Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2014.

 

OR

 

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

 

FOR THE TRANSITION PERIOD FROM            TO            .

 

Commission File Number:  333-179121

 

Hughes Satellite Systems Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

Colorado

 

45-0897865

(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 o  No x*

 

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

 

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

 

Large accelerated filer o

Accelerated filer o

 

 

Non-accelerated filer x

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

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

 

As of August 1, 2014, the Registrant’s outstanding common stock consisted of 1,000 shares of common stock, $0.01  par value per share.

 

The Registrant meets the conditions set forth in General Instructions (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.

 

*     The registrant currently is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 and is filing this Quarterly Report on Form 10-Q on a voluntary basis.  The registrant 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 as if it were subject to such filing requirements during the entirety of such period.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

Disclosure Regarding Forward-Looking Statements

i

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

1

 

Condensed Consolidated Balance Sheets as of June 30, 2014 (Unaudited) and December 31, 2013

1

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2014 and 2013 (Unaudited)

2

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2014 and 2013 (Unaudited)

3

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (Unaudited)

4

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

5

Item 2.

Management’s Narrative Analysis of Results of Operations

36

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

*

Item 4.

Controls and Procedures

45

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

46

Item 1A.

Risk Factors

46

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

*

Item 3.

Defaults upon Senior Securities

*

Item 4.

Mine Safety Disclosures

47

Item 5.

Other Information

46

Item 6.

Exhibits

48

 

Signatures

49

 


*                             This item has been omitted pursuant to the reduced disclosure format as set forth in General Instructions (H)(2) of Form 10-Q

 



Table of Contents

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, in particular, statements about our estimates, expectations, plans, objectives, strategies, results of operations and financial condition, expected impact of regulatory developments and legal proceedings, opportunities in our industries and businesses and other trends and projections for the next fiscal quarter and beyond. All statements, other than statements of historical facts, may be forward-looking statements. Forward-looking statements may also be identified by words such as “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “estimate,” “expect,” “predict,” “continue,” “future,” “will,” “would,” “could,” “can,” “may” and similar terms.  These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and represent management’s current views and assumptions.  Forward-looking statements are not guarantees of future performance, events or results and involve potential known and unknown risks, uncertainties and other factors, many of which may be beyond our control and may pose a risk to our operating and financial condition.  Accordingly, actual performance, events or results could differ materially from those expressed or implied in the forward-looking statements due to a number of factors including, but not limited to:

 

·                  our reliance on our primary customer, DISH Network Corporation (“DISH Network”), for a significant portion of our revenue;

·                  our ability to bring advanced technologies to market to keep pace with our competitors;

·                  significant risks related to the construction, launch and operation of our satellites, such as the risk of material malfunction on one or more of our satellites, changes in the space weather environment that could interfere with the operation of our satellites, and our general lack of commercial insurance coverage on our satellites;

·                  uncertainty in global economic conditions, which may, among other things, cause consumers and enterprise customers to defer purchases;

·                  the failure to adequately anticipate the need for satellite capacity or the inability to obtain satellite capacity for our Hughes segment; and

·                  the failure of third-party providers of components, manufacturing, installation services and customer support services to appropriately deliver the contracted goods or services.

 

Other factors that could cause or contribute to such differences include, but are not limited to, those discussed under the caption “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K (“10-K”) filed with the Securities and Exchange Commission (“SEC”), those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the 10-K and those discussed in other documents we file with the SEC.

 

All cautionary statements made herein should be read as being applicable to all forward-looking statements wherever they appear. Investors should consider the risks and uncertainties described herein and should not place undue reliance on any forward-looking statements. We do not undertake, and specifically disclaim, any obligation to publicly release the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except as required by federal securities laws.

 

i



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.   FINANCIAL STATEMENTS

 

HUGHES SATELLITE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

 

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

267,266

 

$

163,709

 

Marketable investment securities

 

204,035

 

116,860

 

Trade accounts receivable, net of allowance for doubtful accounts of $11,664 and $10,737, respectively

 

149,767

 

132,955

 

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

 

18,562

 

68,091

 

Inventory

 

53,718

 

56,993

 

Deferred tax assets

 

63,756

 

63,786

 

Prepaids and deposits

 

29,960

 

27,127

 

Advances to affiliates, net

 

954

 

740

 

Other current assets

 

10,303

 

27,389

 

Total current assets

 

798,321

 

657,650

 

Noncurrent Assets:

 

 

 

 

 

Restricted cash and cash equivalents

 

18,200

 

15,114

 

Property and equipment, net of accumulated depreciation of $1,865,483 and $1,676,182, respectively

 

2,324,579

 

1,983,281

 

Regulatory authorizations

 

471,658

 

471,658

 

Goodwill

 

504,173

 

504,173

 

Other intangible assets, net

 

182,671

 

213,747

 

Other investments

 

29,854

 

30,212

 

Other noncurrent assets, net

 

176,217

 

165,976

 

Total noncurrent assets

 

3,707,352

 

3,384,161

 

Total assets

 

$

4,505,673

 

$

4,041,811

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Trade accounts payable

 

$

87,138

 

$

91,000

 

Trade accounts payable - DISH Network

 

26

 

5

 

Current portion of long-term debt and capital lease obligations

 

48,715

 

67,300

 

Advances from affiliates, net

 

28,984

 

10,711

 

Deferred revenue and prepayments

 

55,975

 

55,086

 

Accrued compensation

 

20,839

 

19,741

 

Accrued expenses and other

 

83,183

 

84,561

 

Total current liabilities

 

324,860

 

328,404

 

Noncurrent Liabilities:

 

 

 

 

 

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

 

2,339,103

 

2,351,572

 

Deferred tax liabilities

 

416,311

 

266,674

 

Advances from affiliates

 

8,287

 

8,221

 

Other noncurrent liabilities

 

96,419

 

62,122

 

Total noncurrent liabilities

 

2,860,120

 

2,688,589

 

Total liabilities

 

3,184,980

 

3,016,993

 

Commitments and Contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

Preferred Stock, $0.001 par value; 1,000,000 shares authorized:

 

 

 

 

 

Hughes Retail Preferred Tracking Stock, $0.001 par value; 300 shares authorized, 81.128 shares issued and outstanding

 

 

 

Common stock, $0.01 par value; 1,000,000 shares authorized:

 

 

 

 

 

Common stock, $0.01 par value; 1,000,000 shares authorized, 1,000 shares issued and outstanding

 

 

 

Additional paid-in capital

 

1,360,201

 

1,106,463

 

Accumulated other comprehensive loss

 

(16,379

)

(18,644

)

Accumulated deficit

 

(32,966

)

(71,862

)

Total HSS shareholders’ equity

 

1,310,856

 

1,015,957

 

Noncontrolling interests

 

9,837

 

8,861

 

Total shareholders’ equity

 

1,320,693

 

1,024,818

 

Total liabilities and shareholders’ equity

 

$

4,505,673

 

$

4,041,811

 

 

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

 

1



Table of Contents

 

HUGHES SATELLITE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenue:

 

 

 

 

 

 

 

 

 

Services and other revenue - other

 

$

268,815

 

$

247,346

 

$

530,482

 

$

488,717

 

Services and other revenue - DISH Network

 

128,861

 

70,818

 

228,105

 

130,637

 

Equipment revenue - other

 

53,666

 

54,345

 

95,498

 

103,839

 

Equipment revenue - DISH Network

 

6,329

 

25,362

 

17,899

 

37,233

 

Total revenue

 

457,671

 

397,871

 

871,984

 

760,426

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

Cost of sales - services and other (exclusive of depreciation and amortization)

 

132,969

 

122,883

 

265,315

 

244,413

 

Cost of sales - equipment (exclusive of depreciation and amortization)

 

52,791

 

67,873

 

100,197

 

123,581

 

Selling, general and administrative expenses

 

64,528

 

58,525

 

127,799

 

119,536

 

Research and development expenses

 

4,654

 

5,496

 

9,146

 

10,616

 

Depreciation and amortization

 

115,818

 

101,512

 

224,003

 

202,686

 

Impairment of long-lived asset

 

 

34,664

 

 

34,664

 

Total costs and expenses

 

370,760

 

390,953

 

726,460

 

735,496

 

Operating income

 

86,911

 

6,918

 

145,524

 

24,930

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

Interest income

 

620

 

293

 

1,575

 

458

 

Interest expense, net of amounts capitalized

 

(48,595

)

(49,406

)

(97,342

)

(99,030

)

Equity in earnings of unconsolidated affiliate

 

1,244

 

572

 

2,014

 

604

 

Other, net (includes reclassification of realized gains on available-for-sale (“AFS”) securities out of accumulated other comprehensive loss of $2, $5, $10 and $22 respectively)

 

245

 

(1,188

)

476

 

8,470

 

Total other expense, net

 

(46,486

)

(49,729

)

(93,277

)

(89,498

)

Income (loss) before income taxes

 

40,425

 

(42,811

)

52,247

 

(64,568

)

Income tax benefit (provision), net

 

(12,423

)

15,806

 

(12,624

)

28,211

 

Net income (loss)

 

28,002

 

(27,005

)

39,623

 

(36,357

)

Less: Net income attributable to noncontrolling interests

 

428

 

176

 

727

 

216

 

Net income (loss) attributable to HSS

 

$

27,574

 

$

(27,181

)

$

38,896

 

$

(36,573

)

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

28,002

 

$

(27,005

)

$

39,623

 

$

(36,357

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

1,161

 

(5,778

)

3,351

 

(5,600

)

Unrealized losses on AFS securities and other

 

(1,633

)

(249

)

(827

)

(317

)

Recognition of previously unrealized gains on

 

 

 

 

 

 

 

 

 

AFS securities included in net income (loss)

 

(2

)

(5

)

(10

)

(22

)

Total other comprehensive income (loss), net of tax

 

(474

)

(6,032

)

2,514

 

(5,939

)

Comprehensive income (loss)

 

27,528

 

(33,037

)

42,137

 

(42,296

)

Less: Comprehensive income (loss) attributable to noncontrolling interests

 

442

 

(470

)

976

 

(408

)

Comprehensive income (loss) attributable to HSS

 

$

27,086

 

$

(32,567

)

$

41,161

 

$

(41,888

)

 

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

 

2



Table of Contents

 

HUGHES SATELLITE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

 

 

Paid-In

 

Comprehensive

 

Accumulated

 

Noncontrolling

 

 

 

 

 

Capital

 

Loss

 

Deficit

 

Interests

 

Total

 

