XNAS:SATS EchoStar Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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, 2012.

 

OR

 

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

 

Commission File Number:  001-33807

 

EchoStar Corporation

(Exact name of registrant as specified in its charter)

 

Nevada

 

26-1232727

(State or other jurisdiction of incorporation or
organization)

 

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

 

 

 

100 Inverness Terrace East

 

 

Englewood, Colorado

 

80112-5308

(Address of principal executive offices)

 

(Zip code)

 

(303) 706-4000

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  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 £

 

Smaller reporting company £

(Do not check if a smaller reporting company)

 

 

 

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

 

As of April 30, 2012, the registrant’s outstanding common stock consisted of 39,358,396 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, 2012 and December 31, 2011 (Unaudited)

1

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)  For the Three Months Ended March 31, 2012 and 2011 (Unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows  For the Three Months Ended March 31, 2012 and 2011 (Unaudited)

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

4

 

 

 

Item 2.

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

37

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

48

 

 

 

Item 4.

Controls and Procedures

50

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

51

 

 

 

Item 1A.

Risk Factors

53

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

 

 

 

Item 3.

Defaults Upon Senior Securities

None

 

 

 

Item 4.

Mine Safety Disclosures

None

 

 

 

Item 5.

Other Information

None

 

 

 

Item 6.

Exhibits

55

 

 

 

 

Signatures

56

 



Table of Contents

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

General Risks Affecting Our Business

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

i



Table of Contents

 

Risks Affecting Our EchoStar Technologies Segment

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Risks Affecting Our EchoStar Satellite Services and Hughes Segments

 

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

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

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

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

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

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

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

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

 

ii



Table of Contents

 

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

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

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

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

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

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

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

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

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

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

 

Other Risks

 

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

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

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

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

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

 

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

 

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

 

iii



Table of Contents

 

Item 1.  FINANCIAL STATEMENTS

 

ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

629,094

 

$

614,035

 

Marketable investment securities

 

1,053,650

 

1,082,407

 

Trade accounts receivable, net of allowance for doubtful accounts of $18,893 and $18,484, respectively

 

240,486

 

212,960

 

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

 

284,407

 

229,852

 

Inventory

 

97,621

 

68,707

 

Deferred tax assets

 

38,340

 

23,492

 

Other current assets

 

67,673

 

76,284

 

Total current assets

 

2,411,271

 

2,307,737

 

 

 

 

 

 

 

Noncurrent Assets:

 

 

 

 

 

Restricted cash and marketable investment securities

 

23,987

 

24,286

 

Property and equipment, net of accumulated depreciation of $2,092,470 and $2,003,875, respectively

 

2,509,702

 

2,453,546

 

FCC authorizations

 

469,810

 

469,810

 

Intangible assets, net

 

443,146

 

466,452

 

Goodwill

 

526,680

 

533,018

 

Marketable and other investment securities

 

147,315

 

140,439

 

Other noncurrent assets, net

 

155,558

 

148,449

 

Total noncurrent assets

 

4,276,198

 

4,236,000

 

Total assets

 

$

6,687,469

 

$

6,543,737

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Trade accounts payable

 

$

305,172

 

$

250,366

 

Trade accounts payable - DISH Network

 

19,002

 

16,374

 

Deferred revenue and other

 

49,778

 

54,090

 

Accrued interest

 

41,522

 

6,353

 

Accrued royalties

 

17,490

 

23,590

 

Accrued expenses and other

 

155,625

 

167,710

 

Current portion of long-term debt and capital lease obligations

 

68,541

 

65,239

 

Total current liabilities

 

657,130

 

583,722

 

 

 

 

 

 

 

Long-Term Obligations, Net of Current Portion:

 

 

 

 

 

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

 

2,477,143

 

2,469,023

 

Deferred tax liabilities

 

378,218

 

373,391

 

Long-term deferred revenue and other long-term liabilities

 

67,924

 

65,975

 

Total long-term obligations, net of current portion

 

2,923,285

 

2,908,389

 

Total liabilities

 

3,580,415

 

3,492,111

 

 

 

 

 

 

 

Commitments and Contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit):

 

 

 

 

 

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

 

 

 

Class A common stock, $.001 par value, 1,600,000,000 shares authorized, 44,561,296 and 44,500,440 shares issued, and 39,028,978 and 38,968,122 shares outstanding, respectively

 

45

 

45

 

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

 

48

 

48

 

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

 

 

 

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

 

 

 

Additional paid-in capital

 

3,368,534

 

3,360,301

 

Accumulated other comprehensive income (loss)

 

86,039

 

165,771

 

Accumulated earnings (deficit)

 

(258,899

)

(385,487

)

Treasury stock, at cost

 

(98,162

)

(98,162

)

Total EchoStar stockholders’ equity (deficit)

 

3,097,605

 

3,042,516

 

Noncontrolling interests

 

9,449

 

9,110

 

Total stockholders’ equity (deficit)

 

3,107,054

 

