Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

Form 10-Q

 

(Mark One)

 

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

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010.

 

OR

 

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

 

FOR THE TRANSITION PERIOD FROM                       TO                       .

 

Commission File Number:  001-33807

 

EchoStar Corporation

(Exact name of registrant as specified in its charter)

 

Nevada

 

26-1232727

(State or other jurisdiction of incorporation
or organization)

 

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

 

 

 

100 Inverness Terrace East

 

 

Englewood, Colorado

 

80112-5308

(Address of principal executive offices)

 

(Zip code)

 

(303) 706-4000

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o   No  o

 

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

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller Reporting Company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of April 23, 2010, the registrant’s outstanding common stock consisted of 37,384,864 shares of Class A common stock and 47,687,039 shares of Class B common stock.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

Disclosure Regarding Forward-Looking Statements

i

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets —
March 31, 2010 and December 31, 2009 (Unaudited)

1

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Three Months Ended March 31, 2010 and 2009 (Unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows For the
Three Months Ended March 31, 2010 and 2009 (Unaudited)

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

4

 

 

 

Item 2.

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

34

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

46

 

 

 

Item 4.

Controls and Procedures

48

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

49

 

 

 

Item 1A.

Risk Factors

53

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

 

 

 

Item 3.

Defaults Upon Senior Securities

None

 

 

 

Item 4.

Removed and Reserved

None

 

 

 

Item 5.

Other Information

None

 

 

 

Item 6.

Exhibits

54

 

 

 

 

Signatures

55

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

General Risks Affecting Our Business

 

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

 

·                  We currently depend on DISH Network Corporation, or DISH Network, and Bell TV for substantially all of our revenue.  The loss of, or a significant reduction in, orders from or a decrease in selling prices of digital set-top boxes, transponder leasing, digital broadcast operations and/or other products or services to, DISH Network would significantly reduce our revenue and adversely impact our results of operations.  The loss of, or a significant reduction in, orders from or a decrease in selling prices of digital set-top boxes and/or other products and services to Bell TV would significantly reduce our revenue and adversely impact our results of operations.

 

·                  If we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we are not successful in developing and deploying potential new alternative technology and we are unable to reach a license agreement with Tivo on reasonable terms, we would be subject to substantial liability and would be prohibited from offering DVR functionality that would in turn place us at a significant disadvantage to our competitors and significantly decrease sales of digital set-top boxes to DISH Network and others.

 

·                  Adverse developments in DISH Network’s business may adversely affect us.

 

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

 

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

 

·                  We may need additional capital, which may not be available on acceptable terms or at all, to continue investing in our business and to finance acquisitions and other strategic transactions.

 

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

 

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

 

·                  We intend to make significant investments in new products, services, technologies and business areas that may not be profitable.

 

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

 

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

 

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

 

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

 

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Risks Affecting Our “Digital Set-Top Box” Business

 

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

 

·                  Our business may suffer if direct-to-home satellite service providers, who currently comprise our customer base, do not compete successfully with existing and emerging alternative platforms for delivering digital television, including cable television operators, terrestrial broadcasters, and Internet protocol television (“IPTV”).

 

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

 

·                  Component pricing may remain stable or be affected by inflation, which could have a material adverse effect on our results of operations.

 

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

 

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

 

·                  Growth in our “Digital Set-Top Box” business likely requires expansion of our sales to international customers, and we may be unsuccessful in expanding international sales.

 

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

 

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

 

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

 

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

 

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

 

·                  Our future growth depends on growing demand for high definition, or HD, television.

 

Risks Affecting Our “Satellite Services” Business

 

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

 

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

 

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

 

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

 

·                  Our “Satellite Services” business is subject to risks of adverse government regulation.

 

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

 

·                  We may not be aware of certain foreign government regulations.

 

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

 

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·                  We currently have no commercial insurance coverage on the satellites we own and could face significant impairment charges if one of our satellites fails.

 

Risks Relating to the Spin-Off

 

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

 

Risks Relating to our Common Stock and the Securities Market

 

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

 

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

 

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

 

·                  We may face other risks described from time to time in periodic and current reports we file with the Securities and Exchange Commission, or SEC.

 

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

 

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

 

iii



Table of Contents

 

Item 1.  FINANCIAL STATEMENTS

 

ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2010

 

2009

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

163,615

 

$

23,330

 

Marketable investment securities

 

760,321

 

805,832

 

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

 

348,098

 

373,454

 

Trade accounts receivable - other, net of allowance for doubtful accounts of $4,102 and $5,605, respectively

 

57,100

 

84,178

 

Inventory

 

55,355

 

53,014

 

Deferred tax assets

 

7,698

 

5,053

 

Other current assets

 

20,577

 

18,997

 

Total current assets

 

1,412,764

 

1,363,858

 

 

 

 

 

 

 

Noncurrent Assets:

 

 

 

 

 

Restricted cash and marketable investment securities

 

18,003

 

18,003

 

Property and equipment, net of accumulated depreciation of $1,641,480 and $1,609,077, respectively

 

1,229,016

 

1,233,185

 

FCC authorizations

 

69,810

 

69,810

 

Intangible assets, net

 

143,476

 

151,813

 

Marketable and other investment securities

 

655,932

 

562,019

 

Other noncurrent assets, net

 

57,812

 

69,380

 

Total noncurrent assets

 

2,174,049

 

2,104,210

 

Total assets

 

$

3,586,813

 

$

3,468,068

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Trade accounts payable - other

 

$

186,672

 

$

171,335

 

Trade accounts payable - DISH Network

 

30,049

 

38,347

 

Accrued royalties

 

18,591

 

22,052

 

Accrued expenses and other

 

96,402

 

78,070

 

Current portion of capital lease obligations, mortgages and other notes payable

 

51,679

 

54,206

 

Total current liabilities

 

383,393

 

364,010

 

 

 

 

 

 

 

Long-Term Obligations, Net of Current Portion:

 

 

 

 

 

Capital lease obligations, mortgages and other notes payable, net of current portion

 

394,960

 

392,163

 

Deferred tax liabilities

 

25,358

 

31,588

 

Other long-term liabilities

 

15,454

 

15,457

 

Total long-term obligations, net of current portion

 

435,772

 

439,208

 

Total liabilities

 

819,165

 

803,218

 

 

 

 

 

 

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

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

 

 

 

Class A common stock, $.001 par value, 1,600,000,000 shares authorized, 42,687,249 and 42,655,772 shares issued, 37,188,791 and 37,157,314 shares outstanding, respectively

 

43

 

43

 

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

 

48

 

48

 

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

 

 

 

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

 

 

 

Additional paid-in capital

 

3,283,453

 

3,278,680

 

Accumulated other comprehensive income (loss)

 

103,399

 

77,120

 

Accumulated earnings (deficit)

 

(521,738

)

(593,484

)

Treasury stock, at cost

 

(97,557

)

(97,557

)

Total stockholders’ equity (deficit)

 

2,767,648

 

2,664,850

 

Total liabilities and stockholders’ equity (deficit)

 

$

3,586,813

 

$

3,468,068

 

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

 

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ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2010

 

2009

 

Revenue:

 

 

 

 

 

Equipment revenue - DISH Network

 

$

385,848

 

$

320,319

 

Equipment revenue - other

 

111,703

 

56,911

 

Services and other revenue - DISH Network

 

115,060

 

91,885

 

Services and other revenue - other

 

14,469

 

10,432

 

Total revenue

 

627,080

 

479,547

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

Cost of sales - equipment

 

422,208

 

327,017

 

Cost of sales - services and other (exclusive of depreciation shown below - Note 6)

 

57,433

 

52,784

 

Research and development expenses

 

12,234

 

9,592

 

Selling, general and administrative expenses

 

32,631

 

25,795

 

General and administrative expenses - DISH Network

 

4,159

 

4,758

 

Depreciation and amortization (Note 6)

 

57,649

 

61,949

 

Total costs and expenses

 

586,314

 

481,895

 

 

 

 

 

 

 

Operating income (loss)

 

40,766

 

(2,348

)

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

Interest income

 

1,846

 

9,289

 

Interest expense, net of amounts capitalized

 

(11,595

)

(7,286

)

Unrealized and realized gains (losses) on marketable investment securities and other investments

 

(537

)

1,323

 

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

 

65,828

 

6,887

 

Other, net

 

(1,671

)

(2,585

)

Total other income (expense)

 

53,871

 

7,628

 

 

 

 

 

 

 

Income (loss) before income taxes

 

94,637

 

5,280

 

Income tax (provision) benefit, net

 

(22,891

)

(5,925

)

Net income (loss)

 

$

71,746

 

$

(645

)

 

 

 

 

 

 

Comprehensive Income (Loss):

 

 

 

 

 

Foreign currency translation adjustments

 

(390

)

(257

)

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

 

26,669

 

126,720

 

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

 

 

(1,323

)

Deferred income tax (expense) benefit

 

 

(45,014

)

Comprehensive income (loss)

 

$

98,025

 

$

79,481

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic

 

84,855

 

86,471

 

Diluted

 

84,933

 

86,471

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

Basic net income (loss) per share

 