Balance, December 31, 2012

 

$

1,100,276

 

$

(13,539

)

$

(36,163

)

$

9,337

 

$

1,059,911

 

Stock-based compensation

 

784

 

 

 

 

784

 

Other

 

1,610

 

 

 

(467

)

1,143

 

Net income (loss)

 

 

 

(36,573

)

216

 

(36,357

)

Unrealized losses on AFS securities, net and other

 

 

(339

)

 

 

(339

)

Foreign currency translation adjustment

 

 

(4,976

)

 

(624

)

(5,600

)

Balance, June 30, 2013

 

$

1,102,670

 

$

(18,854

)

$

(72,736

)

$

8,462

 

$

1,019,542

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

$

1,106,463

 

$

(18,644

)

$

(71,862

)

$

8,861

 

$

1,024,818

 

Stock-based compensation

 

1,300

 

 

 

 

1,300

 

Issuance of Hughes Retail Preferred Tracking Stock (Note 2)

 

252,990

 

 

 

 

252,990

 

Other, net

 

(552

)

 

 

 

(552

)

Net income

 

 

 

38,896

 

727

 

39,623

 

Unrealized gains on AFS securities, net and other

 

 

(837

)

 

 

(837

)

Foreign currency translation adjustment

 

 

3,102

 

 

249

 

3,351

 

Balance, June 30, 2014

 

$

1,360,201

 

$

(16,379

)

$

(32,966

)

$

9,837

 

$

1,320,693

 

 

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

 

3



Table of Contents

 

HUGHES SATELLITE SYSTEMS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Six Months Ended
June 30,

 

 

 

2014

 

2013

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income (loss)

 

$

39,623

 

$

(36,357

)

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

 

 

 

 

 

Depreciation and amortization

 

224,003

 

202,686

 

Equity in earnings of unconsolidated affiliate

 

(2,014

)

(604

)

Amortization of debt issuance costs

 

2,853

 

2,651

 

Realized gains on marketable investment securities and other investments, net

 

(10

)

(2,574

)

Impairment of long-lived asset

 

 

34,664

 

Stock-based compensation

 

1,300

 

784

 

Deferred tax benefit

 

5,623

 

(31,759

)

Changes in current assets and current liabilities, net

 

61,545

 

(37,834

)

Changes in noncurrent assets and noncurrent liabilities, net

 

(6,663

)

(3,112

)

Other, net

 

3,447

 

(6,925

)

Net cash flows from operating activities

 

329,707

 

121,620

 

Cash Flows from Investing Activities:

 

 

 

 

 

Purchases of marketable investment securities

 

(163,798

)

(35,964

)

Sales and maturities of marketable investment securities

 

74,554

 

30,120

 

Purchases of property and equipment

 

(97,506

)

(102,165

)

Changes in restricted cash and cash equivalents

 

(3,086

)

7,961

 

Other, net

 

(12,316

)

(4,613

)

Net cash flows from investing activities

 

(202,152

)

(104,661

)

Cash Flows from Financing Activities:

 

 

 

 

 

Repayment of long-term debt and capital lease obligations

 

(34,604

)

(35,172

)

Net proceeds from issuance of Hughes Retail Preferred Tracking Stock (Note 2)

 

10,601

 

 

Other

 

(1,907

)

816

 

Net cash flows from financing activities

 

(25,910

)

(34,356

)

Effect of exchange rates on cash and cash equivalents

 

1,912

 

94

 

Net increase in cash and cash equivalents

 

103,557

 

(17,303

)

Cash and cash equivalents, beginning of period

 

163,709

 

136,219

 

Cash and cash equivalents, end of period

 

$

267,266

 

$

118,916

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid for interest

 

$

93,468

 

$

98,275

 

Cash paid for income taxes

 

$

4,978

 

$

4,882

 

Satellites and other assets financed under capital lease obligations

 

$

1,382

 

$

1,249

 

Capitalized in-orbit obligations

 

$

 

$

18,000

 

Transfer of regulatory authorization to DISH Network included in accounts receivable

 

$

 

$

23,000

 

Reduction of capital lease obligation for AMC-16

 

$

 

$

6,694

 

Increase (decrease) in capital expenditures included in accounts payable

 

$

(1,169

)

$

(9,304

)

Net assets transferred from DISH Network in exchange for HSS Tracking Stock (Note 2)

 

$

71,048

 

$

 

Net assets transferred from EchoStar related to Tracking Stock Transaction (Note 2)

 

$

315,643

 

$

 

 

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

 

4



Table of Contents

 

HUGHES SATELLITE SYSTEMS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.                     Organization and Business Activities

 

Principal Business

 

Hughes Satellite Systems Corporation (together with its subsidiaries is referred to as “HSS,” the “Company,” “we,” “us” and/or “our”) is a holding company and a subsidiary of EchoStar Corporation (“EchoStar”).  We are a global provider of satellite operations, video delivery solutions, and broadband satellite technologies and services for home and office, delivering innovative network technologies, managed services, and solutions for enterprises and governments.

 

We currently operate in two business segments.

 

·                  Hughes — which provides satellite broadband internet access to North American consumers and broadband network services and equipment to domestic and international enterprise markets.  The Hughes segment also provides managed services to large enterprises and solutions to customers for mobile satellite systems.

 

·                  EchoStar Satellite Services — which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite services on a full-time and occasional-use basis primarily to DISH Network Corporation (“DISH Network”), and also to Dish Mexico, S. de R.L. de C.V. (“Dish Mexico”), a joint venture that EchoStar entered into in 2008, as well as to United States (“U.S.”) government service providers, state agencies, internet service providers, broadcast news organizations, programmers, and private enterprise customers.

 

We were formed as a Colorado corporation in March 2011 to facilitate the acquisition (the “Hughes Acquisition”) of Hughes Communications, Inc. and its subsidiaries (“Hughes Communications”) and related financing transactions.  In connection with our formation, EchoStar contributed the assets and liabilities of its satellite services business, including its principal operating subsidiary of its satellite services business, EchoStar Satellite Services L.L.C., to us.  As a result of the Satellite and Tracking Stock Transaction described in Note 2 below, effective March 1, 2014, we issued to DISH Network shares of our newly authorized preferred tracking stock representing a 28.11% economic interest in the residential retail satellite broadband business of our Hughes segment.

 

Note 2.                     Hughes Retail Preferred Tracking Stock

 

Satellite and Tracking Stock Transaction

 

On February 20, 2014, HSS and EchoStar entered into agreements with certain subsidiaries of DISH Network  pursuant to which effective March 1, 2014, (i) EchoStar issued shares of its newly authorized Hughes Retail Preferred Tracking Stock (the “EchoStar Tracking Stock”) and HSS issued shares of its newly authorized Hughes Retail Preferred Tracking Stock (the “HSS Tracking Stock” and together with the EchoStar Tracking Stock, the “Tracking Stock”) to DISH Network in exchange for five satellites (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI, and EchoStar XIV) (including the assumption of related in-orbit incentive obligations) and $11.4 million in cash and (ii) DISH Network began receiving certain satellite services on these five satellites from us (the “Satellite and Tracking Stock Transaction”).  Immediately upon receipt of net assets (consisting of two of the five satellites and related in-orbit incentive obligations) from DISH Network in exchange for EchoStar Tracking Stock, EchoStar transferred such net assets to us.  The Tracking Stock tracks the residential retail satellite broadband business of our Hughes segment, including certain operations, assets and liabilities attributed to such business (collectively, the “Hughes Retail Group” or “HRG”).

 

HSS has adopted a policy statement (the “Policy Statement”) setting forth management and allocation policies for purposes of attributing all of the business and operations of HSS to either the Hughes Retail Group or the “HSSC

 

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Group”, which is defined as all other operations of HSS, including all existing and future businesses, other than the Hughes Retail Group.  Among other things, the Policy Statement governs how assets, liabilities, revenue and expenses are attributed or allocated between HRG and the HSSC Group.  Such attributions and allocations generally do not affect the amounts reported in our consolidated financial statements, except for the attribution of shareholders’ equity and net income or loss between the holders of Tracking Stock and common stock.  The Policy Statement also does not significantly affect the way that management assesses operating performance and allocates resources within our Hughes segment.

 

See Note 8 for information about the five satellites received from DISH Network, Note 12 for information about the assumed in-orbit incentive obligations, and Note 14 for information regarding the related satellite services agreements with DISH Network.  We provide unaudited attributed financial information for HRG and the HSSC Group in an exhibit to our periodic reports on Form 10-Q and Form 10-K.  Set forth below is information about certain terms of the Tracking Stock and the initial recording of the Satellite and Tracking Stock Transaction in our consolidated financial statements.

 

Description of the Tracking Stock

 

Tracking stock is a type of capital stock that the issuing company intends to reflect or “track” the economic performance of a particular business component within the company, rather than reflect the economic performance of the company as a whole.  The Tracking Stock is intended to track the economic performance of the Hughes Retail Group.  The shares of the Tracking Stock issued to DISH Network represent an aggregate 80.0% economic interest in the Hughes Retail Group, of which a 28.11% interest is issued as the HSS Tracking Stock.  In addition to the remaining 20.0% economic interest in the Hughes Retail Group, HSS retains all economic interest in the wholesale satellite broadband business and other businesses of HSS.  The Hughes Retail Group is not a separate legal entity and therefore cannot own assets, issue securities or enter into legally binding agreements.  Holders of the Tracking Stock have no direct claim to the assets of the Hughes Retail Group; rather, holders of the Tracking Stock are stockholders of its respective issuer (EchoStar or HSS) and are subject to all risks and liabilities of the issuer.  Accordingly, holders of EchoStar Tracking Stock do not have any direct equity interest in HSS, but have an indirect interest through EchoStar’s ownership of our outstanding common stock.  Holders of shares of the Tracking Stock vote with holders of the outstanding shares of common stock of its respective issuer, as a single class, with respect to any and all matters presented to stockholders for their action or consideration.  Each share of the Tracking Stock is entitled to one-tenth (1/10th) of one vote.  The EchoStar Tracking Stock is a series of EchoStar preferred stock consisting of 13,000,000 authorized shares with a par value of $0.001 per share, of which 6,290,499 shares were issued to DISH Network on March 1, 2014.  The outstanding shares of EchoStar Tracking Stock represent a 51.89% economic interest in the Hughes Retail GroupThe HSS Tracking Stock is a series of HSS preferred stock consisting of 300 authorized shares with a par value of $0.001 per share, of which 81.128 shares were issued to DISH Network on March 1, 2014.  Following the issuance of the shares of the EchoStar Tracking Stock and the HSS Tracking Stock, DISH Network held 6.5% and 7.5% of the aggregate number of outstanding shares of EchoStar and HSS capital stock, respectively.

