Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

Form 10-Q

 

(Mark One)

 

T

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

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011.

 

OR

 

£

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

 

FOR THE TRANSITION PERIOD FROM                    TO                   .

 

Commission File Number:  001-33807

 

EchoStar Corporation

(Exact name of registrant as specified in its charter)

 

Nevada

 

26-1232727

(State or other jurisdiction of incorporation or
organization)

 

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

 

 

 

100 Inverness Terrace East

 

 

Englewood, Colorado

 

80112-5308

(Address of principal executive offices)

 

(Zip code)

 

(303) 706-4000

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

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

 

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 T   No  £

 

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 T

 

Accelerated filer £

 

 

 

Non-accelerated filer £
(Do not check if a smaller reporting company)

 

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  £ No  T

 

As of April 20, 2011, the registrant’s outstanding common stock consisted of 38,470,471 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, 2011 and December 31, 2010 (Unaudited)

1

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) For the Three Months Ended March 31, 2011 and 2010 (Unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2011 and 2010 (Unaudited)

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

4

 

 

 

Item 2.

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

37

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

51

 

 

 

Item 4.

Controls and Procedures

53

 

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

53

 

 

 

Item 1A.

Risk Factors

57

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

 

 

 

Item 3.

Defaults Upon Senior Securities

None

 

 

 

Item 4.

(Removed and Reserved)

None

 

 

 

Item 5.

Other Information

58

 

 

 

Item 6.

Exhibits

59

 

 

 

 

Signatures

60

 



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

 

·                  We currently depend on DISH Network Corporation (“DISH Network”), Bell TV and Dish Mexico, S. de R.L. de C.V. (“Dish Mexico”) 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 and/or other products or services to, DISH Network, Bell TV or Dish Mexico would significantly reduce our revenue and adversely impact our results of operations.  In addition, the loss of, or a significant reduction in, orders from, or a decrease in selling price of transponder leasing and/or providing digital broadcast operations to, DISH Network would also significantly reduce our revenue and adversely impact our results of operations.

 

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

 

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

 

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

 

·                  We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar foreign anti-bribery laws.

 

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

 

·                  Any failure or inadequacy of our information technology infrastructure could harm our business.

 

i



Table of Contents

 

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

 

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

 

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

 

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 our customer base does not compete successfully with existing and emerging competition.

 

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

 

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

 

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

 

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

 

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

 

·                  If we are successful in growing sales of our digital set-top boxes to international customers, we may be subject to greater risks.

 

·                  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 pay-TV services that utilize digital set-top boxes, we may not be able to sustain our current revenue level.

 

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

 

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

 

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

 

Risks Affecting Our “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.

 

ii



Table of Contents

 

·                  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 (“FCC”) licenses that can expire or be revoked or modified and applications for FCC licenses that may not be granted.

 

·                  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.

 

·                  We generally do not have commercial insurance coverage on the satellites we use 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.

 

Risks Relating to our Acquisition of Hughes Communications Inc. (“Hughes”)

 

·                  Governmental authorities must approve our acquisition of Hughes and could impose conditions on, delay, or refuse to approve the merger.

 

·                  Stockholders of Hughes have filed purported class action lawsuits challenging the merger, and are seeking, among other things, injunctive relief to enjoin the consummation of the merger.

 

·                  We may not be able to obtain the financing required to fulfill our obligations under our agreement to acquire Hughes.

 

·                  The terms of the financing related to our acquisition of Hughes will significantly reduce our ability to incur additional indebtedness.

 

·                  The incurrence of indebtedness to finance our acquisition of Hughes will substantially increase our leverage.

 

·                  Although we expect that our acquisition of Hughes will benefit us, those expected benefits may not occur because of the complexity of the integration and other challenges.

 

·                  If we are able to complete our acquisition of Hughes, we will be subject to the risks related to Hughes’ business.

 

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 Securities and Exchange Commission (“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

(Dollars in thousands, except share amounts)

(Unaudited)

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

121,596

 

$

141,814

 

Marketable investment securities

 

1,018,140

 

989,086

 

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

 

250,050

 

238,997

 

Trade accounts receivable - other, net of allowance for doubtful accounts of $8,988 and $7,644, respectively

 

43,336

 

42,247

 

Inventory

 

30,063

 

30,433

 

Other current assets

 

117,503

 

92,890

 

Total current assets

 

1,580,688

 

1,535,467

 

 

 

 

 

 

 

Noncurrent Assets:

 

 

 

 

 

Restricted cash and marketable investment securities

 

17,426

 

17,426

 

Property and equipment, net of accumulated depreciation of $1,807,582 and $1,766,290, respectively

 

1,276,352

 

1,263,303

 

FCC authorizations

 

69,810

 

69,810

 

Intangible assets, net

 

160,579

 

165,451

 

Marketable and other investment securities

 

752,836

 

725,588

 

Other noncurrent assets, net

 

64,330

 

64,975

 

Total noncurrent assets

 

2,341,333

 

2,306,553

 

Total assets

 

$

3,922,021

 

$

3,842,020

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Trade accounts payable - other

 

$

169,073

 

$

145,203

 

Trade accounts payable - DISH Network

 

21,854

 

14,155

 

Accrued royalties

 

16,334

 

20,199

 

Accrued expenses and other

 

73,295

 

62,079

 

Deferred tax liabilities

 

63,890

 

64,121

 

Current portion of long-term debt and capital lease obligations

 

54,675

 

53,060

 

Total current liabilities

 

399,121

 

358,817

 

 

 

 

 

 

 

Long-Term Obligations, Net of Current Portion:

 

 

 

 

 

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

 

354,534

 

359,825

 

Deferred tax liabilities

 

79,031

 

75,840

 

Other long-term liabilities

 

35,316

 

34,348

 

Total long-term obligations, net of current portion

 

468,881

 

470,013

 

Total liabilities

 

868,002

 

828,830

 

 

 

 

 

 

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

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, 43,664,136 and 43,103,166 shares issued, 38,131,818 and 37,570,848 shares outstanding, respectively

 

44

 

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

 

3,329,160

 

3,311,405

 

Accumulated other comprehensive income (loss)

