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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 SEPTEMBER 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:  001-33807
 
EchoStar Corporation
(Exact Name of Registrant as Specified in Its Charter)
 
Nevada
 
26-1232727
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
100 Inverness Terrace East, Englewood, Colorado
 
80112-5308
(Address of Principal Executive Offices)
 
(Zip Code)
 
(303) 706-4000
(Registrant’s Telephone Number, Including Area Code)
 
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  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 ý
Accelerated filer  o
Non-accelerated filer o
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 October 31, 2016, the registrant’s outstanding common stock consisted of 46,413,453 shares of Class A common stock and 47,687,039 shares of Class B common stock, each $0.001 par value.


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TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents


DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q (“Form 10-Q”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including but not limited to statements about our estimates, expectations, plans, objectives, strategies, and financial condition, expected impact of regulatory developments and legal proceedings, opportunities in our industries and businesses and other trends and projections for the next fiscal quarter and beyond.  All statements, other than statements of historical facts, may be forward-looking statements.  Forward-looking statements may also be identified by words such as “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “estimate,” “expect,” “predict,” “continue,” “future,” “will,” “would,” “could,” “can,” “may” and similar terms.  These forward-looking statements are based on information available to us as of the date of this Form 10-Q and represent management’s current views and assumptions.  Forward-looking statements are not guarantees of future performance, events or results and involve potential known and unknown risks, uncertainties and other factors, many of which may be beyond our control and may pose a risk to our operating and financial condition.  Accordingly, actual performance, events or results could differ materially from those expressed or implied in the forward-looking statements due to a number of factors including, but not limited to: 
our reliance on our primary customer, DISH Network Corporation and its subsidiaries (“DISH Network”), for a significant portion of our revenue;
our ability to implement our strategic initiatives;
the impact of variable demand and the adverse pricing and regulatory environment for digital set-top boxes;
dependence on our ability to successfully manufacture and sell our digital set-top boxes in increasing volumes on a cost-effective basis and with acceptable quality;
our ability to bring advanced technologies to market to keep pace with our 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, risks resulting from delays of launches of our satellites, changes in the space weather environment that could interfere with the operation of our satellites, and our general lack of commercial insurance coverage on our satellites;
our failure to adequately anticipate the need for satellite capacity or the inability to obtain satellite capacity for our Hughes segment; and
the failure of third-party providers of components, manufacturing, installation services and customer support services to appropriately deliver the contracted goods or services.
 
Other factors that could cause or contribute to such differences include, but are not limited to, those discussed under the caption “Risk Factors” in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K (“Form 10-K”) filed with the Securities and Exchange Commission (“SEC”), those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in our Form 10-K, and those discussed in other documents we file with the SEC.
 
All cautionary statements made herein should be read as being applicable to all forward-looking statements wherever they appear.  Investors should consider the risks and uncertainties described herein and should not place undue reliance on any forward-looking statements.  We do not undertake, and specifically disclaim, any obligation to publicly release the results of any revisions that may be made to any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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

ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
 
 
 
As of
 
 
September 30,
 
December 31,
 
 
2016
 
2015
Assets
 
 

 
 

Current Assets:
 
 

 
 

Cash and cash equivalents
 
$
2,215,708

 
$
924,240

Marketable investment securities, at fair value
 
803,309

 
612,338

Trade accounts receivable, net of allowance for doubtful accounts of $13,817 and $12,485, respectively
 
177,901

 
179,240

Trade accounts receivable - DISH Network, net of allowance for doubtful accounts of zero
 
330,300

 
277,159

Inventory
 
73,789

 
67,010

Prepaids and deposits
 
61,489

 
56,949

Other current assets
 
54,993

 
16,723

Total current assets
 
3,717,489

 
2,133,659

Noncurrent Assets:
 
 

 
 

Restricted cash and marketable investment securities
 
13,651

 
21,002

Property and equipment, net of accumulated depreciation of $3,303,714 and $2,998,074, respectively
 
3,628,379

 
3,412,990

Regulatory authorizations, net
 
548,211

 
543,812

Goodwill
 
510,630

 
510,630

Other intangible assets, net
 
98,366

 
132,653

Investments in unconsolidated entities
 
202,272

 
209,264

Other receivable - DISH Network
 
90,359

 
90,966

Other noncurrent assets, net
 
167,980

 
154,510

Total noncurrent assets
 
5,259,848

 
5,075,827

Total assets
 
$
8,977,337

 
$
7,209,486

Liabilities and Stockholders’ Equity
 
 

 
 

Current Liabilities:
 
 

 
 

Trade accounts payable
 
$
225,234

 
$
213,671

Trade accounts payable - DISH Network
 
1,520

 
24,682

Current portion of long-term debt and capital lease obligations
 
37,717

 
35,698

Deferred revenue and prepayments
 
62,197

 
61,881

Accrued compensation
 
37,083

 
29,767

Accrued royalties
 
22,687

 
22,531

Accrued interest
 
57,159

 
8,596

Accrued expenses and other
 
104,638

 
130,005

Total current liabilities
 
548,235

 
526,831

Noncurrent Liabilities:
 
 

 
 

Long-term debt and capital lease obligations, net of unamortized debt issuance costs
 
3,629,973

 
2,156,667

Deferred tax liabilities, net
 
724,839

 
650,392

Other noncurrent liabilities
 
95,615

 
93,954

Total noncurrent liabilities
 
4,450,427

 
2,901,013

Total liabilities
 
4,998,662

 
3,427,844

Commitments and Contingencies (Note 14)
 


 


Stockholders’ Equity:
 
 

 
 

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

 
 

Hughes Retail Preferred Tracking Stock, $.001 par value, 13,000,000 shares authorized, 6,290,499 issued and outstanding at each of September 30, 2016 and December 31, 2015
 
6

 
6

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

 
 

Class A common stock, $.001 par value, 1,600,000,000 shares authorized, 51,890,524 shares issued and 46,358,206
 shares outstanding at September 30, 2016 and 51,087,839 shares issued and 45,555,521 shares outstanding at December 31, 2015
 
52

 
51

Class B common stock, $.001 par value, 800,000,000 shares authorized, 47,687,039 shares issued and outstanding at each of September 30, 2016 and December 31, 2015
 
48

 
48

Class C common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding at each of September 30, 2016 and December 31, 2015
 

 

Class D common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding at each of September 30, 2016 and December 31, 2015
 

 

Additional paid-in capital
 
3,813,841

 
3,776,451

Accumulated other comprehensive loss
 
(99,167
)
 
(117,233
)
Accumulated earnings
 
276,059

 
134,317

Treasury stock, at cost
 
(98,162
)
 
(98,162
)
Total EchoStar stockholders’ equity
 
3,892,677

 
3,695,478

Noncontrolling interest in HSS Tracking Stock
 
73,928

 
74,854

Other noncontrolling interests
 
12,070

 
11,310

Total stockholders’ equity
 
3,978,675

 
3,781,642

Total liabilities and stockholders’ equity
 
$
8,977,337

 
$
7,209,486


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

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ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
(Unaudited)
 
 
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 

 
 

 
 

 
 

Services and other revenue - DISH Network
 
$
221,867

 
$
236,601

 
$
655,793

 
$
695,358

Services and other revenue - other
 
278,009

 
277,640

 
826,430

 
824,130

Equipment revenue - DISH Network
 
156,227

 
157,184

 
590,988

 
577,277

Equipment revenue - other
 
86,246

 
89,454

 
243,126

 
256,362

Total revenue
 
742,349

 
760,879

 
2,316,337

 
2,353,127

Costs and Expenses:
 
 

 
 

 
 

 
 

Cost of sales - services and other (exclusive of depreciation and amortization)
 
213,621

 
219,686

 
618,271

 
645,691

Cost of sales - equipment (exclusive of depreciation and amortization)
 
200,986

 
207,989

 
710,724

 
706,835

Selling, general and administrative expenses
 
101,541

 
91,830

 
296,377

 
280,462

Research and development expenses
 
20,587

 
19,875

 
61,761

 
57,432

Depreciation and amortization
 
123,633

 
132,892

 
370,872

 
398,547

Total costs and expenses
 
660,368

 
672,272

 
2,058,005

 
2,088,967

Operating income
 
81,981

 
88,607

 
258,332

 
264,160

 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 

 
 

