e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008.
OR
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o |
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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)
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Nevada
(State or other jurisdiction of
incorporation or organization)
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26-1232727
(I.R.S. Employer Identification No.) |
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90 Inverness Circle E.
Englewood, Colorado
(Address of principal executive offices)
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80112
(Zip code) |
(303) 706-4000
(Registrants 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 þ No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of October 15, 2008, the registrants outstanding common stock consisted of 41,877,170 shares of
Class A common stock and 47,687,039 shares of Class B common stock.
PART I FINANCIAL INFORMATION
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995 throughout this report. Whenever you read a statement that is not simply a statement
of historical fact (such as when we describe what we believe, intend, plan, estimate,
expect or anticipate will occur and other similar statements), you must remember that our
expectations may not be achieved, even though we believe they are reasonable. We do not guarantee
that any future transactions or events described herein will happen as described or that they will
happen at all. You should read this report completely and with the understanding that actual
future results may be materially different from what we expect. Whether actual events or results
will conform with our expectations and predictions is subject to a number of risks and
uncertainties. The risks and uncertainties include, but are not limited to, the following:
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We currently depend on DISH Network for substantially all of our revenue. In addition,
a second customer, Bell ExpressVu, accounts for a majority of our revenue that is not from
DISH Network. The loss of, or a significant reduction in orders from, or a decrease in
selling prices of set-top boxes, transponder leasing, digital broadcast operations and/or
other services to DISH Network or Bell ExpressVu would significantly reduce our revenue,
adversely impact our results of operations and have a material adverse effect on our
results of operations and financial position. Many of our agreements with DISH Network for
these services expire on January 1, 2010 and there can be no assurance that we will be able
to renew these agreements on substantially similar terms. Our relationship with DISH
Network could be terminated or substantially curtailed with little or no advance notice. |
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Because of our dependence on DISH Network and our expectation that DISH Network will
continue to be our primary customer, weaknesses in the economy and other factors adversely
affecting DISH Network, may indirectly have an adverse impact on us. For example, the
decision by AT&T to terminate its distribution relationship with DISH Network effective
January 31, 2009 may reduce the level of subscriber additions at DISH Network and may
indirectly cause a reduction in the volume of sales of set-top boxes that we make to DISH
Network. |
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We may not realize the potential benefits that we expect from our separation
(Spin-off) from DISH Network including the ability to market our products and services to
entities that are competitors of DISH Network. Certain of these benefits depend upon
market acceptance of our separation from DISH Network, which we cannot predict and which
may be affected by significant cross-ownership by Charles W. Ergen, our Chairman and Chief
Executive Officer, as well as certain common management and directors among us and DISH
Network. There are also negative effects arising from the Spin-off, including loss of
access to DISH Networks financial resources. We may also experience loss of synergies as
a result of the Spin-off, particularly as a result of higher administrative and support
requirements and additional infrastructure and personnel resources necessary for our
operations. |
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We currently have substantial unused satellite capacity. Future costs associated with
this excess capacity will negatively impact our margins if we do not generate revenue to
offset these costs. In addition, because a substantial portion of the capacity of each of
our AMC-15 and AMC-16 satellites remains without long-term contracts, there is a
significant risk that in the future, in addition to reporting lower than expected revenues
and profitability, we could be required to record a substantial impairment charge relating
to one or both of these satellites. We currently estimate that these potential charges
could aggregate up to approximately $200 million, which would have a material adverse
effect on our results of operations and financial position. |
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We have suspended construction of the CMBStar satellite and in future periods may
conclude it appropriate to record an impairment charge. During April 2008, we notified the
State Administration of Radio, Film and Television of China that we were suspending
construction of the CMBStar satellite pending, among other things, further analysis
relating to efforts to meet the satellite performance criteria and/or confirmation that
alternative performance criteria would be acceptable. We are currently evaluating
potential alternative uses for the CMBStar satellite. If these alternative uses are
insufficient to recover the carrying value invested to date in the satellite, we may be
required to record an impairment charge in a future period relating to the CMBStar
satellite. We currently estimate that this potential charge could be as much as $100
million, which would have a material adverse effect on our results of operations and
financial position. |
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We expect to face additional competition from companies, principally located in Asia,
which offer low cost set-top boxes, including set-top boxes that are modeled after our
products or products of our principal |
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competitors. The entry of these new competitors may
result in pricing pressure in the market. If market prices are substantially reduced by
such new entrants, our business, financial condition or results of operations could be
materially adversely affected. In particular, it may be difficult for us to make
profitable sales in international markets where these new competitors are present and in
which we have not previously made sales of set-top boxes, which in turn could harm our
long-term growth strategy of expanding into international markets. |
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Our 2007 combined financial information included in this report is not indicative of our
future financial position, future results of operations or future cash flows, nor does it
necessarily reflect what our financial position, results of operations or cash flows would
have been as a separate company during the periods prior to the Spin-off that are presented
in this report. We were not profitable during 2007, as our operations have historically
been dedicated primarily to supporting DISH Network and, prior to 2008, we provided our
products and services to DISH Network at cost. |
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We may face actual or perceived conflicts of interest with DISH Network in a number of
areas relating to our past, ongoing and future relationships, including (i)
cross-officerships, directorships and stock ownership, (ii) related party transactions, and
(iii) future business opportunities. |
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Our ability to grow or maintain our business may be adversely affected by weakening
global or domestic economic conditions, wavering consumer confidence, unemployment, tight
credit markets, declines in global and domestic stock markets, falling home prices and
other factors adversely affecting the global and domestic economy. Unfavorable events in
the economy, including a further deterioration in the credit and equity markets, could
affect consumer demand for pay-TV services and consequently cause sales of our set-top
boxes to decline materially because consumers may delay purchasing decisions or reduce or
reallocate their discretionary spending. Adverse economic conditions may also make it more
difficult for us to access financing on acceptable terms or at all and may cause us to
impair our investment portfolio. |
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We may use a significant portion of our existing cash and marketable securities to fund
stock buyback programs. Our board of directors previously authorized stock repurchases of
up to $1.0 billion of our Class A common stock. As of September 30, 2008, we have
repurchased 0.6 million shares of our Class A common stock for $15 million. Effective
November 6, 2008, our board of directors extended the plan and authorized a reduction in
the maximum dollar value of shares that may be repurchased, such that we are currently
authorized to repurchase up to $500 million of our outstanding shares through and including
December 31, 2009. There can be no assurance however, that we will repurchase any
additional Class A common stock through this repurchase program. |
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We have entered into certain strategic transactions and investments, and we may increase
our strategic investment activity in the United States and in international markets. These
investments, which we believe could become substantial over time, involve a high degree of
risk, are concentrated in a few companies and could expose us to significant financial
losses if the underlying ventures are not successful. These investment opportunities may
also cause us to defer or suspend share repurchases. |
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Our business relies on intellectual property, some of which is owned by third parties,
the patents and proprietary rights of which we may inadvertently infringe. We may be
required to cease developing or marketing infringing products, to obtain licenses from the
holders of the intellectual property at a material cost, or to redesign those products in
such a way as to avoid infringing the patent claims of others. |
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We depend on sales of set-top boxes for the majority of our revenue, and if sales of our
set-top boxes decline, our business and financial position will suffer. Future demand for
our set-top boxes will rely significantly on market acceptance of high definition
television, or HDTV. |
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Our commercial success in selling our set-top boxes to cable operators and other
providers of digital television depends significantly on our ability to obtain licenses to
use the conditional access systems deployed by these operators in our set-top boxes. The
owners of these conditional access systems are in many cases competitors of ours. There
can be no assurance we will be able to obtain such licenses on acceptable terms or at all. |
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The future growth of our set-top box, satellite and transponder leasing, digital
broadcast operations, professional services and related businesses, will depend on a number
of factors, including: the level of market acceptance and demand for these products and services in domestic and international
markets, our ability to introduce new products and services that meet market demand, our
ability to develop |
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relationships with and make sales of these products and services to
providers of digital television in international markets and domestic cable operators and
other providers of digital television that are competitors of our former parent, DISH
Network, our ability to maintain the health, capacity and control of our existing satellite
network, the effectiveness of our competitors in developing and offering similar products
and services and our ability to hire additional sales personnel to develop and manage new
customer relationships. |
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We rely on key personnel including Charles W. Ergen, our chairman and chief executive
officer, and other executives, certain of whom will for some period also have
responsibilities with DISH Network through their positions at DISH Network or our
management services agreement with DISH Network. |
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Our set-top boxes are extremely complex and can have defects in design, manufacture or
associated software. We could incur significant expenses, lost revenue, and reputational
harm if we fail to detect or effectively address such issues through design, testing or
warranty repairs. |
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We obtain many components for our set-top boxes from a single supplier or a limited
group of suppliers. Our reliance on a single or limited group of suppliers, particularly
foreign suppliers, and our reliance on subcontractors, involves several risks. These risks
include a potential inability to obtain an adequate supply of required components, and
reduced control over pricing, quality, and timely delivery of these components. |
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If we are unsuccessful in defending against Tivos motion for contempt or any subsequent
claims that our technology infringes Tivos patent, we could be prohibited from
distributing DVRs, or be required to modify or eliminate certain user-friendly DVR features
that we currently offer to consumers. In that event, we would be at a significant
disadvantage to our competitors who could offer this functionality. We could also have to
pay substantial additional damages. |
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The satellite services industry is highly competitive and is characterized by long-term
leases and high switching costs. It will be difficult to displace customers from their
current relationships with our competitors and we may face competition from others in the
future. |
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Satellites are subject to significant operational risks while in orbit. While we
believe that our satellite fleet is generally in good condition, certain satellites in our
fleet have experienced malfunctions or anomalies, some of which have had a significant
adverse impact on their commercial operation. 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. Therefore, the loss of a satellite or other satellite malfunctions or
anomalies could have a material adverse effect on us. |
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We are subject to comprehensive governmental regulation by the FCC for our domestic
satellite operations. We are also regulated by other federal agencies, state and local
authorities and the International Telecommunication Union. Domestic and international
regulations regarding the licensing, authorization and operations of satellite
communications providers may restrict our satellite services operations. |
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We do not carry insurance for any of the in-orbit satellites that we will own, and we
will bear the risk of any failures of our in-orbit satellites. Because we bear this risk,
failures of our in-orbit satellites could have a material adverse effect on our results of
operations and financial position. |
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We may face other risks described from time to time in periodic and current reports we
file with the Securities and Exchange Commission (SEC). |
All cautionary statements made herein should be read as being applicable to all forward-looking
statements wherever they appear. In this connection, investors should consider the risks described
herein and should not place undue reliance on any forward-looking statements. We assume no
responsibility for updating forward-looking information contained or incorporated by reference
herein or in other reports we file with the SEC.
In this report, the words EchoStar, the Company, we, our and us refer to EchoStar
Corporation and its subsidiaries, unless the context otherwise requires. DISH Network refers to
DISH Network Corporation and its subsidiaries, unless the context otherwise requires.