 

194,896

 

188,982

 

Accumulated earnings (deficit)

 

(371,962

)

(389,126

)

Treasury stock, at cost

 

(98,162

)

(98,162

)

Total EchoStar stockholders’ equity (deficit)

 

3,054,024

 

3,013,190

 

Noncontrolling interest

 

(5

)

 

Total stockholders’ equity (deficit)

 

3,054,019

 

3,013,190

 

Total liabilities and stockholders’ equity (deficit)

 

$

3,922,021

 

$

3,842,020

 

 

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

 

1



Table of Contents

 

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,

 

 

 

2011

 

2010

 

Revenue:

 

 

 

 

 

Equipment revenue - DISH Network

 

$

272,126

 

$

385,848

 

Equipment revenue - other

 

65,909

 

111,703

 

Services and other revenue - DISH Network

 

121,207

 

115,060

 

Services and other revenue - other

 

20,584

 

14,469

 

Total revenue

 

479,826

 

627,080

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

Cost of sales - equipment

 

293,384

 

422,208

 

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

 

61,460

 

57,433

 

Research and development expenses (exclusive of depreciation shown below - Note 6)

 

8,859

 

12,234

 

Selling, general and administrative expenses (exclusive of depreciation shown below - Note 6)

 

44,772

 

32,631

 

General and administrative expenses - DISH Network (exclusive of depreciation shown below - Note 6)

 

3,489

 

4,159

 

Depreciation and amortization (Note 6)

 

57,014

 

57,649

 

Total costs and expenses

 

468,978

 

586,314

 

 

 

 

 

 

 

Operating income (loss)

 

10,848

 

40,766

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

Interest income

 

2,677

 

1,846

 

Interest expense, net of amounts capitalized

 

462

 

(11,595

)

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

 

665

 

(537

)

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

 

3,304

 

65,828

 

Other, net

 

6,991

 

(1,671

)

Total other income (expense)

 

14,099

 

53,871

 

 

 

 

 

 

 

Income (loss) before income taxes

 

24,947

 

94,637

 

Income tax (provision) benefit, net

 

(7,788

)

(22,891

)

Net income (loss)

 

17,159

 

71,746

 

Less: Net income (loss) attributable to noncontrolling interest

 

(5

)

 

Net income (loss) attributable to EchoStar common shareholders

 

$

17,164

 

$

71,746

 

 

 

 

 

 

 

Comprehensive Income (Loss):

 

 

 

 

 

Net income

 

$

17,159

 

$

71,746

 

Foreign currency translation adjustments

 

(192

)

(390

)

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

 

6,771

 

26,669

 

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

 

(665

)

 

Comprehensive income (loss)

 

23,073

 

98,025

 

Less: Comprehensive income (loss) attributable to noncontrolling interest

 

(5

)

 

Comprehensive income (loss) attributable to EchoStar common shareholders

 

$

23,078

 

$

98,025

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic

 

85,466

 

84,855

 

Diluted

 

92,331

 

84,933

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

Basic net income (loss) per share attributable to EchoStar common shareholders

 

$

0.20

 

$

0.85

 

Diluted net income (loss) per share attributable to EchoStar common shareholders

 

$

0.19

 

$

0.84

 

 

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

 

2



Table of Contents

 

ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2011

 

2010

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income (loss)

 

$

17,159

 

$

71,746

 

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

 

 

 

 

 

Depreciation and amortization

 

57,014

 

57,649

 

Equity in losses (earnings) of affiliates

 

(5,008

)

1,690

 

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

 

(665

)

537

 

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

 

(3,304

)

(65,828

)

Non-cash, stock-based compensation

 

2,981

 

4,242

 

Deferred tax expense (benefit)

 

1,759

 

(8,820

)

Other, net

 

353

 

2,184

 

Change in noncurrent assets

 

1,570

 

1,122

 

Changes in current assets and current liabilities, net

 

21,313

 

(35,646

)

Net cash flows from operating activities

 

93,172

 

28,876

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Purchases of marketable investment securities

 

(551,508

)

(570,308

)

Sales and maturities of marketable investment securities

 

488,781

 

642,418

 

Purchases of property and equipment

 

(39,140

)

(32,492

)

Launch service assigned to DISH Network (Note 13)

 

 

102,913

 

Purchase of strategic investments included in marketable and other investment securities

 

(27,775

)

(18,601

)

Proceeds from sale of strategic investments

 

15,437

 

 

Other, net

 

51

 

(200

)

Net cash flows from investing activities

 

(114,154

)

123,730

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Repayment of long-term debt and capital lease obligations

 

(13,019

)

(12,845

)

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

 

14,153

 

524

 

Other

 

694

 

 

Net cash flows from financing activities

 

1,828

 

(12,321

)

 

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents

 

(1,064

)

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(20,218

)

140,285

 

Cash and cash equivalents, beginning of period

 

141,814

 

23,330

 

Cash and cash equivalents, end of period

 

$

121,596

 

$

163,615

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid for interest (including capitalized interest)

 

$

11,716

 

$

11,422

 

Capitalized interest

 

$

9,050

 

$

 

Cash received for interest

 

$

4,693

 

$

2,803

 

Cash paid for income taxes

 

$

474

 

$

8,481

 

Satellites and other assets financed under capital lease obligations

 

$

9,343

 

$

47,808

 

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

 

$

 

$

34,693

 

 

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

 

3



Table of Contents

 

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 and technology, 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 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 primarily to DISH Network, and secondarily to Dish Mexico, U.S. government service providers, state agencies, Internet service providers, broadcast news organizations, programmers and private enterprise customers.