 

Investor Rights Agreement

 

In connection with the Satellite and Tracking Stock Transaction, EchoStar, HSS and DISH Network entered into an agreement (the “Investor Rights Agreement”) setting forth certain rights and obligations of the parties with respect to the Tracking Stock.  Among other provisions, the Investor Rights Agreement provides: (i) certain information and consultation rights for DISH Network; (ii) certain transfer restrictions on the Tracking Stock and certain rights and obligations to offer and sell under certain circumstances (including a prohibition on transfer of the Tracking Stock until March 1, 2015), with continuing transfer restrictions (including a right of first offer in favor of EchoStar) thereafter, an obligation to sell the Tracking Stock to EchoStar in connection with a change of control of DISH Network and a right to require EchoStar to repurchase the Tracking Stock in connection with a change of control of EchoStar, in each case subject to certain terms and conditions; and (iii) certain protective covenants afforded to holders of the Tracking Stock.

 

In addition, the Investor Rights Agreement provides that DISH Network may, on or after September 1, 2016, require EchoStar to use its commercially reasonable efforts to register some or all of the outstanding shares of the Tracking

 

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Stock under the Securities Act of 1933, subject to certain terms and conditions (including EchoStar’s right, upon the receipt of a demand for registration, to offer to repurchase all of the Tracking Stock).  In connection with any demand for registration, DISH Network may require any outstanding shares of the HSS Tracking Stock to be exchanged for shares of the EchoStar Tracking Stock with an equivalent economic interest in the Hughes Retail Group.  In the event that a registration of shares of EchoStar Tracking Stock is effected, EchoStar is required to use its reasonable best efforts to amend the terms of the Tracking Stock so that the Tracking Stock will be convertible or exchangeable for shares of EchoStar Class A Common Stock with equivalent market value.

 

Initial Recording of the Satellite and Tracking Stock Transaction

 

EchoStar and DISH Network are entities under common control.  In accordance with accounting principles that apply to transfers of assets between entities under common control, HSS recorded the net assets received from DISH Network in the Satellite and Tracking Stock Transaction (directly or indirectly through EchoStar) at their historical carrying amounts as reflected in DISH Network’s consolidated financial statements as of February 28, 2014, the day prior to the effective date of the Satellite and Tracking Stock Transaction.  DISH Network transferred the EchoStar I, EchoStar VII, and EchoStar X satellites to HSS and transferred the EchoStar XI and EchoStar XIV satellites to EchoStar.  All of the net assets received by EchoStar in the Satellite and Tracking Stock Transaction were immediately transferred to HSS and are being used by our EchoStar Satellite Services segment.  The historical carrying amounts of net assets transferred to HSS were as follows:

 

 

 

Net Assets
Transferred

 

 

 

(In thousands)

 

 

 

 

 

Cash

 

$

11,404

 

Property and equipment, net

 

432,080

 

Current liabilities

 

(6,555

)

Noncurrent liabilities

 

(38,834

)

Transferred net assets

 

$

398,095

 

 

The transferred net assets increased HSS shareholders’ equity by amounts that reflect the carrying amounts of net assets that would be distributed to holders of the Tracking Stock and common stock in a hypothetical liquidation, which would be in proportion to the relative market values (as defined in applicable agreements) of each class of stock. The amounts credited to equity were reduced by direct costs of the Tracking Stock issuance and deferred income tax liabilities arising from differences between the financial reporting carrying amounts and the tax bases of the transferred satellites. The net amounts credited to HSS’ shareholders’ equity (primarily additional paid-in capital) were as follows:

 

 

 

Increase
(Decrease)
in Equity

 

 

 

(In thousands)

 

Transferred net assets

 

$

398,095

 

Offering costs, net of tax

 

(609

)

Deferred income taxes

 

(144,496

)

Net increase in shareholders’ equity

 

$

252,990

 

 

Note 3.                     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 U.S. (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information.  Accordingly, these financial statements do not include all of

 

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the information and notes required for complete financial statements prepared in accordance with 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, 2013.

 

Principles of Consolidation

 

We consolidate all majority owned subsidiaries, investments in entities in which we have controlling interest and variable interest entities where we are the primary beneficiary.  For entities we control but do not wholly own, we record a noncontrolling interest within shareholders’ equity for the portion of the entity’s equity attributed to the noncontrolling ownership interests.  We use the equity method to account for investments in entities that we do not control but 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 the 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 accordance with GAAP requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheets, the reported amounts of revenue and expense for each reporting period, and certain information disclosed in the notes to the Condensed Consolidated Financial Statements.  Estimates are used in accounting for, among other things, amortization periods of deferred revenue and deferred subscriber acquisition costs, percentage-of-completion related to revenue recognition, allowances for doubtful accounts, allowances for sales returns and 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 EchoStar’s stock-based compensation plans, lease classifications, asset impairments, useful lives and amortization methods of property, equipment and intangible assets, goodwill impairment testing and royalty obligations.  We base our estimates and assumptions on historical experience and on various other factors that we believe to be relevant under the circumstances.  Weakened economic conditions may increase the inherent uncertainty in the estimates and assumptions indicated above.  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 in the period they occur or prospectively if the revised estimate affects future periods.

 

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 utilize the highest level of inputs available according to 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.

 

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Transfers between levels in the fair value hierarchy are considered to occur at the beginning of the quarterly accounting period.  There were no transfers between levels for the six months ended June 30, 2014 or 2013.

 

As of June 30, 2014 and December 31, 2013, the carrying amount of our cash and cash equivalents, trade accounts receivable, net of allowance for doubtful accounts, accounts payable and accrued liabilities were equal to or approximated fair value due to their short-term nature or proximity to current market rates.

 

Fair values of our current marketable investment securities are based on a variety of observable market inputs.  For our investments in publicly traded equity securities, fair value ordinarily is determined based on a Level 1 measurement that reflects quoted prices for identical securities in active markets.  Fair values of our investments in marketable debt securities generally are based on Level 2 measurements, as the markets for debt securities are less active.  Trades of identical debt securities on or near the measurement date are considered a strong indication of fair value.  Matrix pricing techniques that consider par value, coupon rate, credit quality, maturity and other relevant features also may be used to determine fair value of our investments in marketable debt securities.

 

Fair values for our publicly traded long-term debt are based on quoted market prices in less active markets and are categorized as Level 2 measurements.  The fair values of our privately held debt are Level 2 measurements and are estimated to approximate their carrying amounts based on the proximity of their interest rates to current market rates.  See Note 10 for the fair value of our long-term debt.  As of June 30, 2014 and December 31, 2013, the fair values of our orbital incentive obligations, based on measurements categorized within Level 2 of the fair value hierarchy, approximated their carrying amounts of $89.0 million and $48.4 million, respectively.  We use fair value measurements from time-to-time in connection with impairment testing and the assignment of purchase consideration to assets and liabilities of acquired companies that typically include significant unobservable inputs and are categorized within Level 3 of the fair value hierarchy.

 

New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”).  It outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.  The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”  ASU 2014-09 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods and may be applied either retrospectively to prior periods or as a cumulative-effect adjustment as of the date of adoption.  Early adoption is not permitted.  Management has not selected a transition method and is assessing the impact of adopting this new accounting standard on our financial statements and related disclosures.

 

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

 

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

 

Accumulated other comprehensive loss includes cumulative foreign currency translation losses of $17.5 million and $20.6 million as of June 30, 2014 and December 31, 2013, respectively.

 

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Note 5.                     Investment Securities

 

Our marketable investment securities and other investments consisted of the following:

 

 

 

As of

 

 

 

June 30, 

 

December 31,

 

 

 

2014 

 

2013

 

 

 

(In thousands)

 

Marketable investment securities—current:

 

 

 

 

 

Corporate bonds

 

$

188,935

 

$

97,807

 

VRDNs

 

4,580

 

7,460

 

Strategic equity security

 

5,969

 

7,159

 

Other

 

4,551

 

4,434

 

Total marketable investment securities—current

 

204,035

 

116,860

 

Other investments—noncurrent:

 

 

 

 

 

Cost method

 

15,438

 

15,438

 

Equity method

 

14,416

 

14,774

 

Total other investments—noncurrent

 

29,854

 

30,212

 

Total marketable and other investments

 

$

233,889

 

$

147,072

 

 

Marketable Investment Securities

 

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

 

Corporate Bonds

 

Our corporate bond portfolio includes debt instruments issued by individual corporations, primarily in the industrial and financial services industries.

 

Variable Rate Demand Notes (“VRDNs”)

 

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

 

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

 

Other

 

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

 

Other Investments - Noncurrent

 

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

 

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Unrealized Gains (Losses) on Marketable Investment Securities

 

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

 

 

 

Amortized

 

Unrealized

 

Estimated

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

(In thousands)

 

As of June 30, 2014

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

188,968

 

$

49

 

$

(82

)

$

188,935

 

VRDNs

 

4,580

 

 

 

4,580

 

Other

 

4,551

 

 

 

4,551

 

Equity security - strategic

 

4,834

 

1,135

 

 

5,969

 

Total marketable investment securities

 

$

202,933

 

$

1,184

 

$

(82

)

$

204,035

 

As of December 31, 2013

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

97,846

 

$

25

 

$

(64

)

$

97,807

 

VRDNs

 

7,460

 

 

 

7,460

 

Other

 

4,433

 

1

 

 

4,434

 

Equity security - strategic

 

4,834

 

2,325

 

 

7,159

 

Total marketable investment securities

 

$

114,573

 

$

2,351

 

$

(64

)

$

116,860

 

 

As of June 30, 2014, restricted and non-restricted marketable investment securities included debt securities of $140.3 million with contractual maturities of one year or less and $57.7 million with contractual maturities greater than one year.  We may realize proceeds from certain investments prior to their contractual maturity as a result of our ability to sell these securities prior to their contractual maturity.

 

Marketable Investment Securities in a Loss Position

 

The following table reflects the length of time that our available-for-sale securities have been in an unrealized loss position. We do not intend to sell these securities before they recover or mature, and it is more likely than not that we will hold these securities until they recover or mature. In addition, we are not aware of any specific factors indicating that the underlying issuers of these 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 securities are primarily related to temporary market fluctuations.