iii
Item 1. FINANCIAL STATEMENTS
ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
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As of |
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September 30, |
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December 31, |
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2008 |
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2007 |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
329,794 |
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$ |
41,082 |
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Marketable investment securities |
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633,307 |
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491,185 |
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Trade accounts receivable DISH Network |
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491,886 |
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Trade accounts receivable other, net of allowance for uncollectible accounts of $343 and $51, respectively |
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47,339 |
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34,154 |
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Inventories, net |
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51,048 |
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21,043 |
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Other current assets |
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30,252 |
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23,290 |
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Total current assets |
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1,583,626 |
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610,754 |
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Restricted cash and marketable investment securities |
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2,846 |
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Property and equipment, net of accumulated depreciation of $1,387,087 and $32,857, respectively |
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1,455,957 |
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213,837 |
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FCC authorizations |
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69,810 |
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42,873 |
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Intangible assets, net |
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189,882 |
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71,646 |
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Goodwill |
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247,053 |
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248,428 |
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Marketable and non-marketable investment securities |
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321,034 |
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59,160 |
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Other noncurrent assets, net |
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55,546 |
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14,212 |
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Total assets |
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$ |
3,925,754 |
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$ |
1,260,910 |
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Liabilities and Stockholders Equity (Deficit) |
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Current Liabilities: |
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Trade accounts payable DISH Network |
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$ |
72,160 |
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$ |
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Trade accounts payable Other |
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265,901 |
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22,786 |
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Deferred revenue and other |
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6,913 |
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4,055 |
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Accrued expenses DISH Network |
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966 |
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Accrued expenses and other |
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151,552 |
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22,191 |
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Current portion of capital lease obligations, mortgages and other notes payable |
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51,513 |
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1,365 |
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Total current liabilities |
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549,005 |
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50,397 |
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Long-term obligations, net of current portion: |
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Capital lease obligations, mortgages and other notes payable, net of current portion |
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308,455 |
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2,344 |
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Deferred tax liabilities |
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86,298 |
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651 |
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Other long-term liabilities |
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839 |
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Total long-term obligations, net of current portion |
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395,592 |
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2,995 |
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Total liabilities |
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944,597 |
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53,392 |
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Commitments and Contingencies (Note 11) |
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Stockholders Equity (Deficit): |
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Preferred Stock, $.001 par value, 20,000,000 shares authorized,
none issued and outstanding |
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Class A common stock, $.001 par value, 1,600,000,000 shares authorized, 42,278,616 shares and
no shares issued, and 41,727,170 shares and no shares outstanding, respectively |
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42 |
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Class B common stock, $.001 par value, 800,000,000 shares authorized,
47,687,039 shares and no shares issued and outstanding, respectively |
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48 |
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Class C common stock, $.001 par value, 800,000,000 shares authorized,
none issued and outstanding |
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Class D common stock, $.001 par value, 800,000,000 shares authorized,
none issued and outstanding |
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Additional paid-in capital |
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3,249,848 |
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Accumulated other comprehensive income (loss) |
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409 |
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66,696 |
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Accumulated earnings (deficit) |
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(254,405 |
) |
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Owners net investment |
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1,140,822 |
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Treasury stock, at cost |
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(14,785 |
) |
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Total stockholders equity (deficit) |
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2,981,157 |
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1,207,518 |
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Total liabilities and stockholders equity (deficit) |
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$ |
3,925,754 |
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$ |
1,260,910 |
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The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
1
ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
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For the Three Months |
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For the Nine Months |
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Ended September 30, |
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Ended September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenue: |
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Equipment sales DISH Network |
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$ |
461,675 |
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$ |
342,434 |
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$ |
1,134,408 |
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$ |
1,016,247 |
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Equipment sales other |
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55,110 |
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61,919 |
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206,883 |
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160,671 |
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Satellite services, digital broadcast operations and other services DISH Network |
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91,388 |
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276,877 |
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Satellite and other services other |
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8,000 |
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63 |
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35,916 |
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5,850 |
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Total revenue |
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616,173 |
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404,416 |
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1,654,084 |
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1,182,768 |
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Costs and Expenses: |
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Cost of sales equipment |
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446,970 |
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378,568 |
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1,146,878 |
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1,116,577 |
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Satellite
services, digital broadcast operations and other cost of sales
(exclusive of depreciation shown below Note 12) |
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|
52,670 |
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|
185 |
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162,885 |
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|
4,444 |
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Research and development expense |
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|
10,227 |
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|
15,653 |
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37,792 |
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44,697 |
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Selling, general and administrative expenses |
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28,252 |
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7,044 |
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|
|
79,921 |
|
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|
19,556 |
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General and administrative expenses DISH Network |
|
|
6,192 |
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|
|
10,192 |
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|
|
19,488 |
|
|
|
33,271 |
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Depreciation and amortization (Note 12) |
|
|
69,781 |
|
|
|
1,482 |
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|
193,767 |
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|
4,391 |
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Total costs and expenses |
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|
614,092 |
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|
|
413,124 |
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1,640,731 |
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1,222,936 |
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Operating income (loss) |
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2,081 |
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(8,708 |
) |
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13,353 |
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(40,168 |
) |
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Other Income (Expense): |
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Interest income |
|
|
21,436 |
|
|
|
1,919 |
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|
|
62,249 |
|
|
|
2,861 |
|
Interest expense |
|
|
(7,839 |
) |
|
|
(248 |
) |
|
|
(24,400 |
) |
|
|
(785 |
) |
Casualty loss expense (Note 6) |
|
|
|
|
|
|
|
|
|
|
(12,799 |
) |
|
|
|
|
Unrealized gains (losses) due to changes in the fair value of certain debt and equity investments, net |
|
|
(162,949 |
) |
|
|
|
|
|
|
(182,592 |
) |
|
|
|
|
Other (Note 5) |
|
|
(155,618 |
) |
|
|
1,548 |
|
|
|
(94,418 |
) |
|
|
782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(304,970 |
) |
|
|
3,219 |
|
|
|
(251,960 |
) |
|
|
2,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(302,889 |
) |
|
|
(5,489 |
) |
|
|
(238,607 |
) |
|
|
(37,310 |
) |
Income tax (provision) benefit, net (Note 10) |
|
|
(5,041 |
) |
|
|
(1,161 |
) |
|
|
(15,798 |
) |
|
|
(2,633 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(307,930 |
) |
|
$ |
(6,650 |
) |
|
$ |
(254,405 |
) |
|
$ |
(39,943 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted net income (loss) per share Class A and B common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share weighted-average common shares outstanding |
|
|
89,884 |
|
|
|
89,712 |
|
|
|
89,825 |
|
|
|
89,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share weighted-average common shares outstanding |
|
|
89,884 |
|
|
|
89,712 |
|
|
|
89,825 |
|
|
|
89,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share Class A and B common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) |
|
$ |
(3.43 |
) |
|
$ |
(0.07 |
) |
|
$ |
(2.83 |
) |
|
$ |
(0.45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) |
|
$ |
(3.43 |
) |
|
$ |
(0.07 |
) |
|
$ |
(2.83 |
) |
|
$ |
(0.45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
2
ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(254,405 |
) |
|
$ |
(39,943 |
) |
Adjustments to reconcile net income (loss) to net cash flows from operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
193,767 |
|
|
|
4,391 |
|
Equity in losses (earnings) of affiliates |
|
|
3,304 |
|
|
|
(478 |
) |
Realized and unrealized losses (gains) on investments |
|
|
230,978 |
|
|
|
(4,533 |
) |
Impairment on FCC authorizations |
|
|
38,721 |
|
|
|
|
|
Non-cash, stock-based compensation |
|
|
17,477 |
|
|
|
2,865 |
|
Deferred tax expense (benefit) |
|
|
(51,634 |
) |
|
|
10 |
|
Other, net |
|
|
(1,098 |
) |
|
|
850 |
|
Change in noncurrent assets |
|
|
(36,610 |
) |
|
|
|
|
Changes in current assets and current liabilities, net |
|
|
(107,079 |
) |
|
|
2,562 |
|
|
|
|
|
|
|
|
Net cash flows from operating activities |
|
|
33,421 |
|
|
|
(34,276 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
Purchases of marketable investment securities |
|
|
(2,440,917 |
) |
|
|
|
|
Sales and maturities of marketable investment securities |
|
|
2,439,078 |
|
|
|
|
|
Purchases of property and equipment |
|
|
(147,268 |
) |
|
|
(120,076 |
) |
Proceeds from insurance settlement |
|
|
40,750 |
|
|
|
|
|
Change in restricted cash and marketable investment securities |
|
|
304 |
|
|
|
|
|
Purchase of strategic investments and other, included in marketable and non-marketable investment securities |
|
|
(133,692 |
) |
|
|
(40,000 |
) |
Other |
|
|
(1,012 |
) |
|
|
(160 |
) |
|
|
|
|
|
|
|
Net cash flows from investing activities |
|
|
(242,757 |
) |
|
|
(160,236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
Repayment of capital lease obligations, mortgages and other notes payable |
|
|
(37,016 |
) |
|
|
|
|
Contribution of cash and cash equivalents from DISH Network in connection with the Spin-off (Note 1) |
|
|
544,065 |
|
|
|
|
|
Changes in advances from owner |
|
|
|
|
|
|
198,625 |
|
Class A common stock repurchases (Note 9) |
|
|
(14,785 |
) |
|
|
|
|
Net proceeds from Class A common stock options exercised and Class A common stock issued
under the Employee Stock Purchase Plan |
|
|
5,784 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities |
|
|
498,048 |
|
|
|
198,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
288,712 |
|
|
|
4,113 |
|
Cash and cash equivalents, beginning of period |
|
|
41,082 |
|
|
|
29,621 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
329,794 |
|
|
$ |
33,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
24,509 |
|
|
$ |
138 |
|
|
|
|
|
|
|
|
Cash received for interest |
|
$ |
17,637 |
|
|
$ |
974 |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
23,045 |
|
|
$ |
91 |
|
|
|
|
|
|
|
|
Vendor financing |
|
$ |
15,172 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Non-cash investing activities |
|
$ |
15,862 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Non-cash proceeds from the sale of a company which held certain FCC authorizations |
|
$ |
132,900 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Net assets
contributed in connection with the Spin-off, excluding cash and cash
equivalents |
|
$ |
1,541,682 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
3
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Business Activities
Principal Business
The spin-off by DISH Network Corporation (DISH Network) of technology and infrastructure assets
to EchoStar Corporation (EchoStar, the Company, we, and/or us) was completed on January 1,
2008 through a distribution of 100% of the common stock of EchoStar to the holders of DISH
Networks common stock (the Spin-off). The Spin-off was made pursuant to a separation agreement
by which DISH Network contributed to EchoStar the subsidiaries and assets that operated DISH
Networks set-top box business, satellite services, digital broadcast operations, certain real
estate and other assets and liabilities. The Company has received a private letter ruling from the
Internal Revenue Service and an opinion from tax counsel indicating that the Spin-off was tax free
to the stockholders of DISH Network and EchoStar.
The EchoStar business consists of the following segments:
|
|
|
Equipment sales and digital broadcast operations Equipment sales include the sales of
set-top boxes and related components including Slingboxes to DISH Network and international
customers. Digital broadcast operations include satellite uplinking/downlinking,
transmission services, signal processing, conditional access management, telemetry,
tracking and control, and other services provided primarily to DISH Network. |
|
|
|
|
Satellite Services Satellite services consists principally of transponder leasing
provided primarily to DISH Network, and secondarily to other customers. |
The table below summarizes the assets and liabilities which were contributed to us in connection
with the Spin-off in addition to the assets included in our historical financial statements. The
contribution was accounted for at DISH Networks historical cost given the nature of the
distribution.
4
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
|
|
|
|
|
|
|
January 1, 2008 |
|
|
|
(In thousands) |
|
Assets |
|
|
|
|
Current Assets: |
|
|
|
|
Cash and cash equivalents |
|
$ |
544,065 |
|
Marketable investment securities |
|
|
455,935 |
|
Trade accounts receivable, net |
|
|
3,900 |
|
Inventories, net |
|
|
9,957 |
|
Other current assets |
|
|
9,061 |
|
|
|
|
|
Total current assets |
|
|
1,022,918 |
|
Restricted cash and marketable investment securities |
|
|
3,150 |
|
Property and equipment, net |
|
|
1,302,767 |
|
FCC authorizations |
|
|
123,121 |
|
Intangible assets, net |
|
|
142,898 |
|
Other noncurrent assets, net |
|
|
20,335 |
|
|
|
|
|
Total assets |
|
$ |
2,615,189 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
Current Liabilities: |
|
|
|
|
Trade accounts payable |
|
$ |
|
|
Deferred revenue and other accrued expenses |
|
|
11,586 |
|
Current portion of capital lease obligations, mortgages and other notes payable |
|
|
39,168 |
|
|
|
|
|
Total current liabilities |
|
|
50,754 |
|
|
|
|
|
|
|
|
|
|
Long-term obligations, net of current portion: |
|
|
|
|
Capital lease obligations, mortgages and other notes payable, net of current portion |
|
|
339,542 |
|
Deferred tax liabilities |
|
|
139,146 |
|
|
|
|
|
Total long-term obligations, net of current portion |
|
|
478,688 |
|
|
|
|
|
Total liabilities |
|
|
529,442 |
|
|
|
|
|
|
|
|
|
|
Net assets contributed |
|
$ |
2,085,747 |
|
|
|
|
|
2. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States (GAAP) and with the
instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information.
Accordingly, these statements do not include all of the information and notes required for complete
financial statements prepared under GAAP. In our opinion, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 2008 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2008. For further information, refer to the
Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K/A
for the year ended December 31, 2007 (2007 10-K/A). Certain prior period amounts have been
reclassified to conform to the current period presentation. Variable rate demand notes (VRDNs),
which we previously reported as cash and cash equivalents, are now classified as current marketable
investment securities (see Note 5). VRDNs were contributed to us from DISH Network in connection
with the Spin-off and we continue to hold VRDNs as of September 30, 2008. We reclassified the
allocation of cash and cash equivalents and marketable investment securities to accurately reflect
the amounts of each we received from DISH Network in connection with the Spin-off. There was no
change in the combined contribution total of $1.0 billion of cash and cash equivalents and current
marketable investment securities (see Note 1). As a result of these reclassifications, Purchases
of marketable investment securities and Sales and maturities of marketable investment securities
in Net cash flows from investing activities and Contribution of cash and cash equivalents from
DISH Network in connection with the Spin-off in Net cash flows from financing activities on our
Condensed Consolidated Statements of Cash Flows have been reclassified for all prior periods. The
ongoing purchase and sale of VRDNs now appear on our cash flow statement under Cash flows from
investing activities.
5
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
The unaudited Condensed Consolidated Financial Statements in this quarterly report for the periods
presented prior to the Spin-off are presented on a combined basis and principally represent the
digital set-top box business and other net assets transferred to us as part of the Spin-off. The
assets and liabilities presented have been reflected on a historical basis, as prior to the
Spin-off such assets and liabilities were 100% owned by DISH Network. Our historical combined
financial statements do not include the satellites, digital broadcast operations assets, certain
real estate and other assets and related liabilities that were contributed to us by DISH Network in
the Spin-off. Also, the combined financial statements for the periods presented prior to the
Spin-off do not include all of the actual expenses that would have been incurred had EchoStar been
a stand-alone entity during the periods presented and do not reflect EchoStars combined results of
operations, financial position and cash flows had we been a stand-alone company during the periods
presented. The results of operations and the cash flows for any interim period are not necessarily
indicative of the results that may be expected for a fiscal year or any other future period.
Principles of Consolidation
We consolidate all majority owned subsidiaries and investments in entities in which we have
controlling influence. For entities that are considered variable interest entities we apply the
provisions of Financial Accounting Standards Board (FASB) Interpretation No. 46R, Consolidation
of Variable Interest Entities An Interpretation of ARB No. 51 (FIN 46R). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses for each reporting period. Estimates are used in accounting for, among other things,
allowances for uncollectible accounts, inventory allowances, warranty obligations, self-insurance
obligations, deferred taxes and related valuation allowances, uncertain tax positions, loss
contingencies, fair values of financial instruments, fair value of options granted under our
stock-based compensation plans, fair value of assets and liabilities acquired in business
combinations, capital leases, asset impairments, useful lives of property, equipment and intangible
assets, and royalty obligations. Actual results may differ from previously estimated amounts, and
such differences may be material to the Condensed Consolidated Financial Statements. Estimates and
assumptions are reviewed periodically, and the effects of revisions are reflected prospectively
beginning in the period they occur.
Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Net income (loss) |
|
$ |
(307,930 |
) |
|
$ |
(6,650 |
) |
|
$ |
(254,405 |
) |
|
$ |
(39,943 |
) |
Foreign currency translation adjustments |
|
|
(1,037 |
) |
|
|
(162 |
) |
|
|
(1,821 |
) |
|
|
694 |
|
Unrealized holding gains (losses) on available-for-sale securities |
|
|
(53,557 |
) |
|
|
38,751 |
|
|
|
(153,720 |
) |
|
|
42,412 |
|
Recognition of previously unrealized (gains) losses on available-for-sale
securities included in net income (loss) |
|
|
100,728 |
|
|
|
|
|
|
|
101,548 |
|
|
|
(3,048 |
) |
Deferred income tax (expense) benefit |
|
|
|
|
|
|
|
|
|
|
20,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(261,796 |
) |
|
$ |
31,939 |
|
|
$ |
(287,913 |
) |
|
$ |
115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Accumulated other comprehensive income (loss) presented on the accompanying Condensed
Consolidated Balance Sheets consists of the accumulated net unrealized gains (losses) on
available-for-sale securities and foreign currency translation adjustments, net of deferred taxes.
|
|
|
|
|
|
|
Accumulated |
|
|
|
Other |
|
|
|
Comprehensive |
|
|
|
Income |
|
|
|
(In thousands) |
|
Balance, December 31, 2007 |
|
$ |
66,696 |
|
Accumulated other comprehensive income
adjustments in connection with the Spin-off |
|
|
(32,779 |
) |
Foreign currency translation |
|
|
(1,821 |
) |
Change in unrealized holding gains (losses) on available-for-sale securities, net |
|
|
(52,172 |
) |
Deferred income tax (expense) benefit |
|
|
20,485 |
|
|
|
|
|
Balance, September 30, 2008 |
|
$ |
409 |
|
|
|
|
|
Basic and Diluted Income (Loss) Per Share
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128) requires
entities to present both basic earnings per share (EPS) and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income (loss) by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if
stock options were exercised.