$

0.85

 

$

(0.01

)

Diluted net income (loss) per share

 

$

0.84

 

$

(0.01

)

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

 

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ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2010

 

2009

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income (loss)

 

$

71,746

 

$

(645

)

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

 

 

 

 

 

Depreciation and amortization

 

57,649

 

61,949

 

Equity in losses (earnings) of affiliates

 

1,690

 

1,667

 

Unrealized and realized (gains) losses on marketable investment securities and other investments

 

537

 

(1,323

)

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

 

(65,828

)

(6,887

)

Non-cash, stock-based compensation

 

4,242

 

3,454

 

Deferred tax expense (benefit)

 

(8,820

)

(8,351

)

Other, net

 

2,184

 

(5,705

)

Change in noncurrent assets

 

1,122

 

(1,686

)

Changes in current assets and current liabilities, net

 

(35,646

)

2,392

 

Net cash flows from operating activities

 

28,876

 

44,865

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Purchases of marketable investment securities

 

(570,308

)

(243,088

)

Sales and maturities of marketable investment securities

 

642,418

 

386,662

 

Purchases of property and equipment

 

(32,492

)

(34,689

)

Capital transaction with DISH Network in connection with the launch contract (Note 12)

 

102,913

 

 

Purchase of strategic investments included in marketable and other investment securities

 

(18,601

)

(17,935

)

Other, net

 

(200

)

1,423

 

Net cash flows from investing activities

 

123,730

 

92,373

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Repayment of capital lease obligations, mortgages and other notes payable

 

(12,845

)

(14,679

)

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

 

524

 

491

 

Net cash flows from financing activities

 

(12,321

)

(14,188

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

140,285

 

123,050

 

Cash and cash equivalents, beginning of period

 

23,330

 

24,467

 

Cash and cash equivalents, end of period

 

$

163,615

 

$

147,517

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid for interest

 

$

11,422

 

$

7,169

 

Cash received for interest

 

$

2,803

 

$

9,067

 

Cash paid for income taxes

 

$

8,481

 

$

3,814

 

Satellites and other assets financed under capital lease obligations

 

$

47,808

 

$

1,542

 

Reduction of capital lease obligations and associated asset value for AMC-16 (Note 6)

 

$

34,693

 

$

 

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.     Organization and Business Activities

 

Principal Business

 

EchoStar Corporation is a holding company, whose subsidiaries (which together with EchoStar Corporation are referred to as “EchoStar,” the “Company,” “we,” “us” and/or “our”) operate two primary business units:

 

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

 

·                  “Satellite Services” Business — which uses our ten owned and leased in-orbit satellites and related FCC licenses to lease capacity on a full time and occasional-use basis to enterprise, broadcast news and government organizations.  We currently lease capacity primarily to DISH Network, and secondarily to Dish Mexico, government entities, Internet service providers, broadcast news organizations and private enterprise customers.  We also deliver our ViP-TV transport service, offering MPEG-4 encoded Internet Protocol, or IP, streams of video and audio channels to telecommunication companies and small cable operators.

 

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

 

2.              Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information.  Accordingly, these statements do not include all of the information and notes required for complete financial statements prepared under GAAP.  In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.  For further information, refer to the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K/A for the year ended December 31, 2009 (“2009 10-K/A”).  Certain prior period amounts have been reclassified to conform to the current period presentation.  Further, in connection with the preparation of the condensed consolidated financial statements, we have evaluated subsequent events through the issuance of these financial statements.

 

Principles of Consolidation

 

We consolidate all majority owned subsidiaries, investments in entities in which we have controlling influence and variable interest entities where we have been determined to be the primary beneficiary.  Non-majority owned investments are accounted for using the equity method when we have the ability to significantly influence the operating

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

decisions of the investee.  When we do not have the ability to significantly influence the operating decisions of an investee, the cost method is used.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses for each reporting period.  Estimates are used in accounting for, among other things, allowances for doubtful accounts, allowance for sales returns, warranty obligations, self-insurance obligations, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, fair value of financial instruments, fair value of options granted under our stock-based compensation plans, fair value of assets and liabilities acquired in business combinations, capital leases, asset impairments, useful lives of property, equipment and intangible assets, and royalty obligations.  Weakened economic conditions have increased the inherent uncertainty in the estimates and assumptions indicated above.  Actual results may differ from previously estimated amounts, and such differences may be material to the Condensed Consolidated Financial Statements.  Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in the period they occur.

 

Fair Value of Financial Instruments

 

As of March 31, 2010 and December 31, 2009, the carrying value of our cash and cash equivalents, marketable investment securities, trade accounts receivable, net of allowance for doubtful accounts, and current liabilities is equal to or approximates fair value due to their short-term nature.  Disclosure regarding fair value of capital leases is not required.

 

New Accounting Pronouncements

 

Revenue Recognition — Multiple-Deliverable Arrangements

 

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2009-13 (“ASU 2009-13”), Revenue Recognition - Multiple-Deliverable Revenue Arrangements.  ASU 2009-13 changes the requirements for establishing separate units of accounting in a multiple deliverable arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price.  We are currently evaluating the impact, if any, ASU 2009-13 will have on our consolidated financial statements, when adopted, as required, on January 1, 2011.

 

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

 

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

 

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Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

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

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

In thousands, except per share amounts

 

2010

 

2009

 

 

 

 

 

 

 

Net income (loss)

 

$

71,746

 

$

(645

)

 

 

 

 

 

 

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

 

 

 

 

 

Basic

 

84,855

 

86,471

 

Dilutive impact of stock awards outstanding

 

78

 

 

Diluted

 

84,933

 

86,471

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

Basic net income (loss) per share

 

$

0.85

 

$

(0.01

)

Diluted net income (loss) per share

 

$

0.84

 

$

(0.01

)

 

We had a net loss for the three months ended March 31, 2009, therefore, the effect of stock awards is excluded from the computation of diluted earnings (loss) per share since the effect is antidilutive.  As of March 31, 2010, there were stock awards to purchase 5.2 million shares of Class A common stock outstanding, not included in the above denominator, as their effect is antidilutive.

 

Vesting of options and rights to acquire shares of our Class A common stock (“Restricted Performance Units”) granted pursuant to a long-term, performance-based stock incentive plan is contingent upon meeting a certain long-term company goal which has not yet been achieved.  As a consequence, the following are also not included in the diluted EPS calculation:

 

 

 

For the Three Months
Ended March 31,

 

 

 

2010

 

2009

 

 

 

(In thousands)

 

Performance-based options

 

716

 

856

 

Restricted Performance Units

 

98

 

104

 

Total

 

814

 

960

 

 

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Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

4.              Marketable Investment Securities, Restricted Cash and Other Investment Securities

 

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

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2010

 

2009

 

 

 

(In thousands)

 

Marketable investment securities:

 

 

 

 

 

Current marketable investment securities - VRDNs

 

$

227,960

 

$

398,630

 

Current marketable investment securities - strategic

 

154,648

 

126,622

 

Current marketable investment securities - other

 

377,713

 

280,580

 

Total marketable investment securities - current

 

760,321

 

805,832

 

Restricted marketable investment securities (1)

 

2,995

 

2,995

 

Total

 

763,316

 

808,827

 

 

 

 

 

 

 

Restricted cash and cash equivalents (1)

 

15,008

 

15,008

 

 

 

 

 

 

 

Marketable and other investment securities - noncurrent:

 

 

 

 

 

Marketable and other investment securities - cost method

 

36,568

 

33,288

 

Marketable and other investment securities - equity method

 

108,537

 

94,826

 

Marketable and other investment securities - fair value method

 

510,827

 

433,905

 

Total marketable and other investment securities - noncurrent

 

655,932

 

562,019

 

Total marketable investment securities, restricted cash and other investment securities

 

$

1,434,256

 

$

1,385,854

 

 


(1)

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

 

Marketable Investment Securities - Current

 

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

 

Current Marketable Investment Securities - VRDNs

 

Variable rate demand notes (“VRDNs”) are long-term floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest.  All of the put options are secured by a pledged liquidity source.  Our VRDN portfolio is comprised of investments in many municipalities, which are backed by financial institutions or other highly rated companies that serve as the pledged liquidity source.  While they are classified as marketable investment securities, the put option allows VRDNs to be liquidated generally on a same day or on a five business day settlement basis.

 

Current Marketable Investment Securities - Strategic

 

Our strategic marketable investment securities are highly speculative and have experienced and continue to experience volatility.  As of March 31, 2010, a significant portion of our strategic investment portfolio consisted of securities of several issuers and the value of that portfolio therefore depends on those issuers.

 

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Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Current Marketable Investment Securities - Other

 

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

 

Restricted Marketable Investment Securities

 

As of March 31, 2010 and December 31, 2009, restricted marketable investment securities included amounts required under our letters of credit or surety bonds.

 

Marketable and Other Investment Securities - Noncurrent

 

We account for our unconsolidated debt and equity investments under the fair value, equity and/or cost method of accounting.  We have several strategic investments in certain equity securities that are included in noncurrent “Marketable and other investment securities” on our Condensed Consolidated Balance Sheets.