 

 

 

As of

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Loss

 

Value

 

Loss

 

 

 

(In thousands)

 

Less than 12 months

 

$

126,480

 

$

(82

)

$

75,987

 

$

(64

)

12 months or more

 

 

 

 

 

Total

 

$

126,480

 

$

(82

)

$

75,987

 

$

(64

)

 

Realized Gains (Losses) on Marketable Investment Securities

 

We recognized minimal gains from the sales of our available-for-sale marketable investment securities for the three and six months ended June 30, 2014, respectively, and minimal and $2.6 million for the three and six months ended June 30, 2013, respectively.  We did not recognize any losses from the sales of our available-for-sale marketable investment securities for each of the three or six months ended June 30, 2014 and 2013.

 

Proceeds from sales of our available-for-sale marketable investment securities totaled $0.1 million and $0.1 million for the three and six months ended June 30, 2014, respectively, and $3.0 million and $5.1 million for the three and six months ended June 30, 2013, respectively.

 

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Fair Value Measurements

 

Our current marketable investment securities are measured at fair value on a recurring basis as summarized in the table below. As of June 30, 2014 and December 31, 2013, we did not have investments that were categorized within Level 3 of the fair value hierarchy.

 

 

 

As of

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

Total

 

Level 1

 

Level 2

 

Total

 

Level 1

 

Level 2

 

 

 

(In thousands)

 

Cash equivalents

 

$

215,970

 

$

11

 

$

215,959

 

$

115,635

 

$

8,665

 

$

106,970

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

188,935

 

$

 

$

188,935

 

$

97,807

 

$

 

$

97,807

 

VRDNs

 

4,580

 

 

4,580

 

7,460

 

 

7,460

 

Other

 

4,551

 

 

4,551

 

4,434

 

 

4,434

 

Equity security - strategic

 

5,969

 

5,969

 

 

7,159

 

7,159

 

 

Total marketable investment securities

 

$

204,035

 

$

5,969

 

$

198,066

 

$

116,860

 

$

7,159

 

$

109,701

 

 

Note 6.                     Trade Accounts Receivable

 

Our trade accounts receivable consisted of the following:

 

 

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Trade accounts receivable

 

$

151,877

 

$

136,063

 

Contracts in process, net

 

9,554

 

7,629

 

Total trade accounts receivable

 

161,431

 

143,692

 

Allowance for doubtful accounts

 

(11,664

)

(10,737

)

Trade accounts receivable - DISH Network

 

18,562

 

68,091

 

Total trade accounts receivable, net

 

$

168,329

 

$

201,046

 

 

As of June 30, 2014 and December 31, 2013, progress billings offset against contracts in process amounted to $13.0 million and $2.6 million, respectively.

 

Note 7.                     Inventory

 

Our inventory consisted of the following:

 

 

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Finished goods

 

$

40,337

 

$

45,068

 

Raw materials

 

5,394

 

5,871

 

Work-in process

 

7,987

 

6,054

 

Total inventory

 

$

53,718

 

$

56,993

 

 

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Note 8.                     Property and Equipment

 

Property and equipment consisted of the following:

 

 

 

Depreciable

 

As of

 

 

 

Life

 

June 30,

 

December 31,

 

 

 

(In Years)

 

2014

 

2013

 

 

 

 

 

(In thousands)

 

Land

 

 

$

11,668

 

$

11,663

 

Buildings and improvements

 

1 - 30

 

73,192

 

72,559

 

Furniture, fixtures, equipment and other

 

1 - 12

 

322,013

 

296,896

 

Customer rental equipment

 

2 - 4

 

436,998

 

374,689

 

Satellites - owned

 

2 - 15

 

2,381,120

 

1,949,040

 

Satellites acquired under capital leases

 

10 - 15

 

935,104

 

935,104

 

Construction in progress

 

 

29,967

 

19,512

 

Total property and equipment

 

 

 

4,190,062

 

3,659,463

 

Accumulated depreciation

 

 

 

(1,865,483

)

(1,676,182

)

Property and equipment, net

 

 

 

$

2,324,579

 

$

1,983,281

 

 

As of June 30, 2014, our owned satellites included $432.1 million for the five satellites we received from DISH Network as part of the Satellite and Tracking Stock Transaction discussed in Note 2.  This amount represents the net carrying amount of those satellites in DISH Network’s consolidated financial statements as of February 28, 2014, the day prior to the effective date of the Satellite and Tracking Stock Transaction.  Accumulated depreciation for those satellites as of June 30, 2014 was $15.9 million, representing depreciation expense recognized in our consolidated financial statements for the period subsequent to the effective date of the Satellite and Tracking Stock Transaction.

 

Construction in progress consisted of the following:

 

 

 

As of

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

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

 

 

 

 

 

EUTELSAT 65WA

 

$

10,337

 

$

 

Other

 

100

 

100

 

Uplinking equipment

 

6,660

 

3,362

 

Other

 

12,870

 

16,050

 

Construction in progress

 

$

29,967

 

$

19,512

 

 

Depreciation expense associated with our property and equipment consisted of the following:

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(In thousands)

 

Satellites

 

$

55,576

 

$

46,529

 

$

103,139

 

$

93,073

 

Furniture, fixtures, equipment and other

 

12,327

 

12,394

 

25,105

 

25,108

 

Customer rental equipment

 

29,016

 

23,793

 

56,908

 

47,080

 

Buildings and improvements

 

1,325

 

1,245

 

2,771

 

2,485

 

Total depreciation expense

 

$

98,244

 

$

83,961

 

$

187,923

 

$

167,746

 

 

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Satellites

 

As of June 30, 2014, we utilized 17 of our owned and leased satellites in geosynchronous orbit, approximately 22,300 miles above the equator.  Four of our satellites are accounted for as capital leases and are depreciated on a straight-line basis over the terms of the satellite service agreements.  We depreciate our owned satellites on a straight-line basis over the estimated useful life of each satellite.

 

Information for our satellite fleet is presented below.

 

 

 

 

 

 

 

Nominal Degree

 

Depreciable

 

 

 

 

 

Launch

 

Orbital Location

 

Life

 

Satellites 

 

Segment

 

Date

 

(West Longitude)

 

(In Years)

 

Owned:

 

 

 

 

 

 

 

 

 

SPACEWAY 3 (5)

 

Hughes

 

August 2007

 

95

 

12

 

EchoStar XVII

 

Hughes

 

July 2012

 

107

 

15

 

EchoStar I (1) (2) (3)

 

ESS

 

December 1995

 

77

 

 

EchoStar III (3)

 

ESS

 

October 1997

 

61.5

 

12

 

EchoStar VI (3)

 

ESS

 

July 2000

 

96.2

 

12

 

EchoStar VII (1) (2)

 

ESS

 

February 2002

 

119

 

3

 

EchoStar VIII (1)

 

ESS

 

August 2002

 

77

 

12

 

EchoStar XII (1)(6)

 

ESS

 

July 2003

 

61.5

 

2

 

EchoStar IX (1)

 

ESS

 

August 2003

 

121

 

12

 

EchoStar X (1) (2)

 

ESS

 

February 2006

 

110

 

7

 

EchoStar XI (1) (2)

 

ESS

 

July 2008

 

110

 

9

 

EchoStar XIV (1) (2)

 

ESS

 

March 2010

 

119

 

11

 

EchoStar XVI (1)

 

ESS

 

November 2012

 

61.5

 

15

 

 

 

 

 

 

 

 

 

 

 

Leased from Third Parties (4):

 

 

 

 

 

 

 

 

AMC-15

 

ESS

 

October 2004

 

105

 

10

 

AMC-16

 

ESS

 

December 2004

 

85

 

10

 

Nimiq 5 (1)

 

ESS

 

September 2009

 

72.7

 

15

 

QuetzSat-1 (1)

 

ESS

 

September 2011

 

77

 

10

 

 


(1)                     See Note 14 for further discussion of our transactions with DISH Network.

(2)                     Depreciable life represents the remaining useful life as of March 1, 2014, the effective date of our receipt of the satellites from DISH Network as part of the Satellite and Tracking Stock Transaction (See Note 2).

(3)                     Fully depreciated assets.

(4)                     These satellites are accounted for as capital leases and their launch dates represent dates that the satellites were placed into service.

(5)                     Depreciable life represents the remaining useful life as of the date of the Hughes Acquisition.

(6)                     Depreciable life represents the remaining useful life as of June 30, 2013, the date EchoStar XII was impaired.

 

Recent Developments

 

EUTELSAT 65 West A.  In April 2014, we entered into a satellite services agreement pursuant to which Eutelsat do Brasil will provide to Hughes Telecomunicaҫões do Brasil Ltda, our wholly-owned subsidiary, the fixed broadband service on the entire Ka-band capacity into Brazil on the EUTELSAT 65 West A satellite for a 15-year term.  The satellite is scheduled to be placed into service in the second quarter of 2016.

 

EchoStar XIX.  In February 2012 and September 2013, ViaSat and its subsidiary ViaSat Communications filed lawsuits in the U.S. District Court for the Southern District of California against Space Systems Loral, LLC (“SSL”), the manufacturer of EchoStar XVII and EchoStar XIX.  In the first-filed case, ViaSat alleged, among other things, that SSL infringed three patents and breached its contractual obligations through the use of such patented technology to manufacture EchoStar XVII.  A jury trial was held in that case in March and April 2014, and the jury found that in connection with EchoStar XVII, SSL directly infringed the asserted patents and that SSL breached certain agreements with ViaSat.  While we are not a party to this matter, the adverse decision against SSL may have an impact on our ability to make use of EchoStar XIX or other satellites from SSL and may adversely affect our business operations and results of operations.  Until there are further developments in the case, including rulings on post-trial motions and appeals, we cannot determine whether there will be an adverse impact and, if so, the extent of any such impact.

 

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EchoStar I, EchoStar VII, EchoStar X, EchoStar XI, and EchoStar XIV.  As discussed in Note 2, we received  five satellites (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV) from DISH Network as part of the Satellite and Tracking Stock Transaction. These satellites are BSS communications satellites operating in Ku-band frequencies, and DISH Network began receiving certain services from us on these satellites effective March 1, 2014.

 

EchoStar VIII.  In May 2013, DISH Network began receiving satellite services from us on EchoStar VIII as an in-orbit spare.  Effective March 1, 2014, this service arrangement was converted to a month-to-month service agreement. Both parties have the right to terminate this arrangement upon 30 days’ notice.