3,051,626

 

Total liabilities and stockholders’ equity (deficit)

 

$

6,687,469

 

$

6,543,737

 

 

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,

 

 

 

2012

 

2011

 

Revenue:

 

 

 

 

 

Equipment revenue - DISH Network

 

$

237,365

 

$

272,126

 

Equipment revenue - other

 

157,347

 

65,909

 

Services and other revenue - DISH Network

 

126,658

 

121,207

 

Services and other revenue - other

 

243,410

 

20,584

 

Total revenue

 

764,780

 

479,826

 

 

 

 

 

 

 

Costs and Expenses: (exclusive of depreciation shown separately below - Note 7)

 

 

 

 

 

Cost of sales - equipment

 

337,166

 

293,384

 

Cost of sales - services and other

 

167,830

 

61,460

 

Research and development expenses

 

17,350

 

8,859

 

Selling, general and administrative expenses

 

96,979

 

44,772

 

General and administrative expenses - DISH Network

 

1,955

 

3,489

 

Depreciation and amortization (Notes 7 and 8)

 

114,090

 

57,014

 

Total costs and expenses

 

735,370

 

468,978

 

 

 

 

 

 

 

Operating income (loss)

 

29,410

 

10,848

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

Interest income

 

2,879

 

2,677

 

Interest expense, net of amounts capitalized

 

(38,621

)

462

 

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

 

127,995

 

665

 

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

 

 

3,304

 

Other, net

 

4,533

 

6,991

 

Total other income (expense)

 

96,786

 

14,099

 

 

 

 

 

 

 

Income (loss) before income taxes

 

126,196

 

24,947

 

Income tax (provision) benefit, net

 

305

 

(7,788

)

Net income (loss)

 

126,501

 

17,159

 

Less: Net income (loss) attributable to noncontrolling interests

 

(87

)

(5

)

Net income (loss) attributable to EchoStar

 

$

126,588

 

$

17,164

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic

 

86,684

 

85,466

 

Diluted

 

87,326

 

92,331

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

Basic net income (loss) per share attributable to EchoStar

 

$

1.46

 

$

0.20

 

Diluted net income (loss) per share attributable to EchoStar

 

$

1.45

 

$

0.19

 

 

 

 

 

 

 

Comprehensive Income (Loss):

 

 

 

 

 

Net income (loss)

 

$

126,501

 

$

17,159

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Foreign currency translation adjustments

 

5,092

 

(192

)

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

 

43,429

 

6,771

 

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

 

(127,995

)

(665

)

Total other comprehensive income (loss), net of tax

 

(79,474

)

5,914

 

Comprehensive income (loss)

 

47,027

 

23,073

 

Less: Comprehensive income (loss) attributable to noncontrolling interests

 

171

 

(5

)

Comprehensive income (loss) attributable to EchoStar

 

$

46,856

 

$

23,078

 

 

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,

 

 

 

2012

 

2011

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income (loss)

 

$

126,501

 

$

17,159

 

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

 

 

 

 

 

Depreciation and amortization

 

114,090

 

57,014

 

Equity in losses (earnings) of affiliates

 

(4,185

)

(5,008

)

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

 

(127,995

)

(665

)

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

 

 

(3,304

)

Non-cash, stock-based compensation

 

6,918

 

2,981

 

Deferred tax expense (benefit)

 

(4,766

)

1,759

 

Other, net

 

6,511

 

353

 

Change in noncurrent assets

 

(3,681

)

1,570

 

Changes in current assets and current liabilities, net

 

(34,183

)

21,313

 

Net cash flows from operating activities

 

79,210

 

93,172

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Purchases of marketable investment securities

 

(278,902

)

(551,508

)

Sales and maturities of marketable investment securities

 

348,754

 

488,781

 

Purchases of property and equipment

 

(114,007

)

(39,140

)

Change in restricted cash and marketable investment securities

 

299

 

 

Purchase of strategic investments included in marketable and other investment securities

 

(374

)

(27,775

)

Proceeds from sale of strategic investments

 

 

15,437

 

Other, net

 

(4,554

)

51

 

Net cash flows from investing activities

 

(48,784

)

(114,154

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Repayment of long-term debt and capital lease obligations

 

(17,477

)

(13,019

)

Debt issuance costs

 

(229

)

 

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

 

1,297

 

14,153

 

Other

 

288

 

694

 

Net cash flows from financing activities

 

(16,121

)

1,828

 

 

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents

 

754

 

(1,064

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

15,059

 

(20,218

)

Cash and cash equivalents, beginning of period

 

614,035

 

141,814

 

Cash and cash equivalents, end of period

 

$

629,094

 

$

121,596

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid for interest (including capitalized interest)

 

$

13,737

 

$

11,716

 

Capitalized interest

 

$

11,598

 

$

9,050

 

Cash received for interest

 

$

4,993

 

$

4,693

 

Cash paid for income taxes

 

$

1,648

 

$

474

 

Satellites and other assets financed under capital lease obligations

 

$

28,455

 

$

9,343

 

Capital expenditures included in accounts payable

 

$

7,652

 

$

9,463

 

 

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

 

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

 

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

 

·                  EchoStar Satellite Services — which uses 10 of our 11 owned and leased in-orbit satellites and related FCC licenses to lease capacity on a full-time and occasional-use basis primarily to DISH Network, and secondarily to Dish Mexico, S. de R.L. de C.V. (“Dish Mexico”), United States government service providers, state agencies, Internet service providers, broadcast news organizations, programmers and private enterprise customers.

