws and procedures may be less favorable to mortgagees than those in other jurisdictions and may be less favorable than those applicable in the United States. The costs of enforcement in foreign jurisdictions can be high and can include fees based on the face amount of the mortgage(s) being enforced. Foreign court proceedings can also be slow and have unexpected procedural hurdles. Priorities accorded lien claims and mortgages can vary in foreign jurisdictions, and some jurisdictions prefer certain local claimants to foreign claimants. Consequently, there are no assurances that the Collateral Agent will be able to enforce any one or more of the mortgages covering any of the Collateral that is located outside the United States.
The Collateral securing the Secured Notes is shared with the Old Secured Notes and the 2011 Secured Notes and may be diluted under certain circumstances.
The Secured Notes are secured by security interests granted to the Collateral Agent in the Collateral equally and ratably with the $990 million in aggregate principal amount outstanding of the 2011 Secured Notes and with any Old Secured Notes that remain outstanding after this offering. In addition, the indentures governing the 2011 Secured Notes, the Old Secured Notes and the Secured Notes permit us to issue additional senior secured indebtedness, including other indebtedness that may be secured on a pari passu basis with the Secured Notes, subject to our compliance with the restrictive covenants in the indenture and the agreements governing our other indebtedness at the time we issue or incur such additional senior secured indebtedness. As a result, the Collateral securing the Secured Notes would be shared by any such other indebtedness, which would dilute the value of the Collateral compared to the aggregate principal amount of indebtedness issued or incurred such that there can be no assurance that the holders of the Secured Notes will realize any proceeds from the Collateral.
There are circumstances other than repayment or discharge of the Secured Notes under which the Collateral securing the Secured Notes will be released automatically, without your consent or the consent of the Collateral Agent.
Under various circumstances, Collateral securing the Secured Notes will be released automatically, including: (a) upon a sale, transfer or other disposal of such Collateral in a transaction not prohibited under the indenture; (b) with respect to Collateral held by a guarantor, upon the release of the guarantor from its guarantee in accordance with the indenture; and (c) otherwise as permitted under the security documents.
The indenture also permits us to designate one or more of our Restricted Subsidiaries that is a guarantor of the Secured Notes as an Unrestricted Subsidiary. If we designate a subsidiary guarantor as an Unrestricted Subsidiary for purposes of the indenture, all of the liens on any Collateral owned by that subsidiary or any of its subsidiaries and any guarantees of the Secured Notes by that subsidiary or any of its subsidiaries will be released under the indenture if so permitted pursuant to the terms of the indenture.

35


The rights of holders of the Secured Notes in the Collateral may be adversely affected by the failure to perfect security interests in the Collateral and other issues generally associated with the realization of security interests in the Collateral.
Applicable law requires that a security interest in certain tangible and intangible assets can only be properly perfected and its priority retained through certain actions undertaken by the secured party. The senior liens in all Collateral from time to time owned by us or the guarantors and/or the liens in all Collateral from time to time owned by us or the guarantors may not be perfected with respect to the Secured Notes and the guarantees thereof if the Collateral Agent has not taken the actions necessary to perfect any of those liens upon or prior to the issuance of the Secured Notes. The inability or failure of the Collateral Agent to take all actions necessary to create properly perfected security interests in the Collateral may result in the loss of the priority of the security interest for the benefit of the noteholders to which they would have been otherwise entitled.
In addition, applicable law requires that certain property and rights acquired after the grant of a general security interest can only be perfected at the time such property and rights are acquired and identified. We and the guarantors will have limited obligations to perfect the security interest of the holders of the Secured Notes in specified Collateral. We cannot assure you that the Collateral Agent will monitor, or that we or the guarantors will inform the Collateral Agent of, the future acquisition of property and rights that constitute Collateral, and that the necessary action will be taken to properly perfect the security interest in such after-acquired Collateral. The Collateral Agent for the Secured Notes has no obligation to monitor the acquisition of additional property or rights that constitute Collateral or the perfection of any security interest. Such failure may result in the loss of the security interest in the Collateral or the priority of the security interest in favor of the Secured Notes and the guarantees thereof against third parties.
The security interest of the Collateral Agent will be subject to practical challenges generally associated with the realization of security interests in the Collateral. For example, the Collateral Agent may need to obtain the consent of a third party to obtain or enforce a security interest in an asset. We cannot assure you that the Collateral Agent will be able to obtain any such consent or that the consents of any third parties will be given when required to facilitate a foreclosure on such assets. As a result, the Collateral Agent may not have the ability to foreclose upon those assets and the value of the Collateral may significantly decrease.
In addition, because a portion of the Collateral will consist of pledges of 65% of the capital stock of certain of our foreign subsidiaries, the validity of those pledges under local law, if applicable, and the ability of the holders of the Secured Notes to realize upon that Collateral under local law, to the extent applicable, may be limited by such local law, which limitations may or may not affect the liens securing the Secured Notes.
The Collateral is subject to casualty risks.
Certain losses, including losses resulting from terrorist acts, may be either uninsurable or not economically insurable, in whole or in part. As a result, we cannot assure you that the insurance proceeds, if any, will compensate us fully for our losses. If there is a total or partial loss of any of the Collateral securing the Secured Notes, we cannot assure you that any insurance proceeds received by us will be sufficient to satisfy all the secured obligations, including the Secured Notes. We currently do not carry in-orbit insurance on any of our satellites, other than for SPACEWAY 3, EchoStar XVI, EchoStar XVII, and EchoStar XIX for which we carry launch plus one year in-orbit insurance. We often do not use commercial insurance to mitigate the potential financial impact of launch or in-orbit failures.
Any future note guarantees or additional liens on Collateral provided after the Secured Notes are issued could also be avoided by a trustee in bankruptcy.
The indenture governing the Secured Notes provides that certain of our future subsidiaries will guarantee the Secured Notes and secure the guarantees thereof with liens on their assets. The indenture also requires us and the guarantors to grant liens on certain assets that are acquired after the Secured Notes are issued. Any future Secured Note guarantee or additional lien in favor of the Collateral Agent for the benefit of the holders of the Secured Notes might be avoidable by the grantor (as debtor-in-possession) or by its trustee in bankruptcy or other third parties if certain events or circumstances exist or occur. For instance, if the entity granting the future note guarantee or additional lien were insolvent at the time of the grant and if such grant were made within 90 days before that entity commenced a bankruptcy proceeding (or one year before commencement of a bankruptcy proceeding if the creditor that benefited from the note guarantee or lien is an “insider” under the Bankruptcy Code), and the granting of the future note guarantee or additional lien enabled the noteholders to receive more than they would if the grantor were liquidated under Chapter 7 of the Bankruptcy Code, then such note guarantee or lien could be avoided as a preferential transfer.