 

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

 

Recent Developments

 

On February 13, 2011, we and certain of our subsidiaries, including EchoStar Satellite Services L.L.C., (“ESS”) entered into an agreement and plan of merger (the “Hughes Agreement”) with Hughes, whereby we will acquire all of the outstanding equity of Hughes and its subsidiaries, including its main operating subsidiary, Hughes Network Systems, LLC (“HNS”) (the “Hughes Merger”).  Pursuant to the Hughes Agreement, each issued and outstanding share of common stock of Hughes (other than common stock with respect to which appraisal rights have been exercised) will be converted into the right to receive $60.70 in cash.  The Hughes Agreement also contemplates the repayment of all of the outstanding debt of Hughes and HNS (including the 9½% Senior Notes due 2014 issued by HNS), except that the $115 million loan facility guaranteed by COFACE, the French Export Credit Agency, will continue to remain outstanding following the Merger if certain consents are obtained.  As a result, the Hughes Merger is valued at approximately $2.0 billion, including the Hughes debt expected to be refinanced.  The Hughes Merger is expected to close later this year, subject to certain closing conditions, including among others, certain government regulatory approvals, including approval by the FCC.  The Hughes Agreement contains certain termination rights for both Hughes and us.

 

In order to finance the Hughes Merger, we and ESS obtained an aggregate financing commitment of $1.0 billion in senior secured bridge financing and $800 million in senior unsecured bridge financing, in each case from Deutsche Bank AG Cayman Islands Branch (collectively, the “Bridge Commitment”).  Deutsche Bank’s obligations under the Bridge Commitment are subject to a number of conditions, including that the conditions to closing under the Hughes Agreement have been met (subject to certain exceptions); that we have a minimum amount of cash on hand at the closing; that we have provided certain financial statements and other information relating to us and Hughes in specified time periods; and that our aggregate indebtedness not exceed specified levels.  There is no assurance that we will be able to satisfy these conditions.  The initial term of the Bridge Commitment is six months.  We have the option to extend the term of the Bridge Commitment to nine months so long as we have delivered certain required

 

4



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

information, including certain financial statements, and have complied with our obligations to issue debt securities in lieu of borrowing under the Bridge Commitment.  Subject to certain exceptions, we do not have the ability to terminate the Hughes Agreement until nine months after the date the Hughes Agreement was executed.  Accordingly, there is no assurance that the Bridge Commitment will remain in effect for the duration of our obligations under the Hughes Agreement.  We do not have the ability to terminate the Hughes Agreement if we are unable to obtain sufficient funds to satisfy our obligations under the Hughes Agreement.  If the funding under the Bridge Commitment were to become unavailable for any reason, there is no assurance that we will be able to obtain sufficient funds to satisfy our obligations under the Hughes Agreement.

 

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.  Our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.  For further information, refer to the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 10-K”).  Certain prior period amounts have been reclassified to conform to the current period presentation.

 

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

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense for each reporting period.  Estimates are used in accounting for, among other things, 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.

 

5



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Fair Value of Financial Instruments

 

As of March 31, 2011 and 2010, the carrying value of our cash and cash equivalents; current marketable investment securities, trade accounts receivable, net of allowance for doubtful accounts; current liabilities and long-term debt is equal to or approximates fair value due to their short-term nature or proximity to current market rates.

 

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

 

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

 

The potential dilution from stock awards was computed using the treasury stock method based on the average market value of our Class A common stock.  The following table presents 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,

 

 

 

2011

 

2010

 

 

 

(In thousands, except per share amounts)

 

Net income (loss) attributable to EchoStar common shareholders

 

$

17,164

 

$

71,746

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic

 

85,466

 

84,855

 

Dilutive impact of stock awards outstanding

 

6,865

 

78

 

Diluted

 

92,331

 

84,933

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

Basic net income (loss) per share attributable to EchoStar common shareholders

 

$

0.20

 

$

0.85

 

Diluted net income (loss) per share attributable to EchoStar common shareholders

 

$

0.19

 

$

0.84

 

 

As of March 31, 2011 and 2010, there were stock awards to purchase 2.3 million and 5.2 million shares, respectively, of Class A common stock outstanding, not included in the weighted-average common shares outstanding above, 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 performance based stock incentive plan is contingent upon meeting a certain company goal which is not yet probable of being achieved.  As a consequence, the following are also not included in the diluted EPS calculation.

 

 

 

As of March 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Performance based options

 

689

 

716

 

Restricted Performance Units

 

92

 

98

 

Total

 

781

 

814

 

 

6



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,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Marketable investment securities:

 

 

 

 

 

Current marketable investment securities - VRDNs

 

$

546,420

 

$

395,715

 

Current marketable investment securities - strategic

 

239,503

 

232,718

 

Current marketable investment securities - other

 

232,217

 

360,653

 

Total marketable investment securities - current

 

1,018,140

 

989,086

 

Restricted marketable investment securities (1)

 

1,987

 

1,337

 

Total

 

1,020,127

 

990,423

 

 

 

 

 

 

 

Restricted cash and cash equivalents (1)

 

15,439

 

16,089

 

 

 

 

 

 

 

Marketable and other investment securities - noncurrent:

 

 

 

 

 

Cost method

 

3,097

 

3,097

 

Equity method

 

116,575

 

109,366

 

Fair value method

 

633,164

 

613,125

 

Total marketable and other investment securities - noncurrent

 

752,836

 

725,588

 

Total marketable investment securities, restricted cash and other investment securities

 

$

1,788,402

 

$

1,732,100

 

 


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

 

Marketable Investment Securities

 

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

 

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 current strategic marketable investment securities are highly speculative and have experienced and continue to experience volatility.  As of March 31, 2011, a significant portion of our strategic investment portfolio consisted of securities of several issuers and the value of that portfolio depends on those issuers.

 

7



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 Cash and Marketable Investment Securities

 

As of March 31, 2011 and December 31, 2010, our restricted marketable investment securities, together with our restricted cash, included amounts required as collateral for our letters of credit or surety bonds.

 

Marketable and Other Investment Securities - Noncurrent

 

We 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 in equity securities 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 debt and equity investments in affiliates 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.”  See “Investments in TerreStar” below for more information.