 
 

 
 

Interest income
 
6,260

 
2,562

 
13,729

 
7,896

Interest expense, net of amounts capitalized
 
(37,358
)
 
(28,870
)
 
(80,495
)
 
(96,136
)
Loss from partial redemption of debt
 

 

 

 
(5,044
)
Gains (losses) on marketable investment securities, net
 
230

 
(3,912
)
 
8,179

 
(5,516
)
Other-than-temporary impairment loss on available-for-sale securities
 

 
(1,243
)
 

 
(5,892
)
Equity in earnings (losses) of unconsolidated affiliates, net
 
5,164

 
(2,324
)
 
11,181

 
(2,580
)
Other, net
 
645

 
2,115

 
5,900

 
(4,078
)
Total other expense, net
 
(25,059
)
 
(31,672
)
 
(41,506
)
 
(111,350
)
Income before income taxes
 
56,922

 
56,935

 
216,826

 
152,810

Income tax provision
 
(19,512
)
 
(28,577
)
 
(75,064
)
 
(65,841
)
Net income
 
37,410

 
28,358

 
141,762

 
86,969

Less: Net income (loss) attributable to noncontrolling interest in HSS Tracking Stock
 
85

 
(686
)
 
(926
)
 
(4,020
)
Less: Net income attributable to other noncontrolling interests
 
524

 
209

 
946

 
1,006

Net income attributable to EchoStar
 
36,801

 
28,835

 
141,742

 
89,983

Less: Net income (loss) attributable to Hughes Retail Preferred Tracking Stock (Note 4)
 
157

 
(1,267
)
 
(1,709
)
 
(7,421
)
Net income attributable to EchoStar common stock
 
$
36,644

 
$
30,102

 
$
143,451

 
$
97,404

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

 
 

 
 

 
 

Basic
 
93,898

 
92,500

 
93,661

 
92,253

Diluted
 
94,401

 
93,493

 
94,189

 
93,480

 
 
 
 
 
 
 
 
 
Earnings per share - Class A and B common stock:
 
 

 
 

 
 

 
 

Basic
 
$
0.39

 
$
0.33

 
$
1.53

 
$
1.06

Diluted
 
$
0.39

 
$
0.32

 
$
1.52

 
$
1.04

 
 
 
 
 
 
 
 
 
Comprehensive Income:
 
 

 
 

 
 

 
 

Net income
 
$
37,410

 
$
28,358

 
$
141,762

 
$
86,969

Other comprehensive income (loss), net of tax:
 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
2,483

 
(32,603
)
 
13,769

 
(56,009
)
Recognition of foreign currency translation loss in net income
 

 

 

 
1,889

Unrealized gains (losses) on available-for-sale securities and other
 
10,180

 
(7,373
)
 
9,695

 
(8,208
)
Recognition of other-than-temporary loss on available-for-sale securities in net income
 

 
1,243

 

 
5,892

Recognition of realized gains on available-for-sale securities in net income
 
(10
)
 
(9
)
 
(5,584
)
 
(29
)
Total other comprehensive income (loss), net of tax
 
12,653

 
(38,742
)
 
17,880

 
(56,465
)
Comprehensive income (loss)
 
50,063

 
(10,384
)
 
159,642

 
30,504

Less: Comprehensive income (loss) attributable to noncontrolling interest in HSS Tracking Stock
 
85

 
(686
)
 
(926
)
 
(4,020
)
Less: Comprehensive income attributable to other noncontrolling interests
 
524

 
(111
)
 
760

 
686

Comprehensive income attributable to EchoStar
 
$
49,454

 
$
(9,587
)
 
$
159,808

 
$
33,838

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

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ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
 
For the Nine Months
Ended September 30,
 
 
2016
 
2015
Cash Flows from Operating Activities:
 
 

 
 

Net income
 
$
141,762

 
$
86,969

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

 
 

Depreciation and amortization
 
370,872

 
398,547

Equity in losses (earnings) of unconsolidated affiliates, net
 
(11,181
)
 
2,580

Loss from partial redemption of debt
 

 
5,044

Loss (gain) and impairment on marketable investment securities, net
 
(8,179
)
 
11,408

Stock-based compensation
 
11,953

 
16,204

Deferred tax provision
 
71,422

 
63,421

Dividends received from unconsolidated entities
 
15,000

 
5,000

Proceeds from sale of trading securities
 
7,140

 
380

Changes in current assets and current liabilities, net
 
(47,013
)
 
(274
)
Changes in noncurrent assets and noncurrent liabilities, net
 
8,097

 
3,457

Other, net
 
14,836

 
15,187

Net cash flows from operating activities
 
574,709

 
607,923

Cash Flows from Investing Activities:
 
 

 
 

Purchases of marketable investment securities
 
(883,288
)
 
(345,391
)
Sales and maturities of marketable investment securities
 
643,865

 
669,393

Purchases of property and equipment
 
(533,669
)
 
(585,902
)
Refunds and other receipts related to capital expenditures
 
24,087

 
105,750

Changes in restricted cash and marketable investment securities
 
7,351

 
(313
)
Investments in unconsolidated entities
 
(1,636
)
 
(64,655
)
Acquisition of regulatory authorization
 

 
(3,428
)
Expenditures for externally marketed software
 
(17,991
)
 
(16,905
)
Other, net
 
1,462

 
(50
)
Net cash flows from investing activities
 
(759,819
)
 
(241,501
)
Cash Flows from Financing Activities:
 
 

 
 

Proceeds from issuance of long-term debt
 
1,500,000

 

Payments of debt issuance costs
 
(6,275
)
 

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

 
(113,300
)
Repayment of other debt and capital lease obligations
 
(30,615
)
 
(35,303
)
Net proceeds from Class A common stock options exercised and stock issued under the Employee Stock Purchase Plan
 
16,157

 
19,893

Other, net
 
(3,373
)
 
1,525

Net cash flows from financing activities
 
1,475,894

 
(127,185
)
Effect of exchange rates on cash and cash equivalents
 
684

 
(9,185
)
Net increase in cash and cash equivalents
 
1,291,468

 
230,052

Cash and cash equivalents, beginning of period
 
924,240

 
549,053

Cash and cash equivalents, end of period
 
$
2,215,708

 
$
779,105

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 
 

 
 

Cash paid for interest (including capitalized interest)
 
$
97,044

 
$
102,335

Capitalized interest
 
$
70,386

 
$
44,335

Cash paid for income taxes
 
$
9,187

 
$
5,185

Employee benefits paid in Class A common stock
 
$
11,126

 
$
10,711

Property and equipment financed under capital lease obligations
 
$
7,172

 
$
5,551

Increase (decrease) in capital expenditures included in accounts payable, net
 
$
21,951

 
$
10,297

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

 
$
4,500


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

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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.    Organization and Business Activities
 
Principal Business
 
EchoStar Corporation (which, together with its subsidiaries, is referred to as “EchoStar,” the “Company,” “we,” “us” and/or “our”) is a holding company that was organized in October 2007 as a corporation under the laws of the State of Nevada.  We are a global provider of satellite service operations, video delivery solutions, digital set-top boxes, 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.  Our Class A common stock is publicly traded on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “SATS.”
 
We currently operate in the following three business segments:
 
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 consumer, enterprise and government customers.  The Hughes segment also provides managed services, hardware, and satellite services to large enterprises and government customers, and designs, provides and installs gateway and terminal equipment to customers for other satellite systems.
EchoStar Technologies — which designs, develops and distributes secure end-to-end video technology solutions including digital set-top boxes and related products and technology, primarily for satellite TV service providers and telecommunication companies. Our EchoStar Technologies segment also provides digital broadcast operations, including satellite uplinking/downlinking, transmission services, signal processing, conditional access management, and other services, primarily to DISH Network Corporation and its subsidiaries (“DISH Network”) and Dish Mexico, S. de R.L. de C.V. (“Dish Mexico”), a joint venture we entered into in 2008. In addition, we provide our TV Anywhere technology through Slingbox® units directly to consumers via retail outlets and online, as well as to the pay-TV operator market. Beginning in 2015, this segment also includes Move Networks, our over-the-top (“OTT”), Streaming Video on Demand (“SVOD”) platform business, which primarily provides support services to DISH Network’s Sling TVTM service (“Sling TV”).
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, Dish Mexico, United States (“U.S.”) government service providers, internet service providers, broadcast news organizations, programmers, and private enterprise customers.
 
