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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
(Mark One) 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016.
 
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                                       TO                                       .
 
Commission File Number:  333-179121
 
Hughes Satellite Systems Corporation
(Exact Name of Registrant as Specified in Its Charter)
Colorado
 
45-0897865
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
100 Inverness Terrace East, Englewood, Colorado
 
80112-5308
(Address of Principal Executive Offices)
 
(Zip Code)
 
(303) 706-4000
(Registrant’s Telephone Number, Including Area Code)
 
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o  No ý*
 
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 ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one): 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o
 
 
(Do not check if a smaller
 
 
 
reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý
 
As of August 1, 2016, the registrant’s outstanding common stock consisted of 1,000 shares of common stock, $0.01 par value per share.
 
The registrant meets the conditions set forth in General Instructions (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.
 
*       The registrant currently is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 and is filing this Quarterly Report on Form 10-Q on a voluntary basis.  The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months as if it were subject to such filing requirements during the entirety of such period.




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
*
 
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
*
Item 3.
Defaults Upon Senior Securities
*
 

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


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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;

our ability to implement our strategic initiatives;
 
our ability to bring advanced technologies to market to keep pace with our customers and competitors;

risk related to our foreign operations and other uncertainties associated with doing business internationally, including changes in foreign exchange rates between foreign currencies and the United States dollar, economic instability and political disturbances;
 
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 Narrative Analysis of 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.
 
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievements. We do not assume responsibility for the accuracy and completeness of the forward‑looking statements. We assume no responsibility for updating forward‑looking information contained or incorporated by reference herein or in any documents we file with the SEC.

Should one or more of the risks or uncertainties described herein or in any documents we file with the SEC occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.


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PART I — FINANCIAL INFORMATION
 
Item 1.         FINANCIAL STATEMENTS
 
HUGHES SATELLITE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
 
 
As of
 
 
June 30, 2016
 
December 31, 2015
Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
349,788

 
$
382,990

Marketable investment securities, at fair value
 
315,635

 
253,343

Trade accounts receivable, net of allowance for doubtful accounts of $12,440 and $11,447, respectively
 
133,379

 
139,510

Trade accounts receivable - DISH Network, net of allowance for doubtful accounts of zero
 
27,270

 
21,258

Inventory
 
55,241

 
48,797

Prepaids and deposits
 
36,176

 
38,222

Advances to affiliates, net
 
80,187

 
47,387

Other current assets
 
10,437

 
13,273

Total current assets
 
1,008,113

 
944,780

Noncurrent Assets:
 
 
 
 
Restricted cash and cash equivalents
 
21,724

 
20,140

Property and equipment, net of accumulated depreciation of $2,319,774 and $2,138,642, respectively
 
2,322,560

 
2,265,402

Regulatory authorizations
 
471,658

 
471,658

Goodwill
 
504,173

 
504,173

Other intangible assets, net
 
98,077

 
115,420

Investments in unconsolidated entities
 
37,220

 
41,481

Other noncurrent assets, net
 
289,498

 
208,225

Total noncurrent assets
 
3,744,910

 
3,626,499

Total assets
 
$
4,753,023

 
$
4,571,279

Liabilities and Shareholders’ Equity
 
 
 
 
Current Liabilities:
 
 
 
 
Trade accounts payable
 
$
104,379

 
$
97,648

Trade accounts payable - DISH Network
 
5

 
19

Current portion of long-term debt and capital lease obligations
 
31,410

 
30,284

Advances from affiliates, net
 
4,524

 
3,773

Deferred revenue and prepayments
 
63,461

 
57,493

Accrued compensation
 
20,330

 
18,932

Accrued expenses and other
 
74,556

 
104,811

Total current liabilities
 
298,665

 
312,960

Noncurrent Liabilities:
 
 
 
 
Long-term debt and capital lease obligations, net of unamortized debt issuance costs
 
2,142,361

 
2,154,988

Deferred tax liabilities, net
 
492,304

 
452,350

Advances from affiliates
 
30,361

 
25,283

Other noncurrent liabilities
 
83,121

 
84,058

Total noncurrent liabilities
 
2,748,147

 
2,716,679

Total liabilities
 
3,046,812

 
3,029,639

Commitments and Contingencies (Note 12)
 


 


 
 
 
 
 
Shareholders’ Equity:
 
 
 
 
Preferred Stock, $0.001 par value; 1,000,000 shares authorized:
 
 
 
 
Hughes Retail Preferred Tracking Stock, $0.001 par value; 300 shares authorized, 81.128 shares issued and outstanding at each of June 30, 2016 and December 31, 2015
 

 

Common stock, $0.01 par value; 1,000,000 shares authorized, 1,000 shares issued and outstanding at each of June 30, 2016 and December 31, 2015
 

 

Additional paid-in capital
 
1,502,130

 
1,417,748

Accumulated other comprehensive loss
 
(45,770
)
 
(54,116
)
Accumulated earnings
 
238,305

 
166,698

Total HSS shareholders’ equity
 
1,694,665

 
1,530,330

Noncontrolling interests
 
11,546

 
11,310

Total shareholders’ equity
 
1,706,211

 
1,541,640

Total liabilities and shareholders’ equity
 
$
4,753,023

 
$
4,571,279

 
 
 
 
 

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

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HUGHES SATELLITE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 
 
 
 
 

 
 

Services and other revenue - other
 
$
274,563

 
$
271,321

 
$
544,986

 
$
541,000

Services and other revenue - DISH Network
 
112,528

 
131,483

 
225,603

 
262,924

Equipment revenue - other
 
51,526

 
53,849

 
94,385

 
101,900

Equipment revenue - DISH Network
 
2,101

 
2,823

 
4,870

 
3,886

Total revenue
 
440,718

 
459,476

 
869,844

 
909,710

Costs and Expenses:
 
 
 
 
 
 

 
 

Cost of sales - services and other (exclusive of depreciation and amortization)
 
126,800

 
132,548

 
251,377

 
262,466

Cost of sales - equipment (exclusive of depreciation and amortization)
 
47,320

 
48,783

 
90,428

 
93,994

Selling, general and administrative expenses
 
69,185

 
65,023

 
140,100

 
135,568

Research and development expenses
 
7,562

 
6,513

 
14,494

 
12,067

Depreciation and amortization
 
102,305

 
107,625

 
204,674

 
215,639

Total costs and expenses
 
353,172

 
360,492

 
701,073

 
719,734

Operating income
 
87,546

 
98,984

 
168,771

 
189,976

 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 
 
 
 
 

 
 

Interest income
 
1,507

 
1,157

 
3,421

 
2,256

Interest expense, net of amounts capitalized
 
(36,059
)
 
(43,566
)
 
(74,090
)
 
(88,652
)
Loss from partial redemption of debt
 

 
(5,044
)
 

 
(5,044
)
Other-than-temporary impairment loss on available-for-sale securities
 

 
(4,649
)
 

 
(4,649
)
Gains (losses) on marketable investment securities, net
 
5,080

 
(1,613
)
 
5,295

 
(1,613
)
Equity in earnings of unconsolidated affiliate
 
2,245

 
1,241

 
4,104

 
2,638

Other, net
 
(1,500
)
 
(657
)
 
5,389

 
(1,710
)
Total other expense, net
 
(28,727
)
 
(53,131
)
 
(55,881
)
 
(96,774
)
Income before income taxes
 
58,819

 
45,853

 
112,890

 
93,202

Income tax provision
 
(20,820
)
 
(18,380
)
 
(40,861
)
 
(36,353
)
Net income
 
37,999

 
27,473

 
72,029

 
56,849

Less: Net income attributable to noncontrolling interests
 
311

 
428

 
422

 
797

Net income attributable to HSS
 
$
37,688

 
$
27,045

 
$
71,607

 
$
56,052

 
 
 
 
 
 
 
 
 
Comprehensive Income:
 
 
 
 
 
 

 
 

Net income
 
$
37,999

 
$
27,473

 
$
72,029

 
$
56,849

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 

 
 

Foreign currency translation adjustments
 
1,643

 
987

 
9,352

 
(9,247
)
Unrealized gains on available-for-sale securities and other
 
2,167

 
1,756

 
1,793

 
3,313

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

 
4,649

 

 
4,649

Recognition of realized gains on available-for-sale securities in net income
 
(2,985
)
 
(11
)
 
(2,985
)
 
(11
)
Total other comprehensive income (loss), net of tax
 
825

 
7,381

 
8,160

 
(1,296
)
Comprehensive income
 
38,824

 
34,854

 
80,189

 
55,553

Less: Comprehensive income attributable to noncontrolling interests
 
125

 
428

 
236

 
797

Comprehensive income attributable to HSS
 
$
38,699

 
$
34,426

 
$
79,953

 
$
54,756

 
 
 
 
 
 
 
 
 
 



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

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HUGHES SATELLITE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) 
 
 
For the Six Months Ended June 30,
 
 
2016
 
2015
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
72,029

 
$
56,849

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
 
Depreciation and amortization
 
204,674

 
215,639

Equity in earnings of unconsolidated affiliate
 
(4,104
)
 