36


U.S. federal bankruptcy laws may significantly impair noteholders’ ability to realize value from the Collateral.
The right of the Collateral Agent to repossess and dispose of the Collateral securing the Secured Notes upon the occurrence of an event of default under the indenture governing the Secured Notes or any instrument governing future indebtedness is likely to be significantly impaired by U.S. federal bankruptcy law if bankruptcy proceedings were to be commenced by or against us or any guarantor prior to or possibly even after the Collateral Agent has repossessed and disposed of the Collateral. Under the Bankruptcy Code, a secured creditor is prohibited from repossessing its security from a debtor in a bankruptcy proceeding, or from disposing of security repossessed from such debtor, without the approval of the bankruptcy court. Moreover, the Bankruptcy Code permits the debtor to continue to retain and to use the Collateral, and the proceeds, products, rents or profits of the Collateral, even after the debtor is in default under the applicable debt instruments, provided that the secured creditor is given “adequate protection.” The meaning of the term “adequate protection” may vary according to circumstances, but it is intended in general to protect the value of the secured creditor‘s interest in the Collateral and may include cash payments or the granting of additional security, if and at such times as the court in its discretion determines, for any diminution in the value of the Collateral as a result of the stay of repossession or disposition or any use of the Collateral by the debtor during the pendency of the bankruptcy proceeding. In view of the broad discretionary powers of a bankruptcy court, we cannot predict (1) how long payments on the Secured Notes could be delayed following commencement of a bankruptcy proceeding, (2) whether or when the Collateral Agent would repossess or dispose of the Collateral or (3) whether or to what extent noteholders would be compensated for any delay in payment of loss of value of the Collateral through the requirements of “adequate protection.” Furthermore, in the event the bankruptcy court determines that the value of the Collateral is not sufficient to repay all amounts due on the Secured Notes, noteholders would have “undersecured claims.” U.S. federal bankruptcy laws do not permit the payment or accrual of interest, costs and attorneys’ fees for “undersecured claims” during the debtor’s bankruptcy proceeding.
The rights of the holders of the Secured Notes with respect to the Collateral will be subject to the terms of the security documents.
The rights of the holders of the Secured Notes with respect to the Collateral will be subject to the terms of the security documents.  The security documents allow us to remain in possession of, retain exclusive control over, freely operate, and collect, invest and dispose of any income from, the collateral securing the notes and the guarantees, except, under certain circumstances. Pursuant to the terms of the security documents, if an Event of Default (as referred to in the security documents) has occurred and is continuing, the Collateral Agent will only be permitted, subject to applicable law, to exercise remedies and sell the Collateral at the direction of the holders of a majority in the aggregate principal amount of the outstanding Old Secured Notes, Secured Notes, 2011 Secured Notes and any additional pari passu lien obligations incurred after the issuance of the Secured Notes that are made subject to the terms of the security documents.   
The imposition of certain permitted liens could materially adversely affect the value of the Collateral and there are certain assets that are excluded from the Collateral.
The Collateral securing the Secured Notes may also be subject to liens permitted under the terms of the Indenture, whether arising on or after the date the Secured Notes are issued. The existence of any permitted liens could materially adversely affect the value of the Collateral that could be realized by the holders of the Notes as well as the ability of the collateral agent to realize or foreclose on such Collateral. In addition, the imposition of certain permitted liens will cause the relevant assets to become Excluded Assets (as defined in the “Description of the Secured Notes” below), which will not secure the Secured Notes. In addition, certain assets, including Excluded Assets, will be excluded from Collateral. See “Description of the Secured Notes — Security” for the definition of “Excluded Assets.”

37


SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables present the selected historical consolidated financial data of HSS and its subsidiaries at the dates and for the periods indicated. We derived these selected historical consolidated financial data from our audited consolidated financial statements. This selected historical consolidated financial data does not include any adjustments that may be necessary as a result of the Share Exchange.

You should read this data in conjunction with, and it is qualified by reference to, the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the notes thereto included elsewhere in this prospectus.

 
For the Years Ended December 31,

 
2016
 
2015
 
2014
 
2013
 
2012

 
(dollars in thousands)
Revenue:
 


 


 


 


 


Services and other revenue – DISH Network
 
$
449,547

 
$
518,853

 
$
487,985

 
$
291,924

 
$
211,560

Services and other revenue – other
 
1,103,127

 
1,095,249

 
1,077,101

 
987,023

 
941,804

Equipment revenue - DISH Network
 
8,840

 
10,752

 
31,943

 
69,119

 
23,757

Equipment revenue - other
 
238,279

 
212,278

 
210,948

 
194,825

 
255,636

Total revenue
 
1,799,793

 
1,837,132

 
1,807,977

 
1,542,891

 
1,432,757

Costs and Expenses:
 


 


 


 


 


Cost of sales – services and other (exclusive of depreciation and amortization)
 
517,957

 
525,471

 
535,918

 
502,134

 
480,040

Cost of sales – equipment (exclusive of depreciation and amortization)
 
204,753

 
195,537

 
209,022

 
237,103

 
232,690

Selling, general and administrative expenses
 
281,048

 
276,616

 
264,610

 
239,264

 
222,986

Research and development expenses
 
31,170

 
26,377

 
20,192

 
21,845

 
21,264

Depreciation and amortization
 
414,133

 
430,127

 
452,138

 
403,476

 
352,367

Impairments of long-lived assets
 
—

 
—

 
—

 
34,664

 
22,000

Total costs and expenses
 
1,449,061

 
1,454,128

 
1,481,880

 
1,438,486

 
1,331,347

Operating income
 
350,732

 
383,004

 
326,097

 
104,405

 
101,410

Other Income (Expense):
 


 


 


 


 


Interest income
 
12,598

 
4,416

 
3,234

 
7,487

 
2,212

Interest expense, net of amounts capitalized
 
(187,198
)
 
(169,150
)
 
(191,258
)
 
(197,062
)
 
(153,955
)
Other, net
 
19,348

 
(6,922
)
 
4,604

 
14,822

 
27,212

Total other income (expense)
 
(155,252
)
 
(171,656
)
 
(183,420
)
 
(174,753
)
 
(124,531
)
Income (loss) before income taxes
 
195,480

 
211,348

 
142,677

 
(70,348
)
 
(23,121
)
Income tax benefit (provision), net
 
(73,759
)
 
(72,364
)
 
(40,095
)
 
35,525

 
10,895

Net income (loss)
 
121,721

 
138,984

 
102,582

 
(34,823
)
 
(12,226
)
Less: Net income (loss) attributable to noncontrolling interests
 
1,706

 
1,617

 
1,389

 
876

 
(35
)
Net income (loss) attributable to HSS
 
$
120,015

 
$
137,367

 
$
101,193

 
$
(35,699
)
 
$
(12,191
)


38


 
 
For the Years Ended December 31,
Balance Sheet Data:
 
2016
 
2015
 
2014 (1)
 
2013
 
2012
 
 
(dollars in thousands)
Cash, cash equivalents and current marketable securities
 
$
2,258,887

 
$
636,333

 
$
620,549

 
$
280,569

 
$
178,641

Total assets (2) (3)
 
$
6,381,534

 
$
4,571,279

 
$
4,625,522

 
$
3,996,936

 
$
4,166,261

Total debt and capital lease obligations (3)
 
$
3,655,447

 
$
2,185,272

 
$
2,326,101

 
$
2,373,997

 
$
2,434,387

Total stockholders’ equity
 
$
1,755,023

 
$
1,541,640

 
$
1,369,597

 
$
1,024,818

 
$
1,059,911

(1)
In March 2014, we issued the Tracking Stock to DISH Network in exchange for five satellites and $11.4 million in cash.  Please see Note 3 in the notes to our consolidated financial statements included elsewhere in this prospectus.  As a result, our results of operations for the years ended December 31, 2016, 2015 and 2014 are not comparable to our results of operations for the years ended December 31, 2013 and 2012.
(2)
In 2015, we prospectively adopted Accounting Standard Update No. 2015-17, Balance Sheet Classification of Deferred Taxes.  As a result, our total assets as of December 31, 2016 and 2015 are not comparable to our total assets as reported in prior years.
(3)
In March 2016, we retrospectively adopted Accounting Standard Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. As a result, our total assets and total debt and capital lease obligations for all dates presented reflect the application of this Update.

 
 
For the Years Ended December 31,
Other Data (unaudited)
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
(dollars in thousands)
Ratio of earnings to fixed charges (1)
 
1.75

 
2.06

 
1.75

 
—

 
—

Deficiency of earnings to fixed charges (1)
 
$
—

 
$
—

 
$
—

 
$
(63,493
)
 
$
(64,249
)
(1)
For purposes of computing the ratio of earnings to fixed charges, earnings consist of earnings before income taxes, plus fixed charges. Fixed charges consist of interest incurred on all indebtedness, including capitalized interest and the imputed interest component of rental expense under noncancelable operating leases.



39


USE OF PROCEEDS
The exchange offer is intended to satisfy our obligations under the registration rights agreement we entered into in connection with the issuance of the Old Notes. We will not receive any cash proceeds from the issuance of the Notes in the exchange offer. In consideration for issuing the Notes as contemplated in this prospectus, we will receive in exchange the Old Notes in like principal amount. We will cancel and retire the Old Notes surrendered in exchange for the Notes in the exchange offer. As a result, the issuance of the Notes will not result in any increase or decrease in our indebtedness.