The number of shares presented for the three and nine months ended September 30, 2008 represents
the actual weighted-average number of shares outstanding for the period. Prior to January 1, 2008,
we were a wholly-owned subsidiary of DISH Network and had only a nominal number of shares
outstanding. Accordingly for all periods prior to the completion of the Spin-off on January 1,
2008, basic and diluted earnings per share are computed using EchoStars shares outstanding as of
January 1, 2008. The potential dilution from stock options exercisable into common stock was
computed using the treasury stock method based on the average market value of our Class A common
stock. The following table reflects the basic and diluted weighted-average shares outstanding used
to calculate basic and diluted earnings per share. Earnings per share amounts for all periods are
presented below in accordance with the requirements of SFAS 128.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted net income (loss) per share
Net income (loss) |
|
$ |
(307,930 |
) |
|
$ |
(6,650 |
) |
|
$ |
(254,405 |
) |
|
$ |
(39,943 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted net income (loss) per share
weighted-average common shares outstanding |
|
|
89,884 |
|
|
|
89,712 |
|
|
|
89,825 |
|
|
|
89,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share Class A and B common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) |
|
$ |
(3.43 |
) |
|
$ |
(0.07 |
) |
|
$ |
(2.83 |
) |
|
$ |
(0.45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) |
|
$ |
(3.43 |
) |
|
$ |
(0.07 |
) |
|
$ |
(2.83 |
) |
|
$ |
(0.45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008, there were 4.6 million stock incentive awards outstanding not
included in the above denominator as their inclusion would have been antidilutive.
7
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Vesting of options and rights to acquire shares of our Class A common stock granted pursuant to our
long-term incentive plans is contingent upon meeting certain long-term goals which have not yet
been achieved. As a consequence, the following are not included in the diluted EPS calculation:
|
|
|
|
|
|
|
As of |
|
|
|
September 30, 2008 |
|
|
|
(In thousands) |
|
Performance based options |
|
|
1,910 |
|
Restricted performance units |
|
|
114 |
|
|
|
|
|
Total |
|
|
2,024 |
|
|
|
|
|
New Accounting Pronouncements
Revised Business Combinations
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R (revised
2007), Business Combinations (SFAS 141R). SFAS 141R replaces SFAS 141 and establishes
principles and requirements for how an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, including goodwill, the liabilities assumed and any
non-controlling interest in the acquiree. SFAS 141R also establishes disclosure requirements to
enable users of the financial statements to evaluate the nature and financial effects of the
business combination. This statement is effective for fiscal years beginning after December 15,
2008. We do not expect the adoption of SFAS 141R to have a material impact on our financial
position or results of operations.
Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements (SFAS 160). SFAS 160 establishes
accounting and reporting standards for ownership interests in subsidiaries held by parties other
than the parent, the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parents ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes
reporting requirements to clearly identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. This standard is effective for fiscal years beginning
after December 15, 2008. We do not expect the adoption of SFAS 160 to have a material impact on our
financial position or results of operations.
3. Stock-Based Compensation
Stock Incentive Plans
In connection with the Spin-off, as provided in DISH Networks existing stock incentive plans and
consistent with the Spin-off exchange ratio, each DISH Network stock option was converted into two
options as follows:
|
|
an adjusted DISH Network stock option for the same number of shares that were exercisable
under the original DISH Network stock option, with an exercise price equal to the exercise
price of the original DISH Network stock option multiplied by 0.831219. |
|
|
|
a new EchoStar stock option for one-fifth of the number of shares that were exercisable
under the original DISH Network stock option, with an exercise price equal to the exercise
price of the original DISH Network stock option multiplied by 0.843907. |
8
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Similarly, each holder of DISH Network restricted stock units retained his or her DISH Network
restricted stock units and received one EchoStar restricted stock unit for every five DISH Network
restricted stock units that they held.
Consequently, the fair value of the DISH Network stock award and the new EchoStar stock award
immediately following the Spin-off was equivalent to the fair value of such stock award immediately
prior to the Spin-off.
We maintain stock incentive plans to attract and retain officers, directors and key employees.
Awards under these plans include both performance and non-performance based equity incentives. As
of September 30, 2008, we had outstanding under our stock incentive plans options to acquire 6.3
million shares of our Class A common stock and 0.3 million restricted stock awards. Stock options
granted through September 30, 2008 were granted with exercise prices equal to or greater than the
market value of our Class A common stock at the date of grant and with a maximum term of ten years.
Historically, our options have been subject to vesting, typically at the rate of 20% to 25% per
year, however, some options have been granted with immediate vesting and other options vest only
upon the achievement of certain company-wide objectives. As of September 30, 2008, we had 9.5
million shares of our Class A common stock available for future grant under our stock incentive
plans.
As of September 30, 2008, the following stock incentive awards were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008 |
|
|
|
EchoStar Awards |
|
|
DISH Network Awards |
|
|
|
|
|
|
|
Restricted |
|
|
|
|
|
|
Restricted |
|
|
|
Stock |
|
|
Stock |
|
|
Stock |
|
|
Stock |
|
Stock Incentive Awards Outstanding |
|
Options |
|
|
Units |
|
|
Options |
|
|
Units |
|
Held by EchoStar employees |
|
|
3,072,456 |
|
|
|
237,656 |
|
|
|
5,530,638 |
|
|
|
1,188,332 |
|
Held by DISH Network employees |
|
|
3,199,525 |
|
|
|
90,481 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,271,981 |
|
|
|
328,137 |
|
|
|
5,530,638 |
|
|
|
1,188,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We are responsible for fulfilling all stock incentive awards related to EchoStar common stock and
DISH Network is responsible for fulfilling all stock incentive awards related to DISH Network
common stock regardless of whether such stock incentive awards are held by our or DISH Networks
employees. Notwithstanding the foregoing, based on the requirements of Statement of Financial
Accounting Standards No. 123R, Share-Based Payments (SFAS 123R), our stock-based compensation
expense, resulting from awards outstanding at the Spin-off date, is based on the stock incentive
awards held by our employees regardless of whether such awards were issued by EchoStar or DISH
Network. Accordingly, stock-based compensation that we expense with respect to DISH Network stock
incentive awards is included in Additional paid-in capital on our Condensed Consolidated Balance
Sheets.
9
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Stock Award Activity
Our stock option activity (including performance and non-performance based options) for the nine
months ended September 30, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
Ended September 30, 2008 |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Exercise |
|
|
Options |
|
Price |
Total options outstanding, beginning of period |
|
|
4,182,755 |
|
|
$ |
22.96 |
|
Granted |
|
|
2,493,500 |
|
|
|
29.36 |
|
Exercised |
|
|
(202,355 |
) |
|
|
23.88 |
|
Forfeited and cancelled |
|
|
(201,919 |
) |
|
|
27.97 |
|
|
|
|
|
Total options outstanding, end of period |
|
|
6,271,981 |
|
|
|
25.31 |
|
|
|
|
|
|
|
|
|
|
Performance based options outstanding, end of period * |
|
|
1,909,500 |
|
|
|
16.65 |
|
|
|
|
|
|
|
|
|
|
Total options exercisable at end of period |
|
|
1,285,109 |
|
|
|
29.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
These options, which are included in the caption Total options outstanding, end of period, were
issued pursuant to two separate long-term, performance-based stock incentive plans, which are
discussed below. Vesting of these options is contingent upon meeting certain long-term goals which
management has determined are not probable as of September 30, 2008. |
We realized $2 million of tax benefits from stock options exercised during the nine months ended
September 30, 2008. Based on the closing market price of our Class A common stock on September 30,
2008, the aggregate intrinsic value of our outstanding stock options was $19 million. Of that
amount, options with an aggregate intrinsic value of $2 million were exercisable at the end of the
period.
Our restricted stock award activity (including performance and non-performance based options) for
the nine months ended September 30, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
Ended September 30, 2008 |
|
|
|
|
|
|
Weighted- |
|
|
Restricted |
|
Average |
|
|
Stock |
|
Grant Date |
|
|
Awards * |
|
Fair Value |
Total restricted stock awards outstanding, beginning of period |
|
|
343,386 |
|
|
$ |
29.69 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(6,000 |
) |
|
|
26.30 |
|
Forfeited and cancelled |
|
|
(9,249 |
) |
|
|
31.22 |
|
|
|
|
|
|
|
|
|
|
Total restricted stock awards outstanding, end of period |
|
|
328,137 |
|
|
|
29.72 |
|
|
|
|
|
|
|
|
|
|
Restricted performance units outstanding, end of period * |
|
|
114,137 |
|
|
|
26.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
These restricted performance units, which are included in the caption Total restricted stock
awards outstanding, end of period, were issued pursuant to a long-term, performance-based stock
incentive plan, which is discussed below. Vesting of these restricted performance units is
contingent upon meeting a long-term company goal which management has determined is not probable as
of September 30, 2008. |
10
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Long-Term Performance-Based Plans
We have two long-term, performance-based stock incentive plans, the 1999 LTIP and the 2005 LTIP.
The 1999 LTIP provided stock options to key employees which vest over five years at the rate of 20%
per year. Exercise of the options is also contingent on achieving a company-specific goal in
relation to an industry-related metric prior to December 31, 2008. The 2005 LTIP provides stock
options and restricted performance units, either alone or in combination, which vest over seven
years at the rate of 10% per year during the first four years, and at the rate of 20% per year
thereafter. Exercise of the options is also subject to a performance condition that a
company-specific goal is achieved prior to March 31, 2015.
Contingent compensation related to the 1999 LTIP and the 2005 LTIP will not be recorded on our
financial statements unless and until the achievement of the performance condition is probable. The
competitive nature of our industry and certain other factors can significantly impact achievement
of the goal. Consequently, while it was determined that achievement of either of the goals was not
probable as of September 30, 2008, that assessment could change with respect to either goal at any
time. In accordance with SFAS 123R, if all of the awards under each plan were vested and each goal
had been met during the nine months ended September 30, 2008, we would have recorded total
non-cash, stock-based compensation expense for our employees as indicated in the table below. If
the goals are met and there are unvested options at that time, the vested amounts would be expensed
immediately on our Condensed Consolidated Statements of Operations, with the unvested portion
recognized ratably over the remaining vesting period. During the nine months ended September 30,
2008, if we had determined each goal was probable, we would have recorded total non-cash,
stock-based compensation expense for our employees as indicated in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Vested Portion |
|
|
|
1999 LTIP |
|
|
2005 LTIP |
|
|
1999 LTIP |
|
|
2005 LTIP |
|
|
|
(In thousands) |
|
DISH Network awards held by EchoStar
employees |
|
$ |
10,470 |
|
|
$ |
18,425 |
|
|
$ |
10,470 |
|
|
$ |
5,277 |
|
EchoStar awards held by EchoStar employees |
|
|
2,126 |
|
|
|
3,741 |
|
|
|
2,126 |
|
|
|
1,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,596 |
|
|
$ |
22,166 |
|
|
$ |
12,596 |
|
|
$ |
6,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the 6.3 million options and 0.3 million restricted stock awards outstanding under our stock
incentive plans as of September 30, 2008, the following awards were outstanding pursuant to the
1999 LTIP and the 2005 LTIP:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
September 30, 2008 |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
Long-Term Performance-Based Plans |
|
Stock Awards |
|
Exercise Price |
1999 LTIP options |
|
|
1,019,600 |
|
|
$ |
8.84 |
|
2005 LTIP options |
|
|
889,900 |
|
|
|
25.60 |
|
2005 LTIP restricted performance units |
|
|
114,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,023,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No awards were granted under the 1999 LTIP or 2005 LTIP during the nine months ended September 30,
2008.
11
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Stock-Based Compensation
Total non-cash, stock-based compensation expense, net of related tax effects, for all of our
employees is shown in the following table for the three and nine months ended September 30, 2008
and 2007 and was allocated to the same expense categories as the base compensation for such
employees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Satellite services, digital broadcast
operations and other cost of sales |
|
$ |
124 |
|
|
$ |
|
|
|
$ |
358 |
|
|
$ |
|
|
Research and development expense |
|
|
1,377 |
|
|
|
425 |
|
|
|
4,511 |
|
|
|
1,234 |
|
Selling, general and administrative expenses |
|
|
2,518 |
|
|
|
106 |
|
|
|
6,099 |
|
|
|
540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-cash, stock based compensation |
|
$ |
4,019 |
|
|
$ |
531 |
|
|
$ |
10,968 |
|
|
$ |
1,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008, our total unrecognized compensation cost related to our non-performance
based unvested stock options was $55 million and includes compensation expense that we will
recognize for DISH Network stock options held by our employees as a result of the Spin-off. This
cost is based on an estimated future forfeiture rate of approximately 1.1% per year and will be
recognized over a weighted-average period of approximately three years. Share-based compensation
expense is recognized based on awards ultimately expected to vest and is reduced for estimated
forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. Changes in the
estimated forfeiture rate can have a significant effect on share-based compensation expense since
the effect of adjusting the rate is recognized in the period the forfeiture estimate is changed.
The fair value of each award for the three and nine months ended September 30, 2008 was estimated
at the date of the grant using a Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Nine |
|
|
Months Ended |
|
Months Ended |
|
|
September 30, 2008 |
|
September 30, 2008 |
Risk-free interest rate |
|
|
3.15 |
% |
|
|
2.74% 3.42 |
% |
Volatility factor |
|
|
24.90 |
% |
|
|
19.98% 24.90 |
% |
Expected term of options in years |
|
|
6.1 |
|
|
|
6.0 6.1 |
|
Weighted-average fair value of options granted |
|
|
$7.63 |
|
|
|
$7.63 $9.29 |
|
We do not currently plan to pay dividends on our common stock, and therefore the dividend yield
percentage is set at zero. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions and are fully
transferable. Consequently, our estimate of fair value may differ from other valuation models.
Further, the Black-Scholes model requires the input of highly subjective assumptions. Changes in
the subjective input assumptions can materially affect the fair value estimate. Therefore, we do
not believe the existing models provide as reliable a single measure of the fair value of
stock-based compensation awards as a market-based model would.
We will continue to evaluate the assumptions used to derive the estimated fair value of options for
our stock as new events or changes in circumstances become known.