 

Satellite Anomalies

 

Certain of our satellites have experienced anomalies, some of which have had a significant adverse impact on their remaining useful lives and/or the commercial operation of the satellites.  There can be no assurance that existing and future anomalies will not further impact the remaining useful life and/or the commercial operation of any of the satellites in our fleet.  In addition, there can be no assurance that we can recover critical transmission capacity in the event one or more of our in-orbit satellites were to fail.  We generally do not carry in-orbit insurance on our satellites; therefore, we generally bear the risk of any uninsured in-orbit failures.  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 and in-orbit insurance for SPACEWAY 3, EchoStar XVI, and EchoStar XVII.

 

We have previously disclosed in our financial statements as of and for the year ended December 31, 2013, anomalies in prior years that affect our in-service owned and leased satellites, including EchoStar III, EchoStar VI, EchoStar VIII, EchoStar XII, and AMC-16.  We are not aware of any additional anomalies that have occurred on any of our owned or leased satellites in 2014 as of the date of this report that affected the commercial operation of these satellites.  EchoStar III and EchoStar VI are fully depreciated and EchoStar III is being used as an in-orbit spare; accordingly, the prior anomalies affecting these satellites have not had a significant effect on our operating results and cash flows.  EchoStar XII has experienced several anomalies, which have resulted in a loss of electrical power.  Those anomalies have not had a significant adverse impact on service under the related satellite services agreement with DISH Network for EchoStar XII; however, the anomalies have increased the risk of future transponder failures that could result in reductions in our revenue and require recognition of a satellite impairment loss.  See Satellite Impairments below.

 

The five satellites received from DISH Network pursuant to the Satellite and Tracking Stock Transaction have experienced certain anomalies prior to March 1, 2014, the effective date of the Satellite and Tracking Stock Transaction as described below.

 

EchoStar I.  During the first quarter of 2012, DISH Network determined that EchoStar I experienced a communications receiver anomaly.  The communications receivers process signals sent from the uplink center for transmission by the satellite to customers.  While this anomaly did not impact commercial operation of the satellite, there can be no assurance that future anomalies will not impact its future commercial operation.  EchoStar I is fully depreciated.

 

EchoStar VII.  Prior to 2012, EchoStar VII experienced certain thruster failures.  During the fourth quarter of 2012, DISH Network determined that EchoStar VII experienced an additional thruster failure.  Thrusters control the satellite’s location and orientation.  While this anomaly did not impact commercial operation of the satellite, there can be no assurance that future anomalies will not reduce its useful life or impact its commercial operation.

 

EchoStar X.  During the second and third quarters of 2010, EchoStar X experienced anomalies which affected seven solar array circuits reducing the number of functional solar array circuits to 17. While these anomalies did not impact commercial operation of the satellite, there can be no assurance that future anomalies will not reduce its useful life or impact its commercial operation.

 

EchoStar XI.  During the first quarter of 2012, DISH Network determined that EchoStar XI experienced solar array anomalies that reduced the total power available for use by the satellite.  While these anomalies did not impact

 

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commercial operation of the satellite, there can be no assurance that future anomalies will not reduce its useful life or impact its commercial operation.

 

EchoStar XIV.  During the third quarter of 2011 and the first quarter of 2012, DISH Network determined that EchoStar XIV experienced solar array anomalies that reduced the total power available for use by the satellite.  While these anomalies did not impact commercial operation of the satellite, there can be no assurance that future anomalies will not reduce its useful life or impact its commercial operation.

 

Satellite Impairments

 

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.  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, certain of these anomalies are not necessarily considered to be significant events that would require a test of recoverability.  There have been no satellite impairments in 2014 as of the date of this report.

 

EchoStar XII.  Prior to 2010, EchoStar XII experienced anomalies resulting in the loss of electrical power available from its solar arrays.  In September 2012, November 2012, and January 2013, EchoStar XII experienced additional solar array anomalies, which further reduced the electrical power available to operate EchoStar XII.  An engineering analysis completed in the second quarter of 2013 indicated further loss of available electrical power and resulting capacity loss was likely. As a result, we recognized a $34.7 million impairment loss in the second quarter of 2013.  Additional solar array anomalies are likely, and if they occur, they will continue to degrade the operational capability of EchoStar XII and could lead to additional impairment charges in the future. EchoStar XII has experienced no additional electrical power loss or solar array anomalies in 2014 as of the date of this report.

 

Note 9.                     Goodwill and Other Intangible Assets

 

Goodwill

 

The excess of the cost of an acquired business over the fair values of net tangible and identifiable intangible assets at the time of the acquisition is recorded as goodwill. Goodwill is assigned to our reporting units of our operating segments and is subject to our annual impairment testing, or more frequently when events or changes in circumstances indicate the fair value of a reporting unit is more likely than not less than its carrying amount.

 

As of June 30, 2014, all of our goodwill was assigned to reporting units of the Hughes segment.  Based on our qualitative assessment of impairment of such goodwill in the second quarter of 2014, we determined that no further testing of goodwill for impairment as of that date was necessary as it was not more likely than not that the fair values of the Hughes segment reporting units were less than the corresponding carrying amounts.

 

Other Intangible Assets

 

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

 

 

 

Weighted

 

As of

 

 

 

Average

 

June 30, 2014

 

December 31, 2013

 

 

 

Useful life

 

 

 

Accumulated

 

Carrying

 

 

 

Accumulated

 

Carrying

 

 

 

(in Years)

 

Cost

 

Amortization

 

Amount

 

Cost

 

Amortization

 

Amount

 

 

 

(In thousands)

 

Customer relationships

 

8

 

$

270,300

 

$

(145,392

)

$

124,908

 

$

270,300

 

$

(129,022

)

$

141,278

 

Contract-based

 

4

 

64,800

 

(58,223

)

6,577

 

64,800

 

(49,132

)

15,668

 

Technology-based

 

6

 

51,417

 

(26,431

)

24,986

 

51,417

 

(22,147

)

29,270

 

Trademark portfolio

 

20

 

29,700

 

(4,579

)

25,121

 

29,700

 

(3,836

)

25,864

 

Favorable leases

 

4

 

4,707

 

(3,628

)

1,079

 

4,707

 

(3,040

)

1,667

 

Total other intangible assets

 

 

 

$

420,924

 

$

(238,253

)

$

182,671

 

$

420,924

 

$

(207,177

)

$

213,747

 

 

Customer relationships are amortized predominantly in relation to the expected contribution of cash flow to the

 

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business over the life of the intangible asset.  Other intangible assets are amortized on a straight-line basis over the periods the assets are expected to contribute to our cash flows.  Amortization expense was $15.0 million and $17.6 million for the three months ended June 30, 2014 and 2013, respectively, and $31.1 million and $34.9 million for the six months ended June 30, 2014 and 2013, respectively.

 

Note 10.              Debt and Capital Lease Obligations

 

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

 

 

 

As of

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

 

Amount

 

Value

 

Amount

 

Value

 

 

 

(In thousands)

 

6 1/2% Senior Secured Notes due 2019

 

$

1,100,000

 

$

1,226,500

 

$

1,100,000

 

$

1,193,500

 

7 5/8% Senior Notes due 2021

 

900,000

 

1,030,500

 

900,000

 

1,001,250

 

Other

 

1,267

 

1,267

 

1,496

 

1,496

 

Subtotal

 

2,001,267

 

$

2,258,267

 

2,001,496

 

$

2,196,246

 

Capital lease obligations (1)

 

386,551

 

 

 

417,376

 

 

 

Total debt and capital lease obligations

 

2,387,818

 

 

 

2,418,872

 

 

 

Less: Current portion

 

(48,715

)

 

 

(67,300

)

 

 

Long-term portion of debt and capital lease obligations

 

$

2,339,103

 

 

 

$

2,351,572

 

 

 

 


(1)   Disclosure regarding the fair value of capital lease obligations is not required.

 

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

 

Note 11.              Income Taxes

 

Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period.  Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.

 

Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, is subject to significant volatility due to several factors, including variability in accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, income and losses from investments, changes in tax laws and relative changes of expenses or losses for which tax benefits are not recognized.  Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income.  For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.

 

Income tax expense was approximately $12.6 million for the six months ended June 30, 2014 compared to an income tax benefit of $28.2 million for the six months ended June 30, 2013.  Our effective income tax rate was 24.2% for the six months ended June 30, 2014 compared to 43.7% for the same period in 2013.  The variation in our current year effective tax rate from a U.S. federal statutory rate for the current period was primarily due to a lower state effective tax rate. For the same period in 2013, the variation in our effective tax rate from a U.S. federal statutory rate was primarily due to the current year research and experimentation credits and reinstatement of the research and experimentation tax credit for 2012, as provided by the American Taxpayer Relief Act enacted on January 2, 2013.

 

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Note 12.              Commitments and Contingencies

 

Commitments

 

As of June 30, 2014, our satellite-related obligations were approximately $771.8 million.  Our satellite-related obligations primarily include, among other things, payments pursuant to launch services contracts, executory costs for our capital lease satellites, costs under transponder agreements and in-orbit incentives relating to certain satellites, including certain satellites received from DISH Network as a result of the Satellite and Tracking Stock Transaction.

 

Contingencies

 

Separation Agreement

 

In 2008, DISH Network Corporation contributed 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 to EchoStar (the “Spin-off”).  In connection with the Spin-off, EchoStar 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, EchoStar has assumed certain liabilities that relate to its 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, EchoStar will only be liable for its acts or omissions following the Spin-off and DISH Network will indemnify EchoStar 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. We record an accrual for litigation and other loss contingencies when we determine that a loss is probable and the amount of the loss can be reasonably estimated. Legal fees and other costs of defending litigation are charged to expense as incurred.

 

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 are involved (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.

 

California Institute of Technology

 

On October 1, 2013, the California Institute of Technology (“Caltech”) filed suit against two of our indirect wholly-owned subsidiaries, Hughes Communications, Inc. and Hughes Network Systems, LLC, as well as against DISH Network, DISH Network L.L.C., and dishNET Satellite Broadband L.L.C., in the United States District Court for the Central District of California alleging infringement of United States Patent Nos. 7,116,710; 7,421,032; 7,916,781; and 8,284,833, each of which is entitled “Serial Concatenation of Interleaved Convolutional Codes forming Turbo-Like Codes.”  Caltech appears to assert that encoding data as specified by the DVB-S2 standard infringes each of the

 

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asserted patents.  In the operative Amended Complaint, served on March 6, 2014, Caltech claims that the HopperTM set-top box, as well as certain of our Hughes segment’s satellite broadband products and services, infringe the asserted patents by implementing the DVB-S2 standard.