(2,638
)
Amortization of debt issuance costs
 
3,103

 
3,051

Loss from partial redemption of debt
 

 
5,044

Losses (gains) and impairment on marketable investment securities, net
 
(5,295
)
 
6,262

Stock-based compensation
 
2,487

 
2,602

Deferred tax provision
 
39,219

 
34,584

Dividends received from unconsolidated entity
 
10,000

 

Proceeds from sale of trading securities
 
7,140

 

Changes in current assets and current liabilities, net
 
(52,511
)
 
(67,920
)
Changes in noncurrent assets and noncurrent liabilities, net
 
3,654

 
3,831

Other, net
 
945

 
(3,330
)
Net cash flows from operating activities
 
281,341

 
253,974

Cash Flows from Investing Activities:
 
 
 
 
Purchases of marketable investment securities
 
(280,810
)
 
(96,462
)
Sales and maturities of marketable investment securities
 
213,913

 
104,423

Purchases of property and equipment
 
(220,591
)
 
(187,305
)
Expenditures for externally marketed software
 
(12,299
)
 
(11,660
)
Changes in restricted cash and cash equivalents
 
(1,584
)
 
(1,507
)
Investment in unconsolidated entity
 
(1,636
)
 

Payment for EchoStar XXI launch services
 
(11,875
)
 

Other, net
 

 
(9
)
Net cash flows from investing activities
 
(314,882
)
 
(192,520
)
Cash Flows from Financing Activities:
 
 
 
 
Repayment of 6 1/2% Senior Secured Notes Due 2019 and related premium
 

 
(113,300
)
Repayment of other debt and capital lease obligations
 
(16,199
)
 
(23,722
)
Advances from affiliates
 
4,934

 

Capital contribution from EchoStar
 
11,875

 

Other, net
 
(798
)
 
(709
)
Net cash flows from financing activities
 
(188
)
 
(137,731
)
Effect of exchange rates on cash and cash equivalents
 
527

 
(626
)
Net increase (decrease) in cash and cash equivalents
 
(33,202
)
 
(76,903
)
Cash and cash equivalents, beginning of period
 
382,990

 
225,557

Cash and cash equivalents, end of period
 
$
349,788

 
$
148,654

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 
 
 
 
Cash paid for interest (including capitalized interest)
 
$
86,623

 
$
91,653

Capitalized interest
 
$
15,830

 
$
5,656

Cash paid for income taxes
 
$
2,471

 
$
1,932

Property and equipment financed under capital lease obligations
 
$
335

 
$
328

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

 
$
4,500

Increase (decrease) in capital expenditures included in accounts payable, net
 
$
906

 
$
(148
)
Transfer of EchoStar XXI launch contract from EchoStar to HNS
 
$

 
$
52,250

Transfer of EchoStar XXIII launch contract from EchoStar to HNS
 
$
70,300

 
$




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

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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1.                   Organization and Business Activities
 
Principal Business
 
Hughes Satellite Systems Corporation (which, together with its subsidiaries, is referred to as “HSS,” the “Company,” “we,” “us” and/or “our”) is a holding company and a subsidiary of EchoStar Corporation (“EchoStar”).  We are a global provider of satellite service operations, video delivery solutions, broadband satellite technologies and broadband services for home and office customers. We deliver innovative network technologies, managed services, and various communications solutions for enterprise and government customers.
 
We currently operate in the following two business segments:
 
Hughes — which provides broadband satellite technologies and broadband services to home and office customers and network technologies, managed services and communication solutions to domestic and international enterprise and government 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 service operations and video delivery solutions on a full-time and occasional-use basis primarily to DISH Network Corporation and its subsidiaries (“DISH Network”), Dish Mexico, S. de R.L. de C.V. (“Dish Mexico”), a joint venture that EchoStar entered into in 2008, United States (“U.S.”) government service providers, internet service providers, broadcast news organizations, programmers, and private enterprise customers.
 
We were formed as a Colorado corporation in March 2011 to facilitate the acquisition (the “Hughes Acquisition”) of Hughes Communications, Inc. and its subsidiaries (“Hughes Communications”) and related financing transactions.  In connection with our formation, EchoStar contributed the assets and liabilities of its satellite services business, including the principal operating subsidiary of its satellite services business, EchoStar Satellite Services L.L.C., to us.  In addition, as a result of the Satellite and Tracking Stock Transaction described in Note 3 below and in our most recent Annual Report on Form 10-K, DISH Network owns shares of our preferred tracking stock representing a 28.11% economic interest in the residential retail satellite broadband business of our Hughes segment. DISH Network also owns shares of preferred tracking stock issued by EchoStar Corporation, which together with our preferred tracking stock represents an aggregate 80.0% economic interest in the residential retail satellite and broadband business of our Hughes segment. The tracking stock is an equity security and the rights of DISH Network, as the holder of the tracking stock, in our assets are subject to the claims of our creditors.
 
Note 2.                   Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity 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 conformity 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, 2015.
 
Principles of Consolidation
 
We consolidate all entities in which we have a controlling financial interest. We are deemed to have a controlling financial interest in variable interest entities where we are the primary beneficiary.  We are deemed to have a controlling financial interest in other entities when we own more than 50 percent of the outstanding voting shares and other shareholders do not have substantive rights to participate in management. For entities we control but do not wholly own, we record a noncontrolling interest within shareholders’ equity for the portion of the entity’s equity attributed to the noncontrolling ownership interests.  All significant intercompany balances and transactions have been eliminated in consolidation.

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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

 
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 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 EchoStar’s stock-based compensation awards, fair value of assets and liabilities acquired in business combinations, lease classifications, asset impairment testing, useful lives and methods for depreciation and amortization of long-lived assets, and certain royalty obligations.  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.  Changing economic conditions may increase the inherent uncertainty in the 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 six months ended June 30, 2016 or 2015.
 
As of June 30, 2016 and December 31, 2015, 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 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 June 30, 2016 and December 31, 2015, the fair values of our in-orbit incentive obligations, based on measurements categorized within Level 2 of the fair value

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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

hierarchy, approximated their carrying amounts of $77.3 million and $79.3 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
 
Costs incurred in research and development activities generally are expensed as incurred. A significant portion of our research and development costs are incurred in connection with the specific requirements of a customer’s order. In such instances, the amounts for these customer funded development efforts are included in cost of sales.

Cost of sales includes research and development costs incurred in connection with customer’s orders of approximately $3.3 million and $5.2 million for the three months ended June 30, 2016 and 2015, respectively, and $6.1 million and $10.9 million for the six months ended June 30, 2016 and 2015, respectively. In addition, we incurred other research and development expenses of approximately $7.6 million and $6.5 million for the three months ended June 30, 2016 and 2015, respectively, and $14.5 million and $12.1 million for the six months ended June 30, 2016 and 2015, respectively.
 
Capitalized Software Costs
 
Costs related to the procurement and development of 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 June 30, 2016 and December 31, 2015, the net carrying amount of externally marketed software was $70.5 million and $62.8 million, respectively.  We capitalized costs related to the development of externally marketed software of $6.3 million and $6.7 million for the three months ended June 30, 2016 and 2015, respectively, and $12.3 million and $11.7 million for the six months ended June 30, 2016 and 2015, respectively.  We recorded amortization expense relating to the development of externally marketed software of $2.3 million and $2.0 million for the three months ended June 30, 2016 and 2015, respectively, and $4.6 million and $3.9 million for the six months ended June 30, 2016 and 2015, respectively.  The weighted average useful life of our externally marketed software was approximately three years as of June 30, 2016.
 
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 the mandatory effective date of ASU 2014-09 by one year.  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.  In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Principal versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Identifying Performance Obligations and Licensing, which amends guidance on identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB issued Accounting Standards Update No. 2016-12, Narrow-Scope Improvements and Practical Expedients, which addresses collectibility, noncash consideration, completed contracts at transition, a practical expedient for contract modifications at transition, and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. 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.

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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

 
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 and general partners’ investments in limited partnerships and similar entities.  ASU 2015-02 was effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods, and required either a retrospective or a modified retrospective approach as of the beginning of the fiscal year of adoption.  We adopted ASU 2015-02 in the first quarter of 2016. The adoption of the standard did not impact our consolidated financial statements.

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 was effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods, and required a retrospective approach to adoption.  We adopted ASU 2015-03 in the first quarter of 2016. Upon adoption, we presented unamortized debt issuance cost previously reported in “Other noncurrent assets, net” with a carrying amount of $31.3 million as of December 31, 2015, as a reduction of our “Long-term debt and capital lease obligations, net of unamortized debt issuance costs”.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This update substantially revises standards for the recognition, measurement and presentation of financial instruments, including requiring all equity investments to be measured at fair value with changes in the fair value recognized through net income. It also amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted for certain requirements. We are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (“ASU 2016-02”). This standard requires lessees to recognize assets and liabilities for all leases with lease terms more than 12 months, including leases classified as operating leases. The standard also modifies the definition of a lease and the criteria for classifying leases as operating leases or financing leases. ASU 2016-02 is effective for annual periods beginning after December 15, 2018 and interim periods within those periods. Early adoption is permitted. We are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.
 