12
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
4. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Finished goods |
|
$ |
24,290 |
|
|
$ |
16,969 |
|
Raw materials |
|
|
17,253 |
|
|
|
4,042 |
|
Work-in-process |
|
|
10,531 |
|
|
|
205 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
52,074 |
|
|
|
21,216 |
|
Inventory allowance |
|
|
(1,026 |
) |
|
|
(173 |
) |
|
|
|
|
|
|
|
Inventories, net |
|
$ |
51,048 |
|
|
$ |
21,043 |
|
|
|
|
|
|
|
|
5. Marketable and Non-Marketable Investment Securities
Fair Value Measurements
Effective January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS 157), for all financial instruments and non-financial instruments
accounted for at fair value on a recurring basis. SFAS 157 establishes a new framework for
measuring fair value and expands related disclosures. Broadly, the SFAS 157 framework requires fair
value to be determined 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. SFAS 157 establishes market or
observable inputs as the preferred source of values, followed by unobservable inputs or assumptions
based on hypothetical transactions in the absence of market inputs.
|
|
|
Level 1, defined as observable inputs being quoted prices in active markets for
identical assets; |
|
|
|
|
Level 2, defined as observable inputs including quoted prices for similar assets; and |
|
|
|
|
Level 3, defined as unobservable inputs in which little or no market data exists,
therefore requiring assumptions based on the best information available. |
Investments in Debt and Equity Securities
We have investments in various debt and equity instruments including corporate bonds, corporate
equity securities, government bonds, and VRDNs. VRDNs are long-term floating rate municipal bonds
with embedded put options that allow the bondholder to sell the security at par plus accrued
interest. All of the put options are secured by a pledged liquidity source. While they are
classified as marketable investment securities, VRDNs can be liquidated per the put option on a
same day or on a five business day settlement basis. As of September 30, 2008 and December 31,
2007, we held VRDNs with fair values of $454 million and zero, respectively.
13
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Our assets measured at fair value on a recurring basis were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value as of |
|
|
|
September 30, 2008 |
|
|
December 31, |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
2007 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable investment securities non strategic |
|
$ |
522,170 |
|
|
$ |
519,683 |
|
|
$ |
2,487 |
|
|
$ |
|
|
|
$ |
|
|
Marketable investment securities strategic |
|
|
111,137 |
|
|
|
111,137 |
|
|
|
|
|
|
|
|
|
|
|
491,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current marketable investment securities |
|
|
633,307 |
|
|
|
630,820 |
|
|
|
2,487 |
|
|
|
|
|
|
|
491,185 |
|
Noncurrent: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable and non-marketable investment securities |
|
|
275,914 |
|
|
|
30,000 |
|
|
|
205,035 |
|
|
|
40,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable investment securities |
|
$ |
909,221 |
|
|
$ |
660,820 |
|
|
$ |
207,522 |
|
|
$ |
40,879 |
|
|
$ |
491,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the Spin-off, we received a contribution of $456 million of marketable
investment securities from DISH Network (see Note 1). In addition, as of September 30, 2008, we held approximately $235 million of publicly traded investment
securities which are reported as non-current in Marketable and non-marketable investments
securities on our Condensed Consolidated Balance Sheets. Of this amount, $207 million were
previously included in Marketable investment securities at December 31, 2007.
Changes in Level 3 instruments are as follows (in thousands):
|
|
|
|
|
|
|
Level 3 |
|
|
|
Investment |
|
|
|
Securities |
|
Balance as of January 1, 2008 |
|
$ |
|
|
Net realized/unrealized gains/(losses) included in earnings |
|
|
(28,858 |
) |
Net realized/unrealized gains/(losses) included in other comprehensive income |
|
|
|
|
Purchases, issuances and settlements, net |
|
|
69,737 |
|
|
|
|
|
Balance as of September 30, 2008 |
|
$ |
40,879 |
|
|
|
|
|
Marketable Investment Securities
Changes in the fair value of marketable investment securities accounted for at fair value are
recognized as unrealized gains and losses on our Condensed Consolidated Statements of Operations.
Interest income on fair value method debt investment securities is recorded in Interest income on
our Condensed Consolidated Statements of Operations. Changes in the fair value of marketable
investment securities accounted for as available-for-sale are reported at fair value with the
related temporary unrealized gains and losses reported as a separate component of Accumulated
other comprehensive income (loss) within Total stockholders equity (deficit), net of related
deferred income tax on our Condensed Consolidated Balance Sheets.
Declines in the fair value of an available-for-sale investment security which are determined to be
other than temporary are recognized in the Condensed Consolidated Statements of Operations in the
Other component of Other Income (Expense), thus establishing a new cost basis for the
investment. We evaluate our available-for-sale investment securities portfolio on a quarterly
basis to determine whether declines in the fair value of these securities are other than temporary.
This quarterly evaluation consists of reviewing, among other things, the fair value of our
marketable investment securities compared to the carrying amount, the historical volatility of the
price of each security and any market and company-specific factors related to each security.
Generally, absent specific factors to the contrary, declines in the fair value of investments below
cost basis for a continuous period of less than six months are considered to be temporary.
Declines in the fair value of investments for a continuous period of six to nine months are
evaluated on a case by case basis to determine whether any company or market-specific factors exist
which would indicate that such declines are other than temporary. Declines in the fair value of
investments below cost basis for a
14
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
continuous period greater than nine months are considered other
than temporary and are recorded as charges to earnings, absent specific factors to the contrary.
For the equity securities that are not publicly traded, it is not practical to regularly estimate
the fair value of the investments; however, these investments are subject to an evaluation for
other than temporary impairment on a quarterly basis. This quarterly evaluation consists of
reviewing, among other things, company business plans and current financial statements, if
available, for factors that may indicate an impairment of our investment. Such factors may
include, but are not limited to, cash flow concerns, material litigation, violations of debt
covenants and changes in business strategy. The fair value of these equity investments is not
estimated unless there are identified changes in circumstances that may indicate an impairment
exists and these changes are likely to have a significant adverse effect on the fair value of the
investment.
We also have an investment in non-marketable convertible debt which is included in Marketable and
non-marketable investment securities on our Condensed
Consolidated Balance Sheets. The fair value of this debt is determined each reporting period based upon inputs other than quoted market prices that are
observable for the debt, either directly or indirectly, with changes in fair value recorded as
unrealized gains and losses on our Condensed Consolidated Statements of Operations. The fair value
analysis takes into consideration the price of the underlying company stock as well as changes in
the credit market, including yield curves and interest rates.
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.
Current Marketable Investment Securities
As of September 30, 2008 and December 31, 2007, we had accumulated unrealized losses of less than
$1 million, net of related tax effect, and unrealized gains of $64 million, net of related tax
effect, respectively, as a part of Accumulated other comprehensive income (loss) within Total
stockholders equity (deficit). As of September 30, 2008, a full valuation allowance has been
established against the deferred tax assets associated with these unrealized capital losses.
Our strategic marketable investment securities are highly speculative and are concentrated in a
small number of companies. Additionally, during the nine months ended September 30, 2008 our
strategic investments have experienced and continue to experience volatility. If the fair value of
our strategic marketable investment securities portfolio, accounted for as available-for-sale, does
not remain above cost basis or if we become aware of any market
or company-specific factors that indicate that the carrying value of certain of our securities is
impaired, we may be required to record charges to earnings in future periods equal to the amount of
the decline in fair value. During October 2008, the value of our current strategic marketable investment
securities of $111 million declined in excess of 20%.
15
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Marketable Investment Securities in a Loss Position. The following table reflects the length of
time that the individual securities, accounted for as available-for-sale, have been in an
unrealized loss position, aggregated by investment category. The unrealized losses on our
investments in corporate equity securities represent investments in the common stock of three
companies in the technology industry and one in the communications industry. We are not aware of
any specific factors which indicate the unrealized loss in these investments is due to anything
other than temporary market fluctuations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008 |
|
|
Primary |
|
Less than Six Months |
|
Six to Nine Months |
|
Nine Months or More |
Investment |
|
Reason for |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
Category |
|
Unrealized Loss |
|
Value |
|
Loss |
|
Value |
|
Loss |
|
Value |
|
Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
Equity securities |
|
Temporary market fluctuations |
|
$ |
21,777 |
|
|
$ |
(4,927 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Non-Current Marketable and Non-Marketable Investment Securities
We account for our unconsolidated debt and equity investments under the fair value, equity or cost
method of accounting. Non-majority owned investments are generally accounted for using the equity
method when we have the ability to significantly influence the operating decisions of the issuer.
However, when we believe the fair value method of accounting provides more meaningful information
to our investors, we elect the fair value method for certain investments in affiliates whose equity
is publicly traded. When we do not have the ability to significantly influence the operating
decisions of an issuer, the cost method is used.
These debt and equity investments are included in Marketable and non-marketable investment
securities on our Condensed Consolidated Balance Sheets and detailed by accounting method below.
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Fair value method * |
|
$ |
275,914 |
|
|
$ |
|
|
Cost method |
|
|
28,389 |
|
|
|
39,046 |
|
Equity method |
|
|
16,731 |
|
|
|
20,114 |
|
|
|
|
|
|
|
|
Total |
|
$ |
321,034 |
|
|
$ |
59,160 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
During the three and nine months ended September 30, 2008, we recorded $163 million and $183
million, respectively, of unrealized losses due to changes in the fair value of certain debt and
equity securities, accounted for under the fair value method, on our Condensed Consolidated
Statements of Operations. |
16
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Other
income and expense on our Condensed Consolidated Statements of
Operations includes other changes
in the carrying amount of our current and non-current marketable investment securities and other
items as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Gain on sale of a company which held certain FCC authorizations |
|
$ |
|
|
|
$ |
|
|
|
$ |
67,624 |
|
|
$ |
|
|
Impairment
on FCC authorizations (Note 7) |
|
|
(38,720 |
) |
|
|
|
|
|
|
(38,720 |
) |
|
|
|
|
Gains (losses) on exchanges/sale of marketable investment securities |
|
|
(30,284 |
) |
|
|
|
|
|
|
14,969 |
|
|
|
1,984 |
|
Other than temporary impairments on marketable investment securities |
|
|
(70,435 |
) |
|
|
|
|
|
|
(116,507 |
) |
|
|
|
|
Other than temporary impairments on non-marketable investment securities |
|
|
(10,000 |
) |
|
|
|
|
|
|
(10,000 |
) |
|
|
|
|
Equity in earnings (losses) of affiliates |
|
|
(1,716 |
) |
|
|
1,602 |
|
|
|
(6,934 |
) |
|
|
(4,177 |
) |
Other |
|
|
(4,463 |
) |
|
|
(54 |
) |
|
|
(4,850 |
) |
|
|
2,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(155,618 |
) |
|
$ |
1,548 |
|
|
$ |
(94,418 |
) |
|
$ |
782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master Investment Agreement with TerreStar
On February 7, 2008, we completed several transactions under a Master Investment Agreement, dated
as of February 5, 2008 between us, TerreStar Corporation (TerreStar) and TerreStar Networks, Inc.
(TerreStar Networks). Under the Master Investment Agreement, we acquired $50 million in
aggregate principal amount of TerreStar Networks 61/2% Senior Exchangeable Paid-in-Kind Notes due
June 15, 2014 (Exchangeable Notes). In addition, we acquired $50 million aggregate principal
amount of TerreStar Networks 15% Senior Secured Paid-in-Kind Notes due February 15, 2014 (15% PIK
Notes).
The Exchangeable Notes are guaranteed by TerreStar License Inc. and TerreStar National Services,
Inc. and mature on June 15, 2014. The Exchangeable Notes are exchangeable for shares of TerreStar
common stock based on a conversion price of $5.57 per share. TerreStar Networks may be obligated
to repurchase all or part of the Exchangeable Notes under certain circumstances, including upon a
change of control of TerreStar Networks. Interest on the Exchangeable Notes is payable in
additional Exchangeable Notes through March 2011 and cash thereafter. Additional cash interest may
be payable in the event that certain milestones are not satisfied.
We also entered into a Purchase Money Credit Agreement with TerreStar Networks and Harbinger
Capital Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund LP
(collectively, Harbinger), in which we and Harbinger each committed to provide up to $50 million
in secured financing, the proceeds of which may be advanced to TerreStar Networks from time to time
as required for TerreStar Networks to make required payments in connection with a communications
satellite to be constructed and launched for TerreStar Networks. Pursuant to a Security Agreement,
dated as of February 5, 2008, from TerreStar Networks in favor of US Bank National Association, as
Collateral Agent, TerreStar Networks granted a security interest to the Collateral Agent in certain
of TerreStar Networks assets to be financed by the proceeds of the loan, including, among other
things, the communications satellite and related raw materials, work-in-progress, and finished
goods. As of September 30, 2008, we had advanced approximately $17 million to TerreStar Networks
under the terms of this agreement.
Also, on February 5, 2008, we entered into a Spectrum Agreement (Spectrum Agreement) with
TerreStar, which provided for the lease to TerreStar of our holdings of 1.4 GHz spectrum along with
an option for TerreStar to acquire the company through which we held these licenses in exchange for
the issuance of 30 million shares of TerreStars common stock (Common Stock). On June 10, 2008,
TerreStar completed the acquisition of the company under the Spectrum Agreement and issued 30
million shares of Common Stock to us. The $68 million gain resulting from our sale of the company
which held certain FCC authorizations was recorded in Other on our Condensed Consolidated
Statements of Operations.
17
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
We have two representatives on TerreStars board of directors and have the ability to exert
significant influence. We currently account for all of our investments in TerreStar using the fair
value method of accounting as we believe that the fair value approach provides our investors with
the most meaningful information. All of our investments in TerreStar are included in Marketable
and non-marketable investment securities on our Condensed Consolidated Balance Sheets.
We rely on TerreStars management to provide us with accurate summary financial information. We
are not aware of any errors in or possible misstatements of the financial information provided to
us that would have a material effect on our Condensed Consolidated Financial Statements. The
following tables provide summarized financial information for TerreStar:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
Balance Sheets (unaudited) |
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
$ |
307,789 |
|
|
$ |
107,558 |
|
Noncurrent assets |
|
|
1,193,981 |
|
|
|
1,135,665 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,501,770 |
|
|
$ |
1,243,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity (Deficit) |
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
45,431 |
|
|
$ |
52,611 |
|
Long-term liabilities |
|
|
880,371 |
|
|
|
753,254 |
|
Minority interest |
|
|
|
|
|
|
12,141 |
|
Cumulative preferred dividend |
|
|
408,500 |
|
|
|
408,500 |
|
Stockholders equity (deficit) |
|
|
167,468 |
|
|
|
16,717 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit) |
|
$ |
1,501,770 |
|
|
$ |
1,243,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
Statement of Operations (unaudited) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Operating expenses |
|
$ |
31,876 |
|
|
$ |
34,557 |
|
|
$ |
156,350 |
|
|
$ |
123,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(64,220 |
) |
|
$ |
(54,135 |
) |
|
$ |
(225,509 |
) |
|
$ |
(177,893 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders |
|
$ |
(71,219 |
) |
|
$ |
(61,224 |
) |
|
$ |
(246,358 |
) |
|
$ |
(198,855 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Cash and Marketable Investment Securities
As of September 30, 2008, restricted cash and marketable investment securities included amounts
required for our letters of credit.