CAPITALIZATION
The following table presents our cash position plus consolidated capitalization as of December 31, 2016. This table is derived from, and should be read in conjunction with, our audited consolidated financial statements and the related notes thereto for the year ended December 31, 2016 that are included as part of this prospectus.
 
 
As of December 31, 2016
 
 
Actual
 
 
(in thousands)
Cash and cash equivalents and marketable investment securities
 
$
2,258,887

Debt
 
 
6 1/2% Senior Secured Notes due 2019
 
$
990,000

7 5/8% Senior Unsecured Notes due 2021
 
900,000

5.250% Senior Secured Notes due 2026
 
750,000

6.625% Senior Unsecured Notes due 2026
 
750,000

Unamortized debt issuance costs
 
(31,821)

Capital lease obligations
 
297,268

Total debt and capital lease obligations (including current portion)
 
3,655,447

Total shareholders’ equity
 
1,755,023

Total capitalization
 
$
5,410,470



40


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context indicates otherwise, as used herein, the terms “we,” “us,” “HSS”, the “Company” and “our” refer to Hughes Satellite Systems Corporation and its subsidiaries. References to “$” are to United States dollars.  The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes to our financial statements included elsewhere in this prospectus.  This management’s discussion and analysis is intended to help provide an understanding of our financial condition, changes in our financial condition and our results of operations.  Many of the statements in this management’s discussion and analysis are forward-looking statements that involve assumptions and are subject to risks and uncertainties that are often difficult to predict and beyond our control.  Actual results could differ materially from those expressed or implied by such forward-looking statements.  See “Disclosure Regarding Forward-Looking Statements” in this prospectus for further discussion.  For a discussion of additional risks, uncertainties and other factors that could impact our results of operations or financial condition, see the caption “Risk Factors” in this prospectus.  Further, such forward-looking statements speak only as of the date of this prospectus and we undertake no obligation to update them except as required by law.

EXECUTIVE SUMMARY

HSS is a holding company and a subsidiary of EchoStar.  We were formed as a Colorado corporation in March 2011.  We are a global provider of satellite service operations, video delivery solutions, broadband satellite technologies and broadband services for home and small office customers. We deliver innovative network technologies, managed services, and various communications solutions for enterprise and government customers. We currently operate in two business segments, which are differentiated primarily by their operational focus:  Hughes and EchoStar Satellite Services (“ESS”). These segments are consistent with the way decisions regarding the allocation of resources are made, as well as how operating results are reviewed by our chief operating decision maker (“CODM”), who for HSS, is the Company’s Chief Executive Officer.
On January 31, 2017, our parent company EchoStar Corporation and certain of our and its subsidiaries entered into a Share Exchange Agreement. Pursuant to the Share Exchange Agreement, which was consummated on February 28, 2017, among other things, EchoStar Corporation and its subsidiaries received all of the shares of the EchoStar Tracking Stock and HSS Tracking Stock that were issued as a result of the Satellite and Tracking Stock Transaction (as defined and described in Note 3 in the notes to our consolidated financial statements included elsewhere in this prospectus) in exchange for 100% of the equity interests of certain subsidiaries of EchoStar Corporation that held substantially all of its EchoStar Technologies segment businesses. Following consummation of the Share Exchange, the EchoStar Tracking Stock and the HSS Tracking Stock were retired and all agreements, arrangements and policy statements with respect to, and terms of, such Echostar Tracking Stock and HSS Tracking Stock terminated and are of no further effect.
Highlights from our financial results are as follows:
Consolidated Results of Operations for the Year Ended December 31, 2016
•
Revenue of $1.80 billion
•
Operating income of $350.7 million
•
Net income of $121.7 million
•
Net income attributable to HSS of $120.0 million
•
EBITDA of $782.5 million (see reconciliation of this non-GAAP measure on page 48)

41


Consolidated Financial Condition as of December 31, 2016
•
Total assets of $6.38 billion
•
Total liabilities of $4.62 billion
•
Total shareholders’ equity of $1.76 billion
•
Cash, cash equivalents and current marketable investment securities of $2.26 billion
HUGHES SEGMENT
Our Hughes segment is a global provider of broadband satellite technologies and broadband services for home and small office customers. We deliver network technologies, managed services, equipment, and communications solutions for domestic and international consumers and enterprise and government customers. In addition, our Hughes segment provides and installs gateway and terminal equipment and provides satellite ground segment systems and terminals for other satellite systems, including mobile system operators.
We continue to focus our efforts on growing our Hughes segment consumer revenue by maximizing utilization of our existing satellites while planning for new satellites to be launched. Our consumer revenue growth depends on our success in adding new subscribers and driving higher average revenue per subscriber across our wholesale and retail channels.
Our Hughes segment currently uses its three owned satellites, the SPACEWAY 3 satellite, the EchoStar XVII satellite and the EchoStar XIX satellite, and additional satellite capacity acquired from multiple third-party providers, to provide satellite broadband internet access and communications services to our customers. In December 2016, EchoStar launched the EchoStar XIX satellite, a next-generation, high throughput geostationary satellite, which will provide significant capacity for continued subscriber growth.  The EchoStar XIX satellite employs a multi-spot beam, bent pipe Ka-band architecture and will provide additional capacity for the Hughes broadband services to our customers in North America and added capacity in Mexico and certain Latin American countries and is expected to add capability for aeronautical, enterprise and international broadband services.  Capital expenditures associated with the construction and launch of the EchoStar XIX satellite have been incurred by EchoStar. EchoStar contributed the EchoStar XIX satellite to us in February 2017.
In addition to our broadband consumer service offerings, our Hughes segment also provides network technologies, managed services, hardware, equipment and satellite services to large enterprise and government customers globally. Examples of such customers include lottery agencies, gas station operators and companies with multi-branch networks that rely on satellite or terrestrial networks for critical communication across wide geographies. Most of our enterprise customers have contracts with us for the services they purchase.
Developments toward the launch of next-generation satellite systems including LEO and geostationary systems could provide additional opportunities to drive the demand for our network equipment and services. The growth of our enterprise and equipment businesses relies heavily on global economic conditions and the competitive landscape for pricing relative to competitors and alternative technologies.
We continue our efforts to grow our consumer satellite services business outside of the U.S. In April 2014, we entered into a satellite services agreement pursuant to which Eutelsat do Brasil provides us Ka-band capacity into Brazil on the EUTELSAT 65 West A satellite for a 15-year term.  That satellite was launched in March 2016 and we began delivering high-speed consumer satellite broadband services in Brazil in July 2016. In September 2015, we entered into satellite services agreements pursuant to which affiliates of Telesat Canada (“Telesat”) will provide to us the Ka-band capacity on a satellite to be located at the 63 degree west longitude orbital location for a 15-year term. We expect the satellite to be launched in the second quarter of 2018 and plan to provide service in additional markets across South America once that capacity is available for commercial use.

We are tracking closely the developments in next-generation satellite businesses, and we are seeking to utilize our services, technologies and expertise to find new commercial opportunities for our business. In June 2015, EchoStar made an equity investment in WorldVu Satellites Limited (“OneWeb”), a global LEO satellite service company. In addition, our Hughes segment entered into an agreement with OneWeb to provide certain equipment and services in connection with the ground systems for OneWeb’s LEO satellites.