 

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

 

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

 

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, 2011 (“2011 10-K”).  Certain prior period amounts have been reclassified to conform to the current period presentation.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Principles of Consolidation

 

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

 

Use of Estimates

 

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

 

Fair Value Measurements

 

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

 

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

 

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

 

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

 

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

 

Fair values for our publicly traded debt securities are based on quoted market prices.  The fair values of our private debt is estimated based on an analysis in which we evaluate market conditions, related securities, various public and

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

private offerings, and other publicly available information.  In performing this analysis, we make various assumptions regarding, among other things, credit spreads, and the impact of these factors on the value of the notes.  See Note 9 for the fair value of our long-term debt.

 

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

 

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

 

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

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2012

 

2011

 

 

 

(In thousands except per share amounts)

 

Net income (loss) attributable to EchoStar

 

$

126,588

 

$

17,164

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic

 

86,684

 

85,466

 

Dilutive impact of stock awards outstanding

 

642

 

6,865

 

Diluted

 

87,326

 

92,331

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

Basic net income (loss) per share attributable to EchoStar

 

$

1.46

 

$

0.20

 

Diluted net income (loss) per share attributable to EchoStar

 

$

1.45

 

$

0.19

 

 

As of March 31, 2012 and 2011, there were stock awards to purchase 4.4 million and 2.3 million shares, respectively, of our 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 granted pursuant to a performance-based stock incentive plan (“Restricted Performance Units”) 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,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Performance-based options

 

659

 

689

 

Restricted Performance Units

 

74

 

92

 

Total

 

733

 

781

 

 

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Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

4.              Other Comprehensive Income Related Tax Effects

 

The following table presents the tax effects allocated to each component of other comprehensive income. A full valuation allowance has been established against any deferred tax assets that are capital in nature.

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2012

 

2011

 

 

 

Before

 

Tax

 

Net

 

Before

 

Tax

 

Net

 

 

 

Tax

 

(Expense)

 

of Tax

 

Tax

 

(Expense)

 

of Tax

 

 

 

Amount

 

Benefit

 

Amount

 

Amount

 

Benefit

 

Amount

 

 

 

(In thousands)

 

Foreign currency translation adjustments

 

$

5,092

 

$

 

$

5,092

 

$

(192

)

$

 

$

(192

)

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

 

43,429

 

 

43,429

 

6,771

 

 

6,771

 

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

 

(127,995

)

 

(127,995

)

(665

)

 

(665

)

Other comprehensive income (loss)

 

$

(79,474

)

$

 

$

(79,474

)

$

5,914

 

$

 

$

5,914

 

 

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

 

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

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Marketable investment securities - current:

 

 

 

 

 

VRDNs

 

$

214,845

 

$

218,665

 

Strategic

 

120,170

 

216,090

 

Other

 

718,635

 

647,652

 

Total marketable investment securities - current

 

1,053,650

 

1,082,407

 

Restricted marketable investment securities (1)

 

3,181

 

3,939

 

Total

 

1,056,831

 

1,086,346

 

 

 

 

 

 

 

Restricted cash and cash equivalents (1)

 

20,806

 

20,347

 

 

 

 

 

 

 

Marketable and other investment securities - noncurrent:

 

 

 

 

 

Cost method

 

26,193

 

26,193

 

Equity method

 

121,122

 

114,246

 

Total marketable and other investment securities - noncurrent

 

147,315

 

140,439

 

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

 

$

1,224,952

 

$

1,247,132

 

 


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

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Marketable Investment Securities

 

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

 

Variable rate demand notes (“VRDNs”)

 

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

 

Strategic

 

Our current strategic marketable investment securities are highly speculative and have experienced and continue to experience volatility.  As of March 31, 2012 and December 31, 2011, a significant portion of our strategic investment portfolio consisted of securities of several issuers and a significant portion of the value of that portfolio depends on the value of those issuers.

 

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

 

Marketable and Other Investment Securities - Noncurrent

 

We 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.

 

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.

 

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

 

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Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

value, interest and dividends are measured at fair value and are recorded in “Unrealized gains (losses) on investments accounted for at fair value, net” in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

 

Unrealized Gains (Losses) on Marketable Investment Securities

 

As of March 31, 2012 and December 31, 2011, we had accumulated net unrealized gains, net of related tax effect, of $95 million and $180 million, 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 summarized in the table below.