Our operations also include real estate and other activities that have not been assigned to our operating segments, including costs incurred in certain satellite development programs and other business development activities, expenses of various corporate departments, and our centralized treasury operations, including income from our investment portfolio and interest expense on our debt. 
 
In 2008, DISH Network completed its distribution to us of its digital set-top box business, certain infrastructure, and other assets and related liabilities, including certain of its satellites, uplink and satellite transmission assets, and real estate (the “Spin-off”).  Since the Spin-off, EchoStar and DISH Network have operated as separate publicly-traded companies.  However, as a result of the Satellite and Tracking Stock Transaction described in Note 4 below and in our most recent Annual Report on Form 10-K, 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.


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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

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 stockholders’ equity for the portion of the entity’s equity attributed to the noncontrolling ownership interests.  As of September 30, 2016 and December 31, 2015, noncontrolling interests consist primarily of HSS Tracking Stock owned by DISH Network, as described in Note 4 below.  All significant intercompany balances and transactions have been eliminated in consolidation.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheets, the reported amounts of revenue and expense for each reporting period, and certain information disclosed in the notes to our condensed consolidated financial statementsEstimates 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 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 statementsChanging 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

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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Level 3, defined as unobservable inputs for which little or no market data exists, consistent with characteristics of the asset or liability that would be considered by market participants in a transaction to purchase or sell the asset or liability.
 
Transfers between levels in the fair value hierarchy are considered to occur at the beginning of the quarterly accounting period.  There were no transfers between levels for each of the nine months ended September 30, 2016 or 2015.
 
As of September 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 September 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 hierarchy, approximated their carrying amounts of $75.2 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 $22.6 million and $15.2 million for the three months ended September 30, 2016 and 2015, respectively, and $48.9 million and $45.7 million for the nine months ended September 30, 2016 and 2015, respectively. In addition, we incurred other research and development expenses of approximately $20.6 million and $19.9 million for the three months ended September 30, 2016 and 2015, respectively, and $61.8 million and $57.4 million for the nine months ended September 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 September 30, 2016 and December 31, 2015, the net carrying amount of externally marketed software was $73.6 million and $62.8 million, respectively, of which $45.6 million and $32.6 million, respectively is under development and not yet placed in service.  We capitalized costs related to the development of externally marketed software of $6.2 million and $5.3 million for the three months ended September 30, 2016 and 2015, respectively, and $18.5 million and $17.0 million for the nine months ended September 30, 2016 and 2015, respectively.  We recorded amortization expense relating to the development of externally marketed software of $2.5 million and $2.2 million for the three

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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

months ended September 30, 2016 and 2015, respectively, and $7.2 million and $6.1 million for the nine months ended September 30, 2016 and 2015, respectively.  The weighted average useful life of our externally marketed software was approximately three years as of September 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 continue to evaluate the impact of the new standard and available adoption methods on our consolidated financial statements. We are in the process of evaluating arrangements with customers and identifying differences in accounting between new and old standards.
 
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

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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

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.

In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. ASU 2016-16 is effective for annual periods beginning after December 15, 2017 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.

Note 3.     Earnings per Share
 
We present basic earnings per share (“EPS”) and diluted EPS for our Class A and Class B common stock.  The EchoStar Tracking Stock (see Note 4 for definitions and a further discussion of the preferred tracking stock, the EchoStar Group and the Hughes Retail Group) is a participating security that shares in our consolidated earnings and therefore, we apply the two-class method to calculate EPS.  Under the two-class method, we allocate net income or loss attributable to EchoStar between common stock and the EchoStar Tracking Stock considering both dividends declared on each class of stock and the participation rights of each class of stock in undistributed earnings.  Based on the 51.89% economic interest in the Hughes Retail Group, represented by the EchoStar Tracking Stock, we allocate undistributed earnings to the EchoStar Tracking Stock based on 51.89% of the attributed net income or loss of the Hughes Retail Group.  Moreover, because the reported amount of “Net income attributable to EchoStar” in our condensed consolidated statements of operations and comprehensive income (loss) excludes DISH Network’s 28.11% economic interest (represented by the HSS Tracking Stock) in the net loss of the Hughes Retail Group (reported as a noncontrolling interest), the amount of consolidated net income or loss allocated to holders of Class A and Class B common stock effectively excludes an aggregate 80.0% of the attributed net loss of the Hughes Retail Group.
 
Basic EPS for our Class A and Class B common stock excludes potential dilution and is computed by dividing “Net income attributable to EchoStar common stock” by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if our common stock awards were exercised or vested.  The potential dilution from common stock awards was computed using the treasury stock method based on the average market value of our Class A common stock during the period.  The calculation of our diluted weighted-average common shares outstanding excluded options to purchase shares of our Class A common stock, whose effect would be anti-dilutive, of 3.6 million shares for each of the three and nine months ended September 30, 2016, and 3.1 million shares and 2.0 million shares for the three and nine months ended September 30, 2015, respectively. 


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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

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

 
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands, except per share amounts)
Net income attributable to EchoStar
 
$
36,801

 
$
28,835

 
$
141,742

 
$
89,983

Less: Net loss attributable to EchoStar Tracking Stock
 
157

 
(1,267
)
 
(1,709
)
 
(7,421
)
Net income attributable to EchoStar common stock
 
$
36,644

 
$
30,102

 
$
143,451

 
$
97,404

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding :
 
 
 
 
 
 
 
 
Class A and B common stock:
 
 
 
 
 
 
 
 
Basic
 
93,898

 
92,500

 
93,661

 
92,253

Dilutive impact of stock awards outstanding
 
503

 
993

 
528

 
1,227

Diluted
 
94,401

 
93,493

 
94,189

 
93,480

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Class A and B common stock:
 
 
 
 
 
 
 
 
Basic
 
$
0.39

 
$
0.33

 
$
1.53

 
$
1.06

Diluted
 
$
0.39

 
$
0.32

 
$
1.52

 
$
1.04


Note 4.    Hughes Retail Preferred Tracking Stock
 
Satellite and Tracking Stock Transaction
 
In February 2014, EchoStar entered into agreements with certain subsidiaries of DISH Network pursuant to which, effective March 1, 2014, (i) EchoStar issued shares of its newly authorized Hughes Retail Preferred Tracking Stock (the “EchoStar Tracking Stock”) and Hughes Satellite Systems Corporation (“HSS”), a subsidiary of EchoStar, also issued shares of its newly authorized Hughes Retail Preferred Tracking Stock (the “HSS Tracking Stock” and together with the EchoStar Tracking Stock, the “Tracking Stock”) to DISH Network in exchange for five satellites (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI, and EchoStar XIV), including the assumption of related in-orbit incentive obligations, and $11.4 million in cash and (ii) DISH Network began receiving certain satellite services on these five satellites from us (the “Satellite and Tracking Stock Transaction”). The Tracking Stock tracks the 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 EchoStar Tracking Stock represent a 51.89% economic interest in the Hughes Retail Group and the shares issued as HSS Tracking Stock represent a 28.11% economic interest in the Hughes Retail Group.) In addition to the remaining 20.0% economic interest in the Hughes Retail Group, EchoStar retains all economic interest in the wholesale satellite broadband business and other businesses of EchoStar. The 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, EchoStar increased short-term cash flow that it believes better positions it to achieve its strategic objectives.
 
EchoStar and HSS have adopted policy statements (the “Policy Statements”) setting forth management and allocation policies for purposes of attributing all of the business and operations of EchoStar to either the Hughes Retail Group or the “EchoStar Group,” which is defined as all other operations of EchoStar, including all existing and future businesses, other than the Hughes Retail Group. Among other things, the Policy Statements govern how assets, liabilities, revenue and expenses are attributed or allocated between HRG and the EchoStar Group. Such attributions and allocations generally do not affect the amounts reported in our consolidated financial statements, except for the attribution of stockholders’ equity and net income or loss between the holders of Tracking Stock and common stock. The Policy Statements also do not significantly affect the way that management assesses operating performance and allocates resources within our Hughes segment.
 