18
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
6. |
|
Property and Equipment |
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable |
|
|
As of |
|
|
|
Life |
|
|
September 30, |
|
|
December 31, |
|
|
|
(In Years) |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(In thousands) |
|
Land |
|
|
|
|
|
$ |
31,517 |
|
|
$ |
2,509 |
|
Buildings and improvements |
|
|
1-40 |
|
|
|
212,920 |
|
|
|
17,482 |
|
Furniture, fixtures, equipment
and other |
|
|
1-10 |
|
|
|
693,745 |
|
|
|
41,292 |
|
Satellites: |
|
|
|
|
|
|
|
|
|
|
|
|
EchoStar III |
|
|
12 |
|
|
|
234,083 |
|
|
|
|
|
EchoStar IV fully depreciated |
|
|
N/A |
|
|
|
78,511 |
|
|
|
|
|
EchoStar VI |
|
|
12 |
|
|
|
244,305 |
|
|
|
|
|
EchoStar VIII |
|
|
12 |
|
|
|
175,801 |
|
|
|
|
|
EchoStar IX |
|
|
12 |
|
|
|
127,376 |
|
|
|
|
|
EchoStar XII |
|
|
10 |
|
|
|
190,051 |
|
|
|
|
|
Satellites acquired under
capital leases |
|
|
10 |
|
|
|
551,628 |
|
|
|
|
|
Construction in process |
|
|
|
|
|
|
303,107 |
|
|
|
185,411 |
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment |
|
|
|
|
|
$ |
2,843,044 |
|
|
$ |
246,694 |
|
Accumulated depreciation |
|
|
|
|
|
|
(1,387,087 |
) |
|
|
(32,857 |
) |
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
$ |
1,455,957 |
|
|
$ |
213,837 |
|
|
|
|
|
|
|
|
|
|
|
|
The majority of the increase in property and equipment in the table above is associated with the
assets contributed to us in connection to the Spin-off (see Note 1).
Construction in process consists of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Progress amounts for satellite construction and launch costs |
|
$ |
258,817 |
|
|
$ |
185,411 |
|
Digital broadcast equipment |
|
|
40,540 |
|
|
|
|
|
Software and other |
|
|
3,750 |
|
|
|
|
|
|
|
|
|
|
|
|
Construction in progress |
|
$ |
303,107 |
|
|
$ |
185,411 |
|
|
|
|
|
|
|
|
Satellites
In connection with the Spin-off, DISH Network contributed six of its owned satellites and two of
its satellite lease agreements to us. The two leased satellites are accounted for as capital
leases pursuant to Statement of Financial Accounting Standards No. 13, Accounting for Leases
(SFAS 13) and are depreciated over the ten-year terms of the satellite service agreements.
We believe that overall our satellites are generally in good condition. Prior to 2008, certain of
these satellites have experienced anomalies, some of which have had a significant adverse impact on
their commercial operation. There can be no assurance future anomalies will not cause further
losses, which could impact the remaining life or commercial operation of any of these satellites.
See discussion of evaluation of impairment in Long-Lived Assets below. Certain of these
anomalies are discussed below.
19
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
EchoStar III
EchoStar III was originally designed to operate a maximum of 32 DBS transponders in CONUS, which
provides service to the entire continental United States, at approximately 120 watts per channel,
switchable to 16 transponders operating at over 230 watts per channel, and was equipped with a
total of 44 traveling wave tube amplifiers (TWTAs) to provide redundancy. As a result of past
TWTA failures, only 18 transponders are currently available for use. Due to redundancy switching
limitations and specific channel authorizations, we can only operate on 15 of our 19 FCC authorized
frequencies at the 61.5 degree location. While we do not expect a large number of additional TWTAs
to fail in any year, and the failures have not reduced the original minimum 12-year design life of
the satellite, it is likely that additional TWTA failures will occur from time to time in the
future and those failures will further impact commercial operation of the satellite.
EchoStar IV
EchoStar IV currently operates at the 77 degree orbital location, which is licensed by the
government of Mexico. The satellite was originally designed to operate a maximum of 32 DBS
transponders in CONUS at approximately 120 watts per channel, switchable to 16 transponders
operating at over 230 watts per channel. As a result of past TWTA failures, only six transponders
are currently available for use and the satellite has been fully depreciated. There can be no
assurance that further material degradation, or total loss of use, of EchoStar IV will not occur in
the immediate future. Based on a recent analysis of the remaining fuel life, EchoStar IV is not
expected to be in operation beyond 2009.
EchoStar VI
EchoStar VI was originally equipped with 108 solar array strings, approximately 102 of which are
required to assure full power availability for the original minimum 12-year useful life of the
satellite. Prior to 2008, EchoStar VI experienced anomalies resulting in the loss of 22 solar
array strings, reducing the number of functional solar array strings to 86. While the useful life
of the satellite has not been affected, commercial operability has been reduced. The satellite was
designed to operate 32 DBS transponders in CONUS at approximately 125 watts per channel, switchable
to 16 transponders operating at approximately 225 watts per channel. The power reduction resulting
from the solar array failures currently limits us to operation of a maximum of 25 transponders in
standard power mode, or 12 transponders in high power mode. The number of transponders to which
power can be provided is expected to decline in the future at the rate of approximately one
transponder every three years.
EchoStar VIII
EchoStar VIII was designed to operate 32 DBS transponders in CONUS at approximately 120 watts per
channel, switchable to 16 transponders operating at approximately 240 watts per channel. EchoStar
VIII also includes spot-beam technology. This satellite has experienced several anomalies since
launch, but none have impacted commercial operation or reduced the 12-year estimated useful life of
the satellite.
EchoStar IX
EchoStar IX was designed to operate 32 fixed satellite service (FSS) band transponders in CONUS
at approximately 110 watts per channel, along with transponders that can provide services in the
Ka-Band (a Ka-band payload). The satellite also includes a C-band payload which is owned by a
third party. Prior to 2007, EchoStar IX experienced the loss of one of its three momentum wheels,
two of which are utilized during normal operations. A spare wheel was switched in at the time and
the loss did not reduce the 12-year estimated useful life of the satellite. During 2007, the
satellite experienced anomalies resulting in the loss of three solar array strings. The anomalies
have not impacted commercial operation of the satellite to date.
20
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
EchoStar XII
EchoStar XII was designed to operate 13 DBS transponders at 270 watts per channel in CONUS mode, or
22 spot beams using a combination of 135 and 65 watt TWTAs. We currently operate the satellite in
spot beam/CONUS hybrid mode. EchoStar XII has a total of 24 solar array circuits, approximately 22
of which are required to assure full power for the original minimum 12-year design life of the
satellite. Prior to 2008, eight solar array circuits on EchoStar XII have experienced anomalous
behavior resulting in both temporary and permanent solar array circuit failures. Although the
design life of the satellite has not been affected, these circuit failures have resulted in a
reduction in power to the satellite which will preclude us from using the full complement of
transponders on EchoStar XII for the 12-year design life of the satellite.
AMC-14
In connection with the Spin-off, DISH Network contributed its AMC-14 satellite services contract to
us. During March 2008, AMC-14 experienced a launch anomaly and failed to reach its intended orbit.
SES Americom subsequently declared the AMC-14 satellite a total loss due to a lack of viable
options to reposition the satellite to its proper geostationary orbit. Therefore, we have no
obligation to make any future monthly lease payments to SES Americom with respect to the satellite.
However, we did make up-front payments with respect to the satellite prior to launch and recorded
capitalized interest and insurance costs related to the satellite. These amounts, net of insurance
proceeds of $41 million, totaled $13 million and were written-off during the first quarter of 2008.
The insurance proceeds were collected during the second quarter of 2008.
AMC-16
DISH Network contributed its AMC-16 satellite services contract to us in connection with the
Spin-off. During the first quarter of 2008, SES Americom notified us that the satellite had
experienced an anomaly and is no longer capable of operating at full capacity. Pursuant to the
satellite services agreement, we are entitled to a reduction of our monthly recurring payment in
the event of a partial loss of satellite capacity. Effective October 1, 2008, the monthly
recurring payment has been reduced and as a result our capital lease obligation and the
corresponding asset value will be lowered by approximately $5 million.
CMBStar
We have suspended construction of the CMBStar satellite and in future periods may conclude it
appropriate to record an impairment charge. During April 2008, we notified the State
Administration of Radio, Film and Television of China that we were suspending construction of the
CMBStar satellite pending, among other things, further analysis relating to efforts to meet the
satellite performance criteria and/or confirmation that alternative performance criteria would be
acceptable. We are currently evaluating potential alternative uses for the CMBStar satellite. If
these alternative uses are insufficient to recover the carrying value invested to date in the
satellite, we may be required to record an impairment charge in a future period relating to the
CMBStar satellite. We currently estimate that this potential charge could be as much as $100
million, which would have a material adverse effect on our results of operations and financial
position.
21
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Long-Lived Satellite Assets
We account for impairments of long-lived satellite assets in accordance with the provisions of
Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144). SFAS 144 requires a long-lived asset or asset group to be tested
for recoverability whenever events or changes in circumstance indicate that its carrying amount may
not be recoverable. Based on the guidance under SFAS 144, we evaluate our satellites for
recoverability at the lowest level for which identifiable cash flows are largely independent of the
cash flows of other assets and liabilities. While certain of the anomalies discussed above, and
previously disclosed, may be considered to represent a significant adverse change in the physical
condition of a particular satellite, based on the redundancy designed within each satellite, these
anomalies are not considered to be significant events that would require evaluation for impairment
recognition pursuant to the guidance under SFAS 144.
In connection with the Spin-off, we performed an impairment analysis in accordance with SFAS 144
and currently expect the undiscounted cash flows of each satellite to be greater than the current
carrying amounts. Should we be unable to achieve our business plan, or if conditions require us to
change that plan, one or more of our satellites could become partially or fully impaired, which
could have a material adverse effect on our results of operations and financial position.
A substantial portion of the capacity of our AMC-15 and AMC-16 satellites remain without long-term
contracts. There is a significant risk that in the future we could be required to record a
substantial impairment charge relating to these satellites. We currently estimate that these
potential charges could aggregate up to approximately $200 million.
7. Goodwill, FCC Authorizations and Intangible Assets
Goodwill and FCC Authorizations
We account for our goodwill and intangible assets in accordance with the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), which
requires goodwill and intangible assets with indefinite useful lives not be amortized, but to be
tested for impairment annually or whenever indicators of impairments arise. Intangible assets that
have finite useful lives continue to be amortized over their estimated useful lives. Generally, we
have determined that our FCC licenses have indefinite useful lives due to the following:
|
|
|
FCC spectrum is a non-depleting asset; |
|
|
|
|
replacement satellite applications are generally authorized by the FCC subject to
certain conditions, without substantial cost under a stable regulatory, legislative and
legal environment; |
|
|
|
|
maintenance expenditures in order to obtain future cash flows are not significant;
and |
|
|
|
|
we intend to use these assets indefinitely. |
22
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Prior to September 30, 2008, we held certain FCC licenses with an aggregate carrying amount of $43
million in our Satellite Services operating segment. Recent weakening in domestic economic
conditions has resulted in a triggering event requiring us to perform an impairment review of these
assets. As a result of this review, during the three months ended September 30, 2008, we recorded a
pre-tax impairment charge of $39 million in Other expense on our Condensed Consolidated
Statements of Operations. We used Level 3 inputs, as defined by SFAS
157, in a discounted cash flow model to determine our estimates of
fair value.
Intangible Assets
As of September 30, 2008 and December 31, 2007, our identifiable intangibles subject to
amortization consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Intangible |
|
|
Accumulated |
|
|
Intangible |
|
|
Accumulated |
|
|
|
Assets |
|
|
Amortization |
|
|
Assets |
|
|
Amortization |
|
|
|
(In thousands) |
|
Contract-based |
|
$ |
190,566 |
|
|
$ |
(70,946 |
) |
|
$ |
4,640 |
|
|
$ |
(373 |
) |
Customer relationships |
|
|
23,600 |
|
|
|
(7,867 |
) |
|
|
23,600 |
|
|
|
(1,967 |
) |
Technology-based |
|
|
69,797 |
|
|
|
(15,268 |
) |
|
|
50,297 |
|
|
|
(4,551 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
283,963 |
|
|
$ |
(94,081 |
) |
|
$ |
78,537 |
|
|
$ |
(6,891 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of these intangible assets, recorded on a straight line basis over an average finite
useful life primarily ranging from approximately three to 20 years, was $8 million for the three
months ended September 30, 2008 and $24 million for the nine months ended September 30, 2008.
Estimated future amortization of our identifiable intangible assets as of September 30, 2008 is as
follows (in thousands):
|
|
|
|
|
For the Years Ending December 31, |
|
|
|
|
2008 (remaining three months) |
|
$ |
8,044 |
|
2009 |
|
|
32,176 |
|
2010 |
|
|
30,209 |
|
2011 |
|
|
24,028 |
|
2012 |
|
|
23,182 |
|
2013 |
|
|
23,174 |
|
Thereafter |
|
|
49,069 |
|
|
|
|
|
Total |
|
$ |
189,882 |
|
|
|
|
|
23
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
8. Long-Term Debt
Capital Lease Obligations, Mortgages and Notes Payable
Capital lease obligations, mortgages and notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
Capital lease obligations: |
|
|
|
|
|
|
|
|
Satellites financed under capital lease obligations |
|
$ |
341,706 |
|
|
$ |
|
|
Other equipment financed under capital lease obligations |
|
|
8,206 |
|
|
|
|
|
8% note payable for EchoStar IX satellite vendor financing, payable over 14 years
from launch |
|
|
7,577 |
|
|
|
|
|
Other mortgages and notes payable in installments through 2017 with interest ranging
from 4% to 20% |
|
|
2,479 |
|
|
|
3,709 |
|
|
|
|
|
|
|
|
Total |
|
$ |
359,968 |
|
|
$ |
3,709 |
|
Less current portion |
|
|
(51,513 |
) |
|
|
(1,365 |
) |
|
|
|
|
|
|
|
Capital lease obligations, mortgages and other notes payable, net of current portion |
|
$ |
308,455 |
|
|
$ |
2,344 |
|
|
|
|
|
|
|
|
Capital Lease Obligations
In connection with the Spin-off, the satellite lease contracts for AMC-15 and AMC-16 were
contributed to EchoStar. These satellites are accounted for as capital leases pursuant to SFAS 13
and are depreciated over the ten-year terms of the satellite service agreements.
