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 SEPTEMBER 30, 2015.

 

OR

 

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

 

FOR THE TRANSITION PERIOD FROM                TO                .

 

Commission File Number:  001-33807

 

EchoStar Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada

 

26-1232727

(State or Other Jurisdiction of Incorporation or Organization)

 

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

 

 

 

100 Inverness Terrace East, Englewood, Colorado

 

80112-5308

(Address of Principal Executive Offices)

 

(Zip Code)

 

(303) 706-4000

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  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 T

Accelerated filer  o

Non-accelerated filer o

Smaller reporting

 

 

(Do not check if a smaller

company o

 

 

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 October 28, 2015, the registrant’s outstanding common stock consisted of 44,906,535 shares of Class A common stock and 47,687,039 shares of Class B common stock.

 

 

 



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 September 30, 2015 (Unaudited) and December 31, 2014

1

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)

2

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (Unaudited)

3

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

4

Item 2.

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

41

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

66

Item 4.

Controls and Procedures

68

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

69

Item 1A.

Risk Factors

69

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

70

Item 3.

Defaults Upon Senior Securities

70

Item 4.

Mine Safety Disclosures

70

Item 5.

Other Information

70

Item 6.

Exhibits

71

 

Signatures

72

 



Table of Contents

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including but not limited to statements about our estimates, expectations, plans, objectives, strategies, and financial condition, expected impact of regulatory developments and legal proceedings, opportunities in our industries and businesses and other trends and projections for the next fiscal quarter and beyond.  All statements, other than statements of historical facts, may be forward-looking statements.  Forward-looking statements may also be identified by words such as “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “estimate,” “expect,” “predict,” “continue,” “future,” “will,” “would,” “could,” “can,” “may” and similar terms.  These forward-looking statements are based on information available to us as of the date of this 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 and its subsidiaries (“DISH Network”), for a significant portion of our revenue;

 

·                  the impact of variable demand and the adverse pricing environment for digital set-top boxes;

 

·                  dependence on our ability to successfully manufacture and sell our digital set-top boxes in increasing volumes on a cost-effective basis and with acceptable quality;

 

·                  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;

 

·                  our 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 Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K (“Form 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 our Form 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, whether as a result of new information, future events or otherwise, except as required by law.

 

i



Table of Contents

 

PART I — FINANCIAL INFORMATION

Item 1.                     FINANCIAL STATEMENTS

ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(Unaudited)

 

(Audited)

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

779,105

 

$

549,053

 

Marketable investment securities, at fair value

 

807,662

 

1,139,103

 

Trade accounts receivable, net of allowance for doubtful accounts of $13,543 and $14,188, respectively

 

177,553

 

163,232

 

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

 

247,453

 

251,669

 

Inventory

 

73,956

 

62,963

 

Prepaid expenses

 

63,776

 

67,164

 

Deferred tax assets

 

95,525

 

87,208

 

Other current assets

 

12,623

 

7,699

 

Total current assets

 

2,257,653

 

2,328,091

 

Noncurrent Assets:

 

 

 

 

 

Restricted cash and marketable investment securities

 

19,258

 

18,945

 

Property and equipment, net of accumulated depreciation of $2,910,823 and $2,899,353, respectively

 

3,320,222

 

3,194,793

 

Regulatory authorizations, net

 

544,343

 

568,378

 

Goodwill

 

510,630

 

510,630

 

Other intangible assets, net

 

147,535

 

195,662

 

Investments in unconsolidated entities

 

214,431

 

159,962

 

Other receivable - DISH Network

 

90,793

 

90,241

 

Other noncurrent assets, net

 

184,278

 

187,296

 

Total noncurrent assets

 

5,031,490

 

4,925,907

 

Total assets

 

$

7,289,143

 

$

7,253,998

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Trade accounts payable

 

$

211,905

 

$

188,282

 

Trade accounts payable - DISH Network

 

23,247

 

32,474

 

Current portion of long-term debt and capital lease obligations

 

32,228

 

41,912

 

Deferred revenue and prepayments

 

69,239

 

71,708

 

Accrued compensation

 

31,658

 

32,117

 

Accrued royalties

 

22,306

 

27,590

 

Accrued interest

 

41,790

 

8,905

 

Accrued expenses and other

 

110,492

 

114,745

 

Total current liabilities

 

542,865

 

517,733

 

Noncurrent Liabilities:

 

 

 

 

 

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

 

2,195,985

 

2,325,775

 

Deferred tax liabilities

 

745,959

 

679,524

 

Other noncurrent liabilities

 

100,767

 

107,328

 

Total noncurrent liabilities

 

3,042,711

 

3,112,627

 

Total liabilities

 

3,585,576

 

3,630,360

 

Commitments and Contingencies (Note 14)

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred Stock, $.001 par value, 20,000,000 shares authorized:

 

 

 

 

 

Hughes Retail Preferred Tracking Stock, $.001 par value, 13,000,000 shares authorized, 6,290,499 issued and outstanding at each of September 30, 2015 and December 31, 2014

 

6

 

6

 

Common stock, $.001 par value, 4,000,000,000 shares authorized:

 

 

 

 

 

Class A common stock, $.001 par value, 1,600,000,000 shares authorized, 50,432,666 shares issued and 44,900,348 shares outstanding at September 30, 2015 and 49,576,247 shares issued and 44,043,929 shares outstanding at December 31, 2014

 

50

 

50

 

Class B common stock, $.001 par value, 800,000,000 shares authorized, 47,687,039 shares issued and outstanding at each of September 30, 2015 and December 31, 2014

 

48

 

48

 

Class C common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding at each of September 30, 2015 and December 31, 2014

 

 

 

Class D common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding at each of September 30, 2015 and December 31, 2014

 

 

 

Additional paid-in capital

 

3,755,547

 

3,706,122

 

Accumulated other comprehensive loss

 

(112,001

)

(55,856

)

Accumulated earnings (deficit)

 

70,943

 

(19,040

)

Treasury stock, at cost

 

(98,162

)

(98,162

)

Total EchoStar stockholders’ equity

 

3,616,431

 

3,533,168

 

Noncontrolling interest in HSS Tracking Stock

 

76,437

 

80,457

 

Other noncontrolling interests

 

10,699

 

10,013

 

Total stockholders’ equity

 

3,703,567

 

3,623,638

 

Total liabilities and stockholders’ equity

 

$

7,289,143

 

$

7,253,998

 

 

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

 

1



Table of Contents

 

ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Revenue:

 

 

 

 

 

 

 

 

 

Equipment revenue - DISH Network

 

$

157,184

 

$

299,050

 

$

577,277

 

$

907,466

 

Equipment revenue - other

 

89,454

 

101,927

 

256,362

 

265,890

 

Services and other revenue - DISH Network

 

236,601

 

215,935

 

695,358

 

609,552

 

Services and other revenue - other

 

277,640

 

278,928

 

824,130

 

818,783

 

Total revenue

 

760,879

 

895,840

 

2,353,127

 

2,601,691

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

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

 

207,989

 

340,159

 

706,835

 

998,205

 

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

 

219,686

 

212,298

 

645,691

 

626,660

 

Selling, general and administrative expenses

 

91,830

 

93,127

 

280,462

 

271,251

 

Research and development expenses

 

19,875

 

15,685

 

57,432

 

44,841

 

Depreciation and amortization

 

132,892

 

142,294

 

398,547

 

416,167

 

Total costs and expenses

 

672,272

 

803,563

 

2,088,967

 

2,357,124

 

Operating income

 

88,607

 

92,277

 

264,160

 

244,567

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

Interest income

 

2,562

 

2,270

 

7,896

 

7,015

 

Interest expense, net of amounts capitalized

 

(28,870

)

(41,688

)

(96,136

)

(132,419

)

Loss from partial redemption of debt

 

 

 

(5,044

)

 

Gains (losses) on marketable investment securities, net

 

(3,912

)

(27

)

(5,516

)

7

 

Other-than-temporary impairment loss on available-for-sale securities

 

(1,243

)

 

(5,892

)

 

Equity in earnings (losses) of unconsolidated affiliates, net

 

(2,324

)

13,198

 

(2,580

)

10,137

 

Other, net

 

2,115

 

(1,485

)

(4,078

)

(1,050

)

Total other expense, net

 

(31,672

)

(27,732

)

(111,350

)

(116,310

)

Income before income taxes

 

56,935

 

64,545

 

152,810

 

128,257

 

Income tax provision, net

 

(28,577

)

(6,108

)

(65,841

)

(28,176

)

Net income

 

28,358

 

58,437

 

86,969

 

100,081

 

Less: Net loss attributable to noncontrolling interest in HSS Tracking Stock

 

(686

)

(2,106

)

(4,020

)

(4,049

)

Less: Net income attributable to other noncontrolling interests

 

209

 

375

 

1,006

 

1,103

 

Net income attributable to EchoStar

 

28,835

 

60,168

 

89,983

 

103,027

 

Less: Net loss attributable to Hughes Retail Preferred Tracking Stock (Note 2)

 

(1,267

)

(3,887

)

(7,421

)

(7,474

)

Net income attributable to EchoStar common stock

 

$

30,102

 

$

64,055

 

$

97,404

 

$

110,501

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

92,500

 

91,358

 

92,253

 

91,050

 

Diluted

 

93,493

 

92,971

 

93,480

 

92,723

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.33

 

$

0.70

 

$

1.06

 

$

1.21

 

Diluted

 

$

0.32

 

$

0.69

 

$

1.04

 

$

1.19

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

Net income

 

$

28,358

 

$

58,437

 

$

86,969

 

$

100,081

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(32,603

)

(18,783

)

(56,009

)

(11,068

)

Recognition of foreign currency translation loss in net income

 

 

 

1,889

 

 

Unrealized losses on available-for-sale securities and other

 

(7,373

)

(6,981

)

(8,208

)

(9,484

)

Recognition of other-than-temporary loss on available-for-sale securities in net income

 

1,243

 

 

5,892

 

 

Recognition of realized (gains) losses on available-for-sale securities in net income

 

(9

)

27

 

(29

)

(7

)

Total other comprehensive loss, net of tax

 

(38,742

)

(25,737

)

(56,465

)

(20,559

)

Comprehensive income (loss)

 

(10,384

)

32,700

 

30,504

 

79,522

 

Less: Comprehensive loss attributable to noncontrolling interest in HSS Tracking Stock

 

(686

)

(2,106

)

(4,020

)

(4,049

)