 

 

 

As of March 31, 2012

 

As of December 31, 2011

 

 

 

Marketable

 

 

 

 

 

 

 

Marketable

 

 

 

 

 

 

 

 

 

Investment

 

Unrealized

 

Investment

 

Unrealized

 

 

 

Securities

 

Gains

 

Losses

 

Net

 

Securities

 

Gains

 

Losses

 

Net

 

 

 

(In thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

214,845

 

$

 

$

 

$

 

$

218,665

 

$

 

$

 

$

 

Other (including restricted)

 

721,816

 

635

 

(1,017

)

(382

)

651,591

 

253

 

(2,715

)

(2,462

)

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

120,170

 

95,568

 

 

95,568

 

216,090

 

182,214

 

 

182,214

 

Total marketable investment securities

 

$

1,056,831

 

$

96,203

 

$

(1,017

)

$

95,186

 

$

1,086,346

 

$

182,467

 

$

(2,715

)

$

179,752

 

 

As of March 31, 2012, restricted and non-restricted marketable investment securities included debt securities of $831 million with contractual maturities of one year or less and $106 million with contractual maturities greater than one year.  Actual maturities may differ from contractual maturities as a result of our ability to sell these securities prior to maturity.

 

Marketable Investment Securities in a Loss Position

 

The following table reflects the length of time that our available-for-sale debt securities have been in an unrealized loss position.  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 primarily related to temporary market fluctuations.

 

 

 

As of

 

 

 

March 31, 2012

 

December 31, 2011

 

Debt Securities

 

Fair Value

 

Unrealized
Loss

 

Fair Value

 

Unrealized
Loss

 

 

 

(In thousands)

 

Less than 12 months

 

$

428,083

 

$

(1,017

)

$

507,925

 

$

(2,709

)

12 months or more

 

 

 

3,931

 

(6

)

Total

 

$

428,083

 

$

(1,017

)

$

511,856

 

$

(2,715

)

 

9



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Fair Value Measurements

 

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

 

 

 

As of

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents (including restricted)

 

$

534,686

 

$

15,735

 

$

518,951

 

$

 

$

543,243

 

$

16,197

 

$

527,046

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VRDNs

 

$

214,845

 

$

 

$

214,845

 

$

 

$

218,665

 

$

 

$

218,665

 

$

 

Other (including restricted)

 

721,816

 

 

721,816

 

 

651,591

 

 

651,591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities - strategic

 

120,170

 

120,170

 

 

 

216,090

 

216,090

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at fair value

 

$

1,056,831

 

$

120,170

 

$

936,661

 

$

 

$

1,086,346

 

$

216,090

 

$

870,256

 

$

 

 

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

 

During the three months ended March 31, 2012 and 2011, we recognized $128 million and $1 million, respectively, of realized gains on sales of our debt and equity marketable investment securities.

 

Investment in TerreStar

 

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

 

Pursuant to the TerreStar Networks Plan, which became effective March 29, 2012, our Exchangeable Notes were cancelled.  In satisfaction of our claims against TerreStar under the Exchangeable Notes, we have a right to receive a distribution, along with other general unsecured creditors, in accordance with the terms of the TerreStar Networks Plan.  The amount of any distribution we ultimately receive will vary depending upon and will be impacted by, among other things, the outcome of any claim objections, and will be substantially less than the amount we paid for the Exchangeable Notes.  Any proceeds received on this investment will be recognized as a gain in “Unrealized and realized gains (losses) on marketable investment securities and other investments” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and will directly impact our profitability.  As of March 31, 2012 and December 31, 2011, we had no investment in TerreStar.

 

10



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

6.              Inventory

 

Inventory consists of the following:

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Finished goods

 

$

70,556

 

$

49,038

 

Raw materials

 

17,482

 

11,212

 

Work-in-process

 

9,583

 

8,457

 

Total inventory

 

$

97,621

 

$

68,707

 

 

7.              Property and Equipment

 

Depreciation and amortization expense consists of the following:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Satellites

 

$

37,059

 

$

23,125

 

Furniture, fixtures, equipment and other

 

50,573

 

25,377

 

Amortization of intangible assets and other

 

23,263

 

6,869

 

Buildings and improvements

 

3,195

 

1,643

 

Total depreciation and amortization

 

$

114,090

 

$

57,014

 

 

The increase in our depreciation and amortization expense from the three months ended March 31, 2011 compared to the same period in 2012 is primarily related to the Hughes Acquisition.

 

Cost of sales and other expense categories included in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) do not include depreciation expense.

 

Satellites

 

We currently utilize 11 satellites in geostationary orbit approximately 22,300 miles above the equator, including the SPACEWAYTM 3 satellite, which was added to our satellite fleet as a result of the Hughes Acquisition in 2011.  Five of these satellites are leased.  Four of our leased satellites are accounted for as capital leases and are depreciated over the terms of the satellite service agreements, and the one satellite we lease from DISH Network is accounted for as an operating lease.  We depreciate our owned satellites on a straight-line basis over the estimated useful life of each satellite.  See Note 14 for further discussion of our satellite leases with DISH Network.