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplifies the accounting for share-based payment awards. This update requires all excess tax benefits and deficiencies to be recognized as income tax expense or benefit and permits an entity to make an entity-wide policy election to either estimate forfeitures or recognize forfeitures as they occur. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and interim periods within those periods. The update specifies requirements for retrospective, modified retrospective or prospective application for the various amendments contained in the update. We are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those periods. Early adoption is permitted. We are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.


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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Note 3.                   Hughes Retail Preferred Tracking Stock
 
Satellite and Tracking Stock Transaction
 
In February 2014, HSS and EchoStar entered into agreements with certain subsidiaries of DISH Network pursuant to which, effective March 1, 2014, (i) EchoStar issued shares of its newly authorized Hughes Retail Preferred Tracking Stock (the “EchoStar Tracking Stock”) and HSS issued shares of its newly authorized Hughes Retail Preferred Tracking Stock (the “HSS Tracking Stock” and together with the EchoStar Tracking Stock, the “Tracking Stock”) to DISH Network in exchange for five satellites (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI, and EchoStar XIV), including the assumption of related in-orbit incentive obligations, and $11.4 million in cash and (ii) DISH Network began receiving certain satellite services on these five satellites from us (the “Satellite and Tracking Stock Transaction”).  Immediately upon receipt of net assets (consisting of two of the five satellites and related in-orbit incentive obligations) from DISH Network in exchange for EchoStar Tracking Stock, EchoStar transferred such net assets to us.  The Tracking Stock tracks the economic performance of 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 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 HSS Tracking Stock represent a 28.11% economic interest in the Hughes Retail Group and the shares issued as EchoStar Tracking Stock represent a 51.89% economic interest in the Hughes Retail Group).  In addition to the remaining 20.0% economic interest in the Hughes Retail Group, HSS retains all economic interest in the wholesale satellite broadband business and other businesses of HSS.  The Satellite and Tracking Stock Transaction was 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, HSS increased short-term cash flow that it believes better positions it to achieve its strategic objectives.

HSS has adopted a policy statement (the “Policy Statement”) setting forth management and allocation policies for purposes of attributing all of the business and operations of HSS to either the Hughes Retail Group or the “HSSC Group,” which is defined as all other operations of HSS, including all existing and future businesses, other than the Hughes Retail Group.  Among other things, the Policy Statement governs how assets, liabilities, revenue and expenses are attributed or allocated between HRG and the HSSC Group.  Such attributions and allocations generally do not affect the amounts reported in our consolidated financial statements, except for the attribution of shareholders’ equity and net income or loss between the holders of Tracking Stock and common stock.  The Policy Statement also does not significantly affect the way that management assesses operating performance and allocates resources within our Hughes segment.
 
We provide unaudited attributed financial information for HRG and the HSSC Group in an exhibit to our periodic reports on Form 10-Q and Form 10-K.  For a description of the Tracking Stock and the initial recording of the Satellite and Tracking Stock Transaction in our consolidated financial statements, as well as the purpose and effect of the transaction on the Company and holders of shares of HSS common stock, see Note 3 to the consolidated financial statements in our most recent Annual Report on Form 10-K. 

Note 4.                   Other Comprehensive Income (Loss) and Related Tax Effects
 
We have not recognized any tax effects on foreign currency translation adjustments because they are not expected to result in future taxable income or deductions.  We have not recognized any tax effects on unrealized gains or losses on available-for-sale securities because such gains or losses would affect the amount of existing capital loss carryforwards for which the related deferred tax asset has been fully offset by a valuation allowance.
 
Accumulated other comprehensive loss includes cumulative foreign currency translation losses of $44.3 million and $53.8 million as of June 30, 2016 and December 31, 2015, respectively.


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Reclassifications out of accumulated other comprehensive loss for the three and six months ended June 30, 2016 and 2015 were as follows:

 
Accumulated Other Comprehensive Loss Components
 
Affected Line Item in our Condensed Consolidated Statement of Operations
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
(In thousands)
 
Recognition of realized gains on available-for-sale securities in net income (1)
 
Gains (losses) on marketable investment securities, net
 
$
(2,985
)
 
$
(11
)
 
$
(2,985
)
 
$
(11
)
 
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
 

 
4,649

 

 
4,649

 
Total reclassifications, net of tax and noncontrolling interests
 
 
 
$
(2,985
)
 
$
4,638

 
$
(2,985
)
 
$
4,638


(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 “Gains (losses) on marketable investment securities, net” in our condensed consolidated statements of operations and comprehensive income (loss).
(2)
In June 2015, we recorded an other-than-temporary impairment loss on shares of certain common stock included in our strategic equity securities.

Note 5.                   Investment Securities
 
Our marketable investment securities and investments in unconsolidated entities consisted of the following:
 
 
 
As of
 
 
June 30, 2016
 
December 31, 2015
 
 
(In thousands)
Marketable investment securities—current, at fair value:
 
 
 
 
Corporate bonds
 
$
294,285

 
$
228,770

Strategic equity securities
 
8,709

 
18,297

Other
 
12,641

 
6,276

Total marketable investment securities—current
 
315,635

 
253,343

Investments in unconsolidated entities—noncurrent:
 
 
 
 
Cost method
 
15,438

 
15,438

Equity method
 
21,782

 
26,043

Total investments in unconsolidated entities—noncurrent
 
37,220

 
41,481

Total marketable investment securities and investments in unconsolidated entities
 
$
352,855

 
$
294,824


Marketable Investment Securities
 
Our marketable investment securities portfolio consists of various debt and equity instruments, which generally are classified as available-for-sale or trading securities depending on 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. We did not receive any dividend income for the three and six months ended June 30, 2016 or 2015.
 

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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

For the three and six months ended June 30, 2016, “Gains (losses) on marketable investment securities, net” included losses of $1.2 million and $1.0 million, respectively, related to trading securities that we held as of June 30, 2016.  For each of the three and six months ended June 30, 2015, “Gains (losses) on marketable investment securities, net” included a $1.6 million loss related to trading securities that we held as of June 30, 2015.
 
Other
 
Our other current marketable investment securities portfolio includes investments in various debt instruments, including U.S. government bonds.

Unrealized Gains (Losses) on Marketable Investment Securities
 
The components of our available-for-sale investments are summarized in the table below.
 
 
 
Amortized
 
Unrealized
 
Estimated
 
 
Cost
 
Gains
 
Losses
 
Fair Value
 
 
(In thousands)
As of June 30, 2016
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
294,144

 
$
233

 
$
(92
)
 
$
294,285

Other
 
12,642

 
1

 
(2
)
 
12,641

Equity securities - strategic
 
4,833

 

 
(1,637
)
 
3,196

Total marketable investment securities
 
$
311,619

 
$
234

 
$
(1,731
)
 
$
310,122

As of December 31, 2015
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
229,004

 
$
2

 
$
(236
)
 
$
228,770

Other
 
6,279

 

 
(3
)
 
6,276

Equity securities - strategic
 
8,037

 

 
(82
)
 
7,955

Total marketable investment securities
 
$
243,320

 
$
2

 
$
(321
)
 
$
243,001


As of June 30, 2016, restricted and non-restricted marketable investment securities included debt securities of $269.4 million with contractual maturities of one year or less and $37.5 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.
 
Available-for-Sale 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 June 30, 2016.
 
 
 
As of
 
 
June 30, 2016
 
December 31, 2015
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
(In thousands)
Less than 12 months
 
$
149,854

 
$
(1,731
)
 
$
148,629

 
$
(268
)
12 months or more
 
25

 

 
67,751

 
(53
)
Total
 
$
149,879

 
$
(1,731
)
 
$
216,380

 
$
(321
)


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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Sales of Marketable Investment Securities
 
We recognized gains from the sales of our available-for-sale securities of $3.0 million for each of the three and six months ended June 30, 2016 and de minimis gains for each of the three and six months ended June 30, 2015. We recognized de minimis losses from the sales of our available-for-sale securities for each of the three and six months ended June 30, 2016 and 2015
 
Proceeds from sales of our available-for-sale securities totaled $15.3 million and $3.1 million for the three months ended June 30, 2016 and 2015, respectively, and $17.6 million and $10.6 million for the six months ended June 30, 2016 and 2015, 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 June 30, 2016 and December 31, 2015, we did not have investments that were categorized within Level 3 of the fair value hierarchy.
 
 
 
As of
 
 
June 30, 2016
 
December 31, 2015
 
 
Total
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
 
(In thousands)
Cash equivalents
 
$
288,998

 
$
23

 
$
288,975

 
$
303,152

 
$
213

 
$
302,939

Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 
$
294,285

 
$

 
$
294,285

 
$
228,770

 
$

 
$
228,770

Other
 
12,641

 

 
12,641

 
6,276

 

 
6,276

Equity securities - strategic
 
8,709

 
8,709

 

 
18,297

 
18,297

 

Total marketable investment securities
 
$
315,635

 
$
8,709

 
$
306,926

 
$
253,343

 
$
18,297

 
$
235,046


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 2016, we recorded a $10.0 million cash distribution from an investment accounted for using the equity method that was determined to be a return on investment and reported in cash flows from operating activities in our condensed consolidated statement of cash flows.