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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

We provide unaudited attributed financial information for HRG and the EchoStar Group in an exhibit to our periodic reports on Form 10-Q and Annual Report on 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 the Company’s Class A common stock, see Note 4 to the consolidated financial statements in our most recent Annual Report on Form 10-K.

As of September 30, 2016, DISH Network held 6.3% and 7.5% of the aggregate number of outstanding shares of EchoStar and HSS capital stock, respectively.

Note 5.    Other Comprehensive Income (Loss) and Related Tax Effects
 
We have not recognized any tax effects on foreign currency translation adjustments because they are not expected to result in future taxable income or deductions.  We have not recognized any tax effects on unrealized gains or losses on available-for-sale securities because such gains or losses would affect the amount of existing capital loss carryforwards for which the related deferred tax asset has been fully offset by a valuation allowance.
 
Accumulated other comprehensive loss includes cumulative foreign currency translation losses of $110.3 million and $124.3 million as of September 30, 2016 and December 31, 2015, respectively.
 
Reclassifications out of accumulated other comprehensive loss for the three and nine months ended September 30, 2016 and 2015 were as follows:
 
Accumulated Other Comprehensive 
Loss Components
 
Affected Line Item in our Condensed Consolidated Statements of Operations
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 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
 
$
(10
)
 
$
(9
)
 
$
(5,584
)
 
$
(29
)
Recognition of other-than-temporary impairment loss on available-for-sale securities in net income (2)
 
Other-than-temporary impairment loss on available-for-sale securities
 

 
1,243

 

 
5,892

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

 

 

 
1,889

Total reclassifications, net of tax and noncontrolling interests
 
 
 
$
(10
)
 
$
1,234

 
$
(5,584
)
 
$
7,752

(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 and September 2015, we recorded other-than-temporary impairment losses on shares of certain common stock included in our strategic equity securities.
(3)
As a result of the deconsolidation of several of our European subsidiaries in connection with our investment in SmarDTV SA in May 2015, the related cumulative translation adjustments that were previously recognized in other comprehensive income (loss) were reclassified and recognized as a loss within “Other income (expense)” in our condensed consolidated statements of operations and comprehensive income (loss). See Note 6 for further discussion.


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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Note 6.    Investment Securities
 
Our marketable investment securities, restricted cash and cash equivalents, and investments in unconsolidated entities consisted of the following:
 
 
 
As of
 
 
September 30, 2016
 
December 31, 2015
 
 
(In thousands)
Marketable investment securities—current, at fair value:
 
 
 
 
Corporate bonds
 
$
711,984

 
$
562,236

Strategic equity securities
 
59,653

 
38,864

Other
 
31,672

 
11,238

Total marketable investment securities—current
 
803,309

 
612,338

Restricted marketable investment securities (1)
 
12,970

 
13,227

Total
 
816,279

 
625,565

 
 
 
 
 
Restricted cash and cash equivalents (1)
 
681

 
7,775

 
 
 
 
 
Investments in unconsolidated entities—noncurrent:
 
 
 
 
Cost method
 
81,174

 
81,174

Equity method
 
121,098

 
128,090

Total investments in unconsolidated entities—noncurrent
 
202,272

 
209,264

Total marketable investment securities, restricted cash and cash equivalents, and investments in unconsolidated entities
 
$
1,019,232

 
$
842,604

(1)
Restricted marketable investment securities and restricted cash and cash equivalents are included in “Restricted cash and marketable investment securities” in our condensed consolidated balance sheets.
 
Marketable Investment Securities
 
Our marketable investment securities portfolio consists of various debt and equity instruments, which generally are classified as available-for-sale 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 nine months ended September 30, 2016 or 2015.
 
For the three and nine months ended September 30, 2016, “Gains (losses) on marketable investment securities, net” included losses of zero and $1.0 million, respectively, related to trading securities that we held as of September 30, 2016. For each of the three and nine months ended September 30, 2015, “Gains (losses) on marketable investment securities, net” included losses of$3.9 million and $5.5 million, respectively, related to trading securities that we held as of September 30, 2015.
 
Other
 
Our other current marketable investment securities portfolio includes investments in various debt instruments, including U.S. government bonds and mutual funds.


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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Restricted Cash and Marketable Investment Securities
 
As of September 30, 2016 and December 31, 2015, our restricted marketable investment securities, together with our restricted cash, included amounts required as collateral for our letters of credit or surety bonds.
 
Unrealized Gains (Losses) on Available-for-Sale Securities
 
The components of our available-for-sale investments are summarized in the table below.
 
 
 
Amortized
 
Unrealized
 
Estimated
 
 
Cost
 
Gains
 
Losses
 
Fair Value
 
 
(In thousands)
As of September 30, 2016
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
711,651

 
$
481

 
$
(148
)
 
$
711,984

Other (including restricted)
 
40,051

 
17

 

 
40,068

Equity securities - strategic
 
43,328

 
11,645

 
(833
)
 
54,140

Total
 
$
795,030

 
$
12,143

 
$
(981
)
 
$
806,192

As of December 31, 2015
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
Corporate bonds
 
$
562,849

 
$
10

 
$
(623
)
 
$
562,236

Other (including restricted)
 
24,495

 

 
(30
)
 
24,465

Equity securities - strategic
 
20,855

 
7,748

 
(82
)
 
28,521

Total
 
$
608,199

 
$
7,758

 
$
(735
)
 
$
615,222

 
As of September 30, 2016, restricted and non-restricted available-for-sale securities included debt securities of $684.4 million with contractual maturities of one year or less and $67.7 million with contractual maturities greater than one year.  We may realize proceeds from certain investments prior to their contractual maturity as a result of our ability to sell these securities prior to their contractual maturity.
 
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
 
 
September 30, 2016
 
December 31, 2015
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
(In thousands)
Less than 12 months
 
$
271,067

 
$
(973
)
 
$
364,160

 
$
(609
)
12 months or more
 
1,564

 
(8
)
 
149,889

 
(126
)
Total
 
$
272,631

 
$
(981
)
 
$
514,049

 
$
(735
)
 
Sales of Marketable Investment Securities
 
We recognized gains from the sales of our available-for-sale securities of de minimis and $5.6 million for the three and nine months ended September 30, 2016, respectively, and de minimis gains for each of the three and nine months ended September 30, 2015. We recognized de minimis losses from the sales of our available-for-sale securities for each of the three and nine months ended September 30, 2016 and 2015.
 

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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Proceeds from sales of our available-for-sale securities totaled $4.0 million for each of the three months ended September 30, 2016 and 2015, and $35.8 million and $94.2 million for the nine months ended September 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 September 30, 2016 and December 31, 2015, we did not have investments that were categorized within Level 3 of the fair value hierarchy.
 
 
 
As of
 
 
September 30, 2016
 
December 31, 2015
 
 
Total
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
 
(In thousands)
Cash equivalents (including restricted)
 
$
2,143,205

 
$
3,052

 
$
2,140,153

 
$
840,950

 
$
38,771

 
$
802,179

Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 
$
711,984

 
$

 
$
711,984

 
$
562,236

 
$

 
$
562,236

Other (including restricted)
 
44,642

 
12,956

 
31,686

 
24,465

 
12,078

 
12,387

Equity securities - strategic
 
59,653

 
59,653

 

 
38,864

 
38,864

 

Total marketable investment securities
 
$
816,279

 
$
72,609

 
$
743,670

 
$
625,565

 
$
50,942

 
$
574,623


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.

We recorded cash distributions from certain of our investments accounted for using the equity method of $5.0 million and $15.0 million for the three and nine months ended September 30, 2016, respectively. We recorded cash distributions from certain of our investments accounted for using the equity method of $5.0 million for each of the three and nine months ended September 30, 2015. These cash distributions were determined to be a return on investment and reported in cash flows from operating activities in our condensed consolidated statement of cash flows.

In June 2015, we made an equity investment in WorldVu Satellites Limited (“OneWeb”), a global low-earth orbit satellite service company. OneWeb plans to develop and operate a global network of low-earth orbit Ku-band satellites to provide internet access to fixed and mobile terminals. We do not exercise significant influence over the management of OneWeb; accordingly, we account for the investment using the cost method.