 

Satellite Anomalies

 

Prior to 2012, certain of our satellites have experienced anomalies, some of which have had a significant adverse impact on their remaining useful life and/or commercial operation.  There can be no assurance that future anomalies will not further impact the remaining useful life and commercial operation of any of the satellites in our fleet.  See “Long-Lived Satellite Assets” below for further discussion of evaluation of impairment.  In addition, there can be no assurance that we can recover critical transmission capacity in the event one or more of our in-orbit satellites were to fail.  We generally do not carry in-orbit insurance on any of our satellites, other than SPACEWAY 3, EchoStar XVII/Jupiter and EchoStar XVI as discussed below, and therefore, we will bear the risk of any uninsured in-orbit

 

11



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

failures.  However, pursuant to the terms of the agreements governing certain portions of our indebtedness, we are required, subject to certain limitations on coverage, to maintain launch insurance for EchoStar XVII/Jupiter and EchoStar XVI and to maintain in-orbit insurance for EchoStar XVII/Jupiter, EchoStar XVI and SPACEWAY 3.  Satellite anomalies with respect to certain of our satellites are discussed below.

 

Owned Satellites

 

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

 

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

 

Leased Satellites

 

EchoStar I.  During first quarter 2012, it was determined that EchoStar I experienced a communications receiver anomaly.  While this anomaly did not impact the commercial operation of the satellite, there can be no assurance that future anomalies will not impact its future commercial operation.

 

AMC-16.  During 2012, AMC-16 experienced two additional solar-power anomalies, causing a partial power loss that further reduced its capacity.  Testing is being performed to determine the extent to which these anomalies impacted its commercial operations, the extent to which our monthly recurring payment under the applicable satellite services agreement may be further reduced and the extent to which our capital lease obligation may be further decreased. There can be no assurance that these anomalies or any future anomalies will not reduce its useful life or further impact its commercial operations.

 

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.

 

12



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

8.              Intangible Assets and Goodwill

 

Intangible Assets

 

Our identifiable intangible assets subject to amortization consisted of the following:

 

 

 

As of

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Intangible

 

Accumulated

 

Intangible

 

Accumulated

 

 

 

Assets

 

Amortization

 

Assets

 

Amortization

 

 

 

(In thousands)

 

Customer relationships

 

$

295,327

 

$

(86,995

)

$

295,327

 

$

(77,560

)

Contract-based

 

255,366

 

(154,137

)

255,366

 

(145,406

)

Technology-based (1)

 

153,185

 

(53,656

)

153,185

 

(49,307

)

Trademark portfolio

 

32,191

 

(1,861

)

32,191

 

(1,364

)

Favorable leases

 

4,707

 

(981

)

4,707

 

(687

)

Total

 

$

740,776

 

$

(297,630

)

$

740,776

 

$

(274,324

)

 

Amortization expense on these intangible assets is recorded on a straight-line basis over a useful life primarily ranging from approximately one to twenty years or in relation to the estimated discounted cash flows over the life of the intangible.  Amortization expense was $23 million and $7 million for the three months ended March 31, 2012 and 2011, respectively.

 

Estimated future amortization of our identifiable intangible assets as of March 31, 2012 is as follows:

 

 

 

Amount

 

 

 

(In thousands)

 

For the Years Ended December 31,

 

 

 

2012 (remaining nine months)

 

$

67,726

 

2013

 

69,495

 

2014

 

78,082

 

2015

 

63,360

 

2016

 

42,263

 

Thereafter (1)

 

122,220

 

Total

 

$

443,146

 

 


(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 future amortization table, we include, among other things, 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.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Goodwill

 

During the three months ended March 31, 2012, we made adjustments to the allocation of our purchase price related to the Hughes Acquisition as summarized in the table below.

 

 

 

Goodwill

 

 

 

(In thousands)

 

Balance as of December 31, 2011

 

$

533,018

 

Adjustments to the Hughes Acquisition (non-deductible)

 

(6,338

)

Balance as of March 31, 2012

 

$

526,680

 

 

9.              Debt

 

Fair Value of our Debt

 

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

 

 

 

As of

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Carrying

 

 

 

Carrying

 

 

 

 

 

Value

 

Fair Value

 

Value

 

Fair Value

 

 

 

(In thousands)

 

6 1/2% Senior Secured Notes due 2019

 

$

1,100,000

 

$

1,155,000

 

$

1,100,000

 

$

1,138,500

 

7 5/8% Senior Notes due 2021

 

900,000

 

969,750

 

900,000

 

936,000

 

Mortgages and other notes payable

 

6,567

 

6,567

 

6,644

 

6,644

 

Subtotal

 

2,006,567

 

$

2,131,317

 

2,006,644

 

$

2,081,144

 

Capital lease obligations (1)

 

539,117

 

NA

 

527,618

 

NA

 

Total debt and capital lease obligations

 