Note 6.                   Trade Accounts Receivable
 
Our trade accounts receivable consisted of the following:

 
 
As of
 
 
June 30, 2016
 
December 31, 2015
 
 
(In thousands)
Trade accounts receivable
 
$
122,440

 
$
127,946

Contracts in process, net
 
23,379

 
23,011

Total trade accounts receivable
 
145,819

 
150,957

Allowance for doubtful accounts
 
(12,440
)
 
(11,447
)
Trade accounts receivable - DISH Network
 
27,270

 
21,258

Total trade accounts receivable, net
 
$
160,649

 
$
160,768



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Table of Contents
HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

As of June 30, 2016 and December 31, 2015, progress billings offset against contracts in process amounted to $0.9 million and $2.9 million, respectively.

Note 7.                   Inventory
 
Our inventory consisted of the following: 
 
 
As of
 
 
June 30, 2016
 
December 31, 2015
 
 
(In thousands)
Finished goods
 
$
40,863

 
$
39,642

Raw materials
 
6,475

 
5,280

Work-in process
 
7,903

 
3,875

Total inventory
 
$
55,241

 
$
48,797


Note 8.                   Property and Equipment
 
Property and equipment consisted of the following:
 
 
 
 
As of
 
 
Depreciable Life
(In Years)
 
June 30, 2016
 
December 31, 2015
 
 
 
 
(In thousands)
Land
 
 
$
13,338

 
$
12,055

Buildings and improvements
 
1 - 30
 
78,141

 
73,949

Furniture, fixtures, equipment and other
 
1 - 12
 
387,858

 
371,889

Customer rental equipment
 
2 - 4
 
636,745

 
588,430

Satellites - owned
 
2 - 15
 
2,381,120

 
2,381,120

Satellites acquired under capital leases
 
10 - 15
 
665,518

 
665,518

Construction in progress
 
 
479,614

 
311,083

Total property and equipment
 
 
 
4,642,334

 
4,404,044

Accumulated depreciation
 
 
 
(2,319,774
)
 
(2,138,642
)
Property and equipment, net
 
 
 
$
2,322,560

 
$
2,265,402


Construction in progress consisted of the following:
 
 
As of
 
 
June 30,
2016
 
December 31,
2015
 
 
(In thousands)
Progress amounts for satellite construction, including prepayments under capital leases and launch services costs
 
$
307,258

 
$
187,253

Satellite related equipment
 
143,282

 
104,566

Other
 
29,074

 
19,264

Construction in progress
 
$
479,614

 
$
311,083


Construction in progress included the following owned and leased satellites under construction or undergoing in-orbit testing as of June 30, 2016.
 
Satellites
 
Segment
 
Expected Launch Date
 
Eutelsat 65 West A (2)
 
Hughes
 
March 2016 (1)
 
EchoStar 105/SES-11
 
ESS
 
Fourth quarter of 2016
 
Telesat T19V (“63 West”) (2)
 
Hughes
 
Second quarter of 2018
 
 
 
 
 
 
 
(1)
This satellite was launched in March 2016 and placed into service in July 2016.
(2)
We entered into a satellite services agreement and made prepayments for certain capacity on this satellite once launched, but are not a party to the construction contract.

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HUGHES SATELLITE SYSTEMS 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 Ended June 30,
 
For the Six Months
Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
Satellites
 
$
46,965

 
$
49,154

 
$
93,930

 
$
98,241

Furniture, fixtures, equipment and other
 
14,102

 
15,058

 
28,144

 
27,275

Customer rental equipment
 
29,000

 
30,524

 
58,137

 
60,711

Buildings and improvements
 
1,048

 
1,275

 
2,109

 
2,567

Total depreciation expense
 
$
91,115

 
$
96,011

 
$
182,320

 
$
188,794

 
 
 
 
 
 
 
 
 
Satellites
 
As of June 30, 2016, we utilized in support of our operations, 16 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 their respective lease terms. We utilized one satellite that is accounted for as an operating lease and not included in property and equipment as of June 30, 2016.

Satellite Anomalies
 
Our satellites may experience anomalies from time to time, some of which may have a significant adverse impact on their remaining useful lives, the commercial operation of the satellites or our operating results. We are not aware of any anomalies with respect to our owned or leased satellites that have had any such material adverse effect during the six months ended June 30, 2016There can be no assurance, however, that anomalies will not have any such adverse impacts in the future.  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.  

Note 9.                   Goodwill and Other Intangible Assets
 
Goodwill
 
The excess of the cost of an acquired business over the fair values of net tangible and identifiable intangible assets at the time of the acquisition is recorded as goodwill.  Goodwill is assigned to the reporting units within 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 June 30, 2016 and December 31, 2015, all 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 reporting units’ goodwill in the second quarter of 2016, 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.


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HUGHES SATELLITE SYSTEMS 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 Average Useful Life (in Years)
 
As of
 
 
 
June 30, 2016
 
December 31, 2015
 
 
 
Cost
 
Accumulated
Amortization
 
Carrying
Amount
 
Cost
 
Accumulated
Amortization
 
Carrying
Amount
 
 
 
 
(In thousands)
Customer relationships
 
8
 
$
270,300

 
$
(202,227
)
 
$
68,073

 
$
270,300

 
$
(189,910
)
 
$
80,390

Contract-based
 
4
 
64,800

 
(64,800
)
 

 
64,800

 
(64,800
)
 

Technology-based
 
6
 
51,417

 
(43,564
)
 
7,853

 
51,417

 
(39,281
)
 
12,136

Trademark portfolio
 
20
 
29,700

 
(7,549
)
 
22,151

 
29,700

 
(6,806
)
 
22,894

Total other intangible assets
 
 
 
$
416,217

 
$
(318,140
)
 
$
98,077

 
$
416,217

 
$
(300,797
)
 
$
115,420


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.  Intangible asset amortization expense, including amortization of regulatory authorizations with finite lives and externally marketed capitalized software, was $11.2 million and $11.6 million for the three months ended June 30, 2016 and 2015, respectively, and $22.4 million and $26.8 million for the six months ended June 30, 2016 and 2015, respectively.
 
Note 10.            Debt and Capital Lease Obligations
 
The following table summarizes the carrying amounts and fair values of our debt:
 
 
 
 
 
As of
 
 
 
 
June 30, 2016
 
December 31, 2015
 
 
 
Effective Interest Rate
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
 
 
 
 
(In thousands)
6 1/2% Senior Secured Notes due 2019
 
6.959%
 
$
990,000

 
$
1,070,438

 
$
990,000

 
$
1,071,675

 
7 5/8% Senior Notes due 2021
 
8.062%
 
900,000

 
969,750

 
900,000

 
954,000

 
Other
 
 
 
375

 
375

 
803

 
803

 
Less: Unamortized debt issuance costs
 
 
 
(28,172
)
 

 
(31,276
)
 

 
Subtotal
 
 
 
1,862,203

 
$
2,040,563

 
1,859,527

 
$
2,026,478

 
Capital lease obligations
 
 
 
311,568

 
 
 
325,745

 
 
 
Total debt and capital lease obligations
 
 
 
2,173,771

 
 
 
2,185,272

 
 
 
Less: Current portion
 
 
 
(31,410
)
 
 
 
(30,284
)
 
 
 
Long-term debt and capital lease obligations, net of unamortized debt issuance costs
 
 
 
$
2,142,361

 
 
 
$
2,154,988

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The fair values of our debt are estimates categorized within Level 2 of the fair value hierarchy.

On May 6, 2016, we offered to repurchase for cash all or any part of our outstanding 6 1/2% Senior Secured Notes due 2019 (the “2019 Senior Secured Notes”) and our outstanding 7 5/8% Senior Notes due 2021 (the “2021 Senior Unsecured Notes”) at a purchase price equal to 101% of the aggregate principal amount thereof, together with accrued and unpaid interest thereon to the date of repurchase. The Change of Control Offers expired on June 6, 2016, with none of the 2019 Senior Secured Notes or the 2021 Senior Unsecured Notes tendered for repurchase.


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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Note 11.            Income Taxes
 
Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period.  Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
 
Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, is subject to significant volatility due to several factors, including income and losses from investments for which we have a full valuation allowance, changes in tax laws and relative changes in unrecognized tax benefits.  Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income.  For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.
 
Income tax expense was approximately $40.9 million and $36.4 million for the six months ended June 30, 2016 and 2015, respectively.  Our estimated effective income tax rate was 36.2% and 39.0% for the six months ended June 30, 2016 and 2015, respectively.  The variations in our current year effective tax rate from the U.S. federal statutory rate for the six months ended June 30, 2016 were primarily due to the impact of state and local taxes, partially offset by research and experimentation credits.  For the six months ended June 30, 2015, the variation in our effective tax rate from the U.S. federal statutory rate was primarily due to the impact of state and local taxes.

Note 12.            Commitments and Contingencies
 
Commitments
 
As of June 30, 2016, our satellite-related obligations were approximately $756.3 millionOur satellite-related obligations primarily include payments pursuant to agreements for the construction of the EchoStar XIX, EchoStar XXI, EchoStar XXIII, EchoStar 105/SES-11, and 63 West 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.
 