AMC-15. AMC-15, an FSS satellite, commenced commercial operation during January 2005. This lease is
renewable by us on a year-to-year basis following the initial ten-year term, and provides us with
certain rights to lease capacity on replacement satellites.
AMC-16. AMC-16, an FSS satellite, commenced commercial operation during February 2005. This lease
is renewable by us on a year-to-year basis following the initial ten-year term, and provides us
with certain rights to lease capacity on replacement satellites.
24
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Future minimum lease payments under these capital lease obligations, together with the present
value of the net minimum lease payments as of September 30, 2008 are as follows (in thousands):
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
|
2008 (remaining three months) |
|
$ |
25,469 |
|
2009 |
|
|
90,546 |
|
2010 |
|
|
86,664 |
|
2011 |
|
|
86,351 |
|
2012 |
|
|
86,351 |
|
2013 |
|
|
86,351 |
|
Thereafter |
|
|
81,673 |
|
|
|
|
|
Total minimum lease payments |
|
|
543,405 |
|
Less: Amount representing lease of the orbital location and estimated executory costs (primarily
insurance and maintenance) including profit thereon, included in total minimum lease payments |
|
|
(89,967 |
) |
|
|
|
|
Net minimum lease payments |
|
|
453,438 |
|
Less: Amount representing interest |
|
|
(103,526 |
) |
|
|
|
|
Present value of net minimum lease payments |
|
|
349,912 |
|
Less: Current portion |
|
|
(49,609 |
) |
|
|
|
|
Long-term portion of capital lease obligations |
|
$ |
300,303 |
|
|
|
|
|
9. Stockholders Equity (Deficit)
Common Stock Repurchase Program
Our board of directors previously authorized stock repurchases of up to $1.0 billion of our Class A
common stock. During the three and nine months ended September 30, 2008, we repurchased 0.6 million
shares of our common stock for $15 million. Effective November 6, 2008, our board of directors
extended the plan and authorized a reduction in the maximum dollar value of shares that may be
repurchased, such that we are currently authorized to repurchase up to $500 million of our
outstanding shares through and including December 31, 2009.
10. Income Tax
Our income tax policy is to record the estimated future tax effects of temporary differences
between the tax bases of assets and liabilities and amounts reported on our Condensed Consolidated
Balance Sheets, as well as probable operating loss, tax credit and other carryforwards. We follow
the guidelines set forth in SFAS 109 regarding the recoverability of any tax assets recorded on the
balance sheet and provide any necessary valuation allowances as required. In accordance with SFAS
109, we periodically evaluate our need for a valuation allowance. Determining necessary valuation
allowances requires us to make assessments about historical financial information as well as the
timing of future events, including the probability of expected future taxable income and available
tax planning opportunities.
In connection with the Spin-off, our tax basis of assets and liabilities changed significantly. As
a result of the Spin-off and the related tax requirements governing the use of our deferred tax
assets by DISH Network, we adjusted our deferred tax assets and corresponding valuation allowance
to report our net deferred tax assets at an amount that is more likely than not realizable. The use
of a portion of our deferred tax assets by DISH Network and related effect on our valuation
allowance was recorded as a deemed distribution to DISH Network. A portion of our deferred tax
assets were not used by DISH Network and remain on our Condensed Consolidated Balance Sheets. As of
September 30, 2008, we had net operating loss carryforwards (NOLs) for federal income tax
purposes of approximately $35 million and tax benefits related to credit carryforwards of less than
$1 million. The NOLs and credit carryforwards begin to expire in the year 2024. In addition, we
have accrued deferred tax assets related to the impairment of marketable and non-marketable
investment securities that are capital in nature and have established valuation allowances against
these deferred tax assets as we believe they are not more likely than not to be realized.
25
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
The actual tax provision for the nine months ended September 30, 2008 reconciles to the amounts
computed by applying the statutory Federal tax rate to income before taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
For the Nine |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
September 30, 2008 |
|
|
September 30, 2008 |
|
|
|
% of pre-tax (income)/loss |
|
Statutory rate |
|
|
35.0 |
|
|
|
35.0 |
|
State income taxes, net of Federal benefit |
|
|
1.8 |
|
|
|
1.8 |
|
Foreign taxes and income not U.S. taxable |
|
|
(0.1 |
) |
|
|
(0.7 |
) |
Stock option compensation |
|
|
|
|
|
|
0.7 |
|
Change in valuation allowance related to impairment
of marketable and non-marketable investment securities |
|
|
(33.6 |
) |
|
|
(37.0 |
) |
Other |
|
|
(4.8 |
) |
|
|
(6.4 |
) |
|
|
|
|
|
|
|
Total (provision) benefit for income taxes |
|
|
(1.7 |
) |
|
|
(6.6 |
) |
|
|
|
|
|
|
|
11. Commitments and Contingencies
Commitments
Future maturities of our contractual obligations as of September 30, 2008 are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
Total |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
|
(In thousands) |
|
Satellite-related obligations |
|
$ |
927,036 |
|
|
$ |
75,164 |
|
|
$ |
198,207 |
|
|
$ |
124,481 |
|
|
$ |
63,767 |
|
|
$ |
48,961 |
|
|
$ |
47,717 |
|
|
$ |
368,739 |
|
Capital lease obligations |
|
|
349,912 |
|
|
|
13,818 |
|
|
|
46,922 |
|
|
|
47,729 |
|
|
|
52,463 |
|
|
|
57,971 |
|
|
|
63,989 |
|
|
|
67,020 |
|
Operating lease obligations |
|
|
15,781 |
|
|
|
1,805 |
|
|
|
5,657 |
|
|
|
4,126 |
|
|
|
1,982 |
|
|
|
976 |
|
|
|
788 |
|
|
|
447 |
|
Purchase obligations |
|
|
1,498,095 |
|
|
|
1,485,873 |
|
|
|
8,889 |
|
|
|
3,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages and other notes payable |
|
|
10,056 |
|
|
|
302 |
|
|
|
1,923 |
|
|
|
1,185 |
|
|
|
852 |
|
|
|
808 |
|
|
|
873 |
|
|
|
4,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,800,880 |
|
|
$ |
1,576,962 |
|
|
$ |
261,598 |
|
|
$ |
180,854 |
|
|
$ |
119,064 |
|
|
$ |
108,716 |
|
|
$ |
113,367 |
|
|
$ |
440,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingencies
Separation Agreement
In connection with the Spin-off, we have entered into a separation agreement with DISH Network,
which provides for, among other things, the division of liability resulting from litigation. Under
the terms of the separation agreement, we have assumed liability for any acts or omissions that
relate to our business whether such acts or omissions occurred before or after the Spin-off.
Certain exceptions are provided, including for intellectual property related claims generally,
whereby we will only be liable for our acts or omissions that occurred following the Spin-off.
Therefore, we have been indemnified by DISH Network for any potential liability or damages
resulting from intellectual property claims relating to the period prior to the effective date of
the Spin-off.
26
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Acacia
During 2004, Acacia Media Technologies, (Acacia) filed a lawsuit against us and DISH Network in
the United States District Court for the Northern District of California. The suit also named
DirecTV, Comcast, Charter, Cox and a number of smaller cable companies as defendants. Acacia is an
intellectual property holding company which seeks to license an acquired patent portfolio. The suit
alleges infringement of United States Patent Nos. 5,132,992 (the 992 patent), 5,253,275 (the 275
patent), 5,550,863 (the 863 patent), 6,002,720 (the 720 patent) and 6,144,702 (the 702 patent).
The patents relate to certain systems and methods for transmission of digital data. During 2004 and
2005, the Court issued Markman rulings which found that the 992 and 702 patents were not as broad
as Acacia had contended, and that certain terms in the 702 patent were indefinite. The Court
issued additional claim construction rulings on December 14, 2006, March 2, 2007, October 19, 2007,
and February 13, 2008. On March 12, 2008, the Court issued an order outlining a schedule for filing
dispositive invalidity motions based on its claim constructions. Acacia has agreed to stipulate to
invalidity based on the Courts claim constructions in order to proceed immediately to the Federal
Circuit on appeal. The Court, however, has permitted us to file additional invalidity motions.
Acacias various patent infringement cases have been consolidated for pre-trial purposes in the
United States District Court for the Northern District of California. We intend to vigorously
defend this case. In the event that a Court ultimately determines that we infringe any of the
patents, we may be subject to substantial damages, which may include treble damages and/or an
injunction that could require us to materially modify certain user-friendly features that we
currently offer to consumers. We are being indemnified by DISH Network for any potential liability
or damages resulting from this suit relating to the period prior to the effective date of the
Spin-off. We cannot predict with any degree of certainty the outcome of the suit or determine the
extent of any potential liability or damages.
Broadcast Innovation, L.L.C.
In 2001, Broadcast Innovation, L.L.C. (Broadcast Innovation) filed a lawsuit against DISH
Network, DirecTV, Thomson Consumer Electronics and others in Federal District Court in Denver,
Colorado. The suit alleges infringement of United States Patent Nos. 6,076,094 (the 094 patent)
and 4,992,066 (the 066 patent). The 094 patent relates to certain methods and devices for
transmitting and receiving data along with specific formatting information for the data. The 066
patent relates to certain methods and devices for providing the scrambling circuitry for a pay
television system on removable cards. We examined these patents and believe that they are not
infringed by any of our products or services. Subsequently, DirecTV and Thomson settled with
Broadcast Innovation leaving us as the only defendant.
During 2004, the judge issued an order finding the 066 patent invalid. Also in 2004, the Court
ruled the 094 patent invalid in a parallel case filed by Broadcast Innovation against Charter and
Comcast. In 2005, the United States Court of Appeals for the Federal Circuit overturned the 094
patent finding of invalidity and remanded the case back to the District Court. During June 2006,
Charter filed a reexamination request with the United States Patent and Trademark Office. The Court
has stayed the case pending reexamination. Our case remains stayed pending resolution of the
Charter case.
We intend to vigorously defend this case. In the event that a Court ultimately determines that we
infringe any of the patents, we may be subject to substantial damages, which may include treble
damages and/or an injunction that could require us to materially modify certain user-friendly
features that we currently offer to consumers. We are being indemnified by DISH Network for any
potential liability or damages resulting from this suit relating to the
period prior to the effective date of the Spin-off. We cannot predict with any degree of certainty
the outcome of the suit or determine the extent of any potential liability or damages.
27
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Datasec
During April 2008, Datasec Corporation (Datasec) sued us, DISH Network and DirecTV Corporation
in the United States District Court for the Central District of California, alleging infringement
of U.S. Patent No. 6,075,969 (the 969 patent). The 969 patent was issued in 2000 to inventor
Bruce Lusignan, and is entitled Method for Receiving Signals from a Constellation of Satellites
in Close Geosynchronous Orbit. In September 2008, Datasec voluntarily dismissed its case without
prejudice.
Finisar Corporation
Finisar Corporation (Finisar) obtained a $100 million verdict in the United States District Court
for the Eastern District of Texas against DirecTV for patent infringement. Finisar alleged that
DirecTVs electronic program guide and other elements of its system infringe United States Patent
No. 5,404,505 (the 505 patent).
In July 2006, DISH Network, together with NagraStar LLC, filed a Complaint for Declaratory Judgment
in the United States District Court for the District of Delaware against Finisar that asks the
Court to declare that they and we do not infringe, and have not infringed, any valid claim of the
505 patent. Trial is not currently scheduled. The District Court has stayed our action until the
Federal Circuit has resolved DirecTVs appeal. During April 2008, the Federal Circuit reversed the
judgment against DirecTV and ordered a new trial. We are evaluating the Federal Circuits decision
to determine the impact on our action.
We intend to vigorously prosecute this case. In the event that a Court ultimately determines that
we infringe this patent, we may be subject to substantial damages, which may include treble damages
and/or an injunction that could require us to modify our system architecture. We are being
indemnified by DISH Network for any potential liability or damages resulting from this suit
relating to the period prior to the effective date of the Spin-off. We cannot predict with any
degree of certainty the outcome of the suit or determine the extent of any potential liability or
damages.
Global Communications
On April 19, 2007, Global Communications, Inc. (Global) filed a patent infringement action
against DISH Network in the United States District Court for the Eastern District of Texas. The
suit alleges infringement of United States Patent No. 6,947,702 (the 702 patent). This patent,
which involves satellite reception, was issued in September 2005. On October 24, 2007, the United
States Patent and Trademark Office granted our request for reexamination of the 702 patent and
issued an Office Action finding that all of the claims of the 702 patent were invalid. At the
request of the parties, the District Court stayed the litigation until the reexamination proceeding
is concluded and/or other Global patent applications issue.
We intend to vigorously defend this case. In the event that a Court ultimately determines that we
infringe the 702 patent, we may be subject to substantial damages, which may include treble
damages and/or an injunction that could require us to materially modify certain user-friendly
features that we currently offer to consumers. We are being indemnified by DISH Network for any
potential liability or damages resulting from this suit relating to the period prior to the
effective date of the Spin-off. We cannot predict with any degree of certainty the outcome of the
suit or determine the extent of any potential liability or damages.
Personalized Media Communications
In February 2008, Personalized Media Communications, Inc. filed suit against us, DISH Network and
Motorola, Inc. in the United States District Court for the Eastern District of Texas alleging
infringement of United States Patent Nos. 4,694,490 (the 490 patent), 5,109,414 (the 414
patent), 4,965,825 (the 825 patent), 5,233,654 (the 654 patent), 5,335,277 (the 277 patent),
and 5,887,243 (the 243 patent), all of which were issued to John Harvey and James Cuddihy as
named inventors. The 490 patent, the 414 patent, the 825 patent, the 654 patent and the
28
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
277 patent are defined as the Harvey Patents. The Harvey Patents are entitled Signal
Processing Apparatus and Methods. The lawsuit alleges, among other things, that our DBS system
receives program content at broadcast reception and satellite uplinking facilities and transmits
such program content, via satellite, to remote satellite receivers. The lawsuit further alleges
that we infringe the Harvey Patents by transmitting and using a DBS signal specifically encoded
to enable the subject receivers to function in a manner that infringes the Harvey Patents, and by
selling services via DBS transmission processes which infringe the Harvey Patents.