 

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, 2011 and December 31, 2010, we had accumulated net unrealized gains of $194 million and $188 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 net 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, 2011

 

As of December 31, 2010

 

 

 

Marketable

 

 

 

 

 

 

 

Marketable

 

 

 

 

 

 

 

 

 

Investment

 

Unrealized

 

Investment

 

Unrealized

 

 

 

Securities

 

Gains

 

Losses

 

Net

 

Securities

 

Gains

 

Losses

 

Net

 

 

 

(In thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

546,420

 

$

 

$

 

$

 

$

395,715

 

$

 

$

 

$

 

Other (including restricted)

 

248,461

 

690

 

(16

)

674

 

375,814

 

1,154

 

(233

)

921

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

225,246

 

193,097

 

 

193,097

 

218,894

 

186,745

 

 

186,745

 

Total marketable investment securities

 

$

1,020,127

 

$

193,787

 

$

(16

)

$

193,771

 

$

990,423

 

$

187,899

 

$

(233

)

$

187,666

 

 

As of March 31, 2011, restricted and non-restricted marketable investment securities include debt securities of $795 million with contractual maturities of one year or less and none 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.

 

9



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

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. 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.

 

 

 

Primary

 

As of March 31, 2011

 

 

 

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

 

$

33,096

 

$

15,389

 

$

(8

)

$

 

$

 

$

17,707

 

$

(8

)

Total

 

 

 

$

33,096

 

$

15,389

 

$

(8

)

$

 

$

 

$

17,707

 

$

(8

)

 

 

 

Primary

 

As of December 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

 

$

119,135

 

$

26,358

 

$

(44

)

$

17,566

 

$

(71

)

$

75,211

 

$

(118

)

Total

 

 

 

$

119,135

 

$

26,358

 

$

(44

)

$

17,566

 

$

(71

)

$

75,211

 

$

(118

)

 

Fair Value Measurements

 

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

 

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

 

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

 

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

 

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:

 

 

 

As of

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

546,420

 

$

 

$

546,420

 

$

 

$

395,715

 

$

 

$

395,715

 

$

 

Other (including restricted)

 

248,461

 

 

248,461

 

 

375,814

 

 

375,814

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

225,246

 

225,246

 

 

 

218,894

 

218,894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable and other investment securities - noncurrent

 

633,164

 

3,450

 

 

629,714

 

613,125

 

4,170

 

 

608,955

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

1,653,291

 

$

228,696

 

$

794,881

 

$

629,714

 

$

1,603,548

 

$

223,064

 

$

771,529

 

$

608,955

 

 

Changes in Level 3 instruments are as follows:

 

 

 

Level 3
 Investment 
Securities

 

 

 

(In thousands)

 

Balance as of December 31, 2010

 

$

608,955

 

Purchases

 

20,759

 

Balance as of March 31, 2011

 

$

629,714

 

 

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,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

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

 

 

 

 

 

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

 

$

665

 

$

 

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

 

 

(537

)

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

 

$

665

 

$

(537

)

 

11



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Investments in TerreStar

 

We account for our investments in TerreStar Corporation (“TerreStar Corporation”) and TerreStar Networks Inc. (“TerreStar Networks”), an indirect, majority-owned subsidiary of TerreStar Corporation, using the fair value method of accounting which we believe provides more meaningful information to our investors.  TerreStar Networks is the principal operating subsidiary of TerreStar Corporation.  TerreStar Networks and TerreStar Corporation and its subsidiary, TerreStar Holdings Inc. (together, the “TSC Debtors”), filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code on October 19, 2010 and February 16, 2011, respectively.

 

We have been an investor in TerreStar Corporation and TerreStar Networks for over three years.  In February 2008, we completed several transactions under a Master Investment Agreement between us, TerreStar Corporation and TerreStar Networks.  Under the Master Investment Agreement, we acquired $50 million in aggregate principal amount of TerreStar Networks’ 6 1/2% Senior Exchangeable Paid-in-Kind Notes due June 15, 2014 (“Exchangeable Notes”) as well as $50 million aggregate principal amount of TerreStar Networks’ 15% Senior Secured Paid-in-Kind Notes due February 15, 2014 (“15% PIK Notes”).  The Master Investment Agreement also provides that we have the right to appoint two representatives to TerreStar Corporation’s Board of Directors.  We do not presently have any representatives on TerreStar Corporation’s Board of Directors.  We have from time to time acquired, and we currently hold, other securities issued by TerreStar Corporation and TerreStar Networks.

 

In February 2008, we also entered into a Spectrum Agreement with TerreStar Corporation, under which, in June 2008, TerreStar Corporation completed the acquisition of our holdings of 1.4 GHz spectrum in exchange for the issuance of 30 million shares of its common stock to us.  We also entered into an agreement with TerreStar Networks and Harbinger Capital Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund LP (collectively, “Harbinger”), in February 2008, in which we and Harbinger each committed to provide up to $50 million in secured financing, the proceeds of which were advanced to TerreStar Networks from time to time as required for TerreStar Networks to make required payments in connection with a communications satellite to be constructed and launched for TerreStar Networks.  As of March 31, 2011, we were owed $46 million by TerreStar Networks under the terms of this credit agreement.

 

In connection with the filings by TerreStar Networks and certain of its affiliates (other than TerreStar Corporation) (the “Debtors”) for protection under Chapter 11 of the U.S. Bankruptcy Code and an ancillary proceeding under the Companies’ Creditors Arrangement Act in Canada, on October 19, 2010, we entered into a commitment to provide a debtor-in-possession credit facility (the “Credit Facility”) to the Debtors.  On November 18, 2010, the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) approved the Credit Facility on a final basis and authorized the Debtors to enter into the Credit Facility.  The Credit Facility consists of a non-revolving, multiple draw term loan in the aggregate principal amount of $75 million, with drawings subject to the terms and conditions set forth in the Credit Facility.  As of March 31, 2011, we had funded $44 million to the Debtors under this Credit Facility which is included in “Marketable and other investment securities” on our Condensed Consolidated Balance Sheets.

 

Our debt investments in TerreStar Networks had a fair value of $647 million and $626 million as of March 31, 2011 and December 31, 2010, respectively, including accrued interest of $17 million in each period.  Our equity investments in TerreStar Corporation had a fair value of $3 million and $4 million as of March 31, 2011 and December 31, 2010, respectively.  Fluctuations in fair value of these investments are recorded in “Unrealized gains (losses) on investments accounted for at fair value, net” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and directly impact our profitability.  For the three months ended March 31, 2011 and 2010, we recorded a $3 million gain and a $66 million gain on these investments, respectively.