Less: Comprehensive income (loss) attributable to other noncontrolling interests

 

(111

)

171

 

686

 

1,147

 

Comprehensive income (loss) attributable to EchoStar

 

$

(9,587

)

$

34,635

 

$

33,838

 

$

82,424

 

 

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

 

2



Table of Contents

 

ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Nine Months

 

 

 

Ended September 30,

 

 

 

2015

 

2014

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

 

$

86,969

 

$

100,081

 

Adjustments to reconcile net income to net cash flows from operating activities:

 

 

 

 

 

Depreciation and amortization

 

398,547

 

416,167

 

Equity in losses (earnings) of unconsolidated affiliates, net

 

2,580

 

(10,137

)

Loss from partial redemption of debt

 

5,044

 

 

Losses (gains) and other-than-temporary impairment on marketable investment securities, net

 

11,408

 

(7

)

Stock-based compensation

 

16,204

 

10,648

 

Deferred tax provision

 

63,421

 

18,773

 

Changes in current assets and current liabilities, net

 

(274

)

110,671

 

Changes in noncurrent assets and noncurrent liabilities, net

 

3,457

 

(10,170

)

Other, net

 

20,567

 

26,408

 

Net cash flows from operating activities

 

607,923

 

662,434

 

Cash Flows from Investing Activities:

 

 

 

 

 

Purchases of marketable investment securities

 

(345,391

)

(920,672

)

Sales and maturities of marketable investment securities

 

669,393

 

891,917

 

Purchases of property and equipment

 

(585,902

)

(434,428

)

Refunds and other receipts related to capital expenditures

 

105,750

 

 

Changes in restricted cash and marketable investment securities

 

(313

)

(2,958

)

Investments in unconsolidated entities

 

(64,655

)

 

Acquisition of regulatory authorization

 

(3,428

)

 

Capital contribution to Sling TV Holding

 

 

(18,569

)

Expenditures for externally marketed software

 

(16,905

)

(17,401

)

Other, net

 

(50

)

1,981

 

Net cash flows from investing activities

 

(241,501

)

(500,130

)

Cash Flows from Financing Activities:

 

 

 

 

 

Repayment of 6 1/2% Senior Notes Due 2019 and related premium

 

(113,300

)

 

Repayment of other long-term debt and capital lease obligations

 

(35,303

)

(52,763

)

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

 

19,893

 

20,678

 

Net proceeds from issuance of Tracking Stock (Note 2)

 

 

7,526

 

Other, net

 

1,525

 

(9,752

)

Net cash flows from financing activities

 

(127,185

)

(34,311

)

Effect of exchange rates on cash and cash equivalents

 

(9,185

)

(1,721

)

Net increase (decrease) in cash and cash equivalents

 

230,052

 

126,272

 

Cash and cash equivalents, beginning of period

 

549,053

 

634,119

 

Cash and cash equivalents, end of period

 

$

779,105

 

$

760,391

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid for interest (including capitalized interest)

 

$

102,335

 

$

106,268

 

Capitalized interest

 

$

44,335

 

$

14,670

 

Cash paid for income taxes

 

$

5,185

 

$

11,610

 

Employee benefits paid in Class A common stock

 

$

10,711

 

$

10,310

 

Satellites and other assets financed under capital lease obligations

 

$

5,551

 

$

2,947

 

Increase in capital expenditures included in accounts payable, net

 

$

10,297

 

$

3,805

 

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

 

$

 

$

398,095

 

Assets received from Sling TV Holding (Note 6)

 

$

 

$

34,075

 

Reduction of capital lease obligation for AMC-15 and AMC-16 satellites

 

$

4,500

 

$

 

 

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

 

3



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.                     Organization and Business Activities

 

Principal Business

 

EchoStar Corporation (which, together with its subsidiaries, is referred to as “EchoStar,” the “Company,” “we,” “us” and/or “our”) is a holding company that was organized in October 2007 as a corporation under the laws of the State of Nevada.  We are a global provider of satellite operations, video delivery solutions, digital set-top boxes, and broadband satellite technologies and services for home and office, delivering innovative network technologies, managed services, and solutions for enterprises and governments.  Our Class A common stock is publicly traded on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “SATS.”

 

We currently operate in the following three business segments:

 

·                  EchoStar Technologies (“ETC”) — which designs, develops and distributes digital set-top boxes and related products and technology, primarily for satellite TV service providers and telecommunication companies.  Our EchoStar Technologies segment also provides digital broadcast operations, including satellite uplinking/downlinking, transmission services, signal processing, conditional access management, and other services, primarily to DISH Network.  In addition, we provide our TVEverywhere technology through Slingboxes directly to consumers via retail outlets and online, as well as to the pay-TV operator market.  Beginning in 2015, this segment also includes Move Network, our live linear over-the-top platform business, which includes assets acquired from Sling TV Holding L.L.C. (formerly DISH Digital Holding L.L.C.), and primarily provides support services to DISH Network’s Sling TV operations.

 

·                  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 (“ESS”) — 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, Dish Mexico, S. de R.L. de C.V. (“Dish Mexico”), a joint venture we entered into in 2008, United States (“U.S.”) government service providers, internet service providers, broadcast news organizations, programmers, and private enterprise customers.

 

Our operations also include real estate and other activities that have not been assigned to our operating segments, including, costs incurred in certain satellite development programs and other 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 Note 15.

 

In 2008, DISH Network completed its distribution to us of its digital set-top box business, certain infrastructure, and other assets and related liabilities, including certain of its satellites, uplink and satellite transmission assets, and real estate (the “Spin-off”).  Since the Spin-off, EchoStar and DISH Network have operated as separate publicly-traded companies.  However, as a result of the Satellite and Tracking Stock Transaction described in Note 2 below, DISH Network owns shares of our and our subsidiary’s preferred tracking stock representing an aggregate 80.0% economic interest in the residential retail satellite broadband business of our Hughes segment.  In addition, a substantial majority of the voting power of the shares of DISH Network and EchoStar is owned beneficially by Charles W. Ergen, our Chairman, and by certain trusts established by Mr. Ergen for the benefit of his family.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Note 2.                     Hughes Retail Preferred Tracking Stock

 

Satellite and Tracking Stock Transaction

 

On February 20, 2014, 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 Hughes Satellite Systems Corporation (“HSS”), a subsidiary of EchoStar, also 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”). 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”).  The Satellite and Tracking Stock Transaction is consistent with the long-term strategy of the Company to increase the scale of its satellite services business, which provides high-margin revenues, while continuing to benefit from the growth of the satellite broadband business.  As a result of the additional satellites received in the Satellite and Tracking Stock Transaction, EchoStar has been able to increase short-term cash flow that it believes will better position it to achieve its strategic objectives.

 

EchoStar and HSS have adopted policy statements (the “Policy Statements”) setting forth management and allocation policies for purposes of attributing all of the business and operations of EchoStar to either the Hughes Retail Group or the “EchoStar Group,” which is defined as all other operations of EchoStar, including all existing and future businesses, other than the Hughes Retail Group. Among other things, the Policy Statements govern how assets, liabilities, revenue and expenses are attributed or allocated between HRG and the EchoStar Group. Such attributions and allocations generally do not affect the amounts reported in our consolidated financial statements, except for the attribution of stockholders’ equity and net income or loss between the holders of Tracking Stock and common stock. The Policy Statements also do not significantly affect the way that management assesses operating performance and allocates resources within our Hughes segment.

 

We provide unaudited attributed financial information for HRG and the EchoStar 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 (the shares issued as EchoStar Tracking Stock represent a 51.89% economic interest in the Hughes Retail Group and the shares issued as HSS Tracking Stock represent a 28.11% economic interest in the Hughes Retail Group).  In addition to the remaining 20.0% economic interest in the Hughes Retail Group, EchoStar retains all economic interest in the wholesale satellite broadband business and other businesses of EchoStar.  The 80.0% economic interest was determined at the time of issuance based on the estimated fair value of the consideration received from DISH Network in exchange for the Tracking Stock, consisting of the five satellites and $11.4 million in cash, relative to the estimated fair value of the Hughes Retail Group.  The allocation of economic interest represented by the Tracking Stock of 51.89% issued as EchoStar Tracking Stock and 28.11% issued as HSS Tracking Stock reflected the relative assignment to HSS Tracking Stock and EchoStar Tracking Stock of the aggregate increase in equity resulting from DISH Network’s contribution of the satellites and cash.  The tracking stock structure and the allocation of the tracking stock economic interest between EchoStar and HSS was advantageous to EchoStar from an economic and tax perspective by allowing the Company to increase cash flow by using the value of the Hughes Retail Group to purchase the satellites from DISH Network.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

While DISH Network, as the holder of the Tracking Stock, holds an aggregate 80.0% economic interest in the Hughes Retail Group, 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.

 

The EchoStar Tracking Stock is a series of 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 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.

 

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, which resulted in a relative loss of voting power for our Class A and Class B common stockholders.  In the event of a liquidation of EchoStar, holders of shares of EchoStar Class A common stock, EchoStar Class B common stock and the EchoStar Tracking Stock are entitled to receive their respective proportionate interests in the net assets of EchoStar, if any, remaining for distribution upon liquidation, pro rata based upon the aggregate market value of outstanding shares of the EchoStar Tracking Stock (determined by an independent appraisal to the extent such shares are not then listed or quoted on any U.S. national or regional securities exchange or quotation system) as compared to the aggregate market value of outstanding shares of EchoStar Class A common stock and EchoStar Class B common stock.  Similarly, in the event of a liquidation of HSS, holders of shares of HSS common stock and HSS Tracking Stock are entitled to receive their respective proportionate interests in the net assets of HSS, if any, remaining for distribution upon liquidation, pro rata based upon the aggregate market value of outstanding shares of HSS Tracking Stock as compared to the aggregate market value of outstanding shares of HSS common stock.  Market values of HSS Tracking Stock and HSS common stock are to be determined by an independent appraisal to the extent such shares are not then listed or quoted on any U.S. national or regional securities exchange or quotation system.

 

Should our board of directors, or the board of directors of HSS, make a future determination to pay a dividend on any shares of capital stock, the respective board of directors may, in its sole discretion, declare dividends only on shares of common stock, only on shares of the Tracking Stock or on shares of both the common stock and the Tracking Stock of the respective company.  No dividend or other distribution may be paid on any shares of EchoStar Tracking Stock unless a dividend or distribution in an equivalent amount is paid on shares of HSS Tracking Stock and no dividend or other distribution may be paid on any shares of HSS Tracking Stock unless a dividend or distribution in an equivalent amount is paid on shares of EchoStar Tracking Stock.