 

Marketable and Other Investment Securities — Cost and Equity

 

Non-majority owned investments are generally accounted for using the equity method when we have the ability to significantly influence the operating decisions of an investee.  However, when we do not have the ability to significantly influence the operating decisions of an investee, the cost method is used.

 

Our ability to realize value from our strategic investments in companies that are not publicly traded depends on the success of those companies’ businesses and their ability to obtain sufficient capital to execute their business plans.  Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell these investments, or that when we desire to sell them we will not be able to obtain fair value for them.

 

Marketable and Other Investment Securities — Fair Value

 

We elect the fair value method for certain investments in affiliates whose debt and equity are publicly traded, when we believe the fair value method of accounting provides more meaningful information to our investors.  For our investments carried at fair value, interest and dividends are measured at fair value and are recorded in “Unrealized gains (losses) on investments accounted for at fair value, net.”

 

Subsequent to March 31, 2010, the fair value of these investments continue to be significantly impacted by the risk of adverse changes in securities markets generally, as well as risks related to the performance of the company whose securities we have invested in, their ability to obtain sufficient capital to execute their business plans, risks associated with their specific industries, and other factors.

 

8



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Unrealized Gains (Losses) on Marketable Investment Securities

 

As of March 31, 2010 and December 31, 2009, we had accumulated net unrealized gains of $103 million and $77 million, both net of related tax effect, respectively, as a part of “Accumulated other comprehensive income (loss)” within “Total stockholders’ equity (deficit).”  A full valuation allowance has been established against any deferred tax assets that are capital in nature.  The components of our available-for-sale investments are detailed in the table below.

 

 

 

As of March 31, 2010

 

As of December 31, 2009

 

 

 

Marketable

 

 

 

 

 

 

 

Marketable

 

 

 

 

 

 

 

 

 

Investment

 

Unrealized

 

Investment

 

Unrealized

 

 

 

Securities

 

Gains

 

Losses

 

Net

 

Securities

 

Gains

 

Losses

 

Net

 

 

 

(In thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

227,960

 

$

 

$

 

$

 

$

398,630

 

$

 

$

 

$

 

Other (including restricted)

 

417,565

 

19,246

 

(275

)

18,971

 

316,793

 

15,696

 

(137

)

15,559

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

117,791

 

84,559

 

(131

)

84,428

 

93,404

 

61,172

 

 

61,172

 

Total marketable investment securities

 

$

763,316

 

$

103,805

 

$

(406

)

$

103,399

 

$

808,827

 

$

76,868

 

$

(137

)

$

76,731

 

 

As of March 31, 2010, restricted and non-restricted marketable investment securities include debt securities of $547 million with contractual maturities of one year or less and $99 million with contractual maturities greater than one year.  Actual maturities may differ from contractual maturities as a result of our ability to sell these securities prior to maturity.

 

Marketable Investment Securities in a Loss Position

 

The following table reflects the length of time that the individual securities, accounted for as available-for-sale, have been in an unrealized loss position, aggregated by investment category.  As of March 31, 2010, the unrealized losses in our investments in equity securities represent an investment in the common stock of one company in the consumer electronics industry.  We are not aware of any specific factors indicating the unrealized loss in this investment is due to anything other than temporary market fluctuations.  We do not intend to sell our investments in debt securities before they recover or mature, and it is more likely than not that we will hold these debt investments until that time.  In addition, we are not aware of any specific factors indicating that the underlying issuers of these debt securities would not be able to pay interest as it becomes due or repay the principal at maturity.  Therefore, we believe that these changes in the estimated fair values of these marketable investment securities are related to temporary market fluctuations.

 

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Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

 

 

Primary

 

As of March 31, 2010

 

 

 

Reason for

 

Total

 

Less than Six Months

 

Six to Nine Months

 

Nine Months or More

 

Investment

 

Unrealized

 

Fair

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Category

 

Loss

 

Value

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

 

 

 

(In thousands)

 

Debt securities

 

Temporary market fluctuations

 

$

93,316

 

$

80,522

 

$

(263

)

$

8,796

 

$

(4

)

$

3,998

 

$

(8

)

Equity securities

 

Temporary market fluctuations

 

599

 

599

 

(131

)

 

 

 

 

Total

 

 

 

$

93,915

 

$

81,121

 

$

(394

)

$

8,796

 

$

(4

)

$

3,998

 

$

(8

)

 

 

 

Primary

 

As of December 31, 2009

 

 

 

Reason for

 

Total

 

Less than Six Months

 

Six to Nine Months

 

Nine Months or More

 

Investment

 

Unrealized

 

Fair

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Category

 

Loss

 

Value

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

 

 

 

(In thousands)

 

Debt securities

 

Temporary market fluctuations

 

$

57,683

 

$

50,648

 

$

(94

)

$

7,035

 

$

(43

)

$

 

$

 

Total

 

 

 

$

57,683

 

$

50,648

 

$

(94

)

$

7,035

 

$

(43

)

$

 

$

 

 

Fair Value Measurements

 

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

 

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

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

·                  Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring assumptions based on the best information available.

 

10



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Our assets measured at fair value on a recurring basis were as follows:

 

 

 

Total Fair Value As of March 31, 2010

 

Total Fair Value As of December 31, 2009

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

227,960

 

$

 

$

227,960

 

$

 

$

398,630

 

$

 

$

398,630

 

$

 

Other (including restricted)

 

417,565

 

4,568

 

412,997

 

 

316,793

 

2,998

 

313,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

117,791

 

117,791

 

 

 

93,404

 

93,404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable and other investment securities - noncurrent

 

510,827

 

39,600

 

399,416

 

71,811

 

433,905

 

28,200

 

339,677

 

66,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

1,274,143

 

$

161,959

 

$

1,040,373

 

$

71,811

 

$

1,242,732

 

$

124,602

 

$

1,052,102

 

$

66,028

 

 

During the three months ended March 31, 2010, none of our marketable investment securities transferred between levels.

 

Changes in Level 3 instruments are as follows:

 

 

 

Level 3
Investment
Securities

 

 

 

(In thousands)

 

Balance as of December 31, 2009

 

$

66,028

 

Net realized and unrealized gains (losses) included in earnings

 

3,759

 

Purchases, issuances and settlements, net

 

2,024

 

Balance as of March 31, 2010

 

$

71,811

 

 

11



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Unrealized and Realized Gains (Losses) on Marketable Investment Securities and Other Investments

 

“Unrealized and realized gains (losses) on marketable investment securities and other investments” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) includes changes in the carrying amount of our investments as follows:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2010

 

2009

 

 

 

(In thousands)

 

Unrealized and realized gains (losses) on marketable investment securities and other investments:

 

 

 

 

 

Marketable investment securities - gains (losses) on sales/exchange

 

$

 

$

1,323

 

Marketable and other investment securities - other-than-temporary impairments

 

(537

)

 

Total unrealized and realized gains (losses) on marketable investment securities and other investments

 

$

(537

)

$

1,323

 

 

Investment in TerreStar

 

We account for our investment in TerreStar using the fair value method of accounting.  We have the right to appoint two representatives on TerreStar’s Board of Directors and have the ability to exert significant influence and believe that the fair value approach provides our investors with the most meaningful information.

 

We report the following TerreStar financial information on a one-quarter lag as TerreStar is a public company but not a “large accelerated filer,” as defined by the SEC.  As such, the statements of operations data, shown below, includes the three months ended December 31 for each respective period presented.  We rely on TerreStar’s management to provide us with accurate summary financial information.  We are not aware of any errors in, or possible misstatements of, the financial information provided to us that would have a material effect on our Condensed Consolidated Financial Statements.  The following table provides summarized financial information from TerreStar:

 

 

 

For the Three Months

 

 

 

Ended December 31,

 

Statements of Operations Data (unaudited):

 

2009

 

2008

 

 

 

(In thousands)

 

Revenue

 

$

2,384

 

$

 

Operating expenses

 

$

44,068

 

$

34,993

 

Net income (loss) from continuing operations

 

$

(58,999

)

$

(52,183

)

Net income (loss)

 

$

(58,999

)

$

(52,183

)

Net income (loss) available to common stockholders

 

$

(63,408

)

$

(55,026

)

 

TerreStar’s annual report on Form 10-K for the year ended December 31, 2009, as amended included disclosure that:

 

·                  Based on TerreStar’s current plans, there is substantial doubt that the available cash balance, investments and available borrowing capacity as of December, 31, 2009 will be sufficient to satisfy the projected funding needs for all of 2010;

 

·                  TerreStar will likely require additional funding in the second quarter of 2010 unless it is able to extend its obligations and commitments to future periods;

 

·                  TerreStar cannot guarantee that financing will be available or available on favorable terms; and

 

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Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

·                  If TerreStar fails to obtain necessary financing on a timely basis, it may be forced to curtail operations or take other actions that will impact its ability to conduct its operations as planned.