$

2,545,684

 

 

 

$

2,534,262

 

 

 

 


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

 

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

 

10.       Stock-Based Compensation

 

Stock Incentive Plans

 

We maintain stock incentive plans to attract and retain officers, directors and key employees.  Stock awards under these plans include both performance and non-performance based stock incentives.  As of March 31, 2012, 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, 2012 were granted with exercise prices equal to or greater than the market value of our Class A common stock at the date of grant and with a maximum term of ten years.  While historically we have issued stock awards subject to vesting, typically at the rate of 20% to 33% per year, some stock awards have been granted with immediate vesting and other stock awards vest only upon the achievement of certain company-wide objectives.  As of March 31, 2012, we had 4.8 million shares of our Class A common stock available for future grant under our stock incentive plans.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

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.

 

The following stock awards were outstanding:

 

 

 

As of March 31, 2012

 

 

 

EchoStar Awards

 

DISH Network Awards

 

Stock Awards Outstanding

 

Stock
Options

 

Restricted
Stock
Units

 

Stock
Options

 

Restricted
Stock
Units

 

Held by EchoStar employees

 

7,916,296

 

89,940

 

2,580,701

 

94,999

 

Held by DISH Network employees

 

791,554

 

53,620

 

N/A

 

N/A

 

Total

 

8,707,850

 

143,560

 

2,580,701

 

94,999

 

 

We are responsible for fulfilling all stock awards related to EchoStar common stock and DISH Network is responsible for fulfilling all stock awards related to DISH Network common stock, regardless of whether such stock awards are held by our 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.

 

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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, 2012

 

 

 

Options

 

Weighted-
Average
Exercise Price

 

Total options outstanding, beginning of period

 

8,778,413

 

$

27.22

 

Granted

 

15,000

 

$

28.14

 

Exercised

 

(24,803

)

$

17.80

 

Forfeited and cancelled

 

(60,760

)

$

29.99

 

Total options outstanding, end of period

 

8,707,850

 

$

27.23

 

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

 

658,700

 

$

25.30

 

Exercisable at end of period

 

3,742,230

 

$

26.03

 

 


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

 

We realized tax benefits from stock awards exercised as follows:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Tax benefit from stock awards exercised

 

$

1,236

 

$

2,170

 

 

Based on the closing market price of our Class A common stock on March 31, 2012, the aggregate intrinsic value of our stock options was as follows:

 

 

 

As of March 31, 2012

 

 

 

Options
Outstanding

 

Options
Exercisable

 

 

 

(In thousands)

 

Aggregate intrinsic value

 

$

33,740

 

$

13,972

 

 

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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, 2012

 

 

 

Restricted
Stock
Units

 

Weighted-
Average
Grant Date
Fair Value

 

Total restricted stock units outstanding, beginning of period

 

144,226

 

$

29.22

 

Granted

 

 

$

 

Vested

 

 

$

 

Forfeited and cancelled

 

(666

)

$

25.46

 

Total restricted stock units outstanding, end of period

 

143,560

 

$

29.24

 

Restricted Performance Units outstanding, end of period (1)

 

73,610

 

$

26.62

 

 


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

 

Long-Term Performance-Based Plans

 

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

 

Contingent compensation related to the 2005 LTIP will not be recorded in our financial statements unless and until the achievement of the performance condition is probable.  The competitive nature of our industry and certain other factors can significantly impact achievement of the goal.  Consequently, while it was determined that achievement of the goal was not probable as of March 31, 2012, this assessment could change in the future.

 

If all of the stock awards under the 2005 LTIP were vested and the goal had been met, or if we had determined that achievement of the goal was probable during the three months ended March 31, 2012, we would have recorded total non-cash, stock-based compensation expense for our employees as indicated in the table below.  If the goal is met and there are unvested stock awards at that time, the vested amounts would be expensed immediately on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), with the unvested portion recognized ratably over the remaining vesting period.

 

 

 

2005 LTIP

 

 

 

 

 

Vested

 

 

 

Total

 

Portion (1)

 

 

 

(In thousands)

 

DISH Network awards held by EchoStar employees

 

$

16,292

 

$

16,140

 

EchoStar awards held by EchoStar employees

 

3,008

 

2,977

 

Total

 

$

19,300

 

$

19,117

 

 


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

 

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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 the following awards were outstanding pursuant to the 2005 LTIP:

 

 

 

As of March 31, 2012

 

 

 

Number of
Awards

 

Weighted-
Average
Exercise
Price

 

Stock options

 

658,700

 

$

25.30

 

Restricted Performance Units

 

73,610

 

 

 

Total

 

732,310

 

 

 

 

Stock-Based Compensation

 