42


As of December 31, 2016, 2015 and 2014, our Hughes segment had approximately 1,036,000, 1,035,000 and 977,000 broadband subscribers, respectively.  These broadband subscribers include customers that subscribe to our HughesNet broadband services through retail, wholesale and small/medium enterprise service channels.  Gross subscriber additions increased by approximately 19,000 in the fourth quarter of 2016 when compared to the third quarter of 2016 primarily due to an increase in additions in our retail channel due to the launch of our broadband service in Brazil in the second quarter of 2016 offset partially by a decrease in additions in our wholesale channel due to our lack of free capacity due to satellite beams servicing certain areas reaching capacity.  Our average monthly subscriber churn percentage for the fourth quarter of 2016 decreased as compared to the third quarter of 2016.  As a result of higher gross subscriber additions and a decrease in churn, net subscribers for the quarter ended December 31, 2016 increased by approximately 30,000 when compared to the third quarter of 2016 with increases in retail and decreases in wholesale subscribers. Subscriber additions and churn include only subscribers through our retail and wholesale channels.
As of December 31, 2016 and 2015, our Hughes segment had approximately $1.52 billion and $1.44 billion, respectively, of contracted revenue backlog.  We define Hughes contracted revenue backlog as our expected future revenue under customer contracts that are non-cancelable, excluding agreements with customers in our consumer market. The increase in contracted revenue backlog is primarily due to an increase in customer contracts from our international markets as a result of future commitments to provide satellite services and gateway and network management services on the EchoStar XIX satellite. Of the total contracted revenue backlog as of December 31, 2016, we expect to recognize approximately $436.5 million of revenue in 2017.
ECHOSTAR SATELLITE SERVICES SEGMENT
Our ESS segment is a global provider of satellite service operations and video delivery solutions. We operate our business using our owned and leased in-orbit satellites.  We provide satellite services on a full-time and occasional-use basis primarily to DISH Network (our largest customer), Dish Mexico, U.S. government service providers, internet service providers, broadcast news organizations, programmers and private enterprise customers.
We depend on DISH Network for a significant portion of the revenue for our ESS segment, and we expect that DISH Network will continue to be the primary source of revenue for our ESS segment.  Therefore, the results of operations of our ESS segment are linked to changes in DISH Network’s satellite capacity requirements.  DISH Network’s capacity requirements have been driven by the addition of new channels and migration of programming to high-definition TV and video on demand services. The services that we provide to DISH Network are critical to its nationwide delivery of content to its customers across the U.S. While we expect to continue to provide satellite services to DISH Network, its satellite capacity requirements may change for a variety of reasons, including its ability to construct and launch its own satellites.  Any termination or reduction in the services we provide to DISH Network may cause us to have unused capacity on our satellites and require that we aggressively pursue alternative sources of revenue for this business.
In August 2014, we entered into: (i) a construction contract with Airbus Defence and Space SAS for the construction of the EchoStar 105/SES-11 satellite with C-band, Ku-band and Ka-band payloads; (ii) an agreement with SES Satellite Leasing Limited for the procurement of the related launch services; and (iii) an agreement with SES Americom Inc. (“SES”) pursuant to which we will transfer the title to the C-band and Ka-band payloads to SES Satellite Leasing Limited at launch and transfer the title to the Ku-band payload to SES following in-orbit testing of the satellite. Simultaneously, SES will provide to us satellite service on the entire Ku-band payload on the EchoStar 105/SES-11 satellite for an initial ten-year term, with an option for us to renew the agreement on a year-to-year basis. Due to anomalies experienced by our launch provider, the expected launch date of the EchoStar 105/SES-11 satellite has been delayed.  We currently expect to launch the EchoStar 105/SES-11 satellite in the second or third quarter of 2017. Our Ku-band payload on the EchoStar 105/SES-11 satellite will replace and augment our current capacity on the AMC-15 satellite. As a result of this launch delay, we have incurred and expect to incur additional costs related to the lease of the AMC-15 satellite.
Revenue growth in our ESS segment depends largely on our ability to continuously make additional satellite capacity available for sale.  Once the EchoStar 105/SES-11 satellite is launched and placed into operation, we expect periodic revenue from the satellite to exceed the amount currently generated by the AMC-15 satellite. As a result of the launch delay, we expect a delay in revenue generated from the EchoStar 105/SES-11 satellite.
We continue to pursue expanding our business offerings by providing value added services such as telemetry, tracking, and control services to third parties, which leverages the ground monitoring networks and personnel currently within our ESS segment.

43


As of December 31, 2016 and 2015, our ESS segment had contracted revenue backlog attributable to satellites currently in orbit of approximately $1.16 billion and $1.41 billion, respectively.  The decrease is primarily driven by the fixed-term nature of the satellite services agreements with DISH Network.  Of the total contracted revenue backlog as of December 31, 2016, we expect to recognize approximately $365.1 million of revenue in 2017.
NEW BUSINESS OPPORTUNITIES
Our industry is evolving with the increase in worldwide demand for broadband internet access for information, entertainment and commerce. In addition to fiber and wireless systems, other technologies such as geostationary high throughput satellites, LEO networks, balloons, and High Altitude Platform Systems have begun to play significant roles in enabling global broadband access, networks and services. We intend to use our expertise, technologies, capital, investments, global presence, relationships and other capabilities to continue to provide broadband internet systems, equipment, networks and services for information, entertainment and commerce in North America and internationally for consumers, enterprises and governments.
We continue to selectively explore opportunities to pursue partnerships, joint ventures and strategic acquisitions, domestically and internationally, that we believe may allow us to increase our existing market share, expand into new markets and new customers, broaden our portfolio of services, products and intellectual property, and strengthen our relationships with our customers. We may allocate significant resources for long-term initiatives that may not have a short or medium-term or any positive impact on our revenue, results of operations, or cash flow.

44


RESULTS OF OPERATIONS
Basis of Presentation

The following discussion and analysis of our consolidated results of operations is presented on a historical basis.

Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
 
 
For the Years Ended December 31,
 
Variance
Statements of Operations Data (1) 
 
2016
 
2015
 
Amount
 
%
 
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
 
Services and other revenue - DISH Network
 
$
449,547

 
$
518,853

 
(69,306
)
 
(13.4
)
Services and other revenue - other
 
1,103,127

 
1,095,249

 
7,878

 
0.7

Equipment revenue - DISH Network
 
8,840

 
10,752

 
(1,912
)
 
(17.8
)
Equipment revenue - other
 
238,279

 
212,278

 
26,001

 
12.2

Total revenue
 
1,799,793

 
1,837,132

 
(37,339
)
 
(2.0
)
Costs and Expenses:
 
 
 
 
 
 
 
 
Cost of sales - services and other
 
517,957

 
525,471

 
(7,514
)
 
(1.4
)
% of Total services and other revenue
 
33.4
%
 
32.6
%
 
 
 
 
Cost of sales - equipment
 
204,753

 
195,537

 
9,216

 
4.7

% of Total equipment revenue
 
82.9
%
 
87.7
%
 
 
 
 
Selling, general and administrative expenses
 
281,048

 
276,616

 
4,432

 
1.6

% of Total revenue
 
15.6
%
 
15.1
%
 
 
 
 
Research and development expenses
 
31,170

 
26,377

 
4,793

 
18.2

% of Total revenue
 
1.7
%
 
1.4
%
 
 
 
 
Depreciation and amortization
 
414,133

 
430,127

 
(15,994
)
 
(3.7
)
Total costs and expenses
 
1,449,061

 
1,454,128

 
(5,067
)
 
(0.3
)
Operating income
 
350,732

 
383,004

 
(32,272
)
 
(8.4
)
Other Income (Expense):
 
 
 
 
 
 
 
 
Interest income
 
12,598

 
4,416

 
8,182

 
*

Interest expense, net of amounts capitalized
 
(187,198
)
 
(169,150
)
 
(18,048
)
 
10.7

Loss from partial redemption of debt
 
—

 
(5,044
)
 
5,044

 
(100.0
)
Gains (losses) and impairment on marketable investment securities, net
 
6,995

 
(12,602
)
 
19,597

 
*

Other, net
 
12,353

 
10,724

 
1,629

 
15.2

Total other expense, net
 
(155,252
)
 
(171,656
)
 
16,404

 
(9.6
)
Income before income taxes
 
195,480

 
211,348

 
(15,868
)
 
(7.5
)
Income tax provision, net
 
(73,759
)
 
(72,364
)
 
(1,395
)
 
1.9

Net income
 
121,721

 
138,984

 
(17,263
)
 
(12.4
)
Less: Net income attributable to noncontrolling interests
 
1,706

 
1,617

 
89

 
5.5

Net income attributable to HSS
 
$
120,015

 
$
137,367

 
$
(17,352
)
 
(12.6
)
Other Data:
 
 
 
 
 
 
 
 
EBITDA (2)
 
$
782,507

 
$
804,592

 
$
(22,085
)
 
(2.7
)
Subscribers, end of period
 
1,036,000

 
1,035,000

 
1,000

 
0.1

*    Percentage is not meaningful.
(1)    An explanation of our key metrics is included under the heading “Explanation of Key Metrics and Other Items.”
(2)
A reconciliation of EBITDA to “Net income,” the most directly comparable GAAP measure in the accompanying financial statements, is included on page 48. For further information on our use of EBITDA, see “Explanation of Key Metrics and Other Items.”