 

On November 19, 2010, we entered into an agreement with the Debtors (the “Restructuring Support Agreement”) pursuant to which we committed to (i) support the Debtors’ proposed plan of reorganization and (ii) backstop a rights offering for preferred shares of TerreStar Networks, which rights offering was to be completed upon the

 

12



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Debtors’ emergence from bankruptcy, on the terms set forth in the Restructuring Support Agreement.  The Bankruptcy Court approved the Restructuring Support Agreement on December 22, 2010.

 

On February 15, 2011, the Restructuring Support Agreement was terminated by mutual agreement of the parties.  TerreStar Networks has proposed holding a sale of substantially all of its assets pursuant to Section 363 of the Bankruptcy Code.  It is impossible to predict with certainty the amount of time that the Debtors may spend in bankruptcy.

 

Our investments in TerreStar Corporation and TerreStar Networks are highly speculative and have experienced and continue to experience significant volatility.  The value of our investments in TerreStar Networks is determined using Level 3 inputs under the fair value hierarchy.  In estimating those fair values we consider quotes from brokers and other pricing services, if available, and obtain both observable and unobservable inputs in our valuation models which include the use of option pricing and discounted cash flow techniques.  The fair value of these investments can be significantly impacted by adverse changes in securities markets generally, as well as risks related to the performance of TerreStar Corporation and TerreStar Networks, their ability to obtain sufficient capital to execute their business plans, risks associated with their specific industries, bankruptcy and other factors.  We are continuing to evaluate the effect of developments in the Debtors’ and TerreStar Corporation’s Chapter 11 cases on the fair value of our investment in TerreStar Networks and TerreStar Corporation.  In particular, as a result of the termination of the Restructuring Support Agreement on February 15, 2011 and the on-going bankruptcy process, the fair value of our investments in TerreStar Networks could be significantly impacted.  For example, a hypothetical 10% adverse change in the price of these debt instruments would result in a decrease of approximately $63 million in the fair value of these investments.

 

On January 14, 2011, TerreStar Corporation filed a Form 15, terminating the registration of its common stock and Series A Voting Convertible Preferred Stock under Section 12(g) of the Securities Exchange Act of 1934 and suspending its obligations to file reports with the Securities and Exchange Commission (other than with respect to its fiscal year ended December 31, 2010).

 

We report the following TerreStar Corporation financial information on a one-quarter lag as TerreStar Corporation was 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 Corporation’s management to provide us with accurate summary financial information, including portions of the information shown below.  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 Corporation:

 

 

 

For the Three Months

 

 

 

Ended December 31,

 

Statements of Operations Data (unaudited):

 

2010

 

2009

 

 

 

(In thousands)

 

Revenue

 

$

6,000

 

$

2,384

 

Operating expenses

 

$

2,220

 

$

44,068

 

Net income (loss) from continuing operations

 

$

(168

)

$

(58,999

)

Net income (loss)

 

$

(168

)

$

(58,999

)

Net income (loss) available to common stockholders

 

$

(168

)

$

(63,408

)

 

13



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

5.              Inventory

 

Inventory consists of the following:

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Finished goods

 

$

15,606

 

$

21,084

 

Raw materials

 

8,567

 

6,819

 

Work-in-process

 

5,890

 

2,530

 

Total inventory

 

$

30,063

 

$

30,433

 

 

6.              Property and Equipment

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense consists of the following:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Satellites

 

$

23,125

 

$

24,536

 

Furniture, fixtures, equipment and other

 

25,377

 

23,242

 

Identifiable intangible assets subject to amortization

 

6,869

 

8,264

 

Buildings and improvements

 

1,643

 

1,607

 

Total depreciation and amortization

 

$

57,014

 

$

57,649

 

 

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 or equipment leased to customers.

 

“Construction in process” consists of the following:

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Progress amounts for satellite construction, including certain amounts prepaid under satellite service agreements and launch costs:

 

 

 

 

 

QuetzSat-1

 

$

161,515

 

$

162,947

 

EchoStar XVI

 

147,002

 

100,312

 

Other

 

71,422

 

93,958

 

Buildings and improvements

 

31,262

 

19,291

 

Uplinking equipment

 

7,744

 

11,933

 

Other

 

7,955

 

4,657

 

Construction in process

 

$

426,900

 

$

393,098

 

 

14



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Satellites

 

We currently utilize ten satellites in geostationary orbit approximately 22,300 miles above the equator, four of which are leased.  Three of our leased satellites are accounted for as capital leases and are depreciated over the terms of the satellite service agreements.  We also lease capacity on one satellite from DISH Network that is accounted for as an operating lease.  See Note 13 for further discussion of our satellite leases with DISH Network.

 

Prior to 2011, certain satellites in our fleet experienced anomalies, some of which have had a significant adverse impact on their remaining useful life and/or commercial operation.  There can be no assurance that future anomalies will not further impact the remaining useful life and commercial operation of any of 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 generally do not carry insurance for any of the in-orbit satellites that we use, and therefore we will bear the risk of any in-orbit failures.  Recent developments with respect to certain of our satellites are discussed below.

 

Owned Satellites

 

EchoStar VIII.  EchoStar VIII was designed to operate 32 direct broadcast satellite (“DBS”) transponders in the continental United States at approximately 120 watts per channel, switchable to 16 DBS transponders operating at approximately 240 watts per channel.  EchoStar VIII was also designed with spot-beam technology.  This satellite has experienced several anomalies prior to 2011.  In January 2011, the satellite experienced an anomaly, which temporarily disrupted electrical power to some components, causing an interruption of broadcast service.  In addition, one of the two central processing units used to control the satellite failed in connection with this anomaly.  None of these anomalies has impacted the commercial operation or estimated useful life of the satellite.  However, there can be no assurance that this anomaly or any future anomalies will not reduce its useful life or impact its commercial operation.

 

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 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.