 

EchoStar and HSS may each, at its option, redeem all of the outstanding shares of its Tracking Stock in exchange for shares of common stock in an HRG Holding Company (as defined below), which EchoStar is required to establish pursuant to the Investor Rights Agreement discussed below.

 

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 us in connection with a change of control of DISH Network and a right to require us to repurchase the Tracking Stock in connection with a change of control of EchoStar, in each case subject to certain terms and conditions; (iii) certain protective covenants afforded to holders of the Tracking Stock; and (iv) a requirement for EchoStar to establish a holding company subsidiary (an “HRG Holding Company”) that is directly or indirectly wholly-owned by EchoStar and that will hold the Hughes Retail Group.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

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 Stock under the Securities Act of 1933, as amended, subject to certain terms and conditions (including our 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 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.

 

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 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 Form 10-K for the year ended December 31, 2014.

 

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 stockholders’ equity for the portion of the entity’s equity attributed to the noncontrolling ownership interests.  For the noncontrolling interest in the HSS Tracking Stock (see Note 2), we attribute a portion of HSS net income or loss to the noncontrolling interest in HSS Tracking Stock with such portion equal to 28.11% (the HSS portion of the 80.0% economic interest) of the Hughes Retail Group attributed net income or loss represented by the HSS Tracking Stock, as determined in accordance with the Policy Statements and other documents governing the Tracking Stock.  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.  We use the cost method when we do not have the ability to significantly influence the operating decisions of the investee.  All significant intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity 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 our condensed consolidated financial statements.  Estimates are used in accounting for, among other things, amortization periods for deferred revenue and deferred subscriber acquisition costs, revenue recognition using the percentage-of-completion method, 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 awards granted under our stock-based compensation plans, fair value of assets and liabilities acquired in business combinations, lease classifications, asset impairments, useful lives and methods for depreciation and amortization of long-lived assets, goodwill impairment testing, royalty obligations, and allocations that affect the net income or loss attributable to the Tracking Stock.  We base our estimates and assumptions on historical experience, observable market inputs and on various other factors that we believe to be relevant under the circumstances.  Due to the inherent uncertainty involved in making estimates, actual results may differ from previously estimated amounts, and such differences may be material to our condensed consolidated financial statements.  Weakened economic conditions may increase the inherent uncertainty in the

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

estimates and assumptions indicated above.  We review our estimates and assumptions 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 characteristics of the asset or liability that would be considered by market participants in a transaction to purchase or sell the asset or liability.

 

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 each of the nine months ended September 30, 2015 or 2014.

 

As of September 30, 2015 and December 31, 2014, the carrying amounts 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 and U.S. government 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 other marketable debt securities generally are based on Level 2 measurements, as the markets for such 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.  As of September 30, 2015 and December 31, 2014, the fair values of our in-orbit incentive obligations, based on measurements categorized within Level 2 of the fair value hierarchy, approximated their carrying amounts of $80.3 million and $85.8 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.  Those fair value measurements typically include significant unobservable inputs and are categorized within Level 3 of the fair value hierarchy.

 

Research and Development

 

In addition to research and development expenses reported in our condensed consolidated statements of operations and comprehensive income (loss), our cost of sales includes research and development costs funded by customers of approximately $15.2 million and $18.0 million for the three months ended September 30, 2015 and 2014, respectively, and $45.7 million and $52.4 million for the nine months ended September 30, 2015 and 2014, respectively.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Capitalized Software Costs

 

Development costs related to software for internal-use and externally marketed software are capitalized and amortized using the straight-line method over the estimated useful life of the software, not in excess of five years.  Capitalized costs of internal-use software are included in “Property and equipment, net” and capitalized costs of externally marketed software are included in “Other noncurrent assets, net” in our condensed consolidated balance sheets.  Externally marketed software is generally installed in the equipment we sell to customers.  We conduct software program reviews for externally marketed capitalized software costs at least annually, or as events and circumstances warrant such a review, to determine if capitalized software development costs are recoverable and to ensure that costs associated with programs that are no longer generating revenue are expensed.  As of September 30, 2015 and December 31, 2014, the net carrying amount of externally marketed software was $59.7 million and $48.9 million, respectively.  We capitalized costs of $5.3 million and $5.1 million for the three months ended September 30, 2015 and 2014, respectively, and costs of $17.0 million and $17.6 million for the nine months ended September 30, 2015 and 2014, respectively, related to the development of externally marketed software.  We recorded amortization expense relating to the development of externally marketed software of $2.2 million and $1.9 million for the three months ended September 30, 2015 and 2014, respectively, and $6.1 million and $3.6 million for the nine months ended September 30, 2015 and 2014, respectively.  The weighted average useful life of our externally marketed software was approximately four years as of September 30, 2015.

 

New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) 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.”  In August 2015, the FASB issued Accounting Standards Update No. 2015-14, which deferred by one year the mandatory effective date of ASU 2014-09.  As a result, public entities are required to adopt the new revenue standard in annual periods beginning after December 15, 2017 and in interim periods within those annual periods.  The standard may be applied either retrospectively to prior periods or as a cumulative-effect adjustment as of the date of adoption.  Early adoption is permitted, but not before annual periods beginning after December 15, 2016.  We have not determined when we will adopt the new revenue standard or selected the transition method that we will apply upon adoption.  We are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

 

In February 2015, the FASB issued Accounting Standards Update No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”).  This standard amends the consolidation guidance for variable interest entities (“VIEs”) and general partners’ investments in limited partnerships and similar entities.  ASU 2015-02 is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods, and requires either a retrospective or a modified retrospective approach as of the beginning of the fiscal year of adoption.  Early adoption is permitted.  We do not expect the adoption of this standard to have a material impact on our consolidated financial statements or related disclosures.  We do not expect to adopt this standard prior to the effective date.

 

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, (“ASU 2015-03”).  This standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums.  ASU 2015-03 is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods, and requires a retrospective approach to adoption.  Early adoption is permitted.  Based on our preliminary assessment, upon adoption of this standard, we expect to present unamortized deferred costs in other noncurrent assets with a carrying amount of $32.8 million and $39.1 million as of September 30, 2015 and December 31, 2014, respectively, as a reduction of our long-term debt balances.  We do not expect to adopt this standard prior to the effective date.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Note 4.                     Earnings per Share

 

We present basic earnings per share (“EPS”) and diluted EPS for our Class A and Class B common stock.  The EchoStar Tracking Stock is a participating security that shares in our consolidated earnings and therefore, effective March 1, 2014, the issuance date of the EchoStar Tracking Stock, we apply the two-class method to calculate EPS.  Under the two-class method, we allocate net income or loss attributable to EchoStar between common stock and the EchoStar Tracking Stock considering both dividends declared on each class of stock and the participation rights of each class of stock in undistributed earnings.  Based on the 51.89% economic interest in the Hughes Retail Group outstanding as the EchoStar Tracking Stock, we allocate undistributed earnings to the EchoStar Tracking Stock based on 51.89% of the attributed net income or loss of the Hughes Retail Group.  We allocated a net loss of $1.3 million and $3.9 million for the three months ended September 30, 2015 and 2014, respectively, and a net loss of $7.4 million and $7.5 million for the nine months ended September 30, 2015 and 2014, respectively, to the EchoStar Tracking Stock reflecting DISH Network’s 51.89% economic interest (represented by the EchoStar Tracking Stock) in the net loss of the Hughes Retail Group.  Moreover, because the reported amount of “Net income attributable to EchoStar” in our condensed consolidated statements of operations and comprehensive income (loss) excludes DISH Network’s 28.11% economic interest (represented by the HSS Tracking Stock) in the net loss of the Hughes Retail Group (reported as a noncontrolling interest), the amount of consolidated net income or loss allocated to holders of Class A and Class B common stock effectively excludes an aggregate 80.0% of the attributed net loss of the Hughes Retail Group.

 

Basic EPS for our Class A and Class B common stock excludes potential dilution and is computed by dividing “Net income attributable to EchoStar common stock” by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if our common stock awards were exercised.  The potential dilution from common stock awards was computed using the treasury stock method based on the average market value of our Class A common stock during the period.  The calculation of our diluted weighted-average common shares outstanding excluded options to purchase shares of our Class A common stock, whose effect would be anti-dilutive, of 3.1 million shares and 2.0 million shares for the three and nine months ended September 30, 2015, respectively, and 0.8 million shares for each of the three and nine months ended September 30, 2014, respectively.  For the three and nine months ended September 30, 2014, the calculation also excluded 0.7 million shares of our Class A common stock that were issuable pursuant to our performance based stock incentive plan contingent upon meeting a company-specific performance measure by March 31, 2015, that was not achieved and which resulted in the expiration of such shares as of March 31, 2015.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

The following table presents basic and diluted EPS amounts for all periods and the corresponding weighted-average shares outstanding used in the calculations.

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(In thousands, except per share amounts)

 

Net income attributable to EchoStar

 

$

28,835

 

$

60,168

 

$

89,983

 

$

103,027

 

Less: Net loss attributable to EchoStar Tracking Stock

 

(1,267

)

(3,887

)

(7,421

)

(7,474

)

Net income attributable to EchoStar common stock

 

$

30,102

 

$

64,055

 

$

97,404

 

$

110,501

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding :

 

 

 

 

 

 

 

 

 

Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic

 

92,500

 

91,358

 

92,253

 

91,050

 

Dilutive impact of stock awards outstanding

 

993

 

1,613

 

1,227

 

1,673

 

Diluted

 

93,493

 

92,971

 

93,480

 

92,723

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Class A and B common stock:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.33

 

$

0.70

 

$

1.06

 

$

1.21

 

Diluted

 

$

0.32

 

$

0.69

 

$

1.04

 

$

1.19

 

 

Note 5.                     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 $117.6 million and $63.8 million as of September 30, 2015 and December 31, 2014, respectively.