During December 2011, DISH Network paid a dividend in cash of $2.00 per share on their outstanding Class A and Class B common stock to shareholders of record on November 17, 2011.  In light of such dividend, during January 2012, the exercise price of 2.6 million DISH Network stock options held by 194 of our employees was reduced by $2.00 per share (“DISH Network’s 2012 Stock Option Adjustment”).  During the three months ended March 31, 2012, we incurred $3 million of additional non-cash, stock-based compensation expense in connection with DISH Network’s 2012 Stock Option Adjustment.  This amount is included in the table below.  Total non-cash, stock-based compensation expense for all of our employees is shown in the following table and was allocated to the same expense categories as the base compensation for such employees:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

Research and development expenses

 

$

1,061

 

$

603

 

Selling, general and administrative expenses

 

5,857

 

2,378

 

Total non-cash, stock-based compensation

 

$

6,918

 

$

2,981

 

 

As of March 31, 2012, our total unrecognized compensation cost related to our non-performance based unvested stock awards was $42 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 1.8% 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.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Valuation

 

The fair value of each stock option for the three months ended March 31, 2012 and 2011 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

 

2012

 

2011

 

Risk-free interest rate

 

1.33

%

2.57

%

Volatility factor

 

40.36

%

34.68

%

Expected term of options in years

 

6.0

 

6.0

 

Weighted-average fair value of options granted

 

$

11.37

 

$

14.42

 

 

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

 

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

 

11.       Acquisition

 

Hughes Communications

 

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

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

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

 

 

 

Preliminary

 

 

 

Purchase Price

 

 

 

Allocation

 

 

 

(In thousands)

 

Cash

 

$

98,900

 

Marketable investment securities

 

22,148

 

Other current assets

 

282,471

 

Property and equipment

 

930,426

 

Intangibles

 

420,907

 

Goodwill (non-deductible)

 

509,860

 

FCC authorizations

 

400,000

 

Other noncurrent assets

 

55,776

 

Current liabilities

 

(293,029

)

Deferred tax liabilities

 

(220,928

)

Long-term liabilities

 

(22,239

)

Non-controlling interests

 

(9,679

)

Total purchase price

 

$

2,174,613

 

 

The following unaudited pro forma condensed consolidated operating results for the three months ended March 31, 2011 gives effect to the Hughes Acquisition as if it occurred on January 1, 2010.  These pro forma amounts are not necessarily indicative of the operating results that would have occurred if this transaction had occurred on such date and should not be used as a predictive measure of our future financial position, results of operations or liquidity.  The pro forma adjustments are based on currently available information and certain assumptions that we believe are reasonable.

 

 

 

For the Three

 

 

 

Months Ended

 

Supplemental pro forma financial information (Unaudited)

 

March 31, 2011

 

 

 

(In thousands,
except per share
amounts)

 

Total revenue

 

$

743,109

 

Net income (loss) attributable to EchoStar

 

$

(6,246

)

Basic net income (loss) per share attributable to EchoStar

 

$

(0.07

)

Diluted net income (loss) per share attributable to EchoStar

 

$

(0.07

)

 

Effective June 9, 2011, revenue and expenses associated with the Hughes Acquisition are included within the Hughes segment in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).  See Note 13 for further discussion.

 

12.       Commitments and Contingencies

 

Commitments

 

Acquisition of Brazilian Orbital Slot.  On August 30, 2011, we were declared the winner of the right to select an orbital slot in an auction conducted by ANATEL, the Brazilian communications regulatory authority.  We selected the 45 degree west longitude orbital location for a bid of approximately $80 million using an exchange rate of $1 to 1.8221 Brazilian Real as of March 31, 2012.  We must comply with certain post-auction regulatory and payment requirements before we will receive the orbital slot.  Once we receive the orbital slot, which is expected to occur

 

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Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

during May 2012, the slot will be used to expand our video and data capabilities in South America.  Pursuant to our obligations under the license for the orbital slot we will be required to make significant additional investments, which may affect our future financial condition or results of operations.

 

EchoStar XVI.  During November 2009, we entered into a contract for the construction of EchoStar XVI, a direct broadcast satellite (“DBS”), which is expected to be launched during the second half of 2012 and will operate at the 61.5 degree west longitude orbital location.  DISH Network has agreed to lease all of the capacity on this satellite from us for a portion of its useful life.  As of March 31, 2012, the remaining obligation related to EchoStar XVI is $68 million, which includes the launch contract, launch insurance and one-year of in-orbit insurance.

 

EchoStar XVII/Jupiter.  During June 2009, Hughes Communications entered into a contract for the construction of EchoStar XVII/Jupiter, which is expected to launch in the summer of 2012.  Barrett Xplore Inc. has agreed to lease the user beams designed to operate in Canada, which represents a portion of the capacity available on EchoStar XVII/Jupiter.  As of March 31, 2012, the remaining obligation related to EchoStar XVII/Jupiter is $120 million, which includes the launch contract, launch insurance and one year of in-orbit insurance.