 

15



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

7.              Intangible Assets

 

As of March 31, 2011 and December 31, 2010, our identifiable intangibles subject to amortization consisted of the following:

 

 

 

As of

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Intangible

 

Accumulated

 

Intangible

 

Accumulated

 

 

 

Assets

 

Amortization

 

Assets

 

Amortization

 

 

 

(In thousands)

 

Contract-based

 

$

190,566

 

$

(112,519

)

$

190,566

 

$

(108,361

)

Customer relationships

 

25,027

 

(23,955

)

23,632

 

(23,605

)

Technology-based (1)

 

100,182

 

(37,395

)

118,305

 

(35,086

)

Trademark portfolio

 

2,491

 

(125

)

 

 

Total

 

$

318,266

 

$

(173,994

)

$

332,503

 

$

(167,052

)

 

Amortization of these intangible assets is recorded on a straight line basis over an average finite useful life primarily ranging from approximately one to 20 years.  Amortization was $7 million and $8 million during the three months ended March 31, 2011 and 2010, respectively.

 

Estimated future amortization of our identifiable intangible assets as of March 31, 2011 is as follows (in thousands):

 

For the Years Ended December 31,

 

 

 

2011 (remaining nine months)

 

$

20,348

 

2012

 

23,690

 

2013

 

23,685

 

2014

 

22,475

 

2015

 

17,843

 

Thereafter (1)

 

36,231

 

Total

 

$

144,272

 

 


(1)  On December 31, 2010, we acquired certain assets of Move Networks, Inc. which included in-process research and development (“R&D”).  In-process R&D assets acquired in a business combination initially are considered indefinite-lived assets until either the completion or abandonment of the associated R&D efforts.  Upon the successful completion of the development process, we will commence amortization of the balance over the estimated useful life of the project.  For purposes of the amortization table, we included the entire in-process R&D balance of $26 million in the category labeled thereafter until such time that the R&D efforts are finalized or abandoned.

 

The excess of our investments in consolidated subsidiaries over net tangible and identifiable intangible asset value at the time of the investment is recorded as goodwill and is not subject to amortization.  We had $16 million of goodwill as of March 31, 2011 associated with various acquisitions.

 

8.              Long-Term Debt and Capital Lease Obligations

 

Capital Lease Obligations

 

As of March 31, 2011 and December 31, 2010, we had $547 million and $535 million capitalized for the estimated fair value of satellites acquired under capital leases included in “Property and equipment, net,” with related accumulated depreciation of $275 million and $268 million, respectively.

 

16



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

In our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), we recognized depreciation expense on satellites acquired under capital lease agreements as follows:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Depreciation expense - capital leases

 

$

7,006

 

$

8,418

 

 

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

 

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 13 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, 2011 are as follows (in thousands):

 

For the Years Ended December 31,

 

 

 

2011 (nine months remaining)

 

$

90,086

 

2012

 

119,691

 

2013

 

119,295

 

2014

 

113,951

 

2015

 

46,130

 

Thereafter

 

394,680

 

Total minimum lease payments

 

883,833

 

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

 

(262,401

)

Net minimum lease payments

 

621,432

 

Less: Amount representing interest

 

(218,749

)

Present value of net minimum lease payments

 

402,683

 

Less: Current portion

 

(53,925

)

Long-term portion of capital lease obligations

 

$

348,758

 

 

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, 2011, we had outstanding under these plans stock options to acquire 8.7 million shares of our Class A common stock and 0.1 million restricted stock units.  Stock options granted prior to and on March 31, 2011 were granted with exercise

 

17



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

prices equal to or greater than the market value of our Class A common stock at the date of grant and with a maximum term of ten years. While historically we have issued stock awards subject to vesting, typically at the rate of 20% to 33% per year, some stock awards have been granted with immediate vesting and other stock awards vest only upon the achievement of certain company-wide objectives.  As of March 31, 2011, we had 5.4 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.

 

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, 2011, the following stock awards were outstanding:

 

 

 

As of March 31, 2011

 

 

 

EchoStar Awards

 

DISH Network Awards

 

Stock Awards Outstanding

 

Stock
Options

 

Restricted
Stock
Units

 

Stock
Options

 

Restricted
Stock
Units

 

Held by EchoStar employees

 

7,728,868

 

46,715

 

3,333,276

 

233,624

 

Held by DISH Network employees

 

946,546

 

58,484

 

N/A

 

N/A

 

Total

 

8,675,414

 

105,199

 

3,333,276

 

233,624

 

 

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.

 

18



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Stock Award Activity

 

Our stock option activity was as follows:

 

 

 

For the Three Months

 

 

 

Ended March 31, 2011

 

 

 

Options

 

Weighted-
Average 
Exercise Price

 

Total options outstanding, beginning of period

 

7,795,373

 

$

23.24

 

Granted

 

1,540,000

 

$

37.85

 

Exercised

 

(622,239

)

$

24.89

 

Forfeited and cancelled

 

(37,720

)

$

25.84

 

Total options outstanding, end of period

 

8,675,414

 

$

25.70

 

Performance based options outstanding, end of period (1)

 

688,800

 

$

25.37

 

Exercisable at end of period

 

2,749,127

 

$

25.56

 

 


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

 

We realized tax benefits from stock awards exercised during the three months ended March 31, 2011 and 2010 as follows:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Tax benefit from stock awards exercised

 

$

2,170

 

$

700

 

 

Based on the closing market price of our Class A common stock on March 31, 2011, the aggregate intrinsic value of our stock options was as follows:

 

 

 

As of March 31, 2011

 

 

 

Options
Outstanding

 

Options 
Exercisable

 

 

 

(In thousands)

 

Aggregate intrinsic value

 

$

105,381

 

$

33,795

 

 

19



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Our restricted stock unit activity was as follows:

 

 

 

For the Three Months

 

 

 

Ended March 31, 2011

 

 

 

Restricted
Stock
Units

 

Weighted-
Average
Grant Date
Fair Value

 

Total restricted stock units outstanding, beginning of period

 

107,249

 

$

27.33

 

Granted

 

 

$

 

Vested

 

 

$

 

Forfeited and cancelled

 

(2,050

)

$

27.05

 

Total restricted stock units outstanding, end of period

 

105,199

 

$

27.34

 

Restricted Performance Units outstanding, end of period (1)

 

91,974

 

$

26.69

 

 


(1)  These Restricted Performance Units, which are included in the caption “Total restricted stock units outstanding, end of period,” were issued pursuant to a performance based stock incentive plan.  Vesting of these Restricted Performance Units is contingent upon meeting a certain company goal which is not yet probable of being 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, 2011, this assessment could change at any time.