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


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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Note 7.    Trade Accounts Receivable
 
Our trade accounts receivable consisted of the following:
 
 
 
As of
 
 
September 30, 2016
 
December 31, 2015
 
 
(In thousands)
Trade accounts receivable
 
$
165,532

 
$
168,714

Contracts in process, net
 
26,186

 
23,011

Total trade accounts receivable
 
191,718

 
191,725

Allowance for doubtful accounts
 
(13,817
)
 
(12,485
)
Trade accounts receivable - DISH Network
 
330,300

 
277,159

Total trade accounts receivable, net
 
$
508,201

 
$
456,399

 
As of September 30, 2016 and December 31, 2015, progress billings offset against contracts in process amounted to $3.9 million and $2.9 million, respectively.
 
Note 8.    Inventory
 
Our inventory consisted of the following:
 
 
 
As of
 
 
September 30, 2016
 
December 31, 2015
 
 
(In thousands)
Finished goods
 
$
56,985

 
$
52,839

Raw materials
 
7,697

 
9,042

Work-in-process
 
9,107

 
5,129

Total inventory
 
$
73,789

 
$
67,010


As a result of our decision in July 2016 not to proceed with our direct-to-consumer security and home automation solution product offering and associated services, “Selling, general and administrative expenses” of our EchoStar Technologies segment for the three and nine months ended September 30, 2016 includes a $9.1 million adjustment to reduce inventory to its estimated net realizable value.


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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Note 9.    Property and Equipment
 
Property and equipment consisted of the following:
 
 
 
Depreciable Life (In Years)
 
As of
 
 
 
September 30, 2016
 
December 31, 2015
 
 
 
 
(In thousands)
Land
 
 
$
42,453

 
$
41,457

Buildings and improvements
 
1-40
 
370,417

 
367,947

Furniture, fixtures, equipment and other
 
1-12
 
1,329,692

 
1,254,325

Customer rental equipment
 
2-4
 
662,994

 
588,430

Satellites - owned
 
2-15
 
2,381,120

 
2,381,120

Satellites acquired under capital leases
 
10-15
 
782,845

 
665,518

Construction in progress
 
 
1,362,572

 
1,112,267

Total property and equipment
 
 
 
6,932,093

 
6,411,064

Accumulated depreciation
 
 
 
(3,303,714
)
 
(2,998,074
)
Property and equipment, net
 
 
 
$
3,628,379

 
$
3,412,990

 
Construction in progress consisted of the following:
 
 
 
As of
 
 
September 30, 2016
 
December 31, 2015
 
 
(In thousands)
Progress amounts for satellite construction, including prepayments under capital leases and launch services costs
 
$
1,154,066

 
$
963,103

Satellite related equipment
 
160,702

 
126,373

Other
 
47,804

 
22,791

Construction in progress
 
$
1,362,572

 
$
1,112,267

 
Construction in progress included the following owned and leased satellites under construction or undergoing in-orbit testing as of September 30, 2016.

Satellites
 
Segment
 
Expected Launch Date
 
EchoStar XIX
 
Other
 
Fourth quarter of 2016
 
EchoStar XXI
 
Other
 
Fourth quarter of 2016/
 First quarter of 2017
 
EchoStar XXIII
 
Other
 
Fourth quarter of 2016/
 First quarter of 2017
 
EchoStar 105/SES-11
 
ESS
 
First half of 2017
 
Telesat T19V (“63 West”) (1)
 
Hughes
 
Second quarter of 2018
 
(1)
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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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Depreciation expense associated with our property and equipment consisted of the following:
 
 
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
Satellites
 
$
46,965

 
$
51,436

 
$
140,895

 
$
149,677

Furniture, fixtures, equipment and other
 
31,162

 
29,104

 
89,247

 
89,504

Customer rental equipment
 
28,652

 
30,839

 
86,789

 
91,550

Buildings and improvements
 
3,065

 
3,325

 
9,218

 
10,183

Total depreciation expense
 
$
109,844

 
$
114,704

 
$
326,149

 
$
340,914

 
Satellites
 
As of September 30, 2016, we utilized in support of our operations, 18 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.  Three 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 September 30, 2016.
 
Recent Developments

Eutelsat 65 West A. The Eutelsat 65 West A satellite was launched in March 2016 and our Hughes segment began to offer consumer broadband services in Brazil using our leased Ka-band payload on the satellite in July 2016.

EchoStar XXI and EchoStar XXIII. Due to anomalies experienced by our launch providers, the expected launch dates of our EchoStar XXI and EchoStar XXIII satellites have been delayed; however, we currently expect to launch both satellites in the fourth quarter of 2016 or the first quarter of 2017. We are in the process of evaluating the implications of these delays, including, without limitation, potential increased costs, regulatory and contractual milestone compliance and other satellite resource allocations. We have regulatory obligations to meet certain milestones by the fourth quarter of 2016 regarding the operations of the EchoStar XXI satellite across the European Union. We may need to seek extensions of certain of these requirements, which may or may not be granted and, if granted, may be subject to penalties, additional conditions or requirements. We also have regulatory obligations to meet certain in-service milestones by the second quarter of 2017 for our Brazilian license at 45 west longitude for the Ka, Ku, and S-band frequency bands. While we expect the EchoStar XXIII satellite to meet our regulatory milestone for the Ku-band, if we do miss our milestone, we may be subject to the imposition of penalties, additional conditions or other requirements.

EchoStar 105/SES-11. Due to anomalies experienced by our launch provider, the expected launch date of our EchoStar 105/SES-11 satellite has been delayed until the first half of 2017. Our Ku-band payload on the EchoStar 105/SES-11 satellite will replace our current capacity on the AMC-15 satellite.

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 nine months ended September 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.


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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Note 10.    Goodwill, Regulatory Authorizations and Other Intangible Assets
 
Goodwill
 
The excess of the cost of an acquired business over the fair values of net tangible and identifiable intangible assets at the time of the acquisition is recorded as goodwill.  Goodwill is assigned to 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 September 30, 2016 and December 31, 2015, approximately $504.2 million of our goodwill was assigned to reporting units of our Hughes segment and $6.4 million was assigned to the Move Networks reporting unit of our EchoStar Technologies segment.  We test this goodwill for impairment annually in the second quarter and third quarter, respectively.  Based on our qualitative assessment of impairment of our Hughes segment 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, including goodwill.

Regulatory Authorizations
 
Regulatory authorizations included amounts with finite and indefinite useful lives, as follows:
 
 
 
As of December 31, 2015
 
Additions
 
Currency
Translation
Adjustment
 
As of
September 30, 2016
 
 
(In thousands)
Finite useful lives:
 
 
 
 
 
 
 
 
Cost
 
$
82,007

 
$

 
$
8,957

 
$
90,964

Accumulated amortization
 
(9,852
)
 
(3,508
)
 
(1,050
)
 
(14,410
)
Net
 
72,155

 
(3,508
)
 
7,907

 
76,554

Indefinite lives
 
471,657

 

 

 
471,657

Total regulatory authorizations, net
 
$
543,812

 
$
(3,508
)
 
$
7,907

 
$
548,211

 
Other Intangible Assets
 
Our other intangible assets, which are subject to amortization, consisted of the following:
 
 
 
Weighted Average Useful Life (in Years)
 
As of
 
 
 
September 30, 2016
 
December 31, 2015
 
 
 
Cost
 
Accumulated
Amortization
 
Carrying
Amount
 
Cost
 
Accumulated
Amortization
 
Carrying
Amount
 
 
 
 
(In thousands)
Customer relationships
 
8
 
$
293,932

 
$
(232,017
)
 
$
61,915

 
$
293,932

 
$
(213,543
)
 
$
80,389

Contract-based
 
4
 
69,440

 
(69,440
)
 

 
255,366

 
(251,493
)
 
3,873

Technology-based
 
7
 
137,197

 
(122,526
)
 
14,671

 
137,337

 
(111,840
)
 
25,497

Trademark portfolio
 
20
 
29,700

 
(7,920
)
 
21,780

 
29,700

 
(6,806
)
 
22,894

Total other intangible assets
 
 
 
$
530,269

 
$
(431,903
)
 
$
98,366

 
$
716,335

 
$
(583,682
)
 
$
132,653

 
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 $13.8 million and $18.2 million for the three months ended September 30, 2016 and 2015, respectively, and $44.7 million and $57.6 million for the nine months ended September 30, 2016 and 2015, respectively.
 