45


Services and other revenue — DISH Network.  “Services and other revenue — DISH Network” totaled $449.5 million for the year ended December 31, 2016, a decrease of $69.3 million, or 13.4%, compared to the same period in 2015.
Services and other revenue — DISH Network from our Hughes segment for the year ended December 31, 2016 increased by $4.0 million, or 4.3%, to $98.5 million compared to the same period in 2015.  The increase was primarily attributable to an increase in the average revenue per subscriber as a result of an increase in wholesale subscribers receiving higher end service plans pursuant to our Distribution Agreement with dishNET Satellite Broadband L.L.C. (“dishNET”), partially offset by a decrease in wholesale subscribers.
Services and other revenue — DISH Network from our ESS segment for the year ended December 31, 2016 decreased by $73.9 million, or 17.5%, to $349.6 million compared to the same period in 2015.  The decrease was mainly due to a decrease of $74.1 million in revenue as a result of the termination of the satellite services provided to DISH Network from the EchoStar I and EchoStar VIII satellites effective in November 2015.
Services and other revenue — other.  “Services and other revenue — other” totaled $1.10 billion for the year ended December 31, 2016, an increase of $7.9 million, or 0.7%, compared to the same period in 2015.
Services and other revenue — other from our Hughes segment for the year ended December 31, 2016 increased by $16.7 million, or 1.6%, to $1.05 billion compared to the same period in 2015.  The increase was primarily attributable to an increase of $28.6 million in sales of broadband services to our domestic consumer customers as a result of an increase in retail subscribers and the average revenue per subscriber. This increase was partially offset by a decrease of $10.8 million of broadband services to our international enterprise customers attributable to an unfavorable foreign exchange impact and non-renewal of certain service contracts.
Services and other revenue — other from our ESS segment for the year ended December 31, 2016 decreased by $9.0 million, or 13.4%, to $58.1 million compared to the same period in 2015.  The decrease was primarily attributable to a decrease in sales of transponder services due to a decrease in the number of transponders available for use in providing service as our lease of the AMC-16 satellite ended in February 2016.
Equipment revenue — DISH Network.  “Equipment revenue — DISH Network” totaled $8.8 million for the year ended December 31, 2016, a decrease of $1.9 million, or 17.8%, compared to the same period in 2015.  The decrease in revenue was primarily due to the decrease in the unit sales of broadband equipment to dishNET.
Equipment revenue — other.  “Equipment revenue — other” totaled $238.3 million for the year ended December 31, 2016, an increase of $26.0 million, or 12.2%, compared to the same period in 2015.  The increase was mainly due to an increase of $40.7 million in sales of broadband equipment to our domestic enterprise and government customers, partially offset by a decrease of $14.7 million in revenue from our international and telecom systems customers from our Hughes segment.
Cost of sales — services and other.  “Cost of sales — services and other” totaled $518.0 million for the year ended December 31, 2016, a decrease of $7.5 million, or 1.4%, compared to the same period in 2015. 
Cost of sales — services and other from our Hughes segment for the year ended December 31, 2016 decreased by $2.2 million, or 0.5%, to $454.5 million compared to the same period in 2015.  The decrease was primarily attributable to the decrease of Ku-band space segment costs as customers either terminated services or migrated to the Ka-band platform offset by the increase in service costs as a result of the increase in sales of broadband services to our domestic consumer customers.
Cost of sales — services and other from our ESS segment for the year ended December 31, 2016 decreased by $6.0 million, or 8.6%, to $64.2 million compared to the same period in 2015.  The decrease was primarily due to a decrease in cost of sales of transponder services as a result of a decrease in the number of leased transponders available for use in providing service as our lease of the AMC-16 satellite ended in February 2016.
Cost of sales — equipment.  “Cost of sales — equipment” totaled $204.8 million for the year ended December 31, 2016, an increase of $9.2 million, or 4.7%, compared to the same period in 2015.  The increase was primarily attributable to an increase of $20.3 million in equipment costs related to the increase in sales volume of broadband equipment to our domestic enterprise and government customers, partially offset by a decrease of $12.3 million in equipment costs related to the decrease in sales to our international and telecom systems customers from our Hughes segment.

46


Selling, general and administrative expenses.  “Selling, general and administrative expenses” totaled $281.0 million for the year ended December 31, 2016, an increase of $4.4 million, or 1.6%, compared to the same period in 2015.  The increase was mainly due to a $3.8 million increase in marketing and promotional costs in our Hughes segment.
Research and development expenses.  “Research and development expenses” totaled $31.2 million for the year ended December 31, 2016, an increase of $4.8 million, or 18.2%, compared to the same period in 2015.  The increase was related to an increase in research and development expense of $4.8 million in our Hughes segment.  The Company’s research and development activities vary based on the activity level and scope of other engineering and customer related development contracts.
Depreciation and amortization.  “Depreciation and amortization” expenses totaled $414.1 million for the year ended December 31, 2016, a decrease of $16.0 million, or 3.7%, compared to the same period in 2015.  The decrease was primarily related to certain of our fully amortized other intangible assets in our Hughes segment and the fully depreciated EchoStar IX satellite as of October 2015 in our ESS segment.
Interest income.  “Interest income” totaled $12.6 million for the year ended December 31, 2016, an increase of $8.2 million compared to the same period in 2015.  The increase was primarily attributable to the increase in our short term investments from proceeds from the issuance of long-term debt in the third quarter of 2016 and an increase in yield percentage.
Interest expense, net of amounts capitalized.  “Interest expense, net of amounts capitalized” totaled $187.2 million for the year ended December 31, 2016, an increase of $18.0 million, or 10.7%, compared to the same period in 2015.  The increase was mainly attributable to an increase of $38.1 million related to the issuance of the Old Notes in the third quarter of 2016. The increase was partially offset by an increase in capitalized interest of $14.3 million related to the construction of the EchoStar XIX, EchoStar XXI and EchoStar 105/SES-11 satellites, and payments for satellite services on the EUTELSAT 65 West A and 63 West satellites, a decrease of $3.2 million relating to the partial redemption of the outstanding principal amount of HSS’ 6 1/2 % Senior Secured Notes due 2019 (the “2011 Secured Notes”) in the second quarter of 2015, and a decrease of $2.8 million relating to the accounting impact of two of our satellites that are treated as capital leases.
Loss from partial redemption of debt.  “Loss from partial redemption of debt” totaled zero for the year ended December 31, 2016. In 2015, the $5.0 million loss was related to the partial redemption of the 2011 Secured Notes in the second quarter of 2015 which included a $3.3 million redemption premium and a $1.7 million write off of related unamortized financing costs.
Gains (losses) and impairment on marketable investment securities, net.  “Gains (losses) and impairment on marketable investment securities, net” totaled $7.0 million in gains for the year ended December 31, 2016 compared to $12.6 million in losses for the same period in 2015.  The change of $19.6 million was primarily due to an increase of $10.5 million in gains on our trading securities in 2016, an other than temporary impairment loss of $6.1 million on certain strategic equity securities in 2015, and an increase of $3.0 million in realized gains on our securities classified as available-for-sale in 2016.
Other, net.  “Other, net” totaled $12.4 million in income for the year ended December 31, 2016, an increase of $1.6 million, or 15.2%, compared to the same period in 2015.  The increase was primarily related to a $13.5 million for a provision recorded in the first half of 2015 in connection with FCC regulatory fees, which was reversed in the first quarter of 2016 and an unfavorable foreign exchange impact of $3.7 million in 2015. The increases were partially offset by a decrease of $8.8 million related to a protective put associated with our trading securities in 2016 when compared to the same period in 2015, a $4.5 million non-recurring reduction of the capital lease obligation for the AMC-15 and AMC-16 satellites recorded in the first quarter of 2015 as a result of anomalies that previously affected the operation of these satellites, and a gain of $1.7 million on the exchange of accounts receivable for certain trading securities in the second quarter of 2015.
Income tax provision, net.  Income tax expense was $73.8 million for the year ended December 31, 2016, an increase of $1.4 million, or 1.9%, compared to the same period in 2015.  Our effective income tax rate was 37.7% for the year ended December 31, 2016, compared to 34.2% for the same period in 2015.  The variation in our current year effective tax rate from the U.S. federal statutory rate was primarily due to state income taxes, partially offset by research and experimentation tax credits and valuation allowances.  The variation in our effective tax rate from the U.S. federal statutory rate for the same period in 2015 was primarily due to research and experimentation tax credits.
Net income attributable to HSS.  Net income attributable to HSS was $120.0 million for the year ended December 31, 2016, a decrease of $17.4 million, or 12.6%, compared to the same period in 2015.  The decrease was primarily due to (i) a decrease of $39.0 million in gross margin, which we define as total revenue less total cost of sales, (ii) an increase of $38.1 million in interest expense related to the issuance of the Old Notes in the third quarter of 2016, (iii) an increase in research and