 

In addition, in the “Report of Independent Registered Public Accounting Firm” included in TerreStar’s Form 10-K for the year ended December 31, 2009, Ernst & Young LLP dated March 16, 2010 expressed an unqualified opinion on the consolidated balance sheet of TerreStar Corporation as of December 31, 2009 and the related consolidated statement of operations, changes in stockholders’ equity, and cash flows for the year then ended that included the following:

 

“The accompanying financial statements have been prepared assuming that TerreStar Corporation will continue as a going concern.  As more fully described in Note 1, the Company has incurred recurring operating losses and will require additional financing in 2010 to meet its obligations.  The Company’s ability to obtain the needed additional financing on acceptable terms, or at all, is uncertain.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.”

 

We account for our investment in TerreStar using the fair value method of accounting and its financial position could have a material impact on the fair value of our investment in subsequent periods as indicated in their Form 10-K for the year ended December 31, 2009.

 

5.              Inventory

 

Inventory consists of the following:

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2010

 

2009

 

 

 

(In thousands)

 

Finished goods

 

$

36,432

 

$

32,988

 

Raw materials

 

13,284

 

16,647

 

Work-in-process

 

5,639

 

3,379

 

Inventory

 

$

55,355

 

$

53,014

 

 

6.              Property and Equipment

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense consists of the following:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2010

 

2009

 

 

 

(In thousands)

 

Satellites

 

$

24,536

 

$

25,570

 

Furniture, fixtures, equipment and other

 

23,242

 

26,570

 

Identifiable intangible assets subject to amortization

 

8,264

 

8,264

 

Buildings and improvements

 

1,607

 

1,545

 

Total depreciation and amortization

 

$

57,649

 

$

61,949

 

 

Cost of sales and operating expense categories included in our accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) do not include depreciation expense related to satellites.

 

13



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Satellites

 

We currently utilize six owned and four leased satellites in geostationary orbit approximately 22,300 miles above the equator.  Our leased satellites accounted for as capital leases are depreciated over the terms of the satellite service agreements.

 

Certain satellites in our fleet have experienced anomalies, some of which have had a significant adverse impact on their remaining life and commercial operation.  There can be no assurance that future anomalies will not further impact the remaining life and commercial operation of any of these satellites.  See “Long-Lived Satellite Assets” below for further discussion of evaluation of impairment.  There can be no assurance that we can recover critical transmission capacity in the event one or more of our in-orbit satellites were to fail.  We do not anticipate carrying insurance for any of the in-orbit satellites that we own, and we will bear the risk associated with any in-orbit satellite failures.  Recent developments with respect to our satellites are discussed below.

 

Owned Satellites

 

EchoStar III.  EchoStar III was originally designed to operate a maximum of 32 DBS transponders in CONUS mode at approximately 120 watts per channel, switchable to 16 transponders operating at over 230 watts per channel, and was equipped with a total of 44 traveling wave tube amplifiers (“TWTAs”) to provide redundancy.  As a result of TWTA failures in previous years and during January and May 2010, only 12 transponders are currently available for use.  Although these failures have impacted the commercial operation of the satellite, it is fully depreciated.  It is likely that additional TWTA failures will occur from time to time in the future and such failures could further impact commercial operation of the satellite.

 

Leased Satellites

 

AMC-16.  AMC-16, an FSS satellite, commenced commercial operation during February 2005 and currently operates at the 85 degree orbital location.  This SES World Skies satellite is equipped with 24 Ku-band FSS transponders that operate at approximately 120 watts per channel and a Ka-band payload consisting of 12 spot beams.  During the first quarter of 2010, SES World Skies notified us that AMC-16 had experienced a solar-power anomaly which caused a power loss further reducing its capacity.  Pursuant to the satellite services agreement, we are entitled to a reduction of our monthly recurring payment in the event of a partial loss of satellite capacity.  Effective in early March 2010, the monthly recurring payment was reduced and as a result our capital lease obligation and the corresponding asset value was lowered by approximately $35 million.

 

Long-Lived Satellite Assets

 

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

 

14



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

7.              Intangible Assets

 

As of March 31, 2010 and December 31, 2009, our identifiable intangibles subject to amortization consisted of the following:

 

 

 

As of

 

 

 

March 31, 2010

 

December 31, 2009

 

 

 

Intangible

 

Accumulated

 

Intangible

 

Accumulated

 

 

 

Assets

 

Amortization

 

Assets

 

Amortization

 

 

 

(In thousands)

 

Contract-based

 

$

190,566

 

$

(95,890

)

$

190,566

 

$

(91,733

)

Customer relationships

 

23,600

 

(19,667

)

23,600

 

(17,700

)

Technology-based

 

73,314

 

(28,447

)

73,314

 

(26,234

)

Total

 

$

287,480

 

$

(144,004

)

$

287,480

 

$

(135,667

)

 

Amortization of these intangible assets is recorded on a straight line basis over an average finite useful life primarily ranging from approximately three to 20 years.  Amortization was $8 million for each of the three months ended March 31, 2010 and 2009.

 

Estimated future amortization of our identifiable intangible assets as of March 31, 2010 is as follows (in thousands):

 

For the Years Ended December 31,

 

 

 

2010 (remaining nine months)

 

$

23,044

 

2011

 

25,005

 

2012

 

23,185

 

2013

 

23,181

 

2014

 

21,969

 

Thereafter

 

27,092

 

Total

 

$

143,476

 

 

8.              Long-Term Debt

 

Capital Lease Obligations

 

As of March 31, 2010 and December 31, 2009, we had $529 million and $509 million capitalized for the estimated fair value of satellites acquired under capital leases included in “Property and equipment, net,” with related accumulated depreciation of $248 million and $240 million, respectively.  In our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), we recognized $8 million and $5 million in depreciation expense on satellites acquired under capital lease agreements during the three months ended March 31, 2010 and 2009, respectively.

 

The following satellites are accounted for as capital leases and depreciated over the terms of the satellite service agreements.

 

AMC-15.  AMC-15, an FSS satellite, commenced commercial operation during January 2005.  This lease is renewable by us on a year-to-year basis following the initial ten-year term, and provides us with certain rights to lease capacity on replacement satellites.

 

AMC-16.  AMC-16, an FSS satellite, commenced commercial operation during February 2005.  This lease is renewable by us on a year-to-year basis following the initial ten-year term, and provides us with certain rights to lease capacity on replacement satellites.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Nimiq 5.  Nimiq 5 was launched in September 2009 and commenced commercial operation at the 72.7 degree orbital location during October 2009, where it provides additional high-powered capacity to our satellite fleet.  See Note 12 for further discussion.

 

Future minimum lease payments under these capital lease obligations, together with the present value of the net minimum lease payments as of March 31, 2010 are as follows (in thousands):

 

For the Years Ended December 31,

 

 

 

2010 (nine months remaining)

 

$

89,484

 

2011

 

117,762

 

2012

 

116,998

 

2013

 

116,998

 

2014

 

111,410

 

Thereafter

 

401,939

 

Total minimum lease payments

 

954,591

 

Less: Amount representing use of the orbital location and estimated executory costs (primarily insurance and maintenance) including profit thereon, included in total minimum lease payments

 

(273,141

)

Net minimum lease payments

 

681,450

 

Less: Amount representing interest

 

(242,030

)

Present value of net minimum lease payments

 

439,420

 

Less: Current portion

 

(50,985

)

Long-term portion of capital lease obligations

 

$

388,435

 

 

9.              Stock-Based Compensation

 

Stock Incentive Plans

 

We maintain stock incentive plans to attract and retain officers, directors and key employees.  Stock awards under these plans include both performance and non-performance based stock incentives.  As of March 31, 2010, we had outstanding under these plans stock options to acquire 7.2 million shares of our Class A common stock and 0.1 million restricted stock units.  Stock options granted through March 31, 2010 were granted with exercise prices equal to or greater than the market value of our Class A common stock at the date of grant and with a maximum term of ten years.  Historically, our stock awards have been subject to vesting, typically at the rate of 20% to 33% per year, however, some stock awards have been granted with immediate vesting and other stock awards vest only upon the achievement of certain company-wide objectives.  As of March 31, 2010, we had 7.6 million shares of our Class A common stock available for future grant under our stock incentive plans.

 

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

 

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

 

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

 

Similarly, each holder of DISH Network restricted stock units retained his or her DISH Network restricted stock units and received one EchoStar restricted stock unit for every five DISH Network restricted stock units that they held.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Consequently, the fair value of the DISH Network stock award and the new EchoStar stock award immediately following the Spin-off was equivalent to the fair value of such stock award immediately prior to the Spin-off.