 

Reclassifications out of accumulated other comprehensive loss for the three and nine months ended September 30, 2015 and 2014 were as follows:

 

 

 

Affected Line Item in our

 

For the Three Months

 

For the Nine Months

 

 

 

Condensed Consolidated

 

Ended September 30,

 

Ended September 30,

 

Accumulated Other Comprehensive Loss Components

 

Statement of Operations

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

(In thousands)

 

Recognition of realized (gains) losses on available-for-sale securities in net income (1)

 

Gains (losses) on marketable investment securities, net

 

$

(9

)

$

27

 

$

(29

)

$

(7

)

Recognition of other-than-temporary impairment loss on available-for-sale securities in net income (2)

 

Other-than-temporary impairment loss on available-for sale securities

 

1,243

 

 

5,892

 

 

Recognition of foreign currency translation losses in net income (3)

 

Other, net

 

 

 

1,889

 

 

Total reclassifications, net of tax and noncontrolling interests

 

 

 

$

1,234

 

$

27

 

$

7,752

 

$

(7

)

 


(1)         When available-for-sale securities are sold, the related unrealized gains and losses that were previously recognized in other comprehensive income (loss) are reclassified and recognized as realized gains (losses) on available-for-sale securities on the condensed consolidated statement of operations and comprehensive income (loss).

(2)         In June 2015 and September 2015, we recorded other-than-temporary impairment losses on shares of certain common stock included in our strategic equity securities.  See Note 6 for further discussion.

(3)         As a result of the deconsolidation of several of our European subsidiaries in connection with our investment in SmarDTV SA in May 2015, the related cumulative translation adjustments that were previously recognized in other comprehensive income (loss) were reclassified and recognized as a loss within “Other income (expense)” in our condensed consolidated statement of operations and comprehensive income (loss).  See Note 6 for further discussion.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Note 6.                     Investment Securities

 

Our marketable investment securities, restricted cash and cash equivalents, and investments in unconsolidated entities consisted of the following:

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

Marketable investment securities—current:

 

 

 

 

 

Corporate bonds

 

$

731,893

 

$

1,049,139

 

Strategic equity securities

 

43,501

 

41,705

 

Other

 

32,268

 

48,259

 

Total marketable investment securities—current

 

807,662

 

1,139,103

 

Restricted marketable investment securities (1)

 

11,806

 

11,712

 

Total

 

819,468

 

1,150,815

 

 

 

 

 

 

 

Restricted cash and cash equivalents (1)

 

7,452

 

7,233

 

 

 

 

 

 

 

Investments in unconsolidated entities—noncurrent:

 

 

 

 

 

Cost method

 

81,174

 

31,174

 

Equity method

 

133,257

 

128,788

 

Total investments in unconsolidated entities—noncurrent

 

214,431

 

159,962

 

Total marketable investment securities, restricted cash and cash equivalents, and investments in unconsolidated entities

 

$

1,041,351

 

$

1,318,010

 

 


(1)         Restricted marketable investment securities and restricted cash and cash equivalents are included in “Restricted cash and marketable investment securities” in our condensed consolidated balance sheets.

 

Marketable Investment Securities

 

Our marketable investment securities portfolio consists of various debt and equity instruments, which generally are classified as available-for-sale.  As of September 30, 2015, certain of our equity securities were classified as trading securities in order to reflect our investment strategy for those securities.  The value of our investment portfolio depends on the value of such securities and other instruments comprising the portfolio.

 

Corporate Bonds

 

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

 

Strategic Equity Securities

 

Our strategic investment portfolio consists of investments in shares of common stock of public companies, which are highly speculative and have experienced and continue to experience volatility.

 

As of September 30, 2015 and December 31, 2014, our strategic equity securities included shares of common stock of one of our customers that we received in satisfaction of certain milestone payments that were required to be paid to us under an existing long-term contract.  For the three and nine months ended September 30, 2015, “Other-than-temporary impairment loss on available-for-sale securities” included a $1.2 million and $5.9 million other-than-temporary impairment of such common stock in our available-for-sale portfolio, respectively.  For the three and nine months ended September 30, 2015, “Gains (losses) on marketable investment securities, net” includes $3.9 million and $5.5 million in losses on such common stock in our trading securities portfolio, respectively, which had a fair value of $11.3 million as of September 30, 2015.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Other

 

Our other current marketable investment securities portfolio includes investments in various debt instruments, including U.S. government bonds and variable rate demand notes.

 

Restricted Cash and Marketable Investment Securities

 

As of September 30, 2015 and December 31, 2014, our restricted marketable investment securities, together with our restricted cash, included amounts required as collateral for our letters of credit or surety bonds.

 

Investments in unconsolidated entities - Noncurrent

 

We have several strategic investments in certain non-publicly traded 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.

 

In June 2015, we purchased a noncontrolling equity investment in WorldVu Satellites Limited (“WorldVu”), a low-earth orbit satellite company.  WorldVu plans to develop and operate a global network of low-earth orbit Ku-band satellites to provide internet access to fixed and mobile terminals.  We do not exercise significant influence over the management of WorldVu; accordingly, we account for the investment using the cost method.  Our Hughes segment entered into an agreement to sell certain equipment and services to WorldVu for the ground systems for WorldVu’s low-earth orbit satellites in connection with our investment based on then existing market terms.

 

In May 2015, we acquired a 22.5% interest in the equity and subordinated debt of SmarDTV SA (“SmarDTV”), a Swiss subsidiary of Kudelski SA that offers set-top boxes and conditional access modules, in exchange for cash of $13.9 million and the contribution of several of our European subsidiaries to SmarDTV.  We recorded our initial investment in SmarDTV at $20.0 million, representing our estimate of the investment’s fair value using discounted cash flow techniques.  Our estimate included significant unobservable inputs related to SmarDTV’s future operations and is categorized within Level 3 of the fair value hierarchy.  As of the acquisition date, we deconsolidated the contributed entities and recognized a $2.6 million loss within “Other income (expense)” in our condensed consolidated statement of operations and comprehensive income (loss), consisting of: (i) a $0.7 million loss resulting from our initial investment (at fair value) being less than our $13.9 million cash payment and the carrying amount of the net assets of the deconsolidated entities and (ii) the reclassification from accumulated other comprehensive loss of $1.9 million in foreign currency translation adjustments related to the deconsolidated entities.  The net assets of the deconsolidated entities included net property and equipment of $6.7 million and cash of $0.8 million.  We have the ability to exercise significant influence over SmarDTV and therefore account for our investment using the equity method.  We and SmarDTV also entered into a services agreement pursuant to which our EchoStar Technologies segment purchases certain engineering services from SmarDTV.  See Note 16 for information about our related party transactions with SmarDTV subsequent to the date of our initial investment.

 

On August 8, 2014, an option providing for an unrelated party to acquire a 51.0% equity interest in Dish Mexico was terminated.  Although we have owned 49.0% of the equity of Dish Mexico since its inception in 2008, we accounted for our investment as a 24.0% equity interest using the equity method based on assumed dilution that would occur upon the exercise of the option.  Upon termination of the option, we recorded a $10.3 million adjustment to increase “Equity in earnings (losses) of unconsolidated affiliates” to reflect an increase from 24.0% to 49.0% in our interest in Dish Mexico’s inception-to-date net income.  For periods subsequent to the date of the termination of the option, we account for our investment in Dish Mexico as a 49.0% equity interest using the equity method.

 

Effective August 1, 2014, we and DISH Digital Holding, L.L.C. (now known as Sling TV Holding L.L.C., “Sling TV Holding”) entered into an exchange agreement (the “Exchange Agreement”) pursuant to which we exchanged our one-third voting interest in Sling TV Holding, which we accounted for using the equity method, for a 10.0%

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

non-voting interest in Sling TV Holding, which we account for using the cost method.  As part of this transaction, we received a distribution of certain noncurrent assets associated with an internet protocol television technology business, including property and equipment, technology-related intangible assets and goodwill.  Because we and Sling TV Holding are entities under common control, we recorded the distributed assets at their carrying amounts in Sling TV Holding’s accounts, which totaled $34.1 million at the date of distribution, and we recorded our non-voting interest at $1.1 million, which represents 10.0% of the carrying amount of the remaining equity in Sling TV Holding.  These amounts exceeded the carrying amount of our existing equity method investment by $8.8 million, which was credited to additional paid-in capital because gain recognition generally is precluded by GAAP in exchanges between entities under common control.  In connection with our obligations associated with our interest prior to the Exchange Agreement, we contributed $18.6 million in cash to Sling TV Holding during the third quarter of 2014.  We have no obligation to contribute additional capital to Sling TV Holding.  See Note 16 for more information regarding the Exchange Agreement with Sling TV Holding.

 

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 September 30, 2015

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

732,354

 

$

36

 

$

(497

)

$

731,893

 

Other (including restricted)

 

44,069

 

8

 

(3

)

44,074

 

Equity securities - strategic

 

26,188

 

9,373

 

(3,336

)

32,225

 

Total marketable investment securities

 

$

802,611

 

$

9,417

 

$

(3,836

)

$

808,192

 

As of December 31, 2014

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

1,050,803

 

$

33

 

$

(1,697

)

$

1,049,139

 

Other (including restricted)

 

59,977

 

1

 

(7

)

59,971

 

Equity securities - strategic

 

32,081

 

12,849

 

(3,225

)

41,705

 

Total marketable investment securities

 

$

1,142,861

 

$

12,883

 

$

(4,929

)

$

1,150,815

 

 

As of September 30, 2015, restricted and non-restricted marketable investment securities included debt securities of $754.2 million with contractual maturities of one year or less and $21.8 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.  We believe that changes in the estimated fair values of these securities are primarily related to temporary market conditions as of September 30, 2015.

 

 

 

As of

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

 

 

(In thousands)

 

Less than 12 months

 

$

485,186

 

$

(3,751

)

$

968,941

 

$

(4,929

)

12 months or more

 

135,389

 

(85

)

 

 

Total

 

$

620,575

 

$

(3,836

)

$

968,941

 

$

(4,929

)

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Sales of Marketable Investment Securities

 

We recognized minimal gains and losses from the sales of our available-for-sale marketable investment securities for each of the three and nine months ended September 30, 2015 and 2014.

 

Proceeds from sales of our available-for-sale marketable investment securities totaled $4.0 million and $36.9 million for the three months ended September 30, 2015 and 2014, respectively, and $94.2 million and $42.3 million for the nine months ended September 30, 2015 and 2014, respectively.

 

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 September 30, 2015 and December 31, 2014, we did not have investments that were categorized within Level 3 of the fair value hierarchy.