 

Contingencies

 

Separation Agreement

 

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

 

Litigation

 

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

 

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

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

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

 

On September 15, 2011, LVL Patent Group, LLC filed a complaint against us and our wholly-owned subsidiary, EchoStar Technologies L.L.C., as well as DISH Network L.L.C. a wholly-owned subsidiary of DISH Network, and DirecTV, Inc. in the United States District Court for the District of Delaware alleging infringement of United States Patent No. 6,044,382, which is entitled “Data Transaction Assembly Server.”  On November 18, 2011, Cyberfone Systems, LLC (f/k/a LVL Patent Group, LLC) filed an amended complaint making the same claim.  DirecTV was dismissed from the case on January 4, 2012.

 

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

 

E-Contact Technologies, LLC

 

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

 

We, along with the third party service provider, intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe the asserted patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us or our service provider 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.

 

Joao Control & Monitoring Systems

 

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

 

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

 

Nazomi Communications, Inc.

 

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

 

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.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

NorthPoint Technology, Ltd.

 

On July 2, 2009, NorthPoint Technology, Ltd. (“NorthPoint”) filed suit against us, DISH Network, and DirecTV in the United States District Court for the Western District of Texas alleging infringement of United States Patent No. 6,208,636 (the “‘636 patent”).  The ‘636 patent relates to the use of multiple low-noise block converter feedhorns, or LNBFs, which are antennas used for satellite reception.  On April 21, 2011, the United States Patent and Trademark Office issued an order granting reexamination of the ‘636 patent.  On June 21, 2011, the District Court entered summary judgment in our favor, finding that all asserted claims of the ‘636 patent are invalid.  NorthPoint has appealed.

 

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, Inc.

 

During 2008, Personalized Media Communications, Inc. (“PMC”) filed suit against us, DISH Network and Motorola Inc. in the United States District Court for the Eastern District of Texas alleging infringement of United States Patent Nos. 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.  Subsequently, Motorola Inc. settled with PMC, leaving DISH Network and us as defendants.  Trial is currently set for August 2012.

 

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

 

Semiconductor Ideas to the Market BV

 

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

 

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

 

Technology Development and Licensing L.L.C.

 

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

 

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

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Vigilos, LLC

 

On February 23, 2011, Vigilos, LLC filed suit against us, two of our subsidiaries, Sling Media, Inc. and EchoStar Technologies L.L.C., and Monsoon Multimedia, Inc. in the United States District Court for the Eastern District of Texas alleging infringement of United States Patent No. 6,839,731, which is entitled “System and Method for Providing Data Communication in a Device Network.”  Subsequently in 2011, Vigilos added DISH Network L.L.C., a wholly owned subsidiary of DISH Network, as a defendant in its First Amended Complaint and the case was transferred to the Northern District of California.  Later in 2011, Vigilos filed a Second Amended Complaint that added claims for infringement of a second patent, United States Patent No. 7,370,074, which is entitled “System and Method for Implementing Open-Protocol Remote Device Control.”

 

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

 

Other

 

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

 

13.       Segment Reporting

 

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

 

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

 

·                  EchoStar Satellite Services — which uses 10 of our 11 owned and leased in-orbit satellites and related FCC licenses to lease capacity on a full-time and occasional-use basis primarily to DISH Network, and secondarily to Dish Mexico, United States government service providers, state agencies, Internet service providers, broadcast news organizations, programmers and private enterprise customers.

 

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

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

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

 

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

 

 

 

 

 

EchoStar

 

 

 

All

 

 

 

 

 

EchoStar

 

Satellite

 

 

 

Other and

 

Consolidated

 

For the Three Months Ended March 31, 2012

 

Technologies

 

Services

 

Hughes

 

Eliminations

 

Total

 

 

 

(In thousands)

 

Total revenue

 

$

408,579

 

$

73,583

 

$

274,218

 

$

8,400

 

$

764,780

 

EBITDA (1)

 

24,487

 

52,200

 

69,202

 

130,226

 

276,115

 

Interest income

 

 

22

 

73

 

2,784

 

2,879

 

Interest expense, net of amounts capitalized

 

(20

)

(13,794

)

(88

)

(24,719

)

(38,621

)

Income tax benefit (provision), net

 

(277

)

(2,652

)

(5,218

)

8,452

 

305

 

Depreciation and amortization

 

(19,503

)

(31,439

)

(55,588

)

(7,560

)

(114,090

)

Net income (loss) attributable to EchoStar

 

$

4,687

 

$

4,337

 

$

8,381

 

$

109,183

 

$

126,588

 

 

For the Three Months Ended March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

405,383

 

$

68,771

 

$

 

$

5,672

 

$

479,826

 

EBITDA (1)

 

24,263

 

44,246

 

 

10,318

 

78,827

 

Interest income

 

 

 

 

2,677

 

2,677

 

Interest expense, net

 

(2

)

(8,523

)

 

8,987

 

462

 

Income tax benefit (provision), net

 

1,334

 

(4,640

)

 

(4,482

)

(7,788

)

Depreciation and amortization

 

(26,651

)

(23,625

)

 

(6,738

)

(57,014

)

Net income (loss) attributable to EchoStar

 

$

(1,056

)

$