 

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 our consumers.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

Network Acceleration Technologies, LLC

 

On November 30, 2012, Network Acceleration Technologies, LLC (“NAT”) filed suit against Hughes Network Systems, LLC in the United States District Court for the District of Delaware alleging infringement of United States Patent No. 6,091,710 (the “710 patent”), which is entitled “System and Method for Preventing Data Slow Down Over Asymmetric Data Transmission Links.”  NAT re-filed its case on July 19, 2013.  NAT is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.  On May 22, 2014, NAT filed a stipulation dismissing the litigation without prejudice and the matter is now concluded.

 

TQ Beta LLC

 

On June 30, 2014, TQ Beta LLC (“TQ Beta”) filed suit against DISH Network, DISH DBS Corporation, DISH Network L.L.C., as well as us, EchoStar, EchoStar Technologies, L.L.C, and Sling Media, Inc., in the United States District Court for the District of Delaware, alleging infringement of United States Patent No. 7,203,456 (“the ‘456 patent”), which is entitled “Method and Apparatus for Time and Space Domain Shifting of Broadcast Signals.”  TQ Beta alleges that the Hopper, Hopper with Sling, ViP 722 and ViP 722k DVR devices, as well as the DISH Anywhere service and DISH Anywhere mobile application, infringe the ‘456 patent.  TQ Beta is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.

 

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

 

TQP Development, LLC

 

On November 14, 2012, TQP Development, LLC (“TQP”) filed suit against Hughes Network Systems, LLC in the United States District Court for the Eastern District of Texas, alleging infringement of United States Patent No. 5,412,730, which is entitled “Encrypted Data Transmission System Employing Means for Randomly Altering the Encryption Keys.”  Previously, on October 11, 2012, TQP filed suit in the same venue against Sling Media, Inc., an indirect, wholly-owned subsidiary of EchoStar, alleging infringement of the same patent.  TQP is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.  On July 8, 2013, the Court granted a joint motion to dismiss the claims against Sling without prejudice.  On February 24, 2014, the Court granted a joint motion to dismiss the claims against Hughes Network Systems, LLC, without prejudice and the matter is now concluded.

 

Other

 

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

 

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Note 13.              Segment Reporting

 

Operating segments are business components of an enterprise for which separate financial information is available and regularly evaluated by the chief operating decision maker (“CODM”), who for HSS, is EchoStar’s Chief Executive Officer.  Under this definition, we operate two primary business segments.

 

·                  Hughes — which provides satellite broadband internet access to North American consumers and broadband network services and equipment to domestic and international enterprise markets.  The Hughes segment also provides managed services to large enterprises and solutions to customers for mobile satellite systems.

 

·                  EchoStar Satellite Services which uses certain of our owned and leased in-orbit satellites and related licenses to lease capacity on a full-time and occasional-use basis primarily to DISH Network, and also to Dish Mexico, U.S. government service providers, state agencies, internet service providers, broadcast news organizations, programmers, and private enterprise customers.

 

The primary measure of segment profitability that is reported regularly to our CODM is earnings before interest, taxes, depreciation and amortization, or EBITDA.  Our segment operating results do not include real estate and other activities, costs of certain business development activities, expenses of various corporate departments, and our centralized treasury operations, including income from our investment portfolio and interest expense on our debt.  These activities are accounted for in the “All Other and Eliminations” column in the table below.  Total assets by segment have not been reported herein because the information is not provided to our CODM on a regular basis.  The Hughes Retail Group is included in our Hughes segment and our CODM reviews HRG financial information only to the extent such information is included in our periodic filings with the SEC.  Therefore, we do not consider HRG to be a separate operating segment.

 

The following table presents revenue, EBITDA, and capital expenditures for each of our operating segments:

 

 

 

 

 

EchoStar

 

All

 

 

 

 

 

 

 

Satellite

 

Other and

 

Consolidated

 

 

 

Hughes

 

Services

 

Eliminations

 

Total

 

 

 

(In thousands)

 

For the Three Months Ended June 30, 2014

 

 

 

 

 

 

 

 

 

External revenue

 

$

329,795

 

$

127,742

 

$

134

 

$

457,671

 

Intersegment revenue

 

$

463

 

$

797

 

$

(1,260

)

$

 

Total revenue

 

$

330,258

 

$

128,539

 

$

(1,126

)

$

457,671

 

EBITDA

 

$

90,316

 

$

112,228

 

$

1,246

 

$

203,790

 

Capital expenditures (1)

 

$

51,505

 

$

 

$

 

$

51,505

 

For the Three Months Ended June 30, 2013

 

 

 

 

 

 

 

 

 

External revenue

 

$

313,748

 

$

84,079

 

$

44

 

$

397,871

 

Intersegment revenue

 

$

1,200

 

$

793

 

$

(1,993

)

$

 

Total revenue

 

$

314,948

 

$

84,872

 

$

(1,949

)

$

397,871

 

EBITDA

 

$

73,394

 

$

33,667

 

$

577

 

$

107,638

 

Capital expenditures (1)

 

$

45,493

 

$

60

 

$

 

$

45,553

 

For the Six Months Ended June 30, 2014

 

 

 

 

 

 

 

 

 

External revenue

 

$

644,166

 

$

227,614

 

$

204

 

$

871,984

 

Intersegment revenue

 

$

863

 

$

1,746

 

$

(2,609

)

$

 

Total revenue

 

$

645,029

 

$

229,360

 

$

(2,405

)

$

871,984

 

EBITDA

 

$

172,255

 

$

197,010

 

$

2,025

 

$

371,290

 

Capital expenditures (1)

 

$

97,477

 

$

29

 

$

 

$

97,506

 

For the Six Months Ended June 30, 2013

 

 

 

 

 

 

 

 

 

External revenue

 

$

602,929

 

$

157,425

 

$

72

 

$

760,426

 

Intersegment revenue

 

$

1,418

 

$

1,649

 

$

(3,067

)

$

 

Total revenue

 

$

604,347

 

$

159,074

 

$

(2,995

)

$

760,426

 

EBITDA

 

$

137,375

 

$

98,473

 

$

626

 

$

236,474

 

Capital expenditures (1)

 

$

89,833

 

$

12,332

 

$

 

$

102,165

 

 


(1)         Capital expenditures consist of purchases of property and equipment reported in our Condensed Consolidated Statements of Cash Flows and do not include satellites transferred in the Satellite and Tracking Stock Transaction or other noncash capital expenditures.

 

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The following table reconciles total consolidated EBITDA to reported “Income (loss) before income taxes” in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss):

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(In thousands)

 

EBITDA

 

$

203,790

 

$

107,638

 

$

371,290

 

$

236,474

 

Interest income and expense, net

 

$

(47,975

)

(49,113

)

$

(95,767

)

(98,572

)

Depreciation and amortization

 

$

(115,818

)

(101,512

)

$

(224,003

)

(202,686

)

Net income attributable to noncontrolling interests

 

$

428

 

176

 

727

 

216

 

Income (loss) before income taxes

 

$

40,425

 

$

(42,811

)

$

52,247

 

$

(64,568

)

 

Note 14.              Related Party Transactions

 

EchoStar

 

We and EchoStar have agreed that we shall have the right, but not the obligation, to receive from EchoStar certain corporate services, including among other things: treasury, tax, accounting and reporting, risk management, legal, internal audit, human resources, and information technology.  In addition, we occupy certain office space in buildings owned by EchoStar and pay a portion of the taxes, insurance, utilities and maintenance of the premises in accordance with the percentage of the space we occupy.  These services are provided at cost.  We may terminate a particular service we receive from EchoStar for any reason upon at least 30 days’ notice.  We recorded expenses for services received from EchoStar of $3.4 million and $2.4 million for the three months ended June 30, 2014 and 2013, respectively, and $6.2 and $5.0 million for the six months ended June 30, 2014 and 2013, respectively.

 

DISH Network

 

Following the Spin-off, EchoStar and DISH Network have operated as separate publicly-traded companies.  However, pursuant to the Satellite and Tracking Stock Transaction, described in Note 2 and below, DISH Network owns Hughes Retail Preferred Tracking Stock representing an aggregate 80.0% economic interest in the residential retail satellite broadband business of our Hughes segment, including certain operations, assets and liabilities attributed to such business.  In addition, a substantial majority of the voting power of the shares of EchoStar and DISH Network is owned beneficially by Charles W. Ergen, our Chairman, and by certain trusts established by Mr. Ergen for the benefit of his family.

 

In connection with and following the Spin-off, EchoStar and DISH Network have entered into certain agreements pursuant to which we and EchoStar obtain certain products, services and rights from DISH Network; DISH Network obtains certain products, services and rights from us and EchoStar; and we and DISH Network have indemnified each other against certain liabilities arising from our respective businesses.  EchoStar also may enter into additional agreements with DISH Network in the future.

 

Generally, the amounts DISH Network pays for products and services provided under the agreements are based on our cost plus a fixed margin (unless noted differently below), which varies depending on the nature of the products and services provided.

 

The following is a summary of terms of the principal agreements that we or EchoStar have entered into with DISH Network that may have an impact on our financial position and results of operations

 

“Services and other revenue — DISH Network”

 

Satellite Services Provided to DISH Network.  Since the Spin-off, we have entered into certain satellite capacity agreements pursuant to which DISH Network receives satellite services on certain satellites owned or leased by us.  The fees for the services provided under these satellite service agreements depend, among other things, upon the orbital location of the applicable satellite, the number of transponders that are providing services on the applicable satellite, and the length of the capacity arrangements.  The term of each capacity arrangement is set forth below:

 

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EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV.  As part of the Satellite and Tracking Stock Transaction discussed in Note 2, on March 1, 2014, we began providing certain satellite services to DISH Network on the EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV satellites.  The term of each satellite services agreement generally terminates upon the earlier of:  (i) the end of life of the satellite; (ii) the date the satellite fails; or (iii) a certain date, which depends upon, among other things, the estimated useful life of the satellite.  DISH Network generally has the option to renew each satellite capacity agreement on a year-to-year basis through the end of the respective satellite’s life.  There can be no assurance that any options to renew such agreements will be exercised.

 

EchoStar VIII.  In May 2013, DISH Network began receiving satellite services from us on EchoStar VIII as an in-orbit spare. Effective March 1, 2014, this satellite services arrangement converted to a month-to-month service agreement. Both parties have the right to terminate this agreement upon 30 days’ notice.