47


development expense of $4.8 million, (iv) a decrease of $8.8 million related to a protective put associated with our trading securities in 2016 when compared to the same period in 2015, (v) $4.5 million non-recurring reduction of the capital lease obligation for the AMC-15 and AMC-16 satellites recorded in the first quarter of 2015, (vi) an increase of $4.4 million in selling, general and administrative expense and (vii) an increase in income tax expense of $1.4 million in 2016. The decreases were partially offset by (i) an increase of $19.6 million in gains on marketable investments, net, (ii) a decrease of $16.0 million in depreciation and amortization expense related to certain of our fully amortized other intangible assets in our Hughes segment and the fully depreciated EchoStar IX satellite as of October 2015 in our ESS segment, (iii) higher capitalized interest of $14.3 million related to the construction of the EchoStar XIX, EchoStar XXI and EchoStar 105/SES-11 satellites, and payments for satellite services on the EUTELSAT 65 West A and 63 West satellites, (iv) $13.5 million for a provision recorded in the first half of 2015 in connection with FCC regulatory fees which was reversed in the first quarter of 2016, (v) an increase of $8.2 million in interest income primarily attributable to the increase in our short term investments from proceeds from the issuance of long-term debt in the third quarter of 2016 and an increase in yield percentage, (vi) a $5.0 million loss related to the partial redemption of the 2011 Secured Notes in the second quarter of 2015, (vii) an unfavorable foreign exchange impact of $3.7 million in 2015 and (viii) a decrease in interest expense of $3.2 million relating to the partial redemption of the outstanding principal amount of the 2011 Secured Notes in the second quarter of 2015.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”).  EBITDA was $782.5 million for the year ended December 31, 2016, a decrease of $22.1 million, or 2.7%, compared to the same period in 2015.  The decrease was primarily due to (i) a decrease of $39.0 million in gross margin, (ii) a decrease of $8.8 million related to a protective put associated with our trading securities in 2016 when compared to the same period in 2015, (iii) an increase of $4.8 million related to research and development, (iv) a $4.5 million non-recurring reduction of the capital lease obligation for the AMC-15 and AMC-16 satellites recorded in the first quarter of 2015 as a result of anomalies that previously affected the operation of these satellites and (v) an increase of $4.4 million in selling, general and administrative expense. The decreases were partially offset by (i) an increase of $19.6 million in gains (losses) on marketable investments, net, (ii) $13.5 million for a provision recorded in the first half of 2015 in connection with FCC regulatory fees, which was reversed in the first quarter of 2016, (iii) a $5.0 million loss related to the partial redemption of the 2011 Secured Notes in the second quarter of 2015, and (iv) an unfavorable foreign exchange impact of $3.7 million in 2015. EBITDA is a non-GAAP financial measure and is described under Explanation of Key Metrics and Other Items below.  The following table reconciles EBITDA to Net income, the most directly comparable GAAP measure in the accompanying financial statements.
 
 
For the Years Ended December 31,
 
Variance
 
 
2016
 
2015
 
Amount
 
%
 
 
(Dollars in thousands)
Net income
 
$
121,721

 
$
138,984

 
$
(17,263
)
 
(12.4
)
 
 
 
 
 
 
 
 
 
Interest income and expense, net
 
174,600

 
164,734

 
9,866

 
6.0

Income tax provision
 
73,759

 
72,364

 
1,395

 
1.9

Depreciation and amortization
 
414,133

 
430,127

 
(15,994
)
 
(3.7
)
Net income attributable to noncontrolling interests
 
(1,706
)
 
(1,617
)
 
(89
)
 
5.5

EBITDA
 
$
782,507

 
$
804,592

 
$
(22,085
)
 
(2.7
)


48


Segment Operating Results and Capital Expenditures
Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
 
 
Hughes
 
EchoStar
Satellite Services
 
All
Other and Eliminations
 
Consolidated Total
 
 
(In thousands)
For the Year Ended December 31, 2016
 
 
 
 
 
 
 
 
Total revenue
 
$
1,392,361

 
$
407,660

 
$
(228
)
 
$
1,799,793

Capital expenditures
 
$
322,362

 
$
58,925

 
$
—

 
$
381,287

EBITDA
 
$
427,802

 
$
339,496

 
$
15,209

 
$
782,507

 
 
 
 
 
 
 
 
 
For the Year Ended December 31, 2015
 
 
 
 
 
 
 
 
Total revenue
 
$
1,347,340

 
$
490,591

 
$
(799
)
 
$
1,837,132

Capital expenditures
 
$
285,499

 
$
101,215

 
$
—

 
$
386,714

EBITDA
 
$
396,684

 
$
412,607

 
$
(4,699
)
 
$
804,592

 
 
 
 
 
 
 
 
 

Hughes Segment
 
 
For the Years
Ended December 31,
 
Variance
 
 
2016
 
2015
 
Amount
 
%
 
 
(Dollars in thousands)
Total revenue
 
$
1,392,361

 
$
1,347,340

 
$
45,021

 
3.3
Capital expenditures
 
$
322,362

 
$
285,499

 
$
36,863

 
12.9
EBITDA
 
$
427,802

 
$
396,684

 
$
31,118

 
7.8

Revenue
Hughes segment total revenue for the year ended December 31, 2016 increased by $45.0 million, or 3.3%, compared to the same period in 2015.  The increase was primarily due to an increase of $40.7 million in sales of broadband equipment to our domestic enterprise and government customers and an increase of $28.6 million in sales of broadband services to our domestic consumer customers.  These increases were partially offset by a decrease of $25.5 million in revenue of broadband equipment and services to our international and telecom systems customers.
Capital Expenditures
Hughes segment capital expenditures for the year ended December 31, 2016 increased by $36.9 million, or 12.9%, compared to the same period in 2015, primarily due to an increase in expenditures on the 63 West satellite. The increase was partially offset by a decrease in capital expenditures on satellite ground infrastructures related to the EchoStar XIX and EchoStar XXI satellites. Capital expenditures associated with the construction and launch of the EchoStar XIX satellite are included in “All Other and Eliminations” in our segment reporting.
EBITDA
Hughes segment EBITDA for the year ended December 31, 2016 was $427.8 million, an increase of $31.1 million, or 7.8%, compared to the same period in 2015.  The increase was primarily attributable to a $37.9 million increase in total gross margin and an unfavorable foreign exchange impact of $3.6 million in 2015. These increases were partially offset by an increase of $4.8 million in research and development expenses and an increase of $3.8 million in marketing and promotional costs.