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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Note 11.    Debt and Capital Lease Obligations
 
The following table summarizes the carrying amounts and fair values of our debt:
 
 
 
Effective Interest Rate
 
As of
 
 
 
September 30, 2016
 
December 31, 2015
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
 
 
 
(In thousands)
6 1/2% Senior Secured Notes due 2019
 
6.959%
 
$
990,000

 
$
1,084,674

 
$
990,000

 
$
1,071,675

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

 
962,973

 
900,000

 
954,000

5 1/4% Senior Secured Notes due 2026
 
5.317%
 
750,000

 
742,500

 

 

6 5/8% Senior Unsecured Notes due 2026
 
6.685%
 
750,000

 
726,765

 

 

Other
 
 
 

 

 
803

 
803

Less: Unamortized debt issuance costs
 
 
 
(33,616
)
 

 
(31,276
)
 

Subtotal
 
 
 
3,356,384

 
$
3,516,912

 
1,859,527

 
$
2,026,478

Capital lease obligations
 
 
 
311,306

 
 
 
332,838

 
 
Total debt and capital lease obligations
 
 
 
3,667,690

 
 
 
2,192,365

 
 
Less: Current portion
 
 
 
(37,717
)
 
 
 
(35,698
)
 
 
Long-term debt and capital lease obligations, net of unamortized debt issuance costs
 
 
 
$
3,629,973

 
 
 
$
2,156,667

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

On May 6, 2016, HSS offered to repurchase for cash all or any part of its outstanding 6 1/2% Senior Secured Notes due 2019 (the “2019 Senior Secured Notes”) and its 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.

Issuance of Secured and Unsecured Notes

On July 27, 2016, HSS issued $750 million aggregate principal amount of 5.250% Senior Secured Notes due August 1, 2026 (the “2026 Senior Secured Notes”) pursuant to an Indenture dated July 27, 2016 (the “2016 Secured Indenture”) at an issue price of 100% of their aggregate principal amount and $750 million aggregate principal amount of 6.625% Senior Unsecured Notes due August 1, 2026 (the “2026 Senior Unsecured Notes” and together with the 2026 Senior Secured Notes, the “2026 Notes”) pursuant to an Indenture dated July 27, 2016 (the “2016 Unsecured Indenture” and together with the 2016 Secured Indenture, the “2016 Indentures”) at an issue price of 100% of their aggregate principal amount. Interest on the 2026 Notes will be payable semi-annually on February 1 and August 1 of each year commencing February 1, 2017.

The 2026 Notes are redeemable, in whole or in part at any time at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest to the date of redemption and a “make-whole” premium calculated under the 2016 Indentures. HSS may also redeem up to 10% of the outstanding 2026 Senior Secured Notes per year prior to August 1, 2020 at a redemption price equal to 103% of the principal amount thereof plus accrued and unpaid interest to the date of redemption. In addition, HSS may, at any time prior to August 1, 2019, with the net cash proceeds from certain equity offerings or capital contributions, redeem up to 35% of the 2026 Senior Secured Notes, at 105.25% of the principal amount, and up to 35% of the 2026 Senior Unsecured Notes, at a redemption price equal to 106.625% of the principal amount plus, in each case, accrued and unpaid interest on the 2026 Notes being redeemed to the date of redemption.

The 2026 Senior Secured Notes are:

secured obligations of HSS;
secured by security interests in substantially all existing and future tangible and intangible assets of HSS and certain of its subsidiaries on a first priority basis, subject to certain exceptions;

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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

ranked equally and ratably with the existing 2019 Senior Secured Notes;
effectively junior to HSS’ obligations that are secured by assets that are not part of the collateral that secures the 2026 Senior Secured Notes, in each case, to the extent of the value of the collateral securing such obligations;
effectively senior to HSS’ existing and future unsecured obligations to the extent of the value of the collateral securing the 2026 Senior Secured Notes, after giving effect to permitted liens as provided in the 2016 Secured Indenture;
senior in right of payment to all existing and future obligations of HSS that are expressly subordinated to the 2026 Senior Secured Notes;
structurally junior to any existing and future obligations of any of HSS’ subsidiaries that do not guarantee the 2026 Senior Secured Notes; and
unconditionally guaranteed, jointly and severally, on a general senior secured basis by certain of HSS’ subsidiaries, which guarantees rank equally with all of the guarantors’ existing and future unsubordinated indebtedness and effectively senior to such guarantors’ existing and future obligations to the extent of the value of the assets securing the 2026 Senior Secured Notes.

The 2026 Senior Unsecured Notes are:

unsecured senior obligations of HSS;
ranked equally with all existing and future unsubordinated indebtedness and effectively junior to any secured indebtedness up to the value of the assets securing such indebtedness;
effectively junior to HSS’ obligations that are secured to the extent of the value of the collateral securing such obligations;
senior in right of payment to all existing and future obligations of HSS that are expressly subordinated to the 2026 Senior Unsecured Notes;
structurally junior to any existing and future obligations of any of HSS’ subsidiaries that do not guarantee the 2026 Senior Unsecured Notes; and
unconditionally guaranteed, jointly and severally, on a general senior secured basis by certain of HSS’ subsidiaries, which guarantees rank equally with all of the guarantors’ existing and future unsubordinated indebtedness, and effectively junior to any secured indebtedness of the guarantors up to the value of the assets securing such indebtedness.

The 2026 Notes are guaranteed by the same HSS subsidiary guarantors that currently guarantee the 2019 Senior Secured Notes and the 2021 Senior Unsecured Notes.

Subject to certain exceptions, the 2016 Indentures contain restrictive covenants that, among other things, impose limitations on HSS’ ability and, in certain instances, the ability of certain of HSS’ subsidiaries to:

incur additional debt;
pay dividends or make distributions on HSS’ capital stock or repurchase HSS’ capital stock;
make certain investments;
create liens or enter into sale and leaseback transactions;
enter into transactions with affiliates;
merge or consolidate with another company;
transfer and sell assets; and
allow to exist certain restrictions on the ability of certain of HSS’ subsidiaries to pay dividends, make distributions, make other payments, or transfer assets to HSS or its subsidiaries.

In the event of a Change of Control, as defined in the 2016 Indentures, HSS would be required to make an offer to repurchase all or any part of a holder’s 2026 Notes at a purchase price equal to 101.0% of the aggregate principal amount thereof, together with accrued and unpaid interest to the date of repurchase.

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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)


The 2016 Indentures provide for customary events of default, including, among other things, nonpayment, breach of the covenants in the 2016 Indentures, payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy, insolvency and reorganization. If any event of default occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the applicable then outstanding 2026 Notes may declare all the applicable 2026 Notes to be due and payable immediately, together with any accrued and unpaid interest.

As discussed above, HSS and certain of its subsidiaries have granted a first priority security interest in substantially all of their assets, subject to certain exceptions and permitted liens, to secure HSS’ obligations under the 2019 Senior Secured Notes and the 2026 Senior Secured Notes.

Under the terms of a registration rights agreement, HSS has agreed to register notes having substantially identical terms as the 2026 Notes with the SEC as part of an offer to exchange freely tradable exchange notes for the 2026 Notes.

Note 12.    Income Taxes
 
Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period.  Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
 
Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, is subject to significant volatility due to several factors, including 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 $75.1 million and $65.8 million for the nine months ended September 30, 2016 and 2015, respectively.  Our estimated effective income tax rate was 34.6% and 43.1% for the nine months ended September 30, 2016 and 2015, respectively.  The variations in our current year effective tax rate from the U.S. federal statutory rate for the nine months ended September 30, 2016 were primarily due to research and experimentation credits, partially offset by various permanent tax differences. The variations in our effective tax rate from the U.S. federal statutory rate for the nine months ended September 30, 2015 were primarily due to the increase in our valuation allowance associated with certain foreign losses and realized and unrealized losses that are capital in nature, partially offset by research and experimentation tax credits.

Note 13.    Stock-Based Compensation
 
We maintain stock incentive plans to attract and retain officers, directors and key employees.  Stock awards under these plans include both performance based and non-performance based stock incentives.  We granted stock options and other incentive awards to our employees and nonemployee directors to acquire 137,470 shares and 27,990 shares of our Class A common stock for the three months ended September 30, 2016 and 2015, respectively, and 722,350 shares and 911,970 shares of our Class A common stock for the nine months ended September 30, 2016 and 2015, respectively.
 