 

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, 2011, 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

 

$

17,334

 

$

13,020

 

EchoStar awards held by EchoStar employees

 

3,395

 

2,544

 

Total

 

$

20,729

 

$

15,564

 

 

20



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Of the 8.7 million stock options and 0.1 million restricted stock units outstanding under our stock incentive plans as of March 31, 2011, the following awards were outstanding pursuant to the 2005 LTIP:

 

 

 

As of March 31, 2011

 

 

 

Number of
Awards

 

Weighted-
Average
Exercise
Price

 

Stock options

 

688,800

 

$

25.37

 

Restricted Performance Units

 

91,974

 

 

 

Total

 

780,774

 

 

 

 

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, 2011 and 2010 and was allocated to the same expense categories as the base compensation for such employees:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Research and development expenses

 

$

603

 

$

1,157

 

Selling, general and administrative expenses

 

2,378

 

3,085

 

Total non-cash, stock-based compensation

 

$

2,981

 

$

4,242

 

 

As of March 31, 2011, our total unrecognized compensation cost related to our non-performance based unvested stock awards was $46 million and includes compensation expense that we will recognize for DISH Network stock awards held by our employees as a result of the Spin-off.  This cost is based on an estimated future forfeiture rate of approximately 1.3% 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.

 

Valuation

 

The fair value of each stock option for the three months ended March 31, 2011 and 2010 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

 

2011

 

2010

 

Risk-free interest rate

 

2.57

%

2.97

%

Volatility factor

 

34.68

%

31.00

%

Expected term of options in years

 

6.0

 

6.1

 

Weighted-average fair value of options granted

 

$

14.42

 

$

7.38

 

 

We do not currently intend to pay dividends on our common stock and accordingly, the dividend yield percentage used in the Black-Scholes option valuation model is set at zero for all periods.  The Black-Scholes option valuation model was developed for use in estimating the fair value of traded stock options which have no vesting restrictions

 

21



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

and are fully transferable.  Consequently, our estimate of fair value may differ from other valuation models.  Further, the Black-Scholes option valuation model requires the input of subjective assumptions.  Changes in the subjective input assumptions can materially affect the fair value estimate.

 

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

 

10.       Acquisitions

 

The business combination accounting standard requires most identifiable assets, liabilities, noncontrolling interests and goodwill acquired to be recorded at “full fair value.”  This guidance broadens the scope of what qualifies as a business combination to include in many instances development stage entities.  Transaction costs related to the acquisition of the business are expensed as incurred.  Costs associated with the issuance of debt associated with a business combination are capitalized and included as a yield adjustment to the underlying debt’s stated rate.

 

When we acquire a business we allocate the purchase price to the various components of the acquisition based upon the fair value of each component using various valuation techniques.  These techniques can include the market approach, income approach and/or cost approach.

 

Acquired intangible assets other than goodwill are amortized over their estimated useful lives unless the lives are determined to be indefinite.

 

Acquisition of Move Networks

 

On December 31, 2010, we acquired certain assets of Move Networks, Inc. for $45 million, of which $2.25 million was placed into escrow for certain potential contingencies.  These assets include patented technology that enables the adaptive delivery of video content via the Internet which will allow us to expand our portfolio of advanced technologies serving cable, satellite, telecommunications companies and IPTV video providers.  This transaction was accounted for as a business combination.  The preliminary allocation of the purchase price is in the table below.

 

 

 

Purchase Price

 

 

 

Allocation

 

 

 

(In thousands)

 

In-process R&D

 

$

26,482

 

Property and equipment

 

7,213

 

Goodwill

 

6,457

 

Other intangibles

 

4,271

 

Accounts receivable

 

535

 

Other current

 

33

 

Total purchase price

 

$

44,991

 

 

The transaction did not have an impact on our results of operations for the year ended December 31, 2010 and would not have materially impacted our results of operations for 2010 had the transaction occurred on January 1, 2010.  Furthermore, the transaction would not have had a material impact on our results of operations for the comparable period in 2009 or 2008 had the transaction occurred on January 1, 2009 or January 1, 2008, respectively.

 

22



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

11.       Commitments and Contingencies

 

Commitments

 

Purchase Obligations.  Our purchase obligations primarily consist of binding purchase orders for digital set-top boxes and related components, digital broadcast operations and transitional service agreements.  Our purchase obligations can fluctuate significantly from period to period due to, among other things, management’s control of inventory levels, and can materially impact our future operating asset and liability balances, and our future working capital requirements.  Our purchase obligations which are primarily related to the manufacturing of digital set-top boxes and related components increased from $288 million as of December 31, 2010 to $361 million as of March 31, 2011.  These purchase obligations will be paid during 2011.

 

Satellite-Related Obligations

 

Satellites Under Construction.  As of March 31, 2011, we had entered into the following contracts to construct new satellites which are contractually scheduled to be completed within the next two years.

 

·                  QuetzSat-1.  During 2008, we entered into a ten-year satellite service agreement with SES Latin America S.A. (“SES”) to lease all of the capacity on QuetzSat-1.  QuetzSat-1 is expected to be launched during the second half of 2011 and will operate at the 77 degree orbital location.  Upon expiration of the initial term, we have the option to renew the transponder service agreement on a year-to-year basis through the end-of-life of the QuetzSat-1 satellite.  DISH Network has agreed to lease 24 of the 32 DBS transponders on this satellite from us.  The expected future payments related to QuetzSat-1 are $287 million.

 

·                  EchoStar XVI.  During November 2009, we entered into a contract for the construction of EchoStar XVI, a DBS satellite, which is expected to be completed during the second half of 2012 and will operate at the 61.5 degree orbital location.  DISH Network has agreed to lease all of the capacity on this satellite from us for a portion of its useful life.  The expected future payments related to EchoStar XVI are $137 million, including the launch contract which was previously assigned to CMBStar.