Contingencies
 
Patents and Intellectual Property

Many entities, including some of our competitors, have or may in the future obtain patents and other intellectual property rights that cover or affect products or services directly or indirectly related to those that we offer. We may not be aware of all patents and other intellectual property rights that our products and services may potentially infringe. Damages in patent infringement cases can be substantial, and in certain circumstances can be trebled. Further, we cannot estimate the extent to which we may be required in the future to obtain licenses with respect to intellectual property rights held by others and the availability and cost of any such licenses. Various parties have asserted patent and other intellectual property rights with respect to components within our direct broadcast satellite (“DBS”) products and services. We cannot be certain that these persons do not own the rights they claim, that these rights are not valid or that our products and services do not infringe on these rights. Further, we cannot be certain that we would be able to obtain licenses from these persons on commercially reasonable terms or, if we were unable to obtain such licenses, that we would be able to redesign our products and services to avoid infringement.

Separation Agreement
 
In 2008, DISH Network Corporation contributed its digital set-top box business and certain infrastructure and other assets, including certain of its satellites, uplink and satellite transmission assets, real estate, and other assets and related liabilities to EchoStar (the “Spin-off”).  In connection with the Spin-off, EchoStar entered into a separation agreement with DISH Network that provides, among other things, for the division of certain liabilities, including liabilities resulting from litigation.  Under the terms of the separation agreement, EchoStar has assumed certain liabilities that relate to its business, including certain designated liabilities for acts or omissions that occurred prior to the Spin-off.  Certain specific provisions govern intellectual property related claims under which, generally, EchoStar will only be liable for its acts or omissions following the Spin-off and DISH Network will indemnify EchoStar for any liabilities or damages resulting from intellectual property claims relating to the period prior to the Spin-off, as well as DISH Network’s acts or omissions following the Spin-off.
 

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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

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/or 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.  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.  If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made.  There can be no assurance that legal proceedings against us will be resolved in amounts that will not differ from the amounts of our recorded accruals. Legal fees and other costs of defending litigation are charged to expense as incurred.
 
For certain cases described below, management is unable to predict with any degree of certainty the outcome or 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 or specified; (iii) damages are unsupported, indeterminate 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, operating results or cash flows, though there is no assurance that the resolution and outcomes of these proceedings, individually or in the aggregate, will not be material to our financial condition, operating results or cash flows for any particular period, depending, in part, upon the operating results for such period.
 
We intend to vigorously defend the proceedings against us. In the event that a court ultimately rules against us, we may be subject to adverse consequences, including, without limitation, substantial damages, which may include treble damages, fines, penalties, compensatory damages and/or other equitable or injunctive relief that could require us to materially modify our business operations or certain products or services that we offer to our consumers. In addition, adverse decisions against DISH Network in the proceedings described below could decrease the number of products and components we sell to DISH Network, which could have a material adverse effect on our business operations and our financial condition, results of operation and cash flows.

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 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 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 25, 2016, we, the DISH Network defendants and Caltech entered into a settlement agreement pursuant to which the Court dismissed with prejudice all of the claims in these actions on May 31, 2016.  

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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)


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 April 2, 2015, Elbit filed an amended complaint removing Helm Hotels Group as a defendant, but making similar allegations against a new defendant, Country Home Investments, Inc.  Over November 3 and 4, 2015, and January 22, 2016, the defendants filed petitions before the United States Patent and Trademark Office challenging the validity of the patents in suit, which the Patent and Trademark Office subsequently declined to institute. On April 13, 2016, the defendants answered Elbit’s complaint.
 
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 and Methods for Accelerated Data Storage and Retrieval”; and 8,643,513, entitled “Data Compression System and Methods.”  On September 14, 2015, Realtime amended its complaint, additionally alleging infringement of United States Patent No. 9,116,908, entitled “System and Methods for Accelerated Data Storage and Retrieval.” Realtime generally alleges that the asserted patents are infringed by certain HNS data compression products and services.  Over April 29, 2016 and May 5, 2016, the defendants filed petitions before the United States Patent and Trademark Office challenging the validity of the asserted patents. Realtime is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.

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 HSS, EchoStar Corporation, EchoStar Technologies, L.L.C, and Sling Media, Inc., a subsidiary of EchoStar, 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 certain claims of the 456 patent, and in February 2016, the United States Patent and Trademark Office agreed to institute proceedings on our petitions. On February 25, 2016, the case was stayed pending resolution of these proceedings before the United States Patent and Trademark Office, and the Court vacated all pending court dates and deadlines.
 
Two-Way Media Ltd

On February 17, 2016, Two-Way Media Ltd (“TWM”) filed a complaint against EchoStar Corporation and its subsidiaries, EchoStar Technologies L.L.C., EchoStar Satellite Services L.L.C., and Sling Media, Inc., as well as against DISH Network Corporation, DISH DBS Corporation, DISH Network L.L.C., DISH Network Service L.L.C., Sling TV Holding L.L.C., Sling TV L.L.C., and Sling TV Purchasing L.L.C. TWM brought the suit in the United States District Court for the District of Colorado, alleging infringement of United States Patent Nos. 5,778,187; 5,983,005; 6,434,622; and 7,266,686, each entitled “Multicasting Method and Apparatus”; and 9,124,607, entitled “Methods and Systems for Playing Media.” TWM alleges that the Sling TV, Sling International, DISH Anywhere, and DISHWorld services, as well as the Slingbox units and DISH DVRs incorporating Slingbox technology, infringe the asserted patents. TWM is an entity that seeks to license a patent portfolio without itself practicing any of the claims recited therein.


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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

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.  As part of our ongoing operations, the Company is subject to various inspections, audits, inquiries, investigations and similar actions by third parties, as well as by governmental/regulatory authorities responsible for enforcing the laws and regulations to which the Company may be subject. Further, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the federal government. Some states have adopted similar state whistleblower and false claims provisions. In addition, the Company from time to time receives inquiries from federal, state and foreign agencies regarding compliance with various laws and regulations.

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 cash flows, though the resolutions and outcomes, individually or in the aggregate, could be material to our financial position, operating results or cash flows for any particular period, depending, in part, upon the operating results for such period.

The Company indemnifies its directors, officers and employees for certain liabilities that might arise from the performance of their responsibilities for the Company. Additionally, in the normal course of its business, the Company enters into contracts pursuant to which the Company may make a variety of representations and warranties and indemnify the counterparty for certain losses. The Company’s possible exposure under these arrangements cannot be reasonably estimated as this involves the resolution of claims made, or future claims that may be made, against the Company or its officers, directors or employees, the outcomes of which are unknown and not currently predictable or estimable.
 
Note 13.            Segment Reporting
 
Operating segments are business components of an enterprise for which separate financial information is available and regularly evaluated by the chief operating decision maker (“CODM”), who for HSS, is the Company’s Chief Executive Officer.  Under this definition, we operate in two primary business segments, Hughes and EchoStar Satellite Services as described in Note 1 of these condensed consolidated financial statements.

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.
 
Transactions between segments were not significant for the three and six months ended June 30, 2016 or 2015.
 

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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

The following table presents revenue, capital expenditures, and EBITDA for each of our operating segments:
 
 
 
Hughes
 
EchoStar
Satellite
Services
 
All
Other and
Eliminations
 
Consolidated
Total
 
 
(In thousands)
For the Three Months Ended June 30, 2016
 
 

 
 

 
 

 
 

External revenue
 
$
338,574

 
$
101,278

 
$
866

 
$
440,718

Intersegment revenue
 
$
763

 
$
172

 
$
(935
)
 
$

Total revenue
 
$
339,337

 
$
101,450

 
$
(69
)
 
$
440,718

Capital expenditures
 
$
81,322

 
$
10,312

 
$

 
$
91,634

EBITDA
 
$
106,379

 
$
83,826

 
$
5,160

 
$
195,365

For the Three Months Ended June 30, 2015
 
 

 
 

 
 

 
 

External revenue
 
$
334,554

 
$
124,402

 
$
520

 
$
459,476

Intersegment revenue
 
$
631

 
$
187

 
$
(818
)
 
$

Total revenue
 
$
335,185

 
$
124,589

 
$
(298
)
 
$
459,476

Capital expenditures
 
$
70,527

 
$
24,468

 
$

 
$
94,995

EBITDA
 
$
103,414

 
$
103,558

 
$
(11,513
)
 
$
195,459

For the Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
External revenue
 
$
664,113

 
$
204,093

 
$
1,638

 
$
869,844

Intersegment revenue
 
$
1,462

 
$
346

 
$
(1,808
)
 
$

Total revenue
 
$
665,575

 
$
204,439

 
$
(170
)
 
$
869,844

Capital expenditures
 
$
185,559

 
$
35,032

 
$

 
$
220,591

EBITDA
 
$
205,847

 
$
172,012

 
$
9,952

 
$
387,811

For the Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
External revenue
 
$
659,504

 
$
249,600

 
$
606

 
$
909,710

Intersegment revenue
 
$
961

 
$
387

 
$
(1,348
)
 