 

As of March 31, 2010, the following stock awards were outstanding:

 

 

 

As of March 31, 2010

 

 

 

EchoStar Awards

 

DISH Network Awards

 

Stock Awards Outstanding

 

Stock
Options

 

Restricted
Stock
Units

 

Stock
Options

 

Restricted
Stock
Units

 

Held by EchoStar employees

 

5,963,851

 

66,790

 

3,687,295

 

386,241

 

Held by DISH Network employees

 

1,251,364

 

61,067

 

N/A

 

N/A

 

Total

 

7,215,215

 

127,857

 

3,687,295

 

386,241

 

 

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

 

Stock Award Activity

 

Our stock option activity for the three months ended March 31, 2010 was as follows:

 

 

 

For the Three Months

 

 

 

Ended March 31, 2010

 

 

 

Options

 

Weighted-
Average
Exercise Price

 

Total options outstanding, beginning of period

 

7,203,101

 

$

24.85

 

Granted

 

20,000

 

20.28

 

Exercised

 

(2,369

)

8.35

 

Forfeited and cancelled

 

(5,517

)

32.89

 

Total options outstanding, end of period

 

7,215,215

 

24.67

 

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

 

716,050

 

25.39

 

Exercisable at end of period

 

2,636,170

 

27.74

 

 


(1)  These stock options, which are included in the caption “Total options outstanding, end of period,” were issued pursuant to a long-term, performance-based stock incentive plan.  Vesting of these stock options is contingent upon meeting a certain long-term company goal which has not yet been achieved.  See discussion of the 2005 LTIP below.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

We realized tax benefits from stock awards exercised during the three months ended March 31, 2010 and 2009 as follows:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2010

 

2009

 

 

 

(In thousands)

 

Tax benefit from stock awards exercised

 

$

700

 

$

144

 

 

Based on the closing market price of our Class A common stock on March 31, 2010, the aggregate intrinsic value of our stock options was as follows:

 

 

 

As of March 31, 2010

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

(In thousands)

 

Aggregate intrinsic value

 

$

8,270

 

$

1,742

 

 

Our restricted stock unit activity for the three months ended March 31, 2010 was as follows:

 

 

 

For the Three Months

 

 

 

Ended March 31, 2010

 

 

 

Restricted
Stock
Units

 

Weighted-
Average
Grant Date
Fair Value

 

Total restricted stock units outstanding, beginning of period

 

130,040

 

$

27.78

 

Granted

 

 

 

Vested

 

 

 

Forfeited and cancelled

 

(2,183

)

25.77

 

Total restricted stock units outstanding, end of period

 

127,857

 

27.81

 

Restricted performance units outstanding, end of period (1)

 

98,057

 

26.58

 

 


(1) These restricted performance units, which are included in the caption “Total restricted stock units outstanding, end of period,” were issued pursuant to a long-term, performance-based stock incentive plan.  Vesting of these restricted performance units is contingent upon meeting a certain long-term company goal which has not yet been achieved.  See discussion of the 2005 LTIP below.

 

Long-Term Performance-Based Plans

 

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

 

Contingent compensation related to the 2005 LTIP will not be recorded in our financial statements unless and until the achievement of the performance condition is probable.  The competitive nature of our industry and certain other factors can significantly impact achievement of the goal.  Consequently, while it was determined that achievement of the goal was not probable as of March 31, 2010, that assessment could change at any time.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

If all of the stock awards under the 2005 LTIP were vested and the goal had been met or if we had determined that achievement of the goal was probable during the three months ended March 31, 2010, we would have recorded total non-cash, stock-based compensation expense for our employees as indicated in the table below.  If the goal is met and there are unvested stock awards at that time, the vested amounts would be expensed immediately on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), with the unvested portion recognized ratably over the remaining vesting period.

 

 

 

2005 LTIP

 

 

 

 

 

Vested

 

 

 

Total

 

Portion

 

 

 

(In thousands)

 

DISH Network awards held by EchoStar employees

 

$

18,407

 

$

10,389

 

EchoStar awards held by EchoStar employees

 

3,606

 

2,032

 

Total

 

$

22,013

 

$

12,421

 

 

Of the 7.2 million stock options and 0.1 million restricted stock units outstanding under our stock incentive plans as of March 31, 2010, the following awards were outstanding pursuant to the 2005 LTIP:

 

 

 

As of March 31, 2010

 

 

 

Number of
Awards

 

Weighted-
Average
Exercise
Price

 

Stock options

 

716,050

 

$

25.39

 

Restricted performance units

 

98,057

 

 

 

Total

 

814,107

 

 

 

 

Other Employee Performance Plan

 

Our employees who were hired prior to the Spin-off are eligible to receive a DISH Network stock award.  Vesting of this award is contingent upon meeting a certain company-specific goal, which is currently not probable of being achieved.  While DISH Network is responsible for fulfillment of this award, we would have incurred compensation expense of approximately $2 million had achievement of the goal been probable as of March 31, 2010.

 

Stock-Based Compensation

 

Total non-cash, stock-based compensation expense for all of our employees is shown in the following table for the three months ended March 31, 2010 and 2009 and was allocated to the same expense categories as the base compensation for such employees:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2010

 

2009

 

 

 

(In thousands)

 

Cost of sales - services and other

 

$

 

$

182

 

Research and development expenses

 

1,157

 

1,014

 

Selling, general and administrative expenses

 

3,085

 

2,258

 

Total non-cash, stock based compensation

 

$

4,242

 

$

3,454

 

 

As of March 31, 2010, our total unrecognized compensation cost related to our non-performance based unvested stock awards was $30 million and includes compensation expense that we will recognize for DISH Network stock

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

awards held by our employees as a result of the Spin-off.  This cost is based on an estimated future forfeiture rate of approximately 1.2% per year and will be recognized over a weighted-average period of approximately three years.  Share-based compensation expense is recognized based on stock awards ultimately expected to vest and is reduced for estimated forfeitures.  Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  Changes in the estimated forfeiture rate can have a significant effect on share-based compensation expense since the effect of adjusting the rate is recognized in the period the forfeiture estimate is changed.

 

The fair value of each stock award for the three months ended March 31, 2010 and 2009 was estimated at the date of the grant using a Black-Scholes option valuation model with the following assumptions:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

Stock Options

 

2010

 

2009

 

Risk-free interest rate

 

2.97

%

2.00

%

Volatility factor

 

31.00

%

28.48

%

Expected term of options in years

 

6.1

 

6.2

 

Weighted-average fair value of options granted

 

$

7.38

 

$

4.76

 

 

We do not currently plan to pay dividends on our common stock, and therefore the dividend yield percentage is set at zero for all periods presented.  The Black-Scholes option valuation model was developed for use in estimating the fair value of traded stock options which have no vesting restrictions and are fully transferable.  Consequently, our estimate of fair value may differ from other valuation models.  Further, the Black-Scholes option valuation model requires the input of subjective assumptions.  Changes in the subjective input assumptions can materially affect the fair value estimate.  Therefore, we do not believe the existing models provide as reliable a single measure of the fair value of stock-based compensation awards as a market-based model would.

 

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

 

10.       Commitments and Contingencies

 

Commitments

 

Future maturities of our contractual obligations are summarized as follows:

 

 

 

Payments due by period

 

 

 

Total

 

2010

 

2011

 

2012

 

2013

 

2014

 

Thereafter

 

 

 

(In thousands)

 

Long-term debt obligations

 

$

7,219

 

$

684

 

$

749

 

$

808

 

$

871

 

$

940

 

$

3,167

 

Capital lease obligations

 

439,420

 

37,626

 

53,055

 

57,728

 

63,656

 

65,745

 

161,610

 

Interest expense on long-term debt and capital lease obligations

 

244,812

 

30,554

 

36,671

 

31,834

 

26,502

 

20,616

 

98,635

 

Satellite-related obligations

 

1,175,075

 

159,315

 

188,164

 

113,989

 

80,972

 

77,802

 

554,833

 

Operating lease obligations

 

12,793

 

4,825

 

4,397

 

2,145

 

966

 

460

 

 

Purchase and other obligations

 

529,633

 

529,633

 

 

 

 

 

 

Total

 

$

2,408,952

 

$

762,637

 

$

283,036

 

$

206,504

 

$

172,967

 

$

165,563

 

$

818,245

 

 

Future commitments related to satellites, including one satellite launch contract, are included in the table above under “Satellite-related obligations.”

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Our “Purchase and other obligations” primarily consist of binding purchase orders for digital set-top boxes and related components and we have corresponding commitments from our customers for the substantial majority of these obligations.

 

The table above does not include $15 million of liabilities associated with unrecognized tax benefits which were accrued and are included on our Condensed Consolidated Balance Sheets as of March 31, 2010.  We do not expect any portion of this amount to be paid or settled within the next twelve months.

 

In certain circumstances the dates on which we are obligated to make these payments could be delayed.  These amounts will increase to the extent we procure insurance for our satellites or contract for the construction, launch or lease of additional satellites.

 

Contingencies

 

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

 

Acacia

 

During 2004, Acacia Media Technologies, (“Acacia”) filed a lawsuit against us and DISH Network in the United States District Court for the Northern District of California.  The suit also named DirecTV, Comcast, Charter, Cox and a number of smaller cable companies as defendants.  Acacia is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.  The suit alleges infringement of United States Patent Nos. 5,132,992, 5,253,275, 5,550,863, 6,002,720 and 6,144,702, which relate to certain systems and methods for transmission of digital data.  On September 25, 2009, the Court granted summary judgment to defendants on invalidity grounds, and dismissed the action with prejudice.  The plaintiffs have appealed.

 

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

 

Broadcast Innovation, L.L.C.