 

EchoStar IX.  DISH Network receives satellite services from us on EchoStar IX.  Subject to availability, DISH Network generally has the right to continue to receive satellite services from us on EchoStar IX on a month-to-month basis.

 

EchoStar XII.  DISH Network receives satellite services from us on EchoStar XII.  The term of the satellite services agreement terminates upon the earlier of: (i) the end of life of the satellite; (ii) the date the satellite fails or the date the transponder(s) on which the service was being provided under the agreement fails; or (iii) a certain date, which depends upon, among other things, the estimated useful life of the satellite.  DISH Network generally has the option to renew the agreement on a year-to-year basis through the end of the satellite’s life.  There can be no assurance that any options to renew this agreement will be exercised.

 

EchoStar XVI.  During December 2009, we entered into an initial ten-year transponder service agreement with DISH Network to receive satellite services from us on EchoStar XVI, a DBS satellite.  Effective December 21, 2012, we and DISH Network amended the transponder service agreement to, among other things, change the initial term to generally expire upon the earlier of: (i) the end-of-life or replacement of the satellite; (ii) the date the satellite fails; (iii) the date the transponder(s) on which service is being provided under the agreement fails; or (iv) four years following the actual service commencement date.  Prior to expiration of the initial term, we, upon certain conditions, and DISH Network have the option to renew for an additional six-year period.  If either we or DISH Network exercise our respective six-year renewal options, DISH Network has the option to renew for an additional five-year period prior to expiration of the then-current term.  There can be no assurance that any option to renew this agreement will be exercised.  We began to provide satellite services on EchoStar XVI to DISH Network in January 2013.

 

Satellite and Tracking Stock Transaction.  On February 20, 2014, we entered into agreements with DISH Network to implement a transaction pursuant to which, among other things: (i) on March 1, 2014, EchoStar and HSS issued shares of the Tracking Stock to DISH Network in exchange for five satellites owned by DISH Network (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV) (including related in-orbit incentive obligations and interest payments of approximately $58.9 million) and approximately $11.4 million in cash; and (ii) on March 1, 2014, DISH Network began receiving certain satellite services on these five satellites from us.  See Note 2 for further information.

 

Nimiq 5 Agreement.  During 2009, we entered into a fifteen-year satellite service agreement with Telesat Canada (“Telesat”) to receive service on all 32 DBS transponders on the Nimiq 5 satellite at the 72.7 degree west longitude orbital location (the “Telesat Transponder Agreement”).  During 2009, we also entered into a satellite service agreement (the “DISH Nimiq 5 Agreement”) with DISH Network, pursuant to which DISH Network receives satellite services from us on all 32 of the DBS transponders covered by the Telesat Transponder Agreement.

 

Under the terms of the DISH Nimiq 5 Agreement, DISH Network makes certain monthly payments to us that commenced in September 2009 when the Nimiq 5 satellite was placed into service and continue through the service term.  Unless earlier terminated under the terms and conditions of the DISH Nimiq 5 Agreement, the service term will expire ten years following the date it was placed into service.  Upon expiration of the initial term, DISH Network has the option to renew the DISH Nimiq 5 Agreement on a year-to-year basis through the end of life of the

 

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Nimiq 5 satellite.  Upon in-orbit failure or end of life of the Nimiq 5 satellite, and in certain other circumstances, DISH Network has certain rights to receive service from us on a replacement satellite.  There can be no assurance that any options to renew the DISH Nimiq 5 Agreement will be exercised or that DISH Network will exercise its option to receive service on a replacement satellite.

 

QuetzSat-1 Agreement.  During 2008, we entered into a ten-year satellite service agreement with SES Latin America, which provides, among other things, for the provision by SES Latin America to us of service on 32 DBS transponders on the QuetzSat-1 satellite.  Concurrently, in 2008, we entered into a transponder service agreement with DISH Network, pursuant to which DISH Network receives satellite services on 24 of the DBS transponders on QuetzSat-1.  QuetzSat-1 was launched on September 29, 2011 and was placed into service during the fourth quarter of 2011 at the 67.1 degree west longitude orbital location.  In the interim, we provided DISH Network with alternate capacity at the 77 degree west longitude orbital location.  During the third quarter of 2012, we and DISH Network entered into an agreement pursuant to which we receive certain satellite services from DISH Network on five DBS transponders on the QuetzSat-1 satellite on which DISH Network receives satellite services from us.  In January 2013, QuetzSat-1 was moved to the 77 degree west longitude orbital location and DISH Network commenced commercial operations at such location in February 2013.

 

Under the terms of our contractual arrangements with DISH Network, we began to provide service to DISH Network on the QuetzSat-1 satellite in February 2013 and will continue to provide service through the remainder of the service term.  Unless extended or earlier terminated under the terms and conditions of our agreement with DISH Network for the QuetzSat-1 satellite, the initial service term will expire in November 2021.  Upon expiration of the initial service term, DISH Network has the option to renew the agreement for the QuetzSat-1 satellite on a year-to-year basis through the end of life of the QuetzSat-1 satellite.  Upon an in-orbit failure or end of life of the

 

QuetzSat-1 satellite, and in certain other circumstances, DISH Network has certain rights to receive service from us on a replacement satellite.  There can be no assurance that any options to renew this agreement will be exercised or that DISH Network will exercise its option to receive service on a replacement satellite.

 

103 Degree Orbital Location/SES-3.  During May 2012, we entered into a spectrum development agreement (the “103 Spectrum Development Agreement”) with Ciel Satellite Holdings Inc. (“Ciel”) to develop certain spectrum rights at the 103 degree west longitude orbital location (the “103 Spectrum Rights”).  During June 2013, we and DISH Network entered into a spectrum development agreement (the “DISH 103 Spectrum Development Agreement”) pursuant to which DISH Network may use and develop the 103 Spectrum Rights.  During the third quarter 2013, DISH Network made a payment to us in exchange for these rights.  Unless earlier terminated under the terms and conditions of the DISH 103 Spectrum Development Agreement, the term generally will continue for the duration of the 103 Spectrum Rights Agreement.

 

In connection with the 103 Spectrum Development Agreement, during May 2012, we also entered into a ten-year service agreement with Ciel pursuant to which we receive certain satellite services from Ciel on the SES-3 satellite at the 103 degree orbital location (the “103 Service Agreement”).  During June 2013, we and DISH Network entered into an agreement pursuant to which DISH Network receives certain satellite services from us on the SES-3 satellite (the “DISH 103 Service Agreement”).  Under the terms of the DISH 103 Service Agreement, DISH Network makes certain monthly payments to us through the service term.  Unless earlier terminated under the terms and conditions of the DISH 103 Service Agreement, the initial service term will expire on the earlier of: (i) the date the SES-3 satellite fails; (ii) the date the transponder(s) on which service was being provided under the agreement fails; or (iii) ten years following the actual service commencement date.  Upon in-orbit failure or end of life of the SES-3 satellite, and in certain other circumstances, DISH Network has certain rights to receive service from us on a replacement satellite.  There can be no assurance that DISH Network will exercise its option to receive service on a replacement satellite.

 

TT&C Agreement.  Effective January 1, 2012, we entered into a new telemetry, tracking and control (“TT&C”) agreement pursuant to which we provide TT&C services to DISH Network and its subsidiaries for a period ending on December 31, 2016 (the “2012 TT&C Agreement”).  The 2012 TT&C Agreement replaced the TT&C agreement we entered into with DISH Network in connection with the Spin-off. The fees for services provided under the 2012 TT&C Agreement are calculated at either:  (i) a fixed fee or (ii) cost plus a fixed margin, which will vary depending

 

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on the nature of the services provided.  DISH Network is able to terminate the 2012 TT&C Agreement for any reason upon 60 days’ notice.

 

In connection with the Satellite and Tracking Stock Transaction, on February 20, 2014, we amended the TT&C Agreement to cease the provision of TT&C services to DISH Network for the EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV satellites.  Effective March 1, 2014, we provide TT&C services for the D-1 satellite.

 

Blockbuster Agreements.  On April 26, 2011, DISH Network acquired substantially all of the assets of Blockbuster, Inc. (the “Blockbuster Acquisition”).  On June 8, 2011, we completed the Hughes Acquisition.  Hughes Network Systems, LLC (“HNS”) provided certain broadband products and services to Blockbuster pursuant to an agreement that was entered into prior to the Blockbuster Acquisition and the Hughes Acquisition.  Subsequent to both the Blockbuster Acquisition and the Hughes Acquisition, Blockbuster entered into a new agreement with HNS pursuant to which Blockbuster may continue to purchase broadband products and services from our Hughes segment (the “Blockbuster VSAT Agreement”).

 

Effective February 1, 2014, all services to all Blockbuster locations, including Blockbuster franchisee locations, terminated in connection with the closing of all of the Blockbuster retail locations.

 

Radio Access Network Agreement.  On November 29, 2012, HNS entered into an agreement with DISH Network L.L.C. pursuant to which HNS will construct for DISH Network a ground-based satellite radio access network (“RAN”) for a fixed fee.  The completion of the RAN under this agreement is expected to occur on or before November 29, 2014.  This agreement generally may be terminated by DISH Network at any time for convenience.

 

RUS Implementation Agreement.  In September 2010, DISH Broadband L.L.C. (“DISH Broadband”), DISH Network’s wholly-owned subsidiary, was selected by the Rural Utilities Service (“RUS”) of the United States Department of Agriculture to receive up to approximately $14.1 million in broadband stimulus grant funds (the “Grant Funds”).  Effective November 2011, HNS and DISH Broadband entered into a RUS Implementation Agreement (the “RUS Agreement”) pursuant to which HNS provides certain portions of the equipment and broadband service used to implement DISH Broadband’s RUS program.  The RUS Agreement expired in June 2013 when the Grant Funds were exhausted.

 

TerreStar Agreement.  On March 9, 2012, DISH Network completed its acquisition of substantially all the assets of TerreStar.  Prior to DISH Network’s acquisition of substantially all the assets of TerreStar and our completion of the Hughes Acquisition, TerreStar and HNS entered into various agreements pursuant to which our Hughes segment provides, among other things, hosting, operations and maintenance services for TerreStar’s satellite gateway and associated ground infrastructure.  These agreements generally may be terminated by DISH Network at any time for convenience.