$

Total revenue
 
$
660,465

 
$
249,987

 
$
(742
)
 
$
909,710

Capital expenditures
 
$
135,054

 
$
52,251

 
$

 
$
187,305

EBITDA
 
$
194,687

 
$
209,977

 
$
(10,224
)
 
$
394,440


The following table reconciles total consolidated EBITDA to reported “Income before income taxes” in our condensed consolidated statements of operations and comprehensive income (loss):
 
 
 
For the Three Months Ended June 30,
 
For the Six Months
Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
EBITDA
 
$
195,365

 
$
195,459

 
$
387,811

 
$
394,440

Interest income and expense, net
 
(34,552
)
 
(42,409
)
 
(70,669
)
 
(86,396
)
Depreciation and amortization
 
(102,305
)
 
(107,625
)
 
(204,674
)
 
(215,639
)
Net income attributable to noncontrolling interests
 
311

 
428

 
422

 
797

Income before income taxes
 
$
58,819

 
$
45,853

 
$
112,890

 
$
93,202



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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Note 14.            Related Party Transactions
 
EchoStar
 
We and EchoStar have agreed that we shall have the right, but not the obligation, to receive from EchoStar certain corporate services, including among other things: treasury, tax, accounting and reporting, risk management, legal, internal audit, human resources, and information technology.  These services are provided at cost.  We may terminate a particular service we receive from EchoStar for any reason upon at least 30 days’ notice.  We recorded expenses for services received from EchoStar of $3.2 million and $4.6 million for the three months ended June 30, 2016 and 2015, respectively, and $5.6 million and $8.2 million for the six months ended June 30, 2016 and 2015, respectively. In addition, we occupy certain office space in buildings owned or leased by EchoStar and pay a portion of the taxes, insurance, utilities and maintenance of the premises in accordance with the percentage of the space we occupy.

We participate in certain of EchoStar’s shared services arrangements for its subsidiaries in the ordinary course of business, including arrangements for payroll, accounts payable and cash management. From time to time in connection with the processing of transactions under these arrangements, we may pay or receive amounts attributable to other domestic subsidiaries of EchoStar. We report net payments on behalf of other subsidiaries in “Advances to affiliates, net” within current assets and we report net receipts on behalf of other subsidiaries in “Advances from affiliates, net” within current liabilities in our condensed consolidated balance sheets. No repayment schedule for these net advances has been determined.

EchoStar and certain of its subsidiaries have provided cash advances to certain of our foreign subsidiaries to fund certain expenditures pursuant to loan agreements that mature in 2018 and 2022. Advances under these agreements bear interest at annual rates ranging from one to three percent, subject to periodic adjustment based on the one-year U.S. LIBOR rate. We report amounts payable under these agreements in “Advances from affiliates” within noncurrent liabilities in our condensed consolidated balance sheets.

EchoStar XXI and EchoStar XXIII Launch Facilitation and Operational Control Agreement.  As part of applying for our launch licenses for EchoStar XXI and XXIII through the UK Space Agency, our subsidiary, Hughes Network Systems, Ltd. (“HNS Ltd.”) and a subsidiary of EchoStar, EchoStar Operating L.L.C. (“EOC”), entered into agreements in June 2015 and March 2016 to transfer to HNS Ltd., EOC’s launch service contracts for the EchoStar XXI and EchoStar XXIII satellites, respectively, and to grant HNS Ltd. certain rights to control the in-orbit operations of these satellites.  EOC retained ownership of the satellites, which are currently under construction and scheduled to be launched later in 2016.  In March 2016, we recorded a $70.3 million addition to “Other noncurrent assets, net” and a corresponding increase in “Additional paid-in capital” in our condensed consolidated balance sheet to reflect EOC’s cumulative payments under the EchoStar XXIII launch service contract prior to the transfer date. EOC also contracted to make future payments to HNS Ltd. for amounts that HNS Ltd. is required to pay under both launch service contracts.  In March 2016, HNS Ltd. received $11.9 million in cash from EOC to fund a required payment under the EchoStar XXI launch service contract.  We recorded the cash receipt as an increase in “Additional paid-in capital.” HNS Ltd.’s future payments under the launch service contracts are included in our disclosure of satellite-related obligations in Note 12.

DISH Network
 
Following the Spin-off, EchoStar and DISH Network have operated as separate publicly-traded companies.  However, pursuant to the Satellite and Tracking Stock Transaction, described in Note 3 and below, DISH Network owns Hughes Retail Preferred Tracking Stock representing an aggregate 80.0% economic interest in the residential retail satellite broadband business of our Hughes segment.  The tracking stock is an equity security and the rights of DISH Network, as the holder of the tracking stock, in our assets are subject to the claims of our creditors. In addition, a substantial majority of the voting power of the shares of EchoStar and DISH Network is owned beneficially by Charles W. Ergen, our Chairman, and by certain trusts established by Mr. Ergen for the benefit of his family.
 
In connection with and following the Spin-off, EchoStar and DISH Network have entered into certain agreements pursuant to which we and EchoStar obtain certain products, services and rights from DISH Network; DISH Network obtains certain products, services and rights from us and EchoStar; and we and DISH Network have indemnified each other against certain liabilities arising from our respective businesses.  We and/or EchoStar also may enter into additional agreements with DISH Network in the future.  Generally, the amounts DISH Network pays for products and services provided under the agreements

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HUGHES SATELLITE SYSTEMS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

are based on our cost plus a fixed margin (unless noted differently below or in our most recent Annual Report on Form 10-K), which varies depending on the nature of the products and services provided.
 
The following is a summary of the terms of our principal agreements with DISH Network that may have an impact on our financial condition and results of operations.
 
“Services and other revenue — DISH Network”
 
Satellite Services Provided to DISH Network.  Since the Spin-off, we have entered into certain satellite service agreements pursuant to which DISH Network receives satellite services on certain satellites owned or leased by us.  The fees for the services provided under these satellite service agreements depend, among other things, upon the orbital location of the applicable satellite, the number of transponders that are providing services on the applicable satellite, and the length of the service arrangements.  The terms of each service arrangement is set forth below:
 
EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV.  As part of the Satellite and Tracking Stock Transaction discussed in Note 3, in March 2014, we began providing certain satellite services to DISH Network on the EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV satellites.  The term of each satellite services agreement generally terminates upon the earlier of:  (i) the end of life of the satellite; (ii) the date the satellite fails; or (iii) a certain date, which depends upon, among other things, the estimated useful life of the satellite.  DISH Network generally has the option to renew each satellite service agreement on a year-to-year basis through the end of the respective satellite’s life.  There can be no assurance that any options to renew such agreements will be exercised.  DISH Network elected not to renew the satellite services agreement relative to the EchoStar I satellite.  The agreement for the EchoStar I satellite expired pursuant to its terms effective November 2015. In December 2015, DISH Network renewed the satellite services agreement relative to the EchoStar VII satellite for one year to June 2017.
 
EchoStar VIII.  In May 2013, DISH Network began receiving satellite services from us on the EchoStar VIII satellite as an in-orbit spare.  Effective March 2014, this satellite services arrangement converted to a month-to-month service agreement with both parties having the right to terminate upon 30 days’ notice.  The agreement terminated in accordance with its terms effective November 2015.
 
EchoStar IX.  Effective January 2008, DISH Network began receiving satellite services from us on the EchoStar IX satellite.  Subject to availability, DISH Network generally has the right to continue to receive satellite services from us on the EchoStar IX satellite on a month-to-month basis.
 
EchoStar XII.  DISH Network receives satellite services from us on the EchoStar XII satellite.  The term of the satellite services agreement terminates upon the earlier of: (i) the end of life of the satellite; (ii) the date the satellite fails or the date the transponder(s) on which the service was being provided under the agreement fails; or (iii) September 2017.  DISH Network generally has the option to renew the agreement on a year-to-year basis through the end of the satellite’s life.  There can be no assurance that any options to renew this agreement will be exercised.
 
EchoStar XVI.  In December 2009, we entered into an initial ten-year transponder service agreement with DISH Network, pursuant to which DISH Network has received satellite services from us on the EchoStar XVI satellite since January 2013.  Effective December 2012, we and DISH Network amended the transponder service agreement to, among other things, change the initial term to generally expire upon the earlier of: (i) the end-of-life or replacement of the satellite; (ii) the date the satellite fails; (iii) the date the transponder(s) on which service is being provided under the agreement fails; or (iv) four years following the actual service commencement date.  In July 2016, we and DISH Network further amended the transponder service agreement to, among other things, extend the initial term by one additional year and to reduce the term of the first renewal option by one year. Prior to expiration of the initial term, we, upon certain conditions, and DISH Network have the option to renew for an additional five-year period.  If either we or DISH Network exercise our respective five-year renewal options, DISH Network has the option to renew for an additional five-year period prior to expiration of the then-current term.  There can be no assurance that any option to renew this agreement will be exercised. In the event that we or DISH Network does not exercise the first five-year renewal option or DISH Network does not exercise the second five-year renewal option, DISH Network has the option to purchase the EchoStar XVI satellite for a certain price. If DISH Network does not elect to purchase the EchoStar XVI satellite at that time, we may sell the EchoStar XVI satellite to a third party and DISH Network is required to pay us a certain amount in the event we are not able to sell the EchoStar XVI satellite for more than a certain amount.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

 
Nimiq 5 Agreement. In September 2009, we entered into a fifteen-year satellite service agreement with Telesat Canada (“Telesat”) to receive service on all 32 DBS transponders on the Nimiq 5 satellite at the 72.7 degree west longitude orbital location (the “Telesat Transponder Agreement”).  In September 2009, we also entered into a satellite service agreement (the “DISH Nimiq 5 Agreement”) with DISH Network, pursuant to which DISH Network receives satellite services from us on all 32 of the DBS transponders covered by the Telesat Transponder Agreement.
 