We intend to vigorously defend this case. In the event that a Court ultimately determines that we
infringe any of the asserted patents, we may be subject to substantial damages, which may include
treble damages and/or an injunction that could require us to materially modify certain
user-friendly features that we currently offer to consumers. We are being indemnified by DISH
Network for any potential liability or damages resulting from this suit relating to the period
prior to the effective date of the Spin-off. We cannot predict with any degree of certainty the
outcome of the suit or determine the extent of any potential liability or damages.
Superguide
During 2000, Superguide Corp. (Superguide) filed suit against us. DISH Network, DirecTV, Thomson
and others in the United States District Court for the Western District of North Carolina,
Asheville Division, alleging infringement of United States Patent Nos. 5,038,211 (the 211 patent),
5,293,357 (the 357 patent) and 4,751,578 (the 578 patent) which relate to certain electronic
program guide functions, including the use of electronic program guides to control VCRs. Superguide
sought injunctive and declaratory relief and damages in an unspecified amount. We were indemnified
by DISH Network for any potential liability or damages resulting from this suit relating to the
period prior to the effective date of the Spin-off. In October 2008, a settlement was reached with
Superguide which did not impact our results of operations.
Tivo Inc.
On January 31, 2008, the U.S. Court of Appeals for the Federal Circuit affirmed in part and
reversed in part the April 2006 jury verdict concluding that certain of our digital video
recorders, or DVRs, infringed a patent held by Tivo. In its decision, the Federal Circuit affirmed
the jurys verdict of infringement on Tivos software claims, upheld the award of damages from
the District Court, and ordered that the stay of the District Courts injunction against us, which
was issued pending appeal, will dissolve when the appeal becomes final. The Federal Circuit,
however, found that we did not literally infringe Tivos hardware claims, and remanded such
claims back to the District Court for further proceedings. On October 6, 2008, the Supreme Court
denied our petition for certiorari. As a result, approximately $105 million dollars was released by
DISH Network from an escrow account to Tivo.
In addition, we have developed and deployed next-generation DVR software to our customers DVRs.
This improved software is fully operational and has been automatically downloaded to current
customers (our alternative technology). We have formal legal opinions from outside counsel that
conclude that our alternative technology does not infringe, literally or under the doctrine of
equivalents, either the hardware or software claims of Tivos patent. Tivo has filed a motion for
contempt alleging that we are in violation of the Courts injunction. We have vigorously opposed
the motion arguing that the Courts injunction does not apply to DVRs that have received
our alternative technology, that our alternative technology does not infringe Tivos patent, and
that we are in compliance with the injunction. A hearing was held on Tivos motion for contempt on
September 4, 2008 and we are waiting for a decision from the District Court.
If we are unsuccessful in defending against Tivos motion for contempt or any subsequent claim that
our alternative technology infringes Tivos patent, we could be prohibited from distributing DVRs,
or could be required to modify or eliminate certain user-friendly DVR features that we currently
offer to consumers. In that event we would be at a significant disadvantage to our competitors who
could offer this functionality. We could also have to pay substantial additional damages. We are
being indemnified by DISH Network for any potential liability or damages resulting from this suit
relating to the period prior to the effective date of the Spin-off. Although we believe that we
29
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
do not infringe under any of the claims asserted against us and DISH Network, we cannot predict
with any degree of certainty the outcome of the suit or determine the extent of any potential
liability or damages.
Other
In addition to the above actions, we are subject to various other legal proceedings and claims
which arise in the ordinary course of business. In our opinion, the amount of ultimate liability
with respect to any of these actions is unlikely to materially affect our financial position,
results of operations or liquidity.
12. Depreciation and Amortization Expense
Depreciation and amortization expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Satellites |
|
$ |
34,785 |
|
|
$ |
|
|
|
$ |
104,357 |
|
|
$ |
|
|
Furniture, fixtures, equipment and other |
|
|
25,576 |
|
|
|
1,058 |
|
|
|
60,712 |
|
|
|
3,149 |
|
Identifiable intangible assets subject to amortization |
|
|
7,972 |
|
|
|
294 |
|
|
|
24,416 |
|
|
|
883 |
|
Buildings and improvements |
|
|
1,448 |
|
|
|
130 |
|
|
|
4,282 |
|
|
|
359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
69,781 |
|
|
$ |
1,482 |
|
|
$ |
193,767 |
|
|
$ |
4,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales and operating expense categories included in our accompanying Condensed Consolidated
Statements of Operations do not include depreciation expense related to satellites.
13. Segment Reporting
Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information (SFAS 131) establishes standards for reporting information
about operating segments in annual financial statements of public business enterprises and requires
that those enterprises report selected information
about operating segments in interim financial reports issued to stockholders. Operating segments
are components of an enterprise for which separate financial information is available and regularly
evaluated by the chief operating decision maker(s) of an enterprise. Total assets by segment have
not been specified because the information is not available to the chief operating decision-maker.
Under this definition, we currently operate as two business units.
|
|
|
Equipment sales and digital broadcast operations Equipment sales include the sales of
set-top boxes and related components including Slingboxes to DISH Network and international
customers. Digital broadcast operations include satellite uplinking/downlinking,
transmission services, signal processing, conditional access management, telemetry,
tracking and control, and other services provided primarily to DISH Network. |
|
|
|
|
Satellite Services Satellite services consists principally of transponder leasing
provided primarily to DISH Network, and secondarily to other customers. |
30
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
The All Other category consists of revenue and net income (loss) from other operations including
our corporate investment portfolio for which the disclosure requirements of SFAS 131 do not apply.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment sales and
digital broadcast
operations |
|
$ |
567,434 |
|
|
$ |
404,416 |
|
|
$ |
1,490,601 |
|
|
$ |
1,182,768 |
|
Satellite services |
|
|
43,584 |
|
|
|
|
|
|
|
148,416 |
|
|
|
|
|
All other |
|
|
5,155 |
|
|
|
|
|
|
|
15,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
616,173 |
|
|
$ |
404,416 |
|
|
$ |
1,654,084 |
|
|
$ |
1,182,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment sales and
digital broadcast
operations |
|
$ |
1,187 |
|
|
$ |
(6,650 |
) |
|
$ |
9,870 |
|
|
$ |
(39,943 |
) |
Satellite services |
|
|
(4,008 |
) |
|
|
|
|
|
|
(15,386 |
) |
|
|
|
|
All other |
|
|
(305,109 |
) |
|
|
|
|
|
|
(248,889 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net income (loss) |
|
$ |
(307,930 |
) |
|
$ |
(6,650 |
) |
|
$ |
(254,405 |
) |
|
$ |
(39,943 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
14. Geographic Information and Transactions with Major Customers
Geographic Information
Revenues are attributed to geographic regions based upon the location where the sale originated.
United States revenue includes transactions with both United States and international customers.
The following table summarizes total long-lived assets and revenue attributed to foreign locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United |
|
|
|
|
|
|
|
|
|
|
|
|
States |
|
|
Europe |
|
|
Asia |
|
|
Total |
|
|
|
(In thousands) |
|
Long-lived assets, including FCC
authorizations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008 |
|
$ |
1,720,370 |
|
|
$ |
21,763 |
|
|
$ |
220,569 |
|
|
$ |
1,962,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 |
|
$ |
379,826 |
|
|
$ |
12,679 |
|
|
$ |
184,279 |
|
|
$ |
576,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2008 |
|
$ |
1,580,585 |
|
|
$ |
73,499 |
|
|
$ |
|
|
|
$ |
1,654,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2007 |
|
$ |
1,119,592 |
|
|
$ |
63,176 |
|
|
$ |
|
|
|
$ |
1,182,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Transactions with Major Customers
During the three and nine months ended September 30, 2008 and 2007, the North America revenue
primarily includes sales to two major customers, DISH Network and Bell ExpressVu. The following
table summarizes sales to each customer and its percentage of total revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Total revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH Network |
|
$ |
553,063 |
|
|
$ |
342,434 |
|
|
$ |
1,411,285 |
|
|
$ |
1,016,247 |
|
Bell ExpressVu |
|
|
41,910 |
|
|
|
48,987 |
|
|
|
151,710 |
|
|
|
118,170 |
|
Other |
|
|
21,200 |
|
|
|
12,995 |
|
|
|
91,089 |
|
|
|
48,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
616,173 |
|
|
$ |
404,416 |
|
|
$ |
1,654,084 |
|
|
$ |
1,182,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH Network |
|
|
89.8 |
% |
|
|
84.7 |
% |
|
|
85.3 |
% |
|
|
85.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bell ExpressVu |
|
|
6.8 |
% |
|
|
12.1 |
% |
|
|
9.2 |
% |
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Related Party Transactions
Related Party Transactions with NagraStar
During the three months ended September 30, 2008 and 2007, we purchased $13 and $15 million,
respectively, of security access devices from NagraStar and during the nine months ended September
30, 2008 and 2007, we purchased $33 million and $47 million, respectively. As of September 30,
2008 and December 31, 2007, amounts payable to NagraStar totaled $20 million and $3 million,
respectively. Additionally, as of September 30, 2008, we were committed to purchase $38 million of
security access devices from NagraStar during 2008.
Related Party Transactions with DISH Network
Following the Spin-off, we and DISH Network have operated as separate public companies and DISH
Network has no ownership interest in us. However, a substantial majority of the voting power of
the shares of both companies is owned beneficially by our Chief Executive Officer and Chairman,
Charles W. Ergen.
We and DISH Network entered into certain transitional services agreements pursuant to which we will
obtain certain services and rights from DISH Network, DISH Network will obtain certain services and
rights from us, and we and DISH Network have indemnified each other against certain liabilities
arising from our respective businesses. The following is a summary of the terms of the principal
agreements that we have entered into with DISH Network that have an impact on our results of
operations.
In the near term, we expect that DISH Network will remain our principal customer. Pursuant to the
commercial agreements we entered into with DISH Network, we will sell equipment, including set-top
boxes, to DISH Network and we will provide digital broadcast operations and other products and
services to DISH Network. Generally, all agreements entered into in connection with the Spin-off
are based on pricing at cost plus an additional amount equal to an agreed percentage of our cost,
which will vary depending on the nature of the products and services provided. These commercial
agreements also provide for an arbitration mechanism in the event we are unable to reach agreement
with DISH Network as to the additional amounts payable for products and services, under which the
arbitrator will determine the additional amounts payable by reference to fair market value of the
products and services supplied.
32
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Equipment sales DISH Network
Receiver Agreement. We entered into a receiver agreement for the sale of receivers and other
satellite television programming accessories to DISH Network. Under the receiver agreement, DISH
Network will have the right but not the obligation to purchase receivers, accessories, and other
equipment from us for a two year period. Additionally, we will provide DISH Network with standard
manufacturer warranties for the goods sold under the receiver agreement. DISH Network may
terminate the receiver agreement for any reason upon sixty days written notice. We may also
terminate this agreement if certain entities were to acquire DISH Network. DISH Network has the
right, but not the obligation, to extend the receiver agreement annually for up to two years. The
receiver agreement also includes an indemnification provision, whereby the parties will indemnify
each other for certain intellectual property matters.
Satellite services, digital broadcast operations and other services DISH Network
Broadcast Agreement. We entered into a broadcast agreement with DISH Network, whereby DISH Network
receives broadcast services, including teleport services such as transmission and downlinking,
channel origination, and channel management services from us, thereby enabling DISH Network to
deliver satellite television programming to subscribers. The broadcast agreement has a term of two
years beginning on January 1, 2008; however, DISH Network has the right, but not the obligation, to
extend the agreement annually for successive one-year periods for up to two additional years. DISH
Network may terminate channel origination services and channel management services for any reason
and without any liability upon sixty days written notice to us. If DISH Network terminates
teleport services for a reason other than our breach, DISH Network shall pay us a sum equal to the
aggregate amount of the remainder of the expected cost of providing the teleport services.
Real Estate Lease Agreements. We entered into lease agreements with DISH Network so that DISH
Network can continue to operate certain properties that were contributed to us in the Spin-off.
The rent on a per square foot basis for each of the leases is comparable to per square foot rental
rates of similar commercial property in the same geographic area, and DISH Network is responsible
for a portion of the taxes, insurance, utilities and maintenance of the premises. The term of each
of the leases is set forth below:
Inverness Lease Agreement. The lease for 90 Inverness Circle East in Englewood,
Colorado, is for a period of two years.
Meridian Lease Agreement. The lease for 9601 S. Meridian Blvd. in Englewood, Colorado,
is for a period of two years with annual renewal options for up to three additional
years.
Santa Fe Lease Agreement. The lease for 5701 S. Santa Fe Dr. in Littleton, Colorado, is
for a period of two years with annual renewal options for up to three additional years.
Product Support Agreement. DISH Network needs us to provide product support (including certain
engineering and technical support services and IPTV functionality) for all receivers and related
accessories that our subsidiaries have sold and will sell to DISH Network. As a result, we entered
into a product support agreement, under which DISH Network has the right, but not the obligation,
to receive product support services in respect of such receivers and related accessories. The term
of the product support agreement is the economic life of such receivers and related accessories,
unless terminated earlier. DISH Network may terminate the product support agreement for any reason
upon sixty days prior written notice.
Satellite Capacity Agreements. We entered into satellite capacity agreements whereby a DISH
Network subsidiary, on a transitional basis, leases satellite capacity on satellites owned or
leased by us. The fees for the services to be provided under the satellite capacity agreements are
based on spot market prices for similar satellite capacity and depend upon, among other things, the
orbital location of the satellite and the frequency on which the satellite provides services.
Generally, each satellite capacity agreement will terminate upon the earlier of: (i) the end of
life or replacement of the satellite; (ii) the date the satellite fails; (iii) the date that the
transponder on which service is being provided under the agreement fails; or (iv) two years from
the effective date of such agreement.
33
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Services Agreement. We entered into a services agreement with DISH Network under which DISH
Network has the right, but not the obligation, to receive logistics, procurement and quality
assurance services from us. This agreement has a term of two years. This limited-term agreement
is designed to facilitate the separation of us and DISH Network. DISH Network may terminate the
services agreement with respect to a particular service for any reason upon sixty days prior
written notice.
General and administrative expenses DISH Network
Management Services Agreement. In connection with the Spin-off, we entered into a management
services agreement with DISH Network pursuant to which DISH Network makes certain of its officers
available to provide services (which are primarily legal and accounting services) to EchoStar.