 

 

 

As of

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Total

 

Level 1

 

Level 2

 

Total

 

Level 1

 

Level 2

 

 

 

(In thousands)

 

Cash equivalents (including restricted)

 

$

701,706

 

$

10,540

 

$

691,166

 

$

437,886

 

$

58,108

 

$

379,778

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

731,893

 

$

 

$

731,893

 

$

1,049,139

 

$

 

$

1,049,139

 

Other (including restricted)

 

44,074

 

4,523

 

39,551

 

59,971

 

5,630

 

54,341

 

Equity securities - strategic

 

43,501

 

43,501

 

 

41,705

 

41,705

 

 

Total marketable investment securities

 

$

819,468

 

$

48,024

 

$

771,444

 

$

1,150,815

 

$

47,335

 

$

1,103,480

 

 

Note 7.                     Trade Accounts Receivable

 

Our trade accounts receivable consisted of the following:

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

Trade accounts receivable

 

$

156,645

 

$

160,886

 

Contracts in process, net

 

34,451

 

16,534

 

Total trade accounts receivable

 

191,096

 

177,420

 

Allowance for doubtful accounts

 

(13,543

)

(14,188

)

Trade accounts receivable - DISH Network

 

247,453

 

251,669

 

Total trade accounts receivable, net

 

$

425,006

 

$

414,901

 

 

As of September 30, 2015 and December 31, 2014, progress billings offset against contracts in process amounted to $0.8 million and $2.5 million, respectively.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Note 8.                     Inventory

 

Our inventory consisted of the following:

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

Finished goods

 

$

56,641

 

$

49,038

 

Raw materials

 

7,852

 

6,192

 

Work-in-process

 

9,463

 

7,733

 

Total inventory

 

$

73,956

 

$

62,963

 

 

Note 9.                     Property and Equipment

 

Property and equipment consisted of the following:

 

 

 

Depreciable

 

As of

 

 

 

Life

 

September 30,

 

December 31,

 

 

 

(In Years)

 

2015

 

2014

 

 

 

 

 

(In thousands)

 

Land

 

-

 

$

41,458

 

$

42,826

 

Buildings and improvements

 

1-40

 

369,940

 

375,920

 

Furniture, fixtures, equipment and other

 

1-12

 

1,231,416

 

1,223,807

 

Customer rental equipment

 

2-4

 

581,394

 

498,180

 

Satellites - owned

 

2-15

 

2,381,120

 

2,381,120

 

Satellites acquired under capital leases

 

10-15

 

665,518

 

935,104

 

Construction in progress

 

-

 

960,199

 

637,189

 

Total property and equipment

 

 

 

6,231,045

 

6,094,146

 

Accumulated depreciation

 

 

 

(2,910,823

)

(2,899,353

)

Property and equipment, net

 

 

 

$

3,320,222

 

$

3,194,793

 

 

Construction in progress consisted of the following:

 

 

 

As of

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

 

 

(In thousands)

 

Progress amounts for satellite construction, including prepayments under capital leases and launch services costs

 

$

836,827

 

$

583,877

 

Uplinking equipment

 

97,852

 

34,270

 

Other

 

25,520

 

19,042

 

Construction in progress

 

$

960,199

 

$

637,189

 

 

16



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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

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

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(In thousands)

 

Satellites

 

$

51,436

 

$

55,643

 

$

149,677

 

$

158,782

 

Furniture, fixtures, equipment and other

 

29,104

 

30,595

 

89,504

 

89,647

 

Customer rental equipment

 

30,839

 

29,892

 

91,550

 

86,800

 

Buildings and improvements

 

3,325

 

3,401

 

10,183

 

10,344

 

Total depreciation expense

 

$

114,704

 

$

119,531

 

$

340,914

 

$

345,573

 

 

Satellites

 

As of September 30, 2015, we utilized 19 of our owned and leased satellites in geosynchronous orbit, approximately 22,300 miles above the equator.  We depreciate our owned satellites on a straight-line basis over the estimated useful life of each satellite.  Two 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.  Three of our satellites are accounted for as operating leases and are not included in property and equipment.

 

Recent Developments

 

Satellite Construction-Launch Services Costs.  In the third quarter of 2015, we mutually agreed with a vendor to cancel an existing launch services agreement.  Pursuant to the cancellation, we received a refund of prior payments related to the launch services, and credited the refund amount to construction in progress in the third quarter of 2015.  Also in the third quarter of 2015, we entered into an agreement with a different vendor to provide for the launch services of the satellite, which is expected to be launched in the fourth quarter of 2016. 

 

AMC-15 and AMC-16.  In August 2014, in connection with the execution of agreements related to the EchoStar 105/SES-11 satellite, we entered into amendments that extend the terms of our existing agreements with SES Americom Colorado, Inc. for satellite services on the AMC-15 and AMC-16 satellites.  As amended, the term of our agreement for satellite services on certain transponders on the AMC-15 satellite was extended from December 2014 through the in-service date of the EchoStar 105/SES-11 satellite.  The amended agreement for the AMC-16 satellite services extends the term for the satellite’s entire communications capacity, subject to available power, for one year following expiration of the initial term in February 2015.  The extended terms of these agreements are being accounted for as operating leases.

 

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 our SPACEWAY 3, EchoStar XVI, and EchoStar XVII satellites.  In addition, although we are not required to maintain in-orbit insurance pursuant to our service agreement with DISH Network for the EchoStar XV satellite, we are liable for any damage caused by our use of the satellite and therefore we carry third-party insurance on the EchoStar XV satellite.

 

We have previously disclosed in our financial statements as of and for the year ended December 31, 2014 anomalies in prior years that affect our in-service owned and leased satellites, including the EchoStar III, EchoStar VI, EchoStar VIII, EchoStar XII, and AMC-16 satellites.  In August 2015, SPACEWAY 3 experienced an anomaly causing one of the two on-board computers used to control the satellite payload to temporarily go offline, causing an

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

interruption of service.  The issue has since been resolved and the satellite is functioning normally.  This anomaly did not affect the long-term commercial operations of the satellite or its estimated useful life.  We are not aware of any additional anomalies that have occurred with respect to any of our owned or leased satellites in 2015 as of the date of this report that have materially affected the commercial operation of these satellites or their useful life.  The EchoStar III and EchoStar VI satellites are fully depreciated and the EchoStar III satellite 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. The EchoStar XII satellite, as previously disclosed in our Form 10-K, 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 the EchoStar XII satellite; however, the anomalies have increased the risk of future transponder failures that could result in reductions in our revenue.

 

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 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.

 

Note 10.              Goodwill, Regulatory Authorizations 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 impairment testing annually, 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 September 30, 2015 and December 31, 2014, approximately $504.2 million of our goodwill was assigned to reporting units of our Hughes segment.  We test this goodwill for impairment annually in the second quarter.  Based on our qualitative assessment of impairment of such goodwill in the second quarter of 2015, we determined that it was not more likely than not that the fair values of the Hughes segment reporting units were less than the corresponding carrying amounts.

 

In August 2014, we and Sling TV Holding entered into the Exchange Agreement pursuant to which, among other things, Sling TV Holding distributed certain assets to us at their carrying amounts, including our Move Network business with associated goodwill of $6.5 million.  See Note 16 for a description of the Exchange Agreement.

 

Regulatory Authorizations

 

Regulatory authorizations included amounts with finite and indefinite useful lives, as follows:

 

 

 

As of

 

 

 

Currency

 

As of

 

 

 

December 31,

 

 

 

Translation

 

September 30,

 

 

 

2014

 

Additions

 

Adjustment

 

2015

 

 

 

(In thousands)

 

Finite useful lives:

 

 

 

 

 

 

 

 

 

Cost

 

$

103,499

 

$

 

$

(22,078

)

$

81,421

 

Accumulated amortization

 

(6,778

)

(3,612

)

1,655

 

(8,735

)

Net

 

96,721

 

(3,612

)

(20,423

)

72,686

 

Indefinite lives

 

471,657

 

 

 

471,657

 

Total regulatory authorizations, net

 

$

568,378

 

$

(3,612

)

$

(20,423

)

$

544,343

 

 

18



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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

 

Other Intangible Assets

 

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

 

 

 

Weighted

 

As of

 

 

 

Average

 

September 30, 2015

 

December 31, 2014

 

 

 

Useful life

 

 

 

Accumulated

 

Carrying

 

 

 

Accumulated

 

Carrying

 

 

 

(in Years)

 

Cost

 

Amortization

 

Amount

 

Cost

 

Amortization

 

Amount

 

 

 

 

 

(In thousands)

 

Customer relationships

 

8

 

$

293,932

 

$

(206,506

)

$

87,426

 

$

293,932

 

$

(185,393

)

$

108,539

 

Contract-based

 

10

 

255,366

 

(247,619

)

7,747

 

255,366

 

(233,009

)

22,357

 

Technology-based

 

7

 

137,337

 

(108,240

)

29,097

 

140,837

 

(100,940

)

39,897

 

Trademark portfolio

 

20

 

29,700

 

(6,435

)

23,265

 

29,700

 

(5,321

)

24,379

 

Favorable leases

 

4

 

4,707

 

(4,707

)

 

4,707

 

(4,217

)

490

 

Total other intangible assets

 

 

 

$

721,042

 

$

(573,507

)

$

147,535

 

$

724,542

 

$

(528,880

)

$

195,662

 

 

Customer relationships are amortized predominantly in relation to the expected contribution of cash flow to the 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, including amortization of regulatory authorizations with finite lives and externally marketed capitalized software, was $18.2 million and $22.8 million for the three months ended September 30, 2015 and 2014, respectively, and $57.6 million and $70.6 million for the nine months ended September 30, 2015 and 2014, respectively.

 

Note 11.              Debt and Capital Lease Obligations

 

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

 

 

 

As of

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

 

Amount

 

Value

 

Amount

 

Value

 

 

 

(In thousands)

 

6 1/2% Senior Secured Notes due 2019

 

$

990,000

 

$

1,069,200

 

$

1,100,000

 

$

1,177,000

 

7 5/8% Senior Notes due 2021

 

900,000

 

969,192

 

900,000

 

994,500

 

Other

 

885

 

885

 

1,240

 

1,240

 

Subtotal

 

1,890,885

 

$

2,039,277

 

2,001,240

 

$

2,172,740

 

Capital lease obligations

 

337,328

 

 

 

366,447

 

 

 

Total debt and capital lease obligations

 

2,228,213

 

 

 

2,367,687

 

 

 

Less: Current portion

 

(32,228

)

 

 

(41,912

)

 

 

Long-term portion of debt and capital lease obligations

 

$

2,195,985

 

 

 

$

2,325,775

 

 

 

 

On June 12, 2015, we redeemed $110.0 million of HSS’ 6 1/2% Senior Secured Notes due 2019 (the “Senior Secured Notes”) at a redemption price equal to 103.0% of the principal amount plus related accrued interest.  As a result, we recorded a $5.0 million loss consisting of the $3.3 million redemption premium and $1.7 million representing the write-off of related deferred financing costs.