Under the terms of the DISH Nimiq 5 Agreement, DISH Network makes certain monthly payments to us that commenced in September 2009, when the Nimiq 5 satellite was placed into service, and continue through the service term.  Unless earlier terminated under the terms and conditions of the DISH Nimiq 5 Agreement, the service term will expire ten years following the date the Nimiq 5 satellite was placed into service.  Upon expiration of the initial term, DISH Network has the option to renew the DISH Nimiq 5 Agreement on a year-to-year basis through the end of life of the Nimiq 5 satellite.  Upon in-orbit failure or end of life of the Nimiq 5 satellite, and in certain other circumstances, DISH Network has certain rights to receive service from us on a replacement satellite.  There can be no assurance that any options to renew the DISH Nimiq 5 Agreement will be exercised or that DISH Network will exercise its option to receive service on a replacement satellite.
 
QuetzSat-1 Agreement.  In November 2008, we entered into a ten-year satellite service agreement with SES Latin America, which provides, among other things, for the provision by SES Latin America to us of service on 32 DBS transponders on the QuetzSat-1 satellite.  Concurrently, in 2008, we entered into a transponder service agreement with DISH Network, pursuant to which DISH Network receives satellite services on 24 of the DBS transponders on the QuetzSat-1 satellite.  The QuetzSat-1 satellite was launched in September 2011 and was placed into service in November 2011 at the 67.1 degree west longitude orbital location.  In February 2013, we and DISH Network entered into an agreement pursuant to which we receive certain satellite services from DISH Network on five DBS transponders on the QuetzSat-1 satellite.  In January 2013, the QuetzSat-1 satellite was moved to the 77 degree west longitude orbital location and DISH Network commenced commercial operations at such location in February 2013. 

Under the terms of our contractual arrangements with DISH Network, we began to provide service to DISH Network on the QuetzSat-1 satellite in February 2013 and will continue to provide service through the remainder of the service term.  Unless extended or earlier terminated under the terms and conditions of our agreement with DISH Network for the QuetzSat-1 satellite, the initial service term will expire in November 2021.  Upon expiration of the initial service term, DISH Network has the option to renew the agreement for the QuetzSat-1 satellite on a year-to-year basis through the end of life of the QuetzSat-1 satellite.  Upon an in-orbit failure or end of life of the QuetzSat-1 satellite, and in certain other circumstances, DISH Network has certain rights to receive service from us on a replacement satellite.  There can be no assurance that any options to renew this agreement will be exercised or that DISH Network will exercise its option to receive service on a replacement satellite.
 
103 Degree Orbital Location/SES-3.  In May 2012, we entered into a spectrum development agreement (the “103 Spectrum Development Agreement”) with Ciel Satellite Holdings Inc. (“Ciel”) to develop certain spectrum rights at the 103 degree west longitude orbital location (the “103 Spectrum Rights”).  In June 2013, we and DISH Network entered into a spectrum development agreement (the “DISH 103 Spectrum Development Agreement”) pursuant to which DISH Network may use and develop the 103 Spectrum Rights.  Unless earlier terminated under the terms and conditions of the DISH 103 Spectrum Development Agreement, the term generally will continue for the duration of the 103 Spectrum Rights.

In connection with the 103 Spectrum Development Agreement, in May 2012, we also entered into a ten-year service agreement with Ciel pursuant to which we receive certain satellite services from Ciel on the SES-3 satellite at the 103 degree orbital location.  In June 2013, we and DISH Network entered into an agreement pursuant to which DISH Network receives certain satellite services from us on the SES-3 satellite (the “DISH 103 Service Agreement”).  Under the terms of the DISH 103 Service Agreement, DISH Network makes certain monthly payments to us through the service term.  Unless earlier terminated under the terms and conditions of the DISH 103 Service Agreement, the initial service term will expire on the earlier of: (i) the date the SES-3 satellite fails; (ii) the date the transponder(s) on which service was being provided under the agreement fails; or (iii) June 2023.  Upon in-orbit failure or end of life of the SES-3 satellite, and in certain other circumstances, DISH Network has certain rights to receive service from us on a replacement satellite.  There can be no assurance that DISH Network will exercise its option to receive service on a replacement satellite.
 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Satellite and Tracking Stock Transaction.  In February 2014, we entered into agreements with DISH Network to implement a transaction pursuant to which, among other things: (i) in March 2014, EchoStar and HSS issued shares of the Tracking Stock to DISH Network in exchange for five satellites owned by DISH Network (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV) (including assumption of related in-orbit incentive obligations) and approximately $11.4 million in cash; and (ii) in March 2014, DISH Network began receiving certain satellite services on these five satellites from us.  See Note 3 herein and in our most recent Form 10-K for further information.
 
TT&C Agreement.  Effective January 2012, we entered into a telemetry, tracking and control (“TT&C”) agreement pursuant to which we provide TT&C services to DISH Network for a period ending in December 2016 (the “2012 TT&C Agreement”).  The 2012 TT&C Agreement replaced the TT&C agreement we entered into with DISH Network in connection with the Spin-off.  The fees for services provided under the 2012 TT&C Agreement are calculated at either:  (i) a fixed fee or (ii) cost plus a fixed margin, which will vary depending on the nature of the services provided.  DISH Network is able to terminate the 2012 TT&C Agreement for any reason upon 60 days’ notice.

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

TerreStar Agreement.  In March 2012, DISH Network completed its acquisition of substantially all the assets of TerreStar Networks Inc. (“TerreStar”).  Prior to DISH Network’s acquisition of substantially all the assets of TerreStar and our completion of the Hughes Acquisition, TerreStar and HNS entered into various agreements pursuant to which our Hughes segment provides, among other things, hosting, operations and maintenance services for TerreStar’s satellite gateway and associated ground infrastructure.  These agreements generally may be terminated by DISH Network at any time for convenience.
 
Hughes Broadband Distribution Agreement.  Effective October 2012, HNS and dishNET Satellite Broadband L.L.C. (“dishNET”), a wholly-owned subsidiary of DISH Network, entered into a distribution agreement (the “Distribution Agreement”) pursuant to which dishNET has the right, but not the obligation, to market, sell and distribute the Hughes satellite internet service (the “Hughes service”).  dishNET pays HNS a monthly per subscriber wholesale service fee for the Hughes service based upon a subscriber’s service level and based upon certain volume subscription thresholds.  The Distribution Agreement also provides that dishNET has the right, but not the obligation, to purchase certain broadband equipment from us to support the sale of the Hughes service.  The Distribution Agreement had an initial term of five years with automatic renewal for successive one year terms unless terminated by either party with a written notice at least 180 days before the expiration of the then-current term.  In February 2014, HNS and dishNET entered into an amendment to the Distribution Agreement which, among other things, extended the initial term of the Distribution Agreement until March 2024.  Upon expiration or termination of the Distribution Agreement, the parties will continue to provide the Hughes service to the then-current dishNET subscribers pursuant to the terms and conditions of the Distribution Agreement.

DBSD North America Agreement.  In March 2012, DISH Network completed its acquisition of 100% of the equity of reorganized DBSD North America, Inc. (“DBSD North America”).  Prior to DISH Network’s acquisition of DBSD North America and our completion of the Hughes Acquisition, DBSD North America and HNS entered into various agreements pursuant to which our Hughes segment provides, among other things, hosting, operations and maintenance services of DBSD North America’s satellite gateway and associated ground infrastructure.  The agreements generally may be terminated by DISH Network at any time for convenience.

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

General and administrative expenses — DISH Network
 
Professional Services Agreement.  In connection with the Spin-off, EchoStar entered into various agreements with DISH Network including the Transition Services Agreement, Satellite Procurement Agreement and Services Agreement, which all expired in January 2010 and were replaced by a Professional Services Agreement.  In January 2010, EchoStar and DISH Network agreed that EchoStar shall continue to have the right, but not the obligation, to receive the following services from DISH Network, among others, certain of which were previously provided under the Transition Services Agreement: information technology, travel and event coordination, internal audit, legal, accounting and tax, benefits administration, program acquisition services and other support services.  Additionally, EchoStar and DISH Network agreed that DISH Network would continue to have the right, but not the obligation, to engage us to manage the process of procuring new satellite capacity for DISH Network (previously provided under the Satellite Procurement Agreement), receive logistics, procurement and quality assurance services from EchoStar (previously provided under the Services Agreement) and other support services. A portion of these costs and expenses have been allocated to us in the manner described above under the caption “EchoStar.” The Professional Services Agreement automatically renewed in January 2016 for an additional one-year period until January 2017 and renews automatically for successive one-year periods thereafter, unless terminated earlier by either party upon at least 60 days’ notice. However, either party may terminate the Professional Services Agreement in part with respect to any particular service it receives for any reason upon at least 30 days’ notice.