49


EchoStar Satellite Services Segment
 
 
For the Years
Ended December 31,
 
Variance
 
 
2016
 
2015
 
Amount
 
%
 
 
(Dollars in thousands)
Total revenue
 
$
407,660

 
$
490,591

 
$
(82,931
)
 
(16.9
)
Capital expenditures
 
$
58,925

 
$
101,215

 
$
(42,290
)
 
(41.8
)
EBITDA
 
$
339,496

 
$
412,607

 
$
(73,111
)
 
(17.7
)

Revenue
ESS segment total revenue for the year ended December 31, 2016 decreased by $82.9 million, or 16.9%, compared to the same period in 2015, primarily due to a decrease of $74.1 million in revenue as a result of the termination of the satellite services provided to DISH Network from the EchoStar I and EchoStar VIII satellites effective in November 2015 and a decrease of $9.0 million primarily attributable to a decrease in sales of transponder services.
Capital Expenditures
ESS segment capital expenditures for the year ended December 31, 2016 decreased by $42.3 million, or 41.8%, compared to the same period in 2015, primarily related to a decrease in expenditures on the EchoStar 105/SES-11 satellite.
EBITDA
ESS segment EBITDA for the year ended December 31, 2016 was $339.5 million, a decrease of $73.1 million, or 17.7%, compared to the same period in 2015.  The decrease in EBITDA for our ESS segment was primarily due to a decrease of $76.9 million in gross margin and $4.5 million non-recurring reduction of the capital lease obligation for the AMC-15 and AMC-16 satellites recorded in the first quarter of 2015 as a result of anomalies that previously affected the operation of these satellites. The decrease in EBITDA was partially offset by $7.5 million for a provision recorded in the first half of 2015 in connection with FCC regulatory fees, which was reversed in the first quarter of 2016.

50


Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
 
 
For the Years Ended December 31,
 
Variance
Statements of Operations Data (1) 
 
2015
 
2014
 
Amount
 
%
 
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
 
Services and other revenue - DISH Network
 
$
518,853

 
$
487,985

 
30,868

 
6.3

Services and other revenue - other
 
1,095,249

 
1,077,101

 
18,148

 
1.7

Equipment revenue - DISH Network
 
10,752

 
31,943

 
(21,191
)
 
(66.3
)
Equipment revenue - other
 
212,278

 
210,948

 
1,330

 
0.6

Total revenue
 
1,837,132

 
1,807,977

 
29,155

 
1.6

Costs and Expenses:
 
 
 
 
 
 
 
 
Cost of sales - services and other
 
525,471

 
535,918

 
(10,447
)
 
(1.9
)
% of Total services and other revenue
 
32.6
%
 
34.2
%
 
 
 
 
Cost of sales - equipment
 
195,537

 
209,022

 
(13,485
)
 
(6.5
)
% of Total equipment revenue
 
87.7
%
 
86.1
%
 
 
 
 
Selling, general and administrative expenses
 
276,616

 
264,610

 
12,006

 
4.5

% of Total revenue
 
15.1
%
 
14.6
%
 
 
 
 
Research and development expenses
 
26,377

 
20,192

 
6,185

 
30.6

% of Total revenue
 
1.4
%
 
1.1
%
 
 
 
 
Depreciation and amortization
 
430,127

 
452,138

 
(22,011
)
 
(4.9
)
Total costs and expenses
 
1,454,128

 
1,481,880

 
(27,752
)
 
(1.9
)
Operating income
 
383,004

 
326,097

 
56,907

 
17.5

Other Income (Expense):
 
 
 
 
 
 
 
 
Interest income
 
4,416

 
3,234

 
1,182

 
36.5

Interest expense, net of amounts capitalized
 
(169,150
)
 
(191,258
)
 
22,108

 
(11.6
)
Loss from partial redemption of debt
 
(5,044
)
 
—

 
(5,044
)
 
*

Gains (losses) and impairment on marketable investment securities, net
 
(12,602
)
 
(32
)
 
(12,570
)
 
*

Other, net
 
10,724

 
4,636

 
6,088

 
*

Total other expense, net
 
(171,656
)
 
(183,420
)
 
11,764

 
(6.4
)
Income before income taxes
 
211,348

 
142,677

 
68,671

 
48.1

Income tax provision, net
 
(72,364
)
 
(40,095
)
 
(32,269
)
 
80.5

Net income
 
138,984

 
102,582

 
36,402

 
35.5

Less: Net income attributable to noncontrolling interests
 
1,617

 
1,389

 
228

 
16.4

Net income attributable to HSS
 
$
137,367

 
$
101,193

 
$
36,174

 
35.7

Other Data:
 
 
 
 
 
 
 
 
EBITDA (2)
 
$
804,592

 
$
781,450

 
$
23,142

 
3.0

Subscribers, end of period
 
1,035,000

 
977,000

 
58,000

 
5.9

*    Percentage is not meaningful.
(1)    An explanation of our key metrics is included under the heading “Explanation of Key Metrics and Other Items.”
(2)
A reconciliation of EBITDA to “Net income,” the most directly comparable GAAP measure in the accompanying financial statements, is included on page 54. For further information on our use of EBITDA, see “Explanation of Key Metrics and Other Items.”


51


Services and other revenue — DISH Network.  “Services and other revenue — DISH Network” totaled $518.9 million for the year ended December 31, 2015, an increase of $30.9 million, or 6.3%, compared to the same period in 2014.
 
Services and other revenue — DISH Network from our Hughes segment for the year ended December 31, 2015 increased by $13.7 million, or 16.9%, to $94.4 million compared to the same period in 2014. The increase was primarily attributable to an increase in wholesale subscribers receiving services pursuant to our Distribution Agreement with dishNET.
 
Services and other revenue — DISH Network from our ESS segment for the year ended December 31, 2015 increased by $16.2 million, or 4.0%, to $423.5 million compared to the same period in 2014. The increase was mainly due to an increase of $26.9 million in revenue recognized from certain satellite services provided to DISH Network for the five satellites transferred to us from DISH Network as part of the Satellite and Tracking Stock Transaction. See Note 3 in the notes to consolidated financial statements included in this prospectus for further discussion related to the Satellite and Tracking Stock Transaction. The increase was partially offset by a decrease of $9.0 million in services provided to DISH Network on the EchoStar VIII and EchoStar XII satellites.

Services and other revenue — other.  “Services and other revenue — other” totaled $1.10 billion for the year ended December 31, 2015, an increase of $18.1 million, or 1.7%, compared to the same period in 2014.

Services and other revenue — other from our Hughes segment for the year ended December 31, 2015 increased by $26.2 million, or 2.6%, to $1.03 billion compared to the same period in 2014. The increase was primarily attributable to an increase of $54.2 million in sales of broadband services to our domestic consumer markets, partially offset by a decrease of $24.7 million of broadband services to our international customers, primarily due to weakening foreign exchange rates in certain markets.
 
Services and other revenue — other from our ESS segment for the year ended December 31, 2015 decreased by $10.0 million, or 13.0%, to $67.1 million compared to the same period in 2014. The decrease was primarily attributable to a decrease in sales of transponder services in 2015 compared to the same period in 2014 due to a decrease in transponders available for sale.

Equipment revenue — DISH Network.  “Equipment revenue — DISH Network” totaled $10.8 million for the year ended December 31, 2015, a decrease of $21.2 million, or 66.3%, compared to the same period in 2014. The decrease was primarily due to the decrease in the volume of unit sales of broadband equipment to dishNET. Sales of broadband equipment to dishNET have been decreasing as a result of a decrease in the unit sales of broadband equipment to dishNET.

Equipment revenue — other.  “Equipment revenue — other” totaled $212.3 million for the year ended December 31, 2015, an increase of $1.3 million, or 0.6%, compared to the same period in 2014. The increase was mainly due to an increase of $5.8 million in sales of broadband equipment to our international customers and domestic enterprise market, partially offset by a decrease of $5.5 million in sales of broadband equipment to our domestic consumer market and government projects.