 

Hughes Broadband Distribution Agreement.  Effective October 1, 2012, HNS and dishNET Satellite Broadband L.L.C. (“dishNET”), a wholly-owned subsidiary of DISH Network, entered into a distribution agreement (the “Distribution Agreement”) pursuant to which dishNET has the right, but not the obligation, to market, sell and distribute the Hughes satellite internet service (the “Hughes service”).  dishNET pays HNS a monthly per subscriber wholesale service fee for the Hughes service based upon a subscriber’s service level, and, beginning January 1, 2014, based upon certain volume subscription thresholds.  The Distribution Agreement also provides that dishNET has the right, but not the obligation, to purchase certain broadband equipment from us to support the sale of the Hughes service.  The Distribution Agreement initially had a five year term with automatic renewal for successive one year terms unless terminated by either party with a written notice at least 180 days before the expiration of the then-current term.  On February 20, 2014, HNS and dishNET entered into an amendment to the Distribution Agreement which, among other things, extended the initial term of the Distribution Agreement through March 1, 2024.  Upon expiration or termination of the Distribution Agreement, the parties will continue to provide the Hughes service to the then-current dishNET subscribers pursuant to the terms and conditions of the Distribution Agreement.

 

DBSD North America Agreement.  On March 9, 2012, DISH Network completed its acquisition of 100% of the equity of reorganized DBSD North America, Inc. (“DBSD North America”).  Prior to DISH Network’s acquisition

 

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of DBSD North America and our completion of the Hughes Acquisition, DBSD North America and HNS entered into an agreement pursuant to which our Hughes segment provides, among other things, hosting, operations and maintenance services of DBSD North America’s satellite gateway and associated ground infrastructure.  This agreement was renewed for a one-year period ending on February 15, 2015, and renews for two successive one-year periods unless terminated by DBSD North America upon at least 30 days’ notice prior to the expiration of any renewal term.

 

“Cost of sales — services and other — DISH Network”

 

Satellite Services Received from DISH Network.  Since the Spin-off, EchoStar entered into certain satellite services agreements pursuant to which, it acquires certain satellite services from DISH Network on certain satellites owned or leased by DISH Network.  The fees for the services provided under these satellite services agreements depend, among other things, upon the orbital location of the applicable satellite, the number of transponders that are providing services on the applicable satellite and the length of the service term.  The term of each satellite service agreement is set forth below:

 

D-1.  In November 2012, HNS entered into a satellite service agreement pursuant to which HNS receives satellite services from DISH Network on the D-1 satellite for research and development.  This lease terminated on June 30, 2014.

 

“General and administrative expenses — DISH Network”

 

Management Services Agreement.  EchoStar entered into a Management Services Agreement with DISH Network pursuant to which DISH Network made certain of its officers available to provide services (which were primarily accounting services) to us and EchoStar.  Effective June 15, 2013, we terminated the Management Services Agreement.

 

Professional Services Agreement.  In connection with the Spin-off, EchoStar entered into various agreements with DISH Network including the Transition Services Agreement, Satellite Procurement Agreement and Services Agreement, which all expired on January 1, 2010 and were replaced by a Professional Services Agreement.  During 2009, EchoStar and DISH Network agreed that EchoStar shall continue to have the right, but not the obligation, to receive the following services from DISH Network, among others, certain of which were previously provided under the Transition Services Agreement: information technology, travel and event coordination, internal audit, legal, accounting and tax, benefits administration, program acquisition services and other support services.  Additionally, EchoStar and DISH Network agreed that DISH Network shall continue to have the right, but not the obligation, to engage us to manage the process of procuring new satellite capacity for DISH Network (previously provided under the Satellite Procurement Agreement), receive logistics, procurement and quality assurance services from EchoStar (previously provided under the Services Agreement) and other support services.  A portion of these costs and expenses have been allocated to us in the manner described above under the caption “EchoStar.”  The Professional Services Agreement automatically renewed on January 1, 2014 for an additional one-year period and renews automatically for successive one-year periods thereafter, unless terminated earlier by either party upon at least 60 days’ notice.  However, either party may terminate the Professional Services Agreement in part with respect to any particular service it receives for any reason upon at least 30 days’ notice.

 

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

 

American Fork Occupancy License Agreement.  The license for certain space at 796 East Utah Valley Drive in American Fork, Utah is for a period ending on July 31, 2017, subject to the terms of the underlying lease agreement.

 

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“Other agreements — DISH Network”

 

Tax Sharing Agreement. As a subsidiary of EchoStar, we are an indirect party to EchoStar’s tax sharing agreement with DISH Network that was entered into in connection with the Spin-off.  This agreement governs EchoStar and DISH Network’s respective rights, responsibilities and obligations after the Spin-off with respect to taxes for the periods ending on or before the Spin-off.  Generally, all pre-Spin-off taxes, including any taxes that are incurred as a result of restructuring activities undertaken to implement the Spin-off, are borne by DISH Network, and DISH Network will indemnify EchoStar for such taxes.  However, DISH Network is not liable for and will not indemnify EchoStar for any taxes that are incurred as a result of the Spin-off or certain related transactions failing to qualify as tax-free distributions pursuant to any provision of Section 355 or Section 361 of the Internal Revenue Code of 1986, as amended because of: (i) a direct or indirect acquisition of any of EchoStar’s stock, stock options or assets; (ii) any action that EchoStar takes or fails to take; or (iii) any action that EchoStar takes that is inconsistent with the information and representations furnished to the IRS in connection with the request for the private letter ruling, or to counsel in connection with any opinion being delivered by counsel with respect to the Spin-off or certain related transactions.  In such case, EchoStar will be solely liable for, and will indemnify DISH Network for, any resulting taxes, as well as any losses, claims and expenses.  The tax sharing agreement will only terminate after the later of the full period of all applicable statutes of limitations, including extensions, or once all rights and obligations are fully effectuated or performed.

 

In light of the tax sharing agreement, among other things, and in connection with EchoStar’s consolidated federal income tax returns for certain tax years prior to and for the year of the Spin-off, during the third quarter of 2013, EchoStar and DISH Network agreed upon a supplemental allocation of the tax benefits arising from certain tax items resolved in the course of the IRS’s examination of EchoStar’s consolidated tax returns.  As a result, DISH Network agreed to pay EchoStar an amount that includes $93.1 million of the federal tax benefit they received as a result of our operations.

 

Other Agreements

 

Hughes Systique Corporation (“Hughes Systique”)

 

We contract with Hughes Systique for software development services.  In February 2008, Hughes agreed to make available to Hughes Systique a term loan facility of up to $1.5 million.  Also in 2008, Hughes funded an initial $0.5 million to Hughes Systique pursuant to the term loan facility.  In 2009, HNS funded the remaining $1.0 million of its $1.5 million commitment under the term loan facility.  The loans bear interest at 6%, payable annually, and are convertible into shares of Hughes Systique upon non-payment or an event of default.  As a result, the Company is not obligated to provide any further funding to Hughes Systique under the term loan facility. In May 2014, Hughes and Hughes Systique entered into an amendment to the term loan facility to increase the interest rate from 6% to 8%, payable annually, to reflect current market conditions.  The loans, as amended, mature on May 1, 2015.  In addition to our 44.4% ownership in Hughes Systique, Mr. Pradman Kaul, the President of Hughes Communications, Inc. and a member of EchoStar’s Board of Directors and his brother, who is the CEO and President of Hughes Systique, in the aggregate, owned approximately 26.1%, on an undiluted basis, of Hughes Systique’s outstanding shares as of June 30, 2014.  Furthermore, Mr. Pradman Kaul serves on the board of directors of Hughes Systique.  We are considered the “primary beneficiary” of Hughes Systique due to, among other factors, our ability to significantly influence and direct the operating and financial decisions of Hughes Systique and our obligation to provide financial support in the form of term loans.  As a result, we are required to consolidate Hughes Systique’s financial statements in our Condensed Consolidated Financial Statements.

 

Dish Mexico

 

During 2008, EchoStar entered into a joint venture for a direct-to-home satellite service in Mexico known as Dish Mexico.  Pursuant to these arrangements, we provide certain satellite capacity to Dish Mexico.  We recognized satellite services revenue from Dish Mexico of $5.8 million and $6.4 million for the three months ended June 30, 2014 and 2013, respectively, and $11.7 million and $11.0 million for the six months ended June 30, 2014 and 2013, respectively.  As of June 30, 2014 and December 31, 2013, our accounts receivable balance due from Dish Mexico was $4.0 million and $3.5 million, respectively.

 

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Deluxe/EchoStar LLC

 

We own 50% of Deluxe/EchoStar LLC (“Deluxe”), a joint venture that we entered into in 2010 to build an advanced digital cinema satellite distribution network targeting delivery to digitally equipped theaters in the U.S. and Canada.  We account for our investment in Deluxe using the equity method.  We recognized revenue from Deluxe for transponder services and the sale of broadband equipment of $0.8 million and $0.5 million for the three months ended June 30, 2014 and 2013, respectively, and $1.7 million and $0.9 million for the six months ended June 30, 2014 and 2013, respectively.  As of June 30, 2014 and December 31, 2013, we had receivables from Deluxe of approximately $1.0 million and $1.1 million, respectively.

 

Note 15.              Supplemental Guarantor and Non-Guarantor Financial Information

 

Certain of our wholly-owned subsidiaries (together, the “Guarantor Subsidiaries”) have fully and unconditionally guaranteed, on a joint and several basis, the obligations of our 6 1/2% senior secured notes due 2019 and 7 5/8 % senior notes due 2021 (collectively, the “Notes”), which were issued on June 1, 2011.  See Note 10 for further information on the Notes.

 

In lieu of separate financial statements of the Guarantor Subsidiaries, condensed consolidating financial information prepared in accordance with Rule 3-10(f) of Regulation S-X is presented below, including the condensed balance sheet information, the condensed statement of operations and comprehensive income (loss) information and the condensed statement of cash flows information of HSS, the Guarantor Subsidiaries on a combined basis and the non-guarantor subsidiaries of HSS on a combined basis and the eliminations necessary to arrive at the corresponding information of HSS on a consolidated basis.

 

The indentures governing the Notes contain restrictive covenants that, among other things, impose limitations on our ability and the ability of our restricted subsidiaries to pay dividends or make distributions, incur additional debt, make certain investments, create liens or enter into sale and leaseback transactions, merge or consolidate with another company, transfer and sell assets, or enter into transactions with affiliates.

 

The condensed consolidating financial information presented below should be read in conjunction with our Condensed Consolidated Financial Statements and notes thereto included herein.

 

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Condensed Consolidating Balance Sheet as of June 30, 2014

(In thousands)

 

 

 

 

 

Guarantor

 

Non-
Guarantor

 

 

 

 

 

 

 

HSS

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total