 

Note 12.              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

 

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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 $65.8 million and $28.2 million for the nine months ended September 30, 2015 and 2014, respectively.  Our effective income tax rate was 43.1% and 22.0% for the nine months ended September 30, 2015 and 2014, respectively.  The variation in our current year effective tax rate from the U.S. federal statutory rate for the nine months ended September 30, 2015 was primarily due to the increase in our valuation allowance associated with certain foreign losses as well as realized and unrealized losses that are capital in nature for tax purposes, partially offset by research and experimentation tax credits.  For the nine months ended September 30, 2014, the variation in our effective tax rate from the U.S. federal statutory rate was primarily due to research and experimentation tax credits and a lower state effective tax rate, partially offset by the increase in our valuation allowance associated with realized and unrealized losses that are capital in nature for tax purposes.

 

Note 13.              Stock-Based Compensation

 

We maintain stock incentive plans to attract and retain officers, directors and key employees.  Stock awards under these plans include both performance based and non-performance based stock incentives.  We granted stock options to our employees and nonemployee directors to acquire 27,000 and 909,000 shares of our Class A common stock for the three and nine months ended September 30, 2015, respectively.  We granted stock options to our employees and nonemployee directors to acquire 100,000 and 315,000 shares of our Class A common stock for the three and nine months ended September 30, 2014, respectively.

 

We granted zero and 100,000 restricted stock units (“RSU”) for the three and nine months ended September 30, 2015, respectively. The RSUs vest based on the attainment of certain quarterly company performance criteria for the second, third and fourth quarters of 2015 and will expire on March 31, 2016.  During the three and nine months ended September 30, 2015, 33,333 of the RSUs vested.

 

Our stock-based compensation expense was recorded in our condensed consolidated statements of operations and comprehensive income (loss) as follows:

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(In thousands)

 

Research and development expenses

 

$

1,270

 

$

585

 

$

3,318

 

$

1,760

 

Selling, general and administrative expenses

 

4,646

 

2,885

 

12,886

 

8,888

 

Total stock-based compensation

 

$

5,916

 

$

3,470

 

$

16,204

 

$

10,648

 

 

As of September 30, 2015, total unrecognized stock-based compensation cost, net of estimated forfeitures, related to our unvested stock awards was $38.4 million.

 

Note 14.              Commitments and Contingencies

 

Commitments

 

As of September 30, 2015, our satellite-related obligations were approximately $1.27 billion.  Our satellite-related obligations primarily include payments pursuant to agreements for the construction of the EchoStar XIX, EchoStar XXI, EchoStar XXIII, and EchoStar 105/SES-11 satellites, payments pursuant to launch services contracts and regulatory authorizations, executory costs for our capital lease satellites, costs under satellite service agreements and in-orbit incentives relating to certain satellites, as well as commitments for long-term satellite operating leases and satellite service arrangements.

 

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Contingencies

 

Separation Agreement

 

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

 

Litigation

 

We are involved in a number of legal proceedings (including those described below) concerning matters arising in connection with the conduct of our business activities.  Many of these proceedings are at preliminary stages, and many of these proceedings seek an indeterminate amount of damages.  We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss or an additional loss may have been incurred and to determine if accruals are appropriate.  If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of the possible loss or range of possible loss can be made.  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 in management’s opinion; (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 subsidiaries, Hughes Communications, Inc. and Hughes Network Systems, LLC (“HNS”), 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 asserted that encoding data as specified by the DVB-S2 standard infringes each of the asserted patents.  In the operative Amended Complaint, served on March 6, 2014, Caltech claims that the HopperTM set-top box that we design and sell to DISH Network, as well as certain of our Hughes segment’s satellite broadband products and services, infringe the asserted patents by implementing the DVB-S2 standard.  On September 26, 2014, Caltech requested leave to amend its Amended Complaint to add EchoStar Corporation and our subsidiary, EchoStar Technologies L.L.C. as defendants, as well as to allege that a number of additional set-top boxes infringe the asserted patents.  On November 7, 2014, the Court rejected that request.  Additionally, on November 4, 2014, the Court ruled that the patent claims at issue in the suit are directed to patentable subject matter.  On February 17, 2015, Caltech filed a second complaint in the same district against the same defendants alleging that HNS’ Gen4 HT1000 and HT1100 products infringe the same patents asserted in the first case.  We answered that second complaint on March 24, 2015.  The trial for the first case which was scheduled to commence on April 20, 2015, was vacated by the Court on March 16, 2015 and a new trial date has yet to be set.  On May 5, 2015, the Court granted summary judgment for us on a number of issues, finding that Caltech’s damages theory improperly apportioned alleged damages, that allegations of infringement against DISH Network, DISH Network L.L.C., and dishNET

 

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Satellite Broadband L.L.C. should be dismissed from the case, and affirming that Caltech could not assert infringement under the doctrine of equivalents.  The Court also granted motions by Caltech seeking findings that certain of its patents were not indefinite or subject to equitable estoppel.  The Court otherwise denied motions for summary judgment, including a motion by Caltech seeking summary judgment of infringement.  On May 14, 2015, the judge assigned to the case passed away.  A new judge has not yet been formally assigned.

 

The parties are discussing resolving these cases without further litigation.  There can be no assurance that a settlement agreement will be reached.  If a settlement agreement is not reached, we cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages and we intend to vigorously defend these cases.  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.

 

ClearPlay, Inc.

 

On March 13, 2014, ClearPlay, Inc. (“ClearPlay”) filed a complaint against EchoStar Corporation and our subsidiary, EchoStar Technologies L.L.C., as well as against DISH Network and DISH Network L.L.C. in the United States District Court for the District of Utah.  The complaint alleges infringement of United States Patent Nos. 6,898,799, entitled “Multimedia Content Navigation and Playback”; 7,526,784, entitled “Delivery of Navigation Data for Playback of Audio and Video Content”; 7,543,318, entitled “Delivery of Navigation Data for Playback of Audio and Video Content”; 7,577,970, entitled “Multimedia Content Navigation and Playback”; and 8,117,282, entitled “Media Player Configured to Receive Playback Filters From Alternative Storage Mediums.”  ClearPlay alleges that the AutoHop™ feature of the HopperTM set-top box infringes the asserted patents.  On February 11, 2015, the Court stayed the case pending various third-party challenges before the United States Patent and Trademark Office regarding the validity of certain of the patents ClearPlay asserted in the case.

 

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.

 

CRFD Research, Inc. (a subsidiary of Marathon Patent Group, Inc.)

 

On January 17, 2014, CRFD Research, Inc. (“CRFD”) filed a complaint against EchoStar Corporation and our subsidiary, EchoStar Technologies L.L.C., as well as against DISH Network, DISH DBS Corporation and DISH Network L.L.C., in United States District Court for the District of Delaware, alleging infringement of United States Patent No. 7,191,233 (the “233 patent”).  The 233 patent is entitled “System for Automated, Mid-Session, User-Directed, Device-to-Device Session Transfer System,” and relates to transferring an ongoing software session from one device to another.  CRFD alleges that certain of our set-top boxes infringe the 233 patent.  On the same day, CRFD filed patent infringement complaints against AT&T Inc.; Comcast Corp.; DirecTV; Time Warner Cable Inc.; Cox Communications, Inc.; Level 3 Communications, Inc.; Akamai Technologies, Inc.; Cablevision Systems Corp. and Limelight Networks, Inc.  On January 26, 2015, we and DISH Network filed a petition before the United States Patent and Trademark Office challenging the validity of the 233 patent.  The United States Patent and Trademark Office has agreed to institute a proceeding on our petition, as well as on two third-party petitions challenging the validity of the 233 patent.  On June 4, 2015, the litigation in the District Court was ordered stayed pending resolution of the proceeding before the United States Patent and Trademark Office.  CRFD 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 patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

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Elbit

 

On January 23, 2015, Elbit Systems Land and C4I LTD and Elbit Systems of America Ltd. (together referred to as “Elbit”) filed a complaint against our subsidiary HNS, as well as against Black Elk Energy Offshore Operations, LLC, Bluetide Communications, Inc. and Helm Hotels Group, in the United States District Court for the Eastern District of Texas, alleging infringement of United States Patent Nos. 6,240,073 (the “073 patent”) and 7,245,874 (“874 patent”).  The 073 patent is entitled “Reverse Link for a Satellite Communication Network” and the 874 patent is entitled “Infrastructure for Telephony Network.”  Elbit alleges that the 073 patent is infringed by broadband satellite systems that practice the Internet Protocol Over Satellite standard.  Elbit alleges that the 874 patent is infringed by the manufacture and sale of broadband satellite systems that provide cellular backhaul service via connections to E1 or T1 interfaces at cellular backhaul base stations.  On March 16, 2015, the defendants filed motions to dismiss portions of Elbit’s complaint.  On April 2, 2015, Elbit responded to those motions to dismiss and further filed an amended complaint removing Helm Hotels Group as a defendant, but making similar allegations against a new defendant, Country Home Investments, Inc.  On April 20, 2015, the defendants filed motions to dismiss portions of Elbit’s amended complaint.

 

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.

 

The Hopper Litigation

 

On May 24, 2012, DISH Network L.L.C., filed suit in the United States District Court for the Southern District of New York against American Broadcasting Companies, Inc. (“ABC”), CBS Corporation (“CBS”), Fox Entertainment Group, Inc., Fox Television Holdings, Inc., Fox Cable Network Services, L.L.C. (collectively, “Fox”) and NBCUniversal Media, LLC (“NBC”).  The lawsuit seeks a declaratory judgment that DISH Network L.L.C is not infringing any defendant’s copyright, or breaching any defendant’s retransmission consent agreement, by virtue of the PrimeTime Anytime™ and AutoHop features of the Hopper™ set-top boxes we design and sell to DISH Network.  A consumer can use the PrimeTime Anytime feature at his or her option, to record certain primetime programs airing on ABC, CBS, Fox, and/or NBC up to every night, and to store those recordings for up to eight days.  A consumer can use the AutoHop feature at his or her option, to watch certain recordings the subscriber made with our PrimeTime Anytime feature, commercial-free, if played back at a certain point after the show’s original airing.