Cost of sales — services and other.  “Cost of sales — services and other” totaled $525.5 million for the year ended December 31, 2015, a decrease of $10.4 million, or 1.9%, compared to the same period in 2014. The decrease in our Hughes segment was primarily attributable to a decrease of $19.2 million in service costs of our broadband services provided to our international customers primarily due to lower in-country costs denominated in local currency and a decrease of $3.7 million in the cost of sales related to our domestic broadband services due to the decrease of third party space segment costs as customers either terminated services or migrated to our platform. These decreases were partially offset by an increase of $13.5 million in cost of sales of our EchoStar Satellite Services segment primarily related to the commencement of the AMC-15 and AMC-16 satellite operating leases in the fourth quarter of 2014 and the first quarter of 2015, respectively.

Cost of sales — equipment.  Cost of sales — equipment” totaled $195.5 million for the year ended December 31, 2015, a decrease of $13.5 million, or 6.5%, compared to the same period in 2014. The decrease was primarily attributable to a decrease in equipment costs related to the decrease in sales volume of broadband equipment to DISH Network related to our Distribution Agreement with dishNET, partially offset by an increase in the cost of sales of broadband equipment to our domestic enterprise market.


52


Selling, general and administrative expenses. “Selling, general and administrative expenses” totaled $276.6 million for the year ended December 31, 2015, an increase of $12.0 million, or 4.5%, compared to the same period in 2014. The increase was mainly due to a $4.7 million increase in marketing and promotional expenses primarily in our Hughes segment, a $3.0 million expense related to other general and administrative expenses, and a $2.5 million increase in other personnel expenses.
 
Research and development expenses. “Research and development expenses” totaled $26.4 million for the year ended December 31, 2015, an increase of $6.2 million, or 30.6%, compared to the same period in 2014. The increase was primarily related to an increase in research and development expense of $6.2 million in our Hughes segment. The Company’s research and development activities vary based on the activity level and scope of other engineering and customer related development contracts.
 
Depreciation and amortization. “Depreciation and amortization” expenses totaled $430.1 million for the year ended December 31, 2015, a decrease of $22.0 million, or 4.9%, compared to the same period in 2014. The decrease was primarily attributable to a decrease in depreciation expense of $18.5 million relating to the fully depreciated EchoStar VIII and EchoStar XII satellites, a decrease of $10.4 million in amortization expense from certain of our fully amortized other intangible assets, and a decrease in depreciation expense of $3.5 million relating to the expiration of the capital lease for the AMC-15 satellite in December 2014. The decreases were partially offset by increases in depreciation of $7.9 million from our EchoStar Satellite Services segment, primarily due to the depreciation of the five satellites we received from DISH Network as part of the Satellite and Tracking Stock Transaction.
 
Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized” totaled $169.2 million for the year ended December 31, 2015, a decrease of $22.1 million, or 11.6%, compared to the same period in 2014. The decrease was primarily due to higher capitalized interest of $13.7 million related to the construction of the EchoStar XIX, EchoStar XXI, EchoStar 105/SES-11 and EUTELSAT 65 West A satellites, and a decrease in interest expense of $7.7 million relating to the partial redemption of $110.0 million of the outstanding principal amount of our 2011 Secured Notes in the second quarter of 2015, the expiration of capital leases for the AMC-15 and AMC-16 satellites, and interest expense relating to two of our satellites that are accounted for as capital leases.
 
Loss from partial redemption of debt. “Loss from partial redemption of debt” totaled $5.0 million for the year ended December 31, 2015, which was due to the loss recorded on the partial redemption of the 2011 Secured Notes in the second quarter of 2015. The $5.0 million loss from the partial redemption of the 2011 Secured Notes included a $3.3 million redemption premium and a $1.7 million write off of related unamortized financing costs.
 
Gains (losses) and impairment on marketable investment securities, net. “Gains (losses) and impairment on marketable investment securities, net” totaled $12.6 million in losses for the year ended December 31, 2015, an increase in loss of $12.6 million compared to the same period in 2014. The increase in loss was primarily due to an increase of $6.4 million in unrealized holding losses on our trading securities and an other than temporary impairment loss of $6.1 million on a strategic equity security in our available-for-sale securities portfolio.
 
Other, net. “Other, net” totaled $10.7 million in income for the year ended December 31, 2015 compared to $4.6 million in income for the same period in 2014, an increase of $6.1 million. The increase in income was primarily related to a $4.8 million gain on an instrument related to our trading securities, a $4.5 million reduction of the capital lease obligation for the AMC-15 and AMC-16 satellites in the first quarter of 2015 and a $3.4 million increase in equity in earnings of unconsolidated affiliate in 2015. These increases were offset partially by a loss of $6.8 million attributable to FCC regulatory fees.

Income tax provision, net. Income tax expense was $72.4 million for the year ended December 31, 2015, compared to $40.1 million for the same period in 2014. Our effective income tax rate was 34.2% for the year ended December 31, 2015, compared to 28.1% for the same period in 2014. The variation in our current year effective tax rate from the U.S. federal statutory rate was primarily due to research and experimentation tax credits. The variation in our effective tax rate from the U.S. federal statutory rate for the same period in 2014 was primarily due to research and experimentation tax credits and lower state effective tax rate.
 
Net income attributable to HSS. Net income attributable to HSS was $137.4 million for the year ended December 31, 2015, an increase of $36.2 million, or 35.7%, compared to the same period in 2014. The increase was primarily attributable to an increase in operating income, including depreciation and amortization, of $56.9 million, and a decrease in interest expense of $22.1 million due to an increase in capitalization of interest expense associated with the construction of the EchoStar XIX,

53


EchoStar XXI, EchoStar 105/SES-11 and EUTELSAT 65 West A satellites, and a decrease in interest expense relating to the partial redemption of the 2011 Secured Notes, the expiration of capital leases for the AMC-15 and AMC-16 satellites, and interest expense relating to two of our satellites that are accounted for as capital leases. These increases were partially offset by an increase in income tax expense of $32.3 million, and other-than temporary impairment loss of $6.1 million on a strategic equity security, offset partially by a $4.8 million gain on an instrument related to our trading securities, and a loss of $5.0 million from the partial redemption of the 2011 Secured Notes.

Earnings before interest, taxes, depreciation and amortization (“EBITDA”). EBITDA was $804.6 million for the year ended December 31, 2015, an increase of $23.1 million, or 3.0%, compared to the same period in 2014. Gross margin, which we define as total revenue less total cost of sales, increased by $53.1 million. There was also a $4.8 million gain on an instrument related to our trading securities, as well as a $4.5 million reduction of the capital lease obligation for the AMC-15 and AMC-16 satellites in the first quarter of 2015. These increases in EBITDA were partially offset by increases in Selling, general and administrative expenses of $12.0 million and in research and development expenses of $6.2 million, a loss of $6.8 million attributable to FCC regulatory fees, an other-than-temporary impairment loss of $6.1 million on a certain strategic equity security and a loss of $5.0 million from the partial redemption of the 2011 Secured Notes. EBITDA is a non-GAAP financial measure and is described under Explanation of Key Metrics and Other Items below. The following table reconciles EBITDA to Net income, the most directly comparable GAAP measure in the accompanying financial statements.
 
 
For the Years
Ended December 31,
 
Variance
 
 
2015
 
2014
 
Amount
 
%
 
 
(Dollars in thousands)
Net income
 
$
138,984

 
$
102,582

 
$
36,402

 
35.5
 %
 
 
 
 
 
 
 
 
 
Interest income and expense, net
 
164,734

 
188,024

 
(23,290)

 
(12.4
)%
Income tax provision, net
 
72,364

 
40,095

 
32,269

 
80.5
 %
Depreciation and amortization
 
430,127

 
452,138

 
(22,011)

 
(4.9
)%
Net loss attributable to noncontrolling interest
 
(1,617)

 
(1,389)

 
(228)

 
16.4
 %
EBITDA
 
804,592

 
781,450

 
23,142

 
3.0
 %

Segment Operating Results and Capital Expenditures

Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
 
 
Hughes