In 2015, we granted 100,000 restricted stock units (“RSUs”). The RSUs vested based on the attainment of certain quarterly company performance criteria for the second, third and fourth quarters of 2015.  In 2015, 66,666 of the RSUs vested and in February 2016 the remaining 33,334 RSUs vested.
 

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ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Total non-cash, stock-based compensation expense for all of our employees is shown in the following table for the three and nine months ended September 30, 2016 and 2015 and was assigned to the same expense categories as the base compensation for such employees:
 
 
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
Research and development expenses
 
$
731

 
$
1,270

 
$
2,491

 
$
3,318

Selling, general and administrative expenses
 
2,894

 
4,646

 
9,462

 
12,886

Total stock-based compensation
 
$
3,625

 
$
5,916

 
$
11,953

 
$
16,204

 
As of September 30, 2016, total unrecognized stock-based compensation cost, net of estimated forfeitures, related to our unvested stock awards was $29.7 million.

Note 14.    Commitments and Contingencies
 
Commitments
 
As of September 30, 2016, our satellite-related obligations were approximately $786.0 millionOur satellite-related obligations primarily include payments pursuant to agreements for the construction of the EchoStar XIX, EchoStar XXI, EchoStar XXIII, and EchoStar 105/SES-11 satellites; payments pursuant to launch services contracts and regulatory authorizations; executory costs for our capital lease satellites; costs under satellite service agreements; and in-orbit incentives relating to certain satellites, as well as commitments for long-term satellite operating leases and satellite service arrangements.

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

21

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

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States Patent and Trademark Office regarding the validity of certain of the patents ClearPlay asserted in the case. In those third-party challenges, the United States Patent and Trademark Office found that all claims of the 282 patent are unpatentable and that certain claims of the 784 patent and 318 patent are unpatentable. ClearPlay appealed as to the 784 and 318 patents, and on August 23, 2016, the United States Court of Appeals for the Federal Circuit affirmed the findings of the United States Patent and Trademark Office.
 
CRFD Research, Inc. (a subsidiary of Marathon Patent Group, Inc.)
 
On January 17, 2014, CRFD Research, Inc. (“CRFD”) filed a complaint against EchoStar Corporation and our subsidiary, EchoStar Technologies L.L.C., as well as against DISH Network, DISH DBS Corporation and DISH Network L.L.C., in United States District Court for the District of Delaware, alleging infringement of United States Patent No. 7,191,233 (the “233 patent”).  The 233 patent is entitled “System for Automated, Mid-Session, User-Directed, Device-to-Device Session Transfer System,” and relates to transferring an ongoing software session from one device to another.  CRFD alleges that certain of our set-top boxes infringe the 233 patent.  On the same day, CRFD filed patent infringement complaints against AT&T Inc.; Comcast Corp.; DirecTV; Time Warner Cable Inc.; Cox Communications, Inc.; Level 3 Communications, Inc.; Akamai Technologies, Inc.; Cablevision Systems Corp. and Limelight Networks, Inc.  On January 26, 2015, we and DISH Network filed a petition before the United States Patent and Trademark Office challenging the validity of certain claims of the 233 patent, which was subsequently instituted along with two third-party petitions also challenging the validity of certain claims of the 233 patent.  On June 4, 2015, the litigation in the District Court was ordered stayed pending resolution of our petition before the United States Patent and Trademark Office, and on January 16, 2016, the United States Patent and Trademark Office held oral arguments on the merits of the petition.  On June 1, 2016, the Patent and Trademark Office found that four of the challenged thirty claims were unpatentable. On July 5, 2016, CRFD filed a notice of appeal to the United States Court of Appeals for the Federal Circuit. CRFD is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.
 
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.  On 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. Trial is scheduled to commence on July 31, 2017.
 
The Hopper Litigation
 
On May 24, 2012, DISH Network L.L.C., filed suit in the United States District Court for the Southern District of New York against American Broadcasting Companies, Inc. (“ABC”), CBS Corporation (“CBS”), Fox Entertainment Group, Inc., Fox Television Holdings, Inc., Fox Cable Network Services, L.L.C. (collectively, “Fox”) and NBCUniversal Media, LLC (“NBC”).  The lawsuit sought a declaratory judgment that DISH Network L.L.C is not infringing any defendant’s copyright, or breaching any defendant’s retransmission consent agreement, by virtue of the PrimeTime AnytimeTM and AutoHopTM features of the HopperTM set-top boxes we design and sell to DISH Network.  A consumer can use the PrimeTime Anytime feature at his or her option, to record certain primetime programs airing on ABC, CBS, Fox, and/or NBC up to every night, and to store those recordings for up to eight days.  A consumer can use the AutoHop feature at his or her option, to watch certain recordings the subscriber made with our PrimeTime Anytime feature, commercial-free, if played back at a certain point after the show’s original airing.
 

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Later on May 24, 2012, (i) Fox Broadcasting Company, Twentieth Century Fox Film Corp. and Fox Television Holdings, Inc. filed a lawsuit against DISH Network and DISH Network L.L.C. (collectively, “DISH”) in the United States District Court for the Central District of California, alleging that the PrimeTime Anytime feature, the AutoHop feature, as well as DISH’s use of Slingbox unit’s placeshifting functionality infringe their copyrights and breach their retransmission consent agreements, (ii) NBC Studios LLC, Universal Network Television, LLC, Open 4Business Productions LLC and NBCUniversal Media, LLC filed a lawsuit against DISH in the United States District Court for the Central District of California, alleging that the PrimeTime Anytime feature and the AutoHop feature infringe their copyrights, and (iii) CBS Broadcasting Inc., CBS Studios Inc. and Survivor Productions LLC filed a lawsuit against DISH in the United States District Court for the Central District of California, alleging that the PrimeTime Anytime feature and the AutoHop feature infringe their copyrights.
 
As a result of certain parties’ competing counterclaims and venue-related motions brought in both the New York and California actions, as described below, and certain networks filing various amended complaints, the claims proceeded in the following venues:  (1) the copyright and contract claims regarding the ABC and CBS parties in New York; and (2) the copyright and contract claims regarding the Fox and NBC parties in California.
 
California Actions.  On August 17, 2012, the NBC plaintiffs filed a first amended complaint in their California action adding EchoStar Corporation and our subsidiary EchoStar Technologies L.L.C. to the NBC litigation, alleging various claims of copyright infringement.  Pursuant to a settlement agreement between the parties, on June 16, 2016, the parties filed a stipulation to dismiss with prejudice the NBC action, which was granted on June 20, 2016.

In addition, on February 21, 2013, the Fox plaintiffs filed a second motion for preliminary injunction against: (i) DISH Network, seeking to enjoin the Hopper TransfersTM feature in the second-generation Hopper set-top box, alleging breach of a retransmission consent agreement; and (ii) EchoStar Technologies L.L.C. and DISH Network, seeking to enjoin the Slingbox unit’s placeshifting functionality in the second-generation Hopper set-top box, alleging copyright infringement by both defendants, and breach of the earlier-mentioned retransmission consent agreement by DISH Network. On January 12, 2015, the Court entered an order ruling on the parties’ respective summary judgment motions, holding that: (a) the Slingbox unit’s placeshifting functionality and the PrimeTime Anytime, AutoHop and Hopper Transfers features do not violate copyright law; (b) certain quality assurance copies (which were discontinued in November 2012) did violate copyright law; and (c) the Slingbox unit’s placeshifting functionality, the Hopper Transfers feature and certain quality assurance copies breach DISH’s retransmission consent agreement with Fox.  Pursuant to a settlement agreement between us, DISH Network and the Fox plaintiffs, on February 10, 2016, we, DISH Network and the Fox plaintiffs filed a stipulation to dismiss with prejudice all of our respective claims pending in the California Court. That motion was granted on February 11, 2016.

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

Pursuant to a settlement between us and the ABC parties, during March 2014, the ABC parties withdrew their appeal to the United States Court of Appeals for the Second Circuit; we and the ABC parties filed a stipulation on March 4, 2014 to dismiss without prejudice all of our respective claims pending in the United States District Court for the Southern District of New York; and the ABC parties granted a covenant not to sue. The Court ordered such dismissal on March 6, 2014. Pursuant to a settlement between us and the CBS parties, on December 10, 2014, we and the CBS parties filed a stipulation to dismiss with prejudice all of our respective claims pending in the New York Court. The Court ordered such dismissal on December 10, 2014.