 

Later on May 24, 2012, (i) Fox Broadcasting Company, Twentieth Century Fox Film Corp. and Fox Television Holdings, Inc. filed a lawsuit against DISH Network and DISH Network L.L.C. (collectively, “DISH”) in the United States District Court for the Central District of California, alleging that the PrimeTime Anytime feature, the AutoHop feature, as well as DISH’s use of Slingbox placeshifting functionality infringe their copyrights and breach their retransmission consent agreements, (ii) NBC Studios LLC, Universal Network Television, LLC, Open 4 Business Productions LLC and NBCUniversal Media, LLC filed a lawsuit against DISH in the United States District Court for the Central District of California, alleging that the PrimeTime Anytime feature and the AutoHop feature infringe their copyrights, and (iii) CBS Broadcasting Inc., CBS Studios Inc. and Survivor Productions LLC filed a lawsuit against DISH in the United States District Court for the Central District of California, alleging that the PrimeTime Anytime feature and the AutoHop feature infringe their copyrights.

 

As a result of certain parties’ competing counterclaims and venue-related motions brought in both the New York and California actions, as described below, and certain networks filing various amended complaints, the claims have proceeded in the following venues:  (1) the copyright and contract claims regarding the ABC and CBS parties in New York; and (2) the copyright and contract claims regarding the Fox and NBC parties in California.

 

California Actions.  On August 17, 2012, the NBC plaintiffs filed a first amended complaint in their California action adding EchoStar Corporation and our subsidiary EchoStar Technologies L.L.C. to the NBC litigation, alleging various claims of copyright infringement.  We and our subsidiary answered on September 18, 2012.

 

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On November 7, 2012, the California court denied the Fox plaintiffs’ motion for a preliminary injunction to enjoin the Hopper set-top box’s PrimeTime Anytime and AutoHop features, and the Fox plaintiffs appealed.  On March 27, 2013, at the request of the parties, the Central District of California granted a stay of all proceedings in the action brought by the NBC plaintiffs, pending resolution of the appeal by the Fox plaintiffs.  On July 24, 2013, the United States Court of Appeals for the Ninth Circuit affirmed the denial of the Fox plaintiffs’ motion for a preliminary injunction as to the PrimeTime Anytime and AutoHop features.  On August 7, 2013, the Fox plaintiffs filed a petition for rehearing and rehearing en banc, which was denied on January 24, 2014.  The United States Supreme Court granted the Fox plaintiffs an extension until May 23, 2014 to file a petition for writ of certiorari, but they did not file.  As a result, the stay of the NBC plaintiffs’ action expired.  On August 6, 2014, at the request of the parties, the Central District of California granted a further stay of all proceedings in the action brought by the NBC plaintiffs, pending a final judgment on all claims in the Fox plaintiffs’ action.  No trial date is currently set on the NBC claims.

 

In addition, on February 21, 2013, the Fox plaintiffs filed a second motion for preliminary injunction against: (i) DISH Network, seeking to enjoin the Hopper Transfers™ feature in the second-generation Hopper set-top box, alleging breach of a retransmission consent agreement; and (ii) EchoStar Technologies L.L.C. and DISH Network, seeking to enjoin the Slingbox placeshifting functionality in the second-generation Hopper set-top box, alleging copyright infringement by both defendants, and breach of the earlier-mentioned retransmission consent agreement by DISH Network.  The Fox plaintiffs’ motion was denied on September 23, 2013.  The Fox plaintiffs appealed, and on July 14, 2014, the United States Court of Appeals for the Ninth Circuit affirmed the denial of the Fox plaintiffs’ motion.  On October 17, 2014, the California court heard oral argument on the Fox plaintiffs’ and our respective motions for summary judgment.  On January 12, 2015, the Court entered an order ruling on the parties’ respective summary judgment motions, holding that: (a) the Slingbox placeshifting functionality and the PrimeTime Anytime, AutoHop and Hopper Transfers features do not violate copyright law; (b) certain quality assurance copies (which were discontinued in November 2012) did violate copyright law; and (c) the Slingbox placeshifting functionality, the Hopper Transfers feature and certain quality assurance copies breach DISH’s retransmission consent agreement with Fox.  The only issue remaining for trial is to the amount of damages, if any, on the claims upon which the Fox plaintiffs prevailed on summary judgement, but the Court ruled that the Fox plaintiffs could not pursue disgorgement as a remedy.  At the parties’ joint request, the Court has stayed the case until January 15, 2016 and no trial date has been set.

 

New York Actions.  On October 9, 2012, the ABC plaintiffs filed copyright counterclaims in the New York action against EchoStar Technologies, L.L.C., with the CBS plaintiffs filing similar copyright counterclaims in the New York action against EchoStar Technologies L.L.C. on October 12, 2012.  Additionally, the CBS plaintiffs filed a counterclaim alleging that DISH Network fraudulently concealed the AutoHop feature when negotiating the renewal of its CBS retransmission consent agreement.

 

On November 23, 2012, the ABC plaintiffs filed a motion for a preliminary injunction to enjoin the Hopper set-top box’s PrimeTime Anytime and AutoHop features.  On September 18, 2013, the New York court denied that motion.  The ABC plaintiffs appealed, and oral argument on the appeal was heard on February 20, 2014 before the United States Court of Appeals for the Second Circuit.  Pursuant to a settlement between us and the ABC parties, on March 4, 2014, the ABC parties withdrew their appeal to the United States Court of Appeals for the Second Circuit, and, on March 6, 2014, we and the ABC parties dismissed without prejudice all of our respective claims pending in the United States District Court for the Southern District of New York.  The CBS claims in the New York action were scheduled for trial on May 29, 2015.  However, on December 6, 2014 the parties to the CBS case reached a settlement agreement and all claims pending in New York Court were dismissed with prejudice on December 10, 2014.

 

We intend to vigorously prosecute and defend our position in these cases.  In the event that a court ultimately determines that we infringe the asserted copyrights, we may be subject to substantial damages, and/or an injunction that could require us to materially modify certain features that we currently offer to DISH Network.  An adverse decision against DISH Network could decrease the number of Sling enabled set-top boxes we sell to DISH Network, which could have an adverse impact on the business operations of our EchoStar Technologies segment.  In addition, to the extent that DISH Network experiences fewer gross new subscriber additions, sales of our digital set-top boxes and related components to DISH Network may further decline, which in turn could have a material adverse effect on

 

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our financial position and results of operations.  We cannot predict with any degree of certainty the outcome of these suits or determine the extent of any potential liability or damages.

 

Kappa Digital, LLC

 

On June 1, 2015, Kappa Digital LLC (“Kappa”) filed suit against our subsidiary HNS in the United States District Court for the Eastern District of Texas alleging infringement of United States Patent No. 6,349,135, entitled “Method and System for a Wireless Digital Message Service.”  Kappa generally alleges that HNS’ “HughesNet Gen 4 residential internet service/systems” and “HughesNet Business Broadband service/systems” infringe its asserted patent.  Kappa 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 patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could cause us to materially modify certain features that we currently offer to consumers.  We cannot predict with any degree of certainty the outcome of this suit or determine the extent of any potential liability or damages.

 

LightSquared/Harbinger Capital Partners LLC (LightSquared Bankruptcy)

 

On August 6, 2013, Harbinger Capital Partners LLC and other affiliates of Harbinger (collectively, “Harbinger”), a shareholder of LightSquared Inc. (“LightSquared”), filed an adversary proceeding against EchoStar Corporation, DISH Network, L-Band Acquisition, LLC (“LBAC”), Charles W. Ergen (our Chairman), SP Special Opportunities, LLC (“SPSO”) (an entity controlled by Mr. Ergen), and certain other parties, in the LightSquared bankruptcy cases pending in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”), which cases are jointly administered under the caption In re LightSquared Inc., et. al., Case No. 12 12080 (SCC).  Harbinger alleged, among other things, claims based on fraud, unfair competition, civil conspiracy and tortious interference with prospective economic advantage related to certain purchases of LightSquared secured debt by SPSO.  Subsequently, LightSquared intervened to join in certain claims alleged against certain defendants other than us, DISH Network and LBAC.

 

On October 29, 2013, the Bankruptcy Court dismissed all of the claims against us in Harbinger’s complaint in their entirety, but granted leave for LightSquared to file its own complaint in intervention.  On November 15, 2013, LightSquared filed its complaint, which included various claims against us, DISH Network, Mr. Ergen and SPSO.  On December 2, 2013, Harbinger filed an amended complaint, asserting various claims against SPSO.  On December 12, 2013, the Bankruptcy Court dismissed several of the claims asserted by LightSquared and Harbinger.  The surviving claims included, among others, LightSquared’s claims against SPSO for declaratory relief, breach of contract and statutory disallowance; LightSquared’s tortious interference claim against us, DISH Network and Mr. Ergen; and Harbinger’s claim against SPSO for statutory disallowance.  These claims proceeded to a non-jury trial on January 9, 2014, which concluded on January 17, 2014.  The parties submitted post-trial briefs and a hearing for closing arguments occurred on March 17, 2014.  In its Post-Trial Findings of Fact and Conclusions of Law entered on June 10, 2014, the Bankruptcy Court rejected all claims against us and DISH Network, and it rejected some but not all claims against the other defendants.  On July 7, 2015, the United States District Court for the Southern District of New York denied Harbinger’s motion for an appeal of certain Bankruptcy Court orders in the adversary proceeding.

 

We intend to vigorously defend any claims against us in this proceeding and cannot predict with any degree of certainty the outcome of this proceeding or determine the extent of any potential liability or damages.

 

Michael Heskiaoff, Marc Langenohl, and Rafael Mann

 

On July 10, 2015, Messrs. Michael Heskiaoff and Marc Langenohl, purportedly on behalf of themselves and all others similarly situated, filed suit against our subsidiary Sling Media, Inc. in the United Stated District Court for the Southern District of New York.  The complaint alleges that Sling Media Inc.’s display of advertising to its customers violates a number of state statutes dealing with consumer deception.  On September 25, 2015, the plaintiffs

 

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filed an amended complaint, and Mr. Rafael Mann, purportedly on behalf of himself and all others similarly situated, filed an additional complaint alleging similar causes of action.

 

We intend to vigorously defend this case.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability.

 

Personalized Media Communications, Inc.