 

During 2001, Broadcast Innovation, L.L.C. (“Broadcast Innovation”) filed a lawsuit against DISH Network, DirecTV, Thomson Consumer Electronics and others in United States District Court in Denver, Colorado.  The suit alleges infringement of United States Patent Nos. 6,076,094 (the ‘094 patent) and 4,992,066 (the ‘066 patent).  The ‘094 patent relates to certain methods and devices for transmitting and receiving data along with specific formatting information for the data.  The ‘066 patent relates to certain methods and devices for providing the scrambling circuitry for a pay television system on removable cards.  Subsequently, DirecTV and Thomson settled with Broadcast Innovation leaving DISH Network as the only defendant.

 

During 2004, the District Court issued an order finding the ‘066 patent invalid.  Also in 2004, the District Court found the ‘094 patent invalid in a parallel case filed by Broadcast Innovation against Charter and Comcast. In 2005, the United States Court of Appeals for the Federal Circuit overturned that finding of invalidity with respect to the ‘094 patent and remanded the

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Charter case back to the District Court.  During June 2006, Charter filed a reexamination request with the United States Patent and Trademark Office.  The District Court has stayed the Charter case pending reexamination, and our case has been stayed pending resolution of the Charter case.

 

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

 

Finisar Corporation

 

Finisar Corporation (“Finisar”) obtained a $100 million verdict in the United States District Court for the Eastern District of Texas against DirecTV for patent infringement.  Finisar alleged that DirecTV’s electronic program guide and other elements of its system infringe United States Patent No. 5,404,505 (the ‘505 patent).

 

During 2006, we and DISH Network, together with NagraStar LLC, filed a Complaint for Declaratory Judgment in the United States District Court for the District of Delaware against Finisar that asks the Court to declare that we do not infringe, and have not infringed, any valid claim of the ‘505 patent.  Finisar brought counterclaims against us, DISH Network and NagraStar alleging that we infringed the ‘505 patent.  During April 2008, the Federal Circuit reversed the judgment against DirecTV and ordered a new trial.  On remand, the District Court granted summary judgment in favor of DirecTV and during January 2010, the Federal Circuit affirmed the District Court’s grant of summary judgment, and dismissed the action with prejudice.  Finisar then agreed to dismiss its counterclaims against us, DISH Network and NagraStar without prejudice.  We also agreed to dismiss our Declaratory Judgment action without prejudice.

 

Nazomi Communications

 

On February 10, 2010, Nazomi Communications, Inc. (“Nazomi”) filed suit against Sling Media, Inc, a subsidiary of ours, and several other defendants, in the United States District Court for the Central District of California alleging infringement of United States Patent No. 7,080,362 (“the ‘362 patent”) and United States Patent No. 7,225,436 (“the ‘436 patent”).  The ‘362 patent and the ‘436 patent relate to Java hardware acceleration.  The suit alleges that the Slingbox-Pro-HD product infringes the ‘362 patent and the ‘436 patent because the Slingbox-PRO HD allegedly incorporates an ARM926EJ-S processor core capable of Java hardware acceleration.

 

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

 

NorthPoint Technology

 

On July 2, 2009, NorthPoint Technology, Ltd filed suit against us, DISH Network, and DirecTV in the United States District Court for the Western District of Texas alleging infringement of United States Patent No. 6,208,636 (the ‘636 patent).  The ‘636 patent relates to the use of multiple low-noise block converter feedhorns, or LNBFs, which are antennas used for satellite reception.

 

We intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe the asserted patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers.  We are being indemnified by DISH Network for any potential liability or damages resulting from this suit relating to the period prior to the effective

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

date of the Spin-off.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

Personalized Media Communications

 

During 2008, Personalized Media Communications, Inc. filed suit against us, DISH Network and Motorola, Inc. in the United States District Court for the Eastern District of Texas alleging infringement of United States Patent Nos. 4,694,490; 5,109,414; 4,965,825; 5,233,654; 5,335,277; and 5,887,243, which relate to satellite signal processing.

 

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

 

Technology Development Licensing

 

On January 22, 2009, Technology Development and Licensing LLC filed suit against us and DISH Network in the United States District Court for the Northern District of Illinois alleging infringement of United States Patent No. 35,952, which relates to certain favorite channel features.  In July 2009, the Court granted our motion to stay the case pending two re-examination petitions before the Patent and Trademark Office.

 

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

 

Tivo Inc.

 

During January 2008, the United States Court of Appeals for the Federal Circuit affirmed in part and reversed in part the April 2006 jury verdict concluding that certain of our digital video recorders, or DVRs, infringed a patent held by Tivo.  In its January 2008 decision, the Federal Circuit affirmed the jury’s verdict of infringement on Tivo’s “software claims,” and upheld the award of damages from the District Court.  The Federal Circuit, however, found that we did not literally infringe Tivo’s “hardware claims,” and remanded such claims back to the District Court for further proceedings.  On October 6, 2008, the Supreme Court denied our petition for certiorari.  As a result, DISH Network paid approximately $105 million to Tivo.

 

We also developed and deployed “next-generation” DVR software.  This improved software was automatically downloaded to our current customers’ DVRs, and is fully operational (our “original alternative technology”).  The download was completed as of April 2007.  We received written legal opinions from outside counsel that concluded our original alternative technology does not infringe, literally or under the doctrine of equivalents, either the hardware or software claims of Tivo’s patent.  Tivo filed a motion for contempt alleging that we are in violation of the Court’s injunction.  We opposed this motion on the grounds that the injunction did not apply to DVRs that have received our original alternative technology, that our original alternative technology does not infringe Tivo’s patent, and that we were in compliance with the injunction.

 

In June 2009, the United States District Court granted Tivo’s motion for contempt, finding that our original alternative technology was not more than colorably different than the products found by the jury to infringe Tivo’s patent, that the original alternative technology still infringed the software claims, and that even if the original alternative technology

 

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(Unaudited)

 

was “non-infringing,” the original injunction by its terms required that DISH Network disable DVR functionality in all but approximately 192,000 digital set-top boxes in the field.  The District Court also amended its original injunction to require that we inform the court of any further attempts to design around Tivo’s patent and seek approval from the court before any such design-around is implemented. The District Court awarded Tivo $103 million in supplemental damages and interest for the period from September 2006 through April 2008, based on an assumed $1.25 per subscriber per month royalty rate.  DISH Network posted a bond to secure that award pending appeal of the contempt order.  On July 1, 2009, the Federal Circuit Court of Appeals granted a permanent stay of the District Court’s contempt order pending resolution of our appeal. 

 

The District Court held a hearing on July 28, 2009 on Tivo’s claims for contempt sanctions, but has ordered that enforcement of any sanctions award will be stayed pending resolution of our appeal of the contempt order.  Tivo sought up to $975 million in contempt sanctions for the period from April 2008 to June 2009 based on, among other things, profits Tivo alleges DISH Network made from subscribers using DVRs.  We opposed Tivo’s request arguing, among other things, that sanctions are inappropriate because we made good faith efforts to comply with the Court’s injunction.  We also challenged Tivo’s calculation of profits.

 

On August 3, 2009, the Patent and Trademark Office (the “PTO”) issued an initial office action rejecting the software claims of United States Patent No. 6,233,389 (the’389 patent) as being invalid in light of two prior patents.  These are the same software claims that we were found to have infringed and which underlie the contempt ruling that we are now appealing.  We believe that the PTO’s conclusions are relevant to the issues on appeal as well as the pending sanctions proceedings in the District Court.  The PTO’s conclusions support our position that our original alternative technology is more than colorably different than the devices found to infringe by the jury; that our original alternative technology does not infringe; and that we acted in good faith to design around Tivo’s patent.

 

On September 4, 2009, the District Court partially granted Tivo’s motion for contempt sanctions.  In partially granting Tivo’s motion for contempt sanctions, the District Court awarded $2.25 per DVR subscriber per month for the period from April 2008 to July 2009 (as compared to the award for supplemental damages for the prior period from September 2006 to April 2008, which was based on an assumed $1.25 per DVR subscriber per month).  By the District Court’s estimation, the total award for the period from April 2008 to July 2009 is approximately $200 million (the enforcement of the award has been stayed by the District Court pending resolution of our appeal of the underlying June 2009 contempt order).  The District Court also awarded Tivo its attorneys’ fees and costs incurred during the contempt proceedings.  On February 8, 2010, we and Tivo submitted a stipulation to the District Court that the attorneys’ fees and costs, including expert witness fees and costs, that Tivo incurred during the contempt proceedings amounted to $6 million.

 

In light of the District Court’s finding of contempt, and its description of the manner in which it believes our original alternative technology infringed the ‘389 patent, we are also developing and testing potential new alternative technology in an engineering environment.  As part of our development process, we downloaded several of our design-around options to less than 1,000 subscribers for “beta” testing.