 

Contingencies

 

In connection with the Spin-off, we entered into a separation agreement with DISH Network that provides, among other things, for the division of certain liabilities, including liabilities resulting from litigation.  Under the terms of the separation agreement, we have assumed certain liabilities that relate to our business including certain designated liabilities for acts or omissions 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.

 

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.  Broadcast Innovation 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. 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

 

23



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

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 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.

 

Joao Control

 

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

 

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

 

Nazomi Communications

 

On February 10, 2010, Nazomi Communications, Inc. (“Nazomi”) filed suit against Sling Media, Inc., our indirect wholly owned subsidiary, Nokia Corp, Nokia Inc., Microsoft Corp., Amazon.com Inc., Western Digital Corp., Western Digital Technologies, Inc., Garmin Ltd., Garmin Corp., Garmin International, Inc., Garmin USA, Inc., Vizio Inc. and iOmega Corp in the United States District Court for the Central District of California alleging infringement of United States Patent No. 7,080,362 (the ‘362 patent) and United States Patent No. 7,225,436 (the ‘436 patent).  The ‘362 patent and the ‘436 patent relate to Java hardware acceleration.  The suit alleges that the Slingbox-Pro-HD product infringes the ‘362 patent and the ‘436 patent because the Slingbox-PRO HD allegedly incorporates an ARM926EJ-S processor core capable of Java hardware acceleration.

 

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

 

24



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

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.  On April 21, 2011, the U.S. Patent and Trademark Office issued an order granting reexamination of the ‘636 patent.

 

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

 

Personalized Media Communications

 

During 2008, Personalized Media Communications, Inc. (“PMC”) filed suit against us, DISH Network and Motorola, Inc. in the United States District Court for the Eastern District of Texas alleging infringement of United States Patent Nos. 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.  PMC is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.

 

We intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe 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.

 

Suomen Colorize Oy

 

During October 2010, Suomen Colorize Oy (“Suomen”) filed suit against us and DISH Network L.L.C., an indirect wholly owned subsidiary of DISH Network, in the United States District Court for the Middle District of Florida alleging infringement of United States Patent No. 7,277,398.  Suomen is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.  The abstract of the patent states that the claims are directed to a method and terminal for providing services in a telecommunication network.

 

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

 

Technology Development Licensing

 

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

 

25



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

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

 

On April 29, 2011, we and DISH Network entered into a settlement agreement with TiVo Inc.  See Note 14 for further discussion.

 

26



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Vigilos, LLC

 

On February 23, 2011, Vigilos, LLC filed suit against us, Sling Media, Inc. and EchoStar Technologies L.L.C., two of our subsidiaries, and Monsoon Multimedia, Inc. in the United States District Court for the Eastern District of Texas alleging infringement of United States Patent No. 6,839,731, which is entitled “System and Method for Providing Data Communication in a Device Network.”

 

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.

 

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.

 

12.       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 two primary business units.

 

27



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

·                  “Digital Set-Top Box” Business which designs, develops and distributes digital set-top boxes and related products and technology, including our Slingbox “placeshifting” technology, primarily for satellite TV service providers, telecommunication and 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 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 primarily to DISH Network, and secondarily to Dish Mexico, U.S. government service providers, state agencies, Internet service providers, broadcast news organizations, programmers and private enterprise customers.

 

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

 

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

 

 

 

Digital

 

Satellite

 

 

 

 

 

 

 

 

 

Set-Top Box

 

Services

 

All

 

 

 

Consolidated

 

For the Three Months Ended March 31, 2011

 

Business

 

Business

 

Other

 

Eliminations

 

Total

 

 

 

(In thousands)

 

Total revenue

 

$

405,383

 

$

67,861

 

$

6,582

 

$

 

$

479,826

 

EBITDA (1)

 

27,869

 

44,739

 

6,219

 

 

78,827

 

Interest expense, net

 

549

 

(68

)

2,658

 

 

3,139

 

Income tax benefit (provision), net

 

97

 

(7,995

)

110

 

 

(7,788

)

Depreciation and amortization

 

(26,651

)

(23,625

)

(6,738

)

 

(57,014

)

Net income (loss) attributable to EchoStar common shareholders

 

$

1,864

 

$

13,051

 

$

2,249

 

$

 

$

17,164

 

 

For the Three Months Ended March 31, 2010

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

559,268

 

$

63,557

 

$

4,255

 

$

 

$

627,080

 

EBITDA (1)

 

44,893

 

46,492

 

70,650

 

 

162,035

 

Interest expense, net

 

(14

)

(11,561

)

1,826

 

 

(9,749

)

Income tax benefit (provision), net

 

(6,687

)

(3,869

)

(12,335

)

 

(22,891

)

Depreciation and amortization

 

(27,704

)

(25,110

)

(4,835

)

 

(57,649

)

Net income (loss) attributable to EchoStar common shareholders

 

$

10,488

 

$

5,952

 

$

55,306

 

$

 

$

71,746

 

 


(1)                                  EBITDA is not a measure determined in accordance with GAAP and should not be considered a substitute for operating income, net income or any other measure determined in accordance with GAAP.  Conceptually, EBITDA measures the amount of income generated each period that could be used to service debt, pay taxes and fund capital expenditures.  EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.  EBITDA is used by our management as a measure of operating efficiency and overall financial performance for benchmarking against our peers and competitors.  Management believes EBITDA provides meaningful supplemental information regarding liquidity and the underlying operating performance of our business.  Management also believes that EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate companies in the digital set-top box industry.

 

28



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued

(Unaudited)

 

Geographic Information and Transactions with Major Customers

 

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

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

Long-lived assets, including FCC authorizations:

 

2011

 

2010

 

 

 

(In thousands)

 

North America

 

$

1,494,495

 

$

1,457,208

 

All other

 

12,246

 

41,356

 

Total

 

$

1,506,741

 

$

1,498,564

 

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

Revenue:

 

2011

 

2010

 

 

 

(In thousands)

 

North America

 

$

472,309

 

$

616,222

 

All other

 

7,517

 

10,858

 

Total

 

$

479,826

 

$

627,080

 

 

Transactions with Major Customers.  <