These matters related to the Hopper litigation are now concluded.
 
Michael Heskiaoff, Marc Langenohl, and Rafael Mann
 
On July 10, 2015, Messrs. Michael Heskiaoff and Marc Langenohl, purportedly on behalf of themselves and all others similarly situated, filed suit against our subsidiary Sling Media, Inc. in the United States District Court for the Southern District of New York.  The complaint alleges that Sling Media Inc.’s display of advertising to its customers violates a number of state statutes dealing with consumer deception.  On September 25, 2015, the plaintiffs filed an amended complaint, and Mr. Rafael Mann, purportedly on behalf of himself and all others similarly situated, filed an additional complaint alleging similar causes of action.

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On November 16, 2015, the cases were consolidated. On August 12, 2016, the Court dismissed the consolidated case due to plaintiffs’ failure to state a claim. On September 12, 2016, the plaintiffs moved the Court for leave to file an amended 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. The United States Patent and Trademark Office has instituted proceedings on each of those petitions.  Realtime is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.
 
Shareholder Derivative Litigation
 
On December 5, 2012, Greg Jacobi, purporting to sue derivatively on behalf of EchoStar Corporation, filed suit (the “Jacobi Litigation”) against Charles W. Ergen, Michael T. Dugan, R. Stanton Dodge, Tom A. Ortolf, C. Michael Schroeder, Joseph P. Clayton, David K. Moskowitz, and EchoStar Corporation in the United States District Court for the District of Nevada.  The complaint alleges that a March 2011 attempted grant of 1.5 million stock options to Charles Ergen breached defendants’ fiduciary duties, resulted in unjust enrichment, and constituted a waste of corporate assets.
 
On December 18, 2012, Chester County Employees’ Retirement Fund, derivatively on behalf of EchoStar Corporation, filed a suit (the “Chester County Litigation”) against Charles W. Ergen, Michael T. Dugan, R. Stanton Dodge, Tom A. Ortolf, C. Michael Schroeder, Anthony M. Federico, Pradman P. Kaul, Joseph P. Clayton, and EchoStar Corporation in the United States District Court for the District of Colorado.  The complaint similarly alleges that the March 2011 attempted grant of 1.5 million stock options to Charles Ergen breached defendants’ fiduciary duties, resulted in unjust enrichment, and constituted a waste of corporate assets.
 
On February 22, 2013, the Chester County Litigation was transferred to the District of Nevada, and on April 3, 2013, the Chester County Litigation was consolidated into the Jacobi Litigation.  Oral argument on a motion to dismiss the Jacobi Litigation was held February 21, 2014.  On April 11, 2014, the Chester County Litigation was stayed pending resolution of the motion to dismiss.  On March 30, 2015, the Court dismissed the Jacobi Litigation, with leave for Jacobi to amend his complaint by April 20, 2015.  On April 20, 2015, Jacobi filed an amended complaint, which on June 12, 2015, we moved to dismiss. On March 17, 2016, the Court dismissed the amended Jacobi Litigation, and on July 25, 2016, Jacobi filed an appeal brief with the United States Court of Appeals for the Ninth Circuit. Our answering brief was filed on September 22, 2016.
 
Of the attempted grant of 1.5 million options to Mr. Ergen in 2011, only 800,000 were validly granted and remain outstanding. 
 
Technology Development and Licensing, LLC
 
On January 22, 2009, Technology Development and Licensing, LLC (“TDL”) filed suit against EchoStar Corporation and DISH Network in the United States District Court for the Northern District of Illinois alleging infringement of United States Patent No. Re. 35,952, which relates to certain favorite channel features.  TDL is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.  The case has been stayed since July 2009, pending two reexamination petitions before the United States Patent and Trademark Office, which concluded in August 2015 resulting in 42 out of the 53 claims of the 952 patent being invalidated.  As a result, the case resumed in August 2015.  A trial date has not been set.
 

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TQ Beta LLC
 
On June 30, 2014, TQ Beta LLC (“TQ Beta”) filed suit against DISH Network, DISH DBS Corporation, DISH Network L.L.C., as well as EchoStar Corporation and our subsidiaries, EchoStar Technologies, L.L.C, HSS, and Sling Media, Inc., in the United States District Court for the District of Delaware, alleging infringement of United States Patent No. 7,203,456 (the “456 patent”), which is entitled “Method and Apparatus for Time and Space Domain Shifting of Broadcast Signals.”  TQ Beta alleges that the Hopper, Hopper with Sling, ViP 722 and ViP 722k DVR devices, as well as the DISH Anywhere service and DISH Anywhere mobile application, infringe the 456 patent, but has not specified the amount of damages that it seeks.  TQ Beta is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.  During August 2015, EchoStar Corporation and DISH Network L.L.C. filed petitions before the United States Patent and Trademark Office challenging the validity of 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.

TQ Delta LLC

On July 17, 2015, TQ Delta, LLC (“TQ Delta”) filed a complaint against DISH Network, DISH DBS Corporation and DISH Network L.L.C. in the United States District Court for the District of Delaware. On May 16, 2016, TQ Delta filed a second amended complaint that added EchoStar Corporation and EchoStar Technologies L.L.C. as defendants. That complaint alleges infringement of United States Patent No. 6,961,369 (the “369 patent”), which is entitled “System and Method for Scrambling the Phase of the Carriers in a Multicarrier Communications System”; United States Patent No. 8,718,158 (the “158 patent”), which is entitled “System and Method for Scrambling the Phase of the Carriers in a Multicarrier Communications System”; United States Patent No. 9,014,243 (the “243 patent”), which is entitled “System and Method for Scrambling Using a Bit Scrambler and a Phase Scrambler”; United States Patent No.7,835,430 (the “430 patent”), which is entitled “Multicarrier Modulation Messaging for Frequency Domain Received Idle Channel Noise Information”; United States Patent No. 8,238,412 (the “412 patent”), which is entitled “Multicarrier Modulation Messaging for Power Level per Subchannel Information”; United States Patent No. 8,432,956 (the “956 patent”), which is entitled “Multicarrier Modulation Messaging for Power Level per Subchannel Information”; and United States Patent No. 8,611,404 (the “404 patent”), which is entitled “Multicarrier Transmission System with Low Power Sleep Mode and Rapid-On Capability”; and United States Patent No. 9,094,268 (the “268 patent”), which is entitled “Multicarrier Transmission System with Low Power Sleep Mode and Rapid-On Capability.” TQ Delta alleges that satellite TV services, Internet services, set-top boxes, gateways, routers, modems, adapters and networks that operate in accordance with one or more Multimedia over Coax Alliance Standards infringe the asserted patents. TQ Delta has filed actions in the same court alleging infringement of the same patents against Comcast Corp., Cox Communications, Inc., DirecTV, Time Warner Cable Inc. and Verizon Communications, Inc. TQ Delta is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein. Trial has been set for November 13, 2017. On July 14, 2016, TQ Delta stipulated to dismiss with prejudice all claims related to the 369 patent and the 956 patent. On July 20, 2016, DISH Network filed petitions with the United States Patent and Trademark Office challenging the validity of all of the patent claims of the 404 patent and 268 patent asserted against it, and other parties have also filed petitions with the United States Patent and Trademark Office challenging the validity of all of the patent claims asserted in the action.

Two-Way Media Ltd.

On February 17, 2016, Two-Way Media Ltd. (“TWM”) filed a complaint against EchoStar Corporation and our 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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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 15.    Segment Reporting
 
Operating segments are business components of an enterprise for which separate financial information is available and regularly evaluated by the chief operating decision maker (“CODM”), who for EchoStar is the Company’s Chief Executive Officer.  Under this definition, we operate in three primary business segments, Hughes, EchoStar Technologies 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 nine months ended September 30, 2016 or 2015.
 

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The following table presents revenue, EBITDA, and capital expenditures for each of our operating segments.
 
 
 
Hughes
 
EchoStar
Technologies
 
EchoStar
Satellite
Services
 
All
Other and
Eliminations
 
Consolidated
Total
 
 
(In thousands)
For the Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
External revenue
 
$
355,090

 
$
282,865

 
$
101,308

 
$
3,086