 

During 2008, Personalized Media Communications, Inc. (“PMC”) filed suit against EchoStar Corporation, DISH Network and Motorola Inc. in the United States District Court for the Eastern District of Texas alleging infringement of United States Patent Nos. 5,109,414; 4,965,825; 5,233,654; 5,335,277; and 5,887,243, which relate to satellite signal processing.  PMC is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.  Subsequently, Motorola Inc. settled with PMC, leaving DISH Network and us as defendants.  On July 18, 2012, pursuant to a Court order, PMC filed a Second Amended Complaint that added Rovi Guides, Inc. (f/k/a/ Gemstar-TV Guide International, Inc.) and TVG-PMC, Inc. (collectively, “Gemstar”) as a party, and added a new claim against all defendants seeking a declaratory judgment as to the scope of Gemstar’s license to the patents in suit, under which DISH Network and we are sublicensees.  On August 12, 2014, in response to the parties’ respective summary judgment motions related to the Gemstar license issues, the Court ruled in favor of PMC and dismissed all claims by or against Gemstar and entered partial final judgment in PMC’s favor as to those claims.  On September 16, 2014, we and DISH Network filed a notice of appeal of that partial final judgment, which is pending.  On November 5, 2014, PMC supplemented its expert report on damages, dropping a higher value damages theory and disclosing that it seeks damages ranging from $167 million to $447 million as of September 30, 2014, excluding pre-judgment interest and possible treble damages under Federal law.  On May 7, 2015, we, DISH Network and PMC entered into a settlement and release agreement that provided, among other things, for a license by PMC to us and DISH Network for certain patents and patent applications and the dismissal of all of PMC’s claims in the action against us and DISH Network with prejudice.  In June 2015, we and DISH Network agreed that we would contribute a one-time payment of $5.0 million towards the settlement under the agreements entered into in connection with the Spin-off and the 2012 Receiver Agreement.  On June 4, 2015, the Court dismissed all of PMC’s claims in the action against us and DISH Network with prejudice.  We have recorded a loss related to the settlement within “Selling, general and administrative expenses” in our condensed consolidated statement of operations and comprehensive income (loss) of zero and $5.0 million for the three and nine months ended September 30, 2015, respectively.

 

Phoenix Licensing, L.L.C./LPL Licensing, L.L.C.

 

On July 30, 2015, Phoenix Licensing, L.L.C. and LPL Licensing, L.L.C. (together referred to as “Phoenix”) filed a complaint against our subsidiary HNS in the United States District Court for the Eastern District of Texas, alleging infringement of United States Patent Nos. 5,987,434, entitled “Apparatus and Method for Transacting Marketing and Sales of Financial Products”; 7,890,366, entitled “Personalized Communication Documents, System and Method for Preparing Same”; 8,352,317, entitled “System for Facilitating Production of Variable Offer Communications”; 8,234,184, entitled “Automated Reply Generation Direct Marketing System”; 6,999,938, entitled “Automated Reply Generation Direct Marketing System”; 8,738,435, entitled “Method and Apparatus for Presenting Personalized Content Relating to Offered Products and Services”; and 7,860,744, entitled “System and Method for Automatically Providing Personalized Notices Concerning Financial Products and/or Services.”  Phoenix alleged that HNS infringes the asserted patents by making and using products and services that generate customized marketing materials.  Phoenix is an entity that seeks to license a patent portfolio without itself practicing any of the claims recited therein against us.  On October 16, 2015, Phoenix moved to dismiss the litigation against us without prejudice pursuant to a settlement agreement, and on November 3, 2015, the action was dismissed accordingly.

 

Realtime Data LLC

 

On May 8, 2015, Realtime Data LLC (“Realtime”) filed suit against EchoStar Corporation and our subsidiary HNS in the United States District Court for the Eastern District of Texas alleging infringement of United States Patent Nos. 7,378,992, entitled “Content Independent Data Compression Method and System”; 7,415,530, entitled “System

 

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(Unaudited)

 

and Methods for Accelerated Data Storage and Retrieval”; and 8,643,513, entitled “Data Compression System and Methods.”  Realtime generally alleges that the asserted patents are infringed by certain HNS data compression products and services.  Realtime is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.

 

We intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe any of the asserted patents, we may be subject to substantial damages, which may include supplemental damages, and/or an injunction that could cause 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.

 

Shareholder Derivative Litigation

 

On December 5, 2012, Greg Jacobi, purporting to sue derivatively on behalf of EchoStar Corporation, filed suit (the “Jacobi Litigation”) against Charles W. Ergen, Michael T. Dugan, R. Stanton Dodge, Tom A. Ortolf, C. Michael Schroeder, Joseph P. Clayton, David K. Moskowitz, and EchoStar Corporation in the United States District Court for the District of Nevada.  The complaint alleges that a March 2011 attempted grant of 1.5 million stock options to Charles Ergen breached defendants’ fiduciary duties, resulted in unjust enrichment, and constituted a waste of corporate assets.

 

On December 18, 2012, Chester County Employees’ Retirement Fund, derivatively on behalf of EchoStar Corporation, filed a suit (the “Chester County Litigation”) against Charles W. Ergen, Michael T. Dugan, R. Stanton Dodge, Tom A. Ortolf, C. Michael Schroeder, Anthony M. Federico, Pradman P. Kaul, Joseph P. Clayton, and EchoStar Corporation in the United States District Court for the District of Colorado.  The complaint similarly alleges that the March 2011 attempted grant of 1.5 million stock options to Charles Ergen breached defendants’ fiduciary duties, resulted in unjust enrichment, and constituted a waste of corporate assets.

 

On February 22, 2013, the Chester County Litigation was transferred to the District of Nevada, and on April 3, 2013, the Chester County Litigation was consolidated into the Jacobi Litigation.  Oral argument on a motion to dismiss the Jacobi Litigation was held February 21, 2014.  On April 11, 2014, the Chester County litigation was stayed pending resolution of the motion to dismiss.  On March 30, 2015, the Court dismissed the Jacobi litigation, with leave for Jacobi to amend his complaint by April 20, 2015.  On April 20, 2015, Jacobi filed an amended complaint, which on June 12, 2015, we moved to dismiss.

 

Of the attempted grant of 1.5 million options to Mr. Ergen in 2011, only 800,000 were validly granted and remain outstanding.  We intend to vigorously defend these cases.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability.

 

Technology Development and Licensing, LLC

 

On January 22, 2009, Technology Development and Licensing, LLC (“TDL”) filed suit against EchoStar Corporation and DISH Network in the United States District Court for the Northern District of Illinois alleging infringement of United States Patent No. Re. 35,952, which relates to certain favorite channel features.  TDL is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.  The case has been stayed since July 2009, pending two reexamination petitions before the United States Patent and Trademark Office, which concluded in August 2015 resulting in 42 out of the 53 claims of the 952 patent being cancelled.  As a result, the case resumed in August 2015.  A trial date has not been set.

 

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

 

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(Unaudited)

 

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

 

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 EchoStar Corporation and our subsidiaries, EchoStar Technologies, L.L.C, HSS, 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, but has not specified the amount of damages that it seeks.  TQ Beta is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.  During August 2015, EchoStar Corporation and DISH Network L.L.C. filed petitions before the United States Patent and Trademark Office challenging the validity of the 456 patent.  Trial is scheduled to commence on December 12, 2016.

 

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

 

Other

 

In addition to the above actions, we are subject to various other legal proceedings and claims which arise in the ordinary course of 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.

 

Note 15.              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 EchoStar is the Company’s Chief Executive Officer.  Under this definition, we operate the following three primary business segments:

 

·                  EchoStar Technologies — which designs, develops and distributes digital set-top boxes and related products and technology, primarily for satellite TV service providers and telecommunication companies.  Our EchoStar Technologies segment also provides digital broadcast operations, including satellite uplinking/downlinking, transmission services, signal processing, conditional access management, and other services primarily to DISH Network.  In addition, we provide our TVEverywhere technology through Slingboxes directly to consumers via retail outlets and online, as well as to the pay-TV operator market.  Beginning in 2015, this segment also includes our Move Network business, which primarily provides support services to DISH Network’s Sling TV operations.

 

·                  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, Dish Mexico, U.S. government service providers, internet service providers, broadcast news organizations, programmers, and private enterprise customers.

 

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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 incurred in certain satellite development programs and other 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 separate 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.

 

Prior to 2015, our Move Network business, including certain assets distributed to us in August 2014 in connection with the Exchange Agreement with Sling TV Holding (see Notes 6, 10 and 16), was managed separately from our existing operating segments and was reported within “All Other and Eliminations.”  In the first quarter of 2015, we assigned management responsibility for our Move Network business to our EchoStar Technologies segment, where it continues to be managed and reported as a separate reporting unit.  All prior period amounts have been retrospectively adjusted to present operations of our Move Network business in our EchoStar Technologies segment.

 

Transactions between segments were not significant for the three and nine months ended September 30, 2015 and 2014.

 

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

 

 

 

 

 

 

 

EchoStar

 

All

 

 

 

 

 

EchoStar

 

 

 

Satellite

 

Other and

 

Consolidated

 

 

 

Technologies

 

Hughes

 

Services

 

Eliminations

 

Total

 

 

 

(In thousands)

 

For the Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

External revenue

 

$

294,792

 

$

339,060

 

$

124,126

 

$

2,901

 

$

760,879

 

Intersegment revenue

 

$

133

 

$

669

 

$

174

 

$

(976

)

$

 

Total revenue

 

$

294,925

 

$

339,729

 

$

124,300

 

$

1,925

 

$

760,879

 

EBITDA

 

$

25,946

 

$

101,582

 

$

104,200

 

$

(15,116

)

$

216,612

 

Capital expenditures

 

$

8,528

 

$

72,626

 

$

32,416

 

$

9,672

 

$

123,242

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

External revenue

 

$

427,076

 

$

338,617

 

$

126,944

 

$

3,203

 

$

895,840

 

Intersegment revenue

 

$

142

 

$

451

 

$

660

 

$

(1,253

)

$

 

Total revenue

 

$

427,218

 

$

339,068

 

$

127,604

 

$

1,950

 

$

895,840

 

EBITDA

 

$

38,193

 

$

94,955

 

$

111,563

 

$

3,277

 

$

247,988

 

Capital expenditures

 

$

10,485

 

$

56,724

 

$

11,772

 

$

85,730

 

$

164,711

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

External revenue

 

$

972,591

 

$

998,564

 

$

373,726

 

$

8,246