Other agreements — DISH Network

Tax Sharing Agreement.  As a subsidiary of EchoStar, we are an indirect party to EchoStar’s tax sharing agreement with DISH Network that was entered into in connection with the Spin-off.  This agreement governs EchoStar and DISH Network’s respective rights, responsibilities and obligations after the Spin-off with respect to taxes for the periods ending on or before the Spin-off.  Generally, all pre-Spin-off taxes, including any taxes that are incurred as a result of restructuring activities undertaken to implement the Spin-off, are borne by DISH Network, and DISH Network will indemnify EchoStar for such taxes.  However, DISH Network is not liable for and will not indemnify EchoStar for any taxes that are incurred as a result of the Spin-off or certain related transactions failing to qualify as tax-free distributions pursuant to any provision of Section 355 or Section 361 of the Internal Revenue Code of 1986, as amended because of: (i) a direct or indirect acquisition of any of EchoStar’s stock, stock options or assets; (ii) any action that EchoStar takes or fails to take; or (iii) any action that EchoStar takes that is inconsistent with the information and representations furnished to the IRS in connection with the request for the private letter ruling, or to counsel in connection with any opinion being delivered by counsel with respect to the Spin-off or certain related transactions.  In such case, EchoStar will be solely liable for, and will indemnify DISH Network for, any resulting taxes, as well as any losses, claims and expenses.  The tax sharing agreement will only terminate after the later of the full period of all applicable statutes of limitations, including extensions, or once all rights and obligations are fully effectuated or performed.
 
In light of the tax sharing agreement, among other things, and in connection with EchoStar’s consolidated federal income tax returns for certain tax years prior to and for the year of the Spin-off, in September 2013, EchoStar and DISH Network agreed upon a supplemental allocation of the tax benefits arising from certain tax items resolved in the course of the IRS’s examination of EchoStar’s consolidated tax returns.  As a result, DISH Network agreed to pay EchoStar an amount that includes $93.1 million of the federal tax benefit they received as a result of our operations.
 
Caltech. On October 1, 2013, Caltech filed complaints against two of our subsidiaries, Hughes Communications, Inc. and 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. Caltech claimed 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. Pursuant to a settlement agreement among us, DISH Network and Caltech, in May 2016, Caltech dismissed with prejudice all of its claims in these actions. See Note 14 of these condensed consolidated financial statements for further information.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Other Agreements
 
Hughes Systique Corporation (“Hughes Systique”)
 
We contract with Hughes Systique for software development services. In 2008, Hughes Communications loaned $1.5 million to Hughes Systique pursuant to a term loan facility.  The initial interest rate on the outstanding loans was 6%, payable annually, and the accrued and unpaid interest was added to the principal amount in certain circumstances. The loans were convertible into shares of Hughes Systique upon non-payment or an event of default.  In May 2014, we amended the term loan facility to increase the interest rate from 6% to 8%, payable annually, to reflect then-current market conditions and extend the maturity date of the loans to May 1, 2015, and in April 2015, we extended the maturity date of the loans to May 1, 2016 on the same terms.  In 2015, Hughes Systique repaid $1.5 million of the outstanding principal of the loan facility. In February 2016, Hughes Systique repaid $0.3 million of the outstanding principal of the loan facility. In April 2016, Hughes Systique repaid in full the remaining $0.3 million outstanding principal and interest of the loan facility. As of June 30, 2016, the principal amount outstanding of the loan facility was zero. In addition to our 43.9% ownership in Hughes Systique, Mr. Pradman Kaul, the President of Hughes Communications and a member of EchoStar’s board of directors, and his brother, who is the CEO and President of Hughes Systique, in the aggregate, own approximately 25.8%, on an undiluted basis, of Hughes Systique’s outstanding shares as of June 30, 2016. Furthermore, Mr. Pradman Kaul serves on the board of directors of Hughes Systique. Hughes Systique is a variable interest entity and we are considered the primary beneficiary of Hughes Systique due to, among other factors, our ability to direct the activities that most significantly impact the economic performance of Hughes Systique. As a result, we consolidate Hughes Systique’s financial statements in our condensed consolidated financial statements.
 
Dish Mexico
 
EchoStar owns 49.0% of an entity that provides direct-to-home satellite services in Mexico known as Dish Mexico, and we provide certain satellite services to Dish Mexico.  We recognized satellite services revenue from Dish Mexico of approximately $5.8 million for each of the three months ended June 30, 2016 and 2015 and $11.7 million for each of the six months ended June 30, 2016 and 2015.  As of June 30, 2016 and December 31, 2015, we had trade accounts receivable from Dish Mexico of approximately $12.7 million and $10.6 million, respectively.
 
Deluxe/EchoStar LLC
 
We own 50.0% of Deluxe/EchoStar LLC (“Deluxe”), a joint venture that we entered into in 2010 to build an advanced digital cinema satellite distribution network targeting delivery to digitally equipped theaters in the U.S. and Canada.  We account for our investment in Deluxe using the equity method.  We recognized revenue from Deluxe for transponder services and the sale of broadband equipment of approximately $0.7 million for each of the three months ended June 30, 2016 and 2015 and $1.3 million and $1.4 million for the six months ended June 30, 2016 and 2015, respectively.  As of June 30, 2016 and December 31, 2015, we had trade accounts receivable from Deluxe of approximately $0.6 million and $0.1 million, respectively. In June 2016, we recorded a $10.0 million cash distribution from Deluxe that was determined to be a return on investment and reported in cash flows from operating activities in our condensed consolidated statement of cash flows.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Note 15.            Supplemental Guarantor and Non-Guarantor Financial Information
 
Certain of our wholly-owned subsidiaries (together, the “Guarantor Subsidiaries”) have fully and unconditionally guaranteed, on a joint and several basis, the obligations of our 2019 Senior Secured Notes and 2021 Senior Unsecured Notes, which were issued on June 1, 2011.  See Note 10 for further information on the 2019 Senior Secured Notes and the 2021 Senior Unsecured Notes.
 
In lieu of separate financial statements of the Guarantor Subsidiaries, condensed consolidating financial information prepared in accordance with Rule 3-10(f) of Regulation S-X is presented below, including the condensed balance sheet information, the condensed statement of operations and comprehensive income (loss) information and the condensed statement of cash flows information of HSS, the Guarantor Subsidiaries on a combined basis and the non-guarantor subsidiaries of HSS on a combined basis and the eliminations necessary to arrive at the corresponding information of HSS on a consolidated basis.
 
The indentures governing the 2019 Senior Secured Notes and the 2021 Senior Unsecured Notes contain restrictive covenants that, among other things, impose limitations on our ability and the ability of certain of our subsidiaries to pay dividends or make distributions, incur additional debt, make certain investments, create liens or enter into sale and leaseback transactions, merge or consolidate with another company, transfer and sell assets, enter into transactions with affiliates or allow to exist certain restrictions on the ability of certain of our subsidiaries to pay dividends, make distributions, make other payments, or transfer assets to us.

The condensed consolidating financial information presented below should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Condensed Consolidating Balance Sheet as of June 30, 2016
(In thousands)
 
 
 
HSS
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
288,615

 
$
37,370

 
$
23,803

 
$

 
$
349,788

Marketable investment securities, at fair value
 
306,925

 
8,710

 

 

 
315,635

Trade accounts receivable, net
 

 
105,910

 
27,469

 

 
133,379

Trade accounts receivable - DISH Network, net
 

 
27,270

 

 

 
27,270

Inventory
 

 
46,440

 
8,801

 

 
55,241

Advances to affiliates, net
 
10

 
894,102

 
7,046

 
(820,971
)
 
80,187

Other current assets
 
86

 
22,443

 
24,084

 

 
46,613

Total current assets
 
595,636

 
1,142,245

 
91,203

 
(820,971
)
 
1,008,113

Restricted cash and cash equivalents
 
13,479

 
7,500

 
745

 

 
21,724

Property and equipment, net
 

 
2,167,215

 
155,345

 

 
2,322,560

Regulatory authorizations
 

 
471,658

 

 

 
471,658

Goodwill
 

 
504,173

 

 

 
504,173

Other intangible assets, net
 

 
98,077

 

 

 
98,077

Investments in unconsolidated entities
 

 
37,220

 

 

 
37,220

Investment in subsidiaries
 
3,584,981

 
293,096

 

 
(3,878,077
)
 

Advances to affiliates
 
700

 

 

 
(700
)
 

Other noncurrent assets, net
 
166,406

 
139,326

 
150,172

 
(166,406
)
 
289,498

Total assets
 
$
4,361,202

 
$
4,860,510

 
$
397,465

 
$
(4,866,154
)
 
$