 

Oral argument on our appeal of the contempt ruling took place on November 2, 2009, before a three-judge panel of the Federal Circuit Court of Appeals.  On March 4, 2010, the Federal Circuit affirmed the District Court’s contempt order in a 2-1 decision.  We filed a petition for en banc review of that decision by the full Federal Circuit and requested that the District Court approve the implementation of one of our new design-around options on an expedited basis.  There can be no assurance that our petition for en banc review will be granted, and historically such petitions have rarely been granted.  Nor can there be any assurance that the District Court will approve the implementation of one of our design-around options.  Tivo has stated that it will seek additional damages for the period from June 2009 to the present.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

If we are unsuccessful in overturning the District Court’s ruling on Tivo’s motion for contempt, we are not successful in developing and deploying potential new alternative technology and we are unable to reach a license agreement with Tivo on reasonable terms, we would be required to cease distribution of digital set-top boxes with DVR functionality.  In that event, our sales of digital set-top boxes to DISH Network and others would likely significantly decrease and could even potentially cease for a period of time.  Furthermore, the inability to offer DVR functionality would place us at a significant disadvantage to our competitors and make it even more difficult for us to penetrate new markets for digital set-top boxes.  The adverse effect on our financial position and results of operations if the District Court’s contempt order is upheld would be significant.

 

If we are successful in overturning the District Court’s ruling on Tivo’s motion for contempt, but unsuccessful in defending against any subsequent claim in a new action that our original alternative technology or any potential new alternative technology infringes Tivo’s patent, we could be prohibited from distributing DVRs.  In that event we would be at a significant disadvantage to our competitors who could continue offering DVR functionality and the adverse effect on our business would be material.

 

Because both we and DISH Network are defendants in the Tivo lawsuit, we and DISH Network are jointly and severally liable to Tivo for any final damages and sanctions that may be awarded by the Court.  DISH Network has agreed that it is obligated under the agreements entered into in connection with the Spin-off to indemnify us for substantially all liability arising from this lawsuit.  We have agreed to contribute an amount equal to our $5 million intellectual property liability limit under the Receiver Agreement.  We and DISH Network have further agreed that our $5 million contribution would not exhaust our liability to DISH Network for other intellectual property claims that may arise under the Receiver Agreement.  Therefore, during the second quarter of 2009, we recorded a charge included in “General and administrative expenses — DISH Network” on our Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) of $5 million to reflect this contribution.  We and DISH Network also agreed that we would each be entitled to joint ownership of, and a cross-license to use, any intellectual property developed in connection with any potential new alternative technology.

 

Because we are jointly and severally liable with DISH Network, to the extent that DISH Network does not or is unable to pay any damages or sanctions arising from this lawsuit, we would then be liable for any portion of these damages and sanctions not paid by DISH Network.  Any amounts that DISH Network may be required to pay could impair its ability to pay us and also negatively impact our future liquidity.

 

If we become liable for any portion of these damages or sanctions, we may be required to raise additional capital at a time and in circumstances in which we would normally not raise capital and there can be no assurance that such capital would be available on terms that would be attractive to us or at all.  Therefore, any capital we raise may be on terms that are unfavorable to us, which might adversely affect our financial position and results of operations and might also impair our ability to raise capital on acceptable terms in the future to fund our own operations and initiatives.

 

Other

 

In addition to the above actions, we are subject to various other legal proceedings and claims which arise in the ordinary course of business.  In our opinion, the amount of ultimate liability with respect to any of these actions is unlikely to materially affect our financial position, results of operations or liquidity.

 

11.       Segment Reporting

 

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

 

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(Unaudited)

 

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

 

·                  “Satellite Services” Business — which uses our ten owned and leased in-orbit satellites and related FCC licenses to lease capacity on a full time and occasional-use basis to enterprise, broadcast news and government organizations.  We currently lease capacity primarily to DISH Network, and secondarily to Dish Mexico, government entities, Internet service providers, broadcast news organizations and private enterprise customers.  We also deliver our ViP-TV transport service, offering MPEG-4 encoded Internet Protocol, or IP, streams of video and audio channels to telecommunication companies and small cable operators.

 

The “All Other” category consists of revenue and net income (loss) from other operations including our corporate investment portfolio for which segment disclosure requirements do not apply.

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2010

 

2009

 

 

 

(In thousands)

 

Revenue:

 

 

 

 

 

Digital set-top box

 

$

559,268

 

$

433,857

 

Satellite services

 

63,557

 

40,935

 

All other

 

4,255

 

4,755

 

Total revenue

 

$

627,080

 

$

479,547

 

 

 

 

 

 

 

Net income (loss):

 

 

 

 

 

Digital set-top box

 

$

10,408

 

$

(7,832

)

Satellite services

 

5,951

 

(1,512

)

All other

 

55,387

 

8,699

 

Total net income (loss)

 

$

71,746

 

$

(645

)

 

Geographic Information and Transactions with Major Customers

 

Geographic Information.  Revenues are attributed to geographic regions based upon the location where the sale originated.  North American revenue includes transactions with North American customers.  All other revenue includes transactions with customers in Europe, Africa, South America, and the Middle East.  The following table summarizes total long-lived assets and revenue attributed to the North American and foreign locations.

 

 

 

North

 

All

 

 

 

 

 

America

 

Other

 

Total

 

 

 

(In thousands)

 

Long-lived assets, including FCC authorizations:

 

 

 

 

 

 

 

As of March 31, 2010

 

$

1,399,386

 

$

42,916

 

$

1,442,302

 

As of December 31, 2009

 

$

1,411,292

 

$

43,516

 

$

1,454,808

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

For the three months ended March 31, 2010

 

$

616,222

 

$

10,858

 

$

627,080

 

For the three months ended March 31, 2009

 

$

469,067

 

$

10,480

 

$

479,547

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Transactions with Major Customers.  During the three months ended March 31, 2010 and 2009, North American revenue in the table above primarily included sales to two major customers.  The following table summarizes sales to each customer and its percentage of total revenue.

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2010

 

2009

 

 

 

(In thousands)

 

Total revenue:

 

 

 

 

 

DISH Network

 

$

500,908

 

$

412,204

 

Bell TV

 

73,308

 

45,456

 

Other

 

52,864

 

21,887

 

Total revenue

 

$

627,080

 

$

479,547

 

 

 

 

 

 

 

Percentage of total revenue:

 

 

 

 

 

DISH Network

 

79.9

%

86.0

%

Bell TV

 

11.7

%

9.5

%

 

12.       Related Party Transactions

 

Related Party Transactions with DISH Network

 

Following the Spin-off, we and DISH Network have operated as separate public companies and DISH Network has no ownership interest in us.  However, a substantial majority of the voting power of the shares of both companies is owned beneficially by our Chairman, Charles W. Ergen or by certain trusts established by Mr. Ergen for the benefit of his family.

 

In connection with the Spin-off and subsequent to the Spin-off, we and DISH Network have entered into certain agreements pursuant to which we obtain certain products, services and rights from DISH Network, DISH Network obtains certain products, services and rights from us, and  we and DISH Network have indemnified each other against certain liabilities arising from our respective businesses. We also may enter into additional agreements with DISH Network in the future.  The following is a summary of the terms of the principal agreements that we have entered into with DISH Network that may have an impact on our financial position and results of operations.

 

In the near term, we expect that DISH Network will remain our principal customer. However, except as otherwise noted below, DISH Network has no obligation to purchase digital set-top boxes, satellite services or digital broadcast operation services from us after January 1, 2011 because these services are provided pursuant to contracts that generally expire on that date.  Therefore, if we are unable to extend these contracts on similar terms with DISH Network, or if we are otherwise unable to obtain similar contracts from third parties before that date, there could be a significant adverse effect on our business, results of operations and financial position.

 

Generally, the prices charged for products and services provided under the agreements entered into in connection with the Spin-off are based on our cost plus a fixed margin, which varies depending on the nature of the products and services provided.

 

“Equipment revenue — DISH Network”

 

Receiver Agreement.  In connection with the Spin-off, we entered into a receiver agreement pursuant to which DISH Network has the right but not the obligation to purchase digital set-top boxes, related accessories, and other equipment from us for a period ending on January 1, 2011.  DISH Network has the right, but not the obligation, to extend the receiver agreement for one additional year.  The receiver agreement allows DISH Network to purchase digital set-top boxes, related accessories, and other equipment from us at cost plus a fixed margin, which varies depending on the nature of the equipment purchased.  Additionally, we provide DISH Network with standard manufacturer warranties for the goods sold under the receiver agreement.  DISH Network may terminate the

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

receiver agreement for any reason upon sixty days written notice.  We may terminate this agreement if certain entities were to acquire DISH Network.  The receiver agreement also includes an indemnification provision, whereby the parties indemnify each other for certain intellectual property matters.

 

“Services and other revenue — DISH Network”

 

Broadcast Agreement.  In connection with the Spin-off, we entered into a broadcast agreement pursuant to which DISH Network receives broadcast services, including teleport services such as transmission and downlinking, channel origination, and channel management services from us for a period ending on January 1, 2011.  DISH Network has the right, but not the obligation, to extend the broadcast agreement for one additional year.  DISH Network may terminate channel origination and channel management services for any reason and without any liability upon sixty days written notice to us.  If DISH Network terminates teleport services for a reason other than our breach, DISH Network must pay us a sum equal to the aggregate amount of the remainder of the expected cost of providing the teleport services.

 

Satellite Capacity Agreements.  In connection with the Spin-off and subsequent to the Spin-off, we entered into certain satellite capacity agreements pursuant to which DISH Network leases certain satellite capacity on certain satellites owned or leased by us.  The fees for the services provided under these satellite capacity agreements depend, among other things, upon the orbital location of the applicable satellite and the frequency on which the applicable satellite provides services.  The term of each of the leases is set forth below:

 

EchoStar III, VI, VIII, and XII.  DISH Network leases certain satellite capacity from us on EchoStar III, VI, VIII, and XII.  The leases generally terminate upon the earlier of:  (i) the end of life or replacement of the satellite (unless DISH Network determines to renew on a year-to-year basis); (ii) the date the satellite fails; (iii) the date the transponder on which service is being provided fails; or (iv) a certain date, which depends upon, among other things, the estimated useful life of the satellite, whether the replacement satellite fails at launch or in orbit prior to being placed in service, and the exercise of certain renewal options.  DISH Network generally has the option to renew each lease on a year-to-year basis through the end of the respective satellite’s life.  There can be no assurance that any options to renew such agreements will be exercised.

 

EchoStar XVI.  DISH Network will lease certain satellite capacity from us on EchoStar XVI after its service commencement date and this lease generally terminates upon the earlier of:  (i) the end of life or replacement of the satellite; (ii) the date the satellite fails; (iii) the date the transponder(s) on which service is being provided under the agreement fails; or (iv) ten years following the actual service commencement date.  Upon expiration of the initial term, DISH Network has the option to renew on a year-to-year basis through the end of life of the satellite.  There can be no assurance that any options to renew this agreement will be exercised.

 

Nimiq 5 Agreement.  During September 2009, we entered into a fifteen-year satellite service agreement with Telesat Canada (“Telesat”) to receive service on all 32 DBS transponders on the Nimiq 5 satellite at the 72.7 degree orbital location (the “Telesat Transponder Agreement”).  During September 2009, DISH Network also entered into a satellite service agreement (the “DISH Telesat Agreement”) with us, pursuant to which they will receive service from us on all 32 of the DBS transponders covered by the Telesat Transponder Agreement.  DISH Network is currently receiving service on 21 of these DBS transponders and will receive service on the remaining 11 DBS transponders over a phase-in period that will be completed in 2012.

 

Under the terms of the DISH Telesat Agreement, DISH Network makes certain monthly payments to us that commenced in October 2009 when the Nimiq 5 satellite was placed in service and continue through the service term.  Unless earlier terminated under the terms and conditions of the DISH Telesat Agreement, the service term will expire ten years following the date it was placed in service.  Upon expiration of the initial term DISH Network has the option to renew the DISH Telesat Agreement on a year-to-year basis through the end of life of the Nimiq 5 satellite.  Upon in-orbit failure or end of life of the Nimiq 5 satellite, and in certain other circumstances, DISH Network has certain rights to receive service from us on a replacement satellite.  There can be no assurance that any options to renew this agreement will be exercised or that DISH Network will exercise its option to receive service on a replacement satellite.

 

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(Unaudited)

 

Launch Service.  On December 21, 2009, we assigned the rights under one of our launch contracts to DISH Network for its fair value of $103 million.  We recorded the assignment of the launch contract at our net book value of $89 million and recorded the $14 million difference between our carrying value and DISH Network’s purchase price as a capital transaction to DISH Network.

 

QuetzSat-1 Lease Agreement.  During 2008, we entered into a ten-year satellite service agreement with SES Latin America S.A. (“SES”), which provides, among other things, for the provision by SES to us of service on 32 DBS transponders on the QuetzSat-1 satellite expected to be placed in service at the 77 degree orbital location.  During 2008, we also entered into a transponder service agreement (“QuetzSat-1 Transponder Agreement”) with DISH Network pursuant to which they will receive service from us on 24 of the DBS transponders on QuetzSat-1, which will replace certain other transponders leased from us.  The remaining eight DBS transponders on QuetzSat-1 are expected to be used by Dish Mexico.

 

Under the terms of the QuetzSat-1 Transponder Agreement, DISH Network will make certain monthly payments to us commencing when the QuetzSat-1 satellite is placed into service and continuing through the service term.  Unless earlier terminated under the terms and conditions of the QuetzSat-1 Transponder Agreement, the service term will expire ten years following the actual service commencement date.  Upon expiration of the initial term, DISH Network has the option to renew the QuetzSat-1 Transponder Agreement on a year-to-year basis through the end of life of the QuetzSat-1 satellite.  Upon a launch failure, in-orbit failure or end of life of the QuetzSat-1 satellite, and in certain other circumstances, DISH Network has certain rights to receive service from us on a replacement satellite.  There can be no assurance that any options to renew this agreement will be exercised or that DISH Network will exercise its option to receive service on a replacement satellite.  QuetzSat-1 is expected to be completed during 2011.

 

TT&C Agreement.  In connection with the Spin-off, we entered into a telemetry, tracking and control (“TT&C”) agreement pursuant to which we provide TT&C services to DISH Network and its subsidiaries for a period ending on January 1, 2011.  DISH Network has the right, but not the obligation, to extend the agreement for up to one additional year.  The fees for the services provided under the TT&C agreement are equal to our cost plus a fixed margin.  DISH Network may terminate the TT&C agreement for any reason upon sixty days prior written notice.

 

Real Estate Lease Agreements.  We have entered into certain lease agreements pursuant to which DISH Network leases certain real estate from us.  The rent on a per square foot basis for each of the leases is comparable to per square foot rental rates of similar commercial property in the same geographic area, and DISH Network is responsible for a portion of the taxes, insurance, utilities and maintenance of the premises.  The term of each of the leases is set forth below:

 

Inverness Lease Agreement.  The lease for certain space at 90 Inverness Circle East in Englewood, Colorado, is for a period ending on January 1, 2011.

 

Meridian Lease Agreement.  The lease for all of 9601 S. Meridian Blvd. in Englewood, Colorado, is for a period ending on January 1, 2011 with annual renewal options for up to two additional years.

 

Santa Fe Lease Agreement.  The lease for all of 5701 S. Santa Fe Dr. in Littleton, Colorado, is for a period ending on January 1, 2011 with annual renewal options for up to two additional years.

 

Gilbert Lease Agreement.  The lease for certain space at 801 N. DISH Dr. in Gilbert, Arizona expired on January 1, 2010.

 

EDN Sublease Agreement.  The sublease for certain space at 211 Perimeter Center in Atlanta, Georgia, is for a period of three years, ending on April 30, 2011.

 

Product Support Agreement.  In connection with the Spin-off, we entered into a product support agreement pursuant to which DISH Network has the right, but not the obligation, to receive product support (including certain engineering and technical support services) for all digital set-top boxes and related accessories that our subsidiaries have previously sold and in the future may sell to DISH Network.  The fees for the services provided under the

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

product support agreement are equal to our cost plus a fixed margin, which varies depending on the nature of the services provided.  The term of the product support agreement is the economic life of such receivers and related accessories, unless terminated earlier.  DISH Network may terminate the product support agreement for any reason upon sixty days prior written notice.  In the event of an early termination of this agreement, DISH Network shall be entitled to a refund of any unearned fees paid to us for the services.

 

Satellite Procurement Agreement.  In connection with the Spin-off, we entered into a satellite procurement agreement pursuant to which DISH Network had the right, but not the obligation, to engage us to manage the process of procuring new satellite capacity for DISH Network.  The satellite procurement agreement expired on January 1, 2010.  However, we and DISH Network have agreed that following January 1, 2010, DISH Network continues to have the right, but not the obligation, to engage us to manage the process of procuring new satellite capacity for DISH Network pursuant to the Professional Services Agreement as described below.

 

Services Agreement.  In connection with the Spin-off, we entered into a services agreement pursuant to which DISH Network had the right, but not the obligation, to receive logistics, procurement and quality assurance services from us.  This agreement expired on January 1, 2010.  However, we and DISH Network have agreed that following January 1, 2010, DISH Network continues to have the right, but not the obligation, to receive from us certain of the services previously provided under the services agreement pursuant to the Professional Services Agreement as discussed below.

 

DISHOnline.com Services Agreement.  Effective January 1, 2010, DISH Network entered into a two-year agreement with us pursuant to which DISH Network will receive certain services associated with an online video portal.  The fees for the services provided under this services agreement depend, among other things, upon the cost to develop and operate such services.  DISH Network has the option to renew this agreement for three successive one year terms and the agreement may be terminated for any reason upon 120 days written notice to us.

 

DISH Remote Access Services Agreement.  Effective January 1, 2010, DISH Network entered into an agreement with us pursuant to which DISH Network will receive, among other things, certain remote DVR management services.  The fees for the services provided under this services agreement depend, among other things, upon the cost to develop and operate such services.  This agreement has a term of five years with automatic renewal for successive one year terms and may be terminated for any reason upon 120 days written notice to us.

 

SlingService Services Agreement.  Effective February 23, 2010, DISH Network entered into an agreement with us pursuant to which DISH Network will receive certain place-shifting services.  The fees for the services provided under this services agreement depend, among other things, upon the cost to develop and operate such services.  This agreement has a term of five years with automatic renewal for successive one year terms and may be terminated for any reason upon 120 days written notice to us