Specifically, Bernard L. Han, R. Stanton Dodge and Paul W. Orban remain employed by DISH Network,
but serve as EchoStars Executive Vice President and Chief Financial Officer, Executive Vice
President and General Counsel, and Senior Vice President and Controller, respectively. In
addition, Carl E. Vogel is employed by DISH Network but provides services to EchoStar as an
advisor. We make payments to DISH Network based upon an allocable portion of the personnel costs
and expenses incurred by DISH Network with respect to such DISH Network officers (taking into
account wages and fringe benefits). These allocations are based upon the estimated percentages of
time to be spent by the DISH Network executive officers performing services for us under the
management services agreement. We also reimburse DISH Network for direct out-of-pocket costs
incurred by DISH Network for management services provided to us. We and DISH Network evaluate all
charges for reasonableness at least annually and make any adjustments to these charges as we and
DISH Network mutually agree upon.
The management services agreement will continue in effect until January 1, 2009, and will be
renewed automatically for successive one-year periods thereafter, unless terminated earlier (i) by
us at any time upon at least 30 days prior written notice, (ii) by DISH Network at the end of any
renewal term, upon at least 180 days prior notice; and (iii) by DISH Network upon written notice
to us, following certain changes in control.
Real Estate Lease Agreement. During the three months ended September 30, 2008, we subleased space
at 185 Varick Street, New York, New York from DISH Network for a period of approximately seven
years. The rent on a per square foot basis for this sublease was comparable to per square foot
rental rates of similar commercial property in the same geographic area at the time of the
sublease, and we are responsible for our portion of the taxes, insurance, utilities and maintenance
of the premises.
Transition Services Agreement. We entered into a transition services agreement with DISH Network
pursuant to which DISH Network, or one of its subsidiaries, provides certain transitional services
to us. Under the transition services agreement, we have the right, but not the obligation, to
receive the following services from DISH Network: finance, information technology, benefits
administration, travel and event coordination, human resources, human resources development
(training), program management, internal audit and corporate quality, legal, accounting and tax,
and other support services. The transition services agreement has a term of two years.
Remanufactured receiver agreement
We entered into a remanufactured receiver agreement with DISH Network under which we have the right
to purchase remanufactured receivers and accessories from DISH Network for a two-year period. We
may terminate the remanufactured receiver agreement for any reason upon sixty days written notice
to DISH Network.
34
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Tax sharing agreement
We entered into a tax sharing agreement with DISH Network which governs our and DISH Networks
respective rights, responsibilities and obligations after the Spin-off with respect to taxes for
the periods ending on or before the Spin-off. Generally, all pre-Spin-off taxes, including any
taxes that are incurred as a result of restructuring activities undertaken to implement the
Spin-off, will be borne by DISH Network, and DISH Network will indemnify us for such taxes.
However, DISH Network will not be liable for and will not indemnify us for any taxes that are
incurred as a result of the Spin-off or certain related transactions failing to qualify as tax-free
distributions pursuant to any provision of Section 355 or Section 361 of the Code because of (i) a
direct or indirect acquisition of any of our stock, stock options or assets, (ii) any action that
we take or fail to take or (iii) any action that we take that is inconsistent with the information
and representations furnished to the IRS in connection with the request for the private letter
ruling, or to counsel in connection with any opinion being delivered by counsel with respect to the
Spin-off or certain related transactions. In such case, we will be solely liable for, and will
indemnify DISH Network for, any resulting taxes, as well as any losses, claims and expenses. The
tax sharing agreement terminates after the later of the full period of all applicable statutes of
limitations, including extensions, or once all rights and obligations are fully effectuated or
performed.
Other DISH Network transactions
Nimiq 5 Lease Agreement. On March 11, 2008, we entered into a transponder service agreement (the
Transponder Agreement) with Bell ExpressVu Inc., in its capacity as General Partner of Bell
ExpressVu Limited Partnership (Bell ExpressVu), which provides, among other things, for the
provision by Bell ExpressVu to us of service on sixteen (16) BSS transponders on the Nimiq 5
satellite at the 72.7 W.L. orbital location.. The Nimiq 5 satellite is expected to be launched in
the second half of 2009. Bell ExpressVu currently has the right to receive service on the entire
communications capacity of the Nimiq 5 satellite pursuant to an agreement with Telesat Canada. On
March 11, 2008, we also entered into a transponder service agreement with DISH Network L.L.C.
(DISH L.L.C.), a wholly-owned subsidiary of DISH Network, pursuant to which DISH L.L.C. will
receive service from EchoStar on all of the BSS transponders covered by the Transponder Agreement
(the DISH Agreement). DISH Network guaranteed certain of our obligations under the Transponder
Agreement.
Under the terms of the Transponder Agreement, we will make certain up-front payments to Bell
ExpressVu through the service commencement date on the Nimiq 5 satellite and thereafter will make
certain monthly payments to Bell ExpressVu for the remainder of the service term. Unless earlier
terminated under the terms and conditions of the Transponder Agreement, the service term will
expire fifteen years following the actual service commencement date of the Nimiq 5 satellite. Upon
expiration of this initial term, we have the option to continue to receive service on the Nimiq 5
satellite on a month-to-month basis. Upon a launch failure, in-orbit failure or end-of-life of the
Nimiq 5 satellite, and in certain other circumstances, we have certain rights to receive service
from Bell ExpressVu on a replacement satellite.
Under the terms of the DISH Agreement, DISH L.L.C. will make certain monthly payments to us
commencing when the Nimiq 5 satellite is placed into service (the In-Service Date) and continuing
through the service term. Unless earlier terminated under the terms and conditions of the DISH
Agreement, the service term will expire ten years following the In-Service Date. Upon expiration
of the initial term, DISH L.L.C. has the option to renew the DISH Agreement on a year-to-year basis
through the end-of-life of the Nimiq 5 satellite. Upon a launch failure, in-orbit failure or
end-of-life of the Nimiq 5 satellite, and in certain other circumstances, DISH L.L.C. has certain
rights to receive service from EchoStar on a replacement satellite.
35
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Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
The Spin-off. Effective January 1, 2008, DISH Network Corporation (DISH Network) completed its
distribution to us (the Spin-off) of its set top box business and certain infrastructure and
other assets, including certain of its satellites, uplink and satellite transmission assets, real
estate and other assets and related liabilities. Our business now consists of the following
segments:
|
|
|
Equipment sales and digital broadcast operations Equipment sales include the sales of
set-top boxes and related components including Slingboxes to DISH Network and international
customers. Digital broadcast operations include satellite uplinking/downlinking,
transmission services, signal processing, conditional access management, telemetry,
tracking and control, and other services provided primarily to DISH Network. |
|
|
|
|
Satellite Services Satellite services consists principally of transponder leasing
provided primarily to DISH Network, and secondarily to other customers. |
Dependence on DISH Network. We currently depend on DISH Network for substantially all of the
revenue for each of our primary businesses. We expect that for the foreseeable future, DISH
Network will continue to be the primary source of revenue for each of these businesses. Therefore,
our results of operations are and will for the foreseeable future be closely linked to the
performance of DISH Networks satellite pay-TV business.
Changes in DISH Network subscriber growth could have a material adverse affect on our set-top box
sales. In particular, weaknesses in the economy and other factors adversely affecting DISH
Network, such as the decision by AT&T to terminate its distribution relationship with DISH Network
effective January 31, 2009, may have an adverse impact on us. AT&Ts relationship with DISH
Network accounted for approximately 17 percent of DISH Networks gross subscriber additions during
the nine months ended September 30, 2008. If DISH Networks gross subscriber additions are
adversely affected by the loss of its distribution relationship with AT&T, we may experience a
decline in our sales of set-top boxes to DISH Network. Furthermore, DISH Network has in recent
quarters experienced declining and negative subscriber growth. To the extent that this trend
continues or intensifies as a result of deteriorating economic conditions in the United States or
otherwise, sales of our set-top boxes to DISH Network may decline.
The impact to us of declining DISH Network subscriber growth may be offset over the near term by an
increase in sales to DISH Network resulting from the upgrade of DISH Network subscribers to
advanced products such as high definition (HD) receivers, digital video recorders (DVRs) and HD
DVRs, as well as by the upgrade of DISH set-top boxes to new technologies such as MPEG-4 digital
compression technology. However, we cannot assure you that any of these factors will mitigate
declining subscriber growth at DISH Network. In addition, because all of our sales to DISH Network
are made pursuant to short-term contracts, we can not assure you that DISH Network will continue to
purchase products and services from us on a long-term basis.
We expect to experience significant pressure on margins we earn on the sale of set-top boxes and
other equipment, including on sales to DISH Network. This pressure may be due to advancements in
the technology and functionality of set-top boxes and other equipment, as well as DISH Networks
rights under commercial agreements between DISH Network and us that allow DISH Network to terminate
certain agreements on 60 days notice. We expect that the margins we earn on sales will be
determined largely through periodic negotiations that will likely result in pricing reflecting,
among other things, the set-top boxes and other equipment that best meet our customers current
sales and marketing priorities, the product and service alternatives available from other equipment
suppliers, and our ability to respond to customer requirements and to differentiate ourselves from
other equipment suppliers on bases other than pricing.
36
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Item 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued |
In addition, because the number of potential new customers for our set-top box, satellite services
and digital broadcast operations businesses is small and is likely to be limited by our
relationship with DISH Network, our current customer concentration is likely to continue for the
foreseeable future. Our future success may also depend on the extent to which prospective
customers that have been competitors of DISH Network are willing to purchase products and services
from us. Many of these customers may continue to view us as a competitor given the common
ownership and management team we continue to share with DISH Network.
Additional Challenges for our Set-top Box Business. We believe that our best opportunities for
developing potential new customers for our set-top box business lie in international markets, and
we therefore expect our performance in international markets to be a significant factor in
determining whether we will be able to generate revenue and income growth in future periods.
However, there can be no assurance that we will be able to sustain or grow our international
business. In particular, we have noticed an increase in new market entrants, primarily located in
Asia, that offer low cost set-top boxes, including set-top boxes that are modeled after our
products or products of our principal competitors. The entry of these new competitors may result
in pricing pressure in international markets that we hope to enter. If market prices in
international markets are substantially reduced by such new entrants, it may be difficult for us to
make profitable sales in international markets.
Furthermore, if we do not continue to distinguish our products, particularly our retail products,
through distinctive, technologically advanced features and design, as well as continue to build and
strengthen our brand recognition, our business could be harmed as we may not be able to effectively
compete on price alone in both domestic and international markets against new low cost market
entrants that are principally located in Asia. If we do not otherwise compete effectively, demand
for our products could decline, our gross margins could decrease, we could lose market share, our
growth prospects would be diminished and our revenues and earnings may decline.
Our ability to sustain or increase profitability will also depend in large part on our ability to
control or reduce our costs of producing set-top boxes. The market for our set-top boxes, like
other electronic products, has been characterized by regular reductions in selling prices and
production costs. Therefore, we will likely be required to reduce production costs in order to
maintain the margins we earn on set-top boxes and the profitability of our set-top box business.
Additional Challenges for our Satellite Services Business. Following completion of the Spin-off,
we began operating a satellite services business. This business is being developed using our six
owned and two leased in-orbit satellites, multiple digital broadcast centers and other transmission
assets. As with our set-top box business, DISH Network currently accounts for substantially all of
our satellite services revenue. While we expect to continue to provide satellite services to DISH
Network for the foreseeable future, its satellite capacity requirements may change for a variety of
reasons. In particular, DISH Network may reduce its purchase of satellite services from us if it
successfully completes the launch and orbital placement of satellites that it has previously
announced. Any termination or reduction in the services we provide to DISH Network would increase
excess capacity on our satellites and require that we aggressively pursue alternative sources of
revenue for this business.
However, our ability to expand revenues in the satellite services business will likely require that
we displace incumbent suppliers that generally have well established business models and often
benefit from long term contracts with customers. As a result, in order to grow our satellite
services business we may need to develop or otherwise acquire access to new satellite-delivered
services so that we may offer customers differentiated services or we may be required to compete
aggressively on the basis of pricing, either or both of which may affect our profitability.
We currently have substantial unused satellite capacity. Future costs associated with this excess
capacity will negatively impact our margins if we do not generate revenue to offset these costs.
In addition, because a substantial portion of the capacity of each of our AMC-15 and AMC-16
satellites remains without long-term contracts, there is a significant risk that in the future, in
addition to reporting lower than expected revenues and profitability, we could be required to
record a substantial impairment charge relating to one or both of these satellites. We currently
estimate that these potential charges could aggregate up to approximately $200 million, which would
have a material adverse effect on our results of operations and financial position.
37
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Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued |
We have suspended construction of the CMBStar satellite and in future periods may conclude it
appropriate to record an impairment charge. During April 2008, we notified the State
Administration of Radio, Film and Television of China that we were suspending construction of the
CMBStar satellite pending, among other things, further analysis relating to efforts to meet the
satellite performance criteria and/or confirmation that alternative performance criteria would be
acceptable. We are currently evaluating potential alternative uses for the CMBStar satellite. If
these alternative uses are insufficient to recover the carrying value invested to date in the
satellite, we may be required to record an impairment charge in a future period relating to the
CMBStar satellite. We currently estimate that this potential charge could be as much as $100
million, which would have a material adverse effect on our results of operations and financial
position.
Adverse Economic Conditions. Our ability to increase our income or to generate additional revenues
will depend in part on our ability to organically grow our business, identify and successfully
exploit opportunities to acquire other businesses or technologies, and enter into strategic
partnerships. These activities may require significant additional capital that may not be
available on terms that would be attractive to us or at all. In particular, current dislocations
in the credit markets, which have significantly impacted the availability and cost of financing,
specifically in the leveraged finance markets, may significantly constrain our ability to obtain
financing to support our growth initiatives. These developments in the credit markets may increase
our cost of financing and impair our liquidity position. In addition, these developments may cause
us to defer or abandon business strategies and transactions that we would otherwise pursue if
financing were available on acceptable terms.
Furthermore, unfavorable events in the economy, including a continuation or further deterioration
in the credit and equity markets, could cause consumer demand for pay-TV services and consequently
sales of our set-top boxes to DISH Network, Bell ExpressVu and other customers to decline
materially because consumers may delay purchasing decisions or change or reduce their discretionary
spending.
General Risks. Our profitability will also be affected by costs associated with our efforts to
expand our sales, marketing, product development and general and administrative capabilities in all
of our businesses, as well as expenses that we incur as a separate publicly-traded company. These
costs include costs associated with, among other things, financial reporting, information
technology, complying with federal securities laws (including compliance with the Sarbanes-Oxley
Act of 2002), tax administration and human resources related functions. As we expand
internationally, we may also incur additional costs to conform our set-top boxes to comply with
local laws or local specifications and to ship our set-top boxes to our international customers.
38
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Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued |
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Equipment sales DISH Network. Equipment sales DISH Network primarily includes sales of
set-top boxes and related components to DISH Network, including Slingboxes and related hardware
products.
Equipment sales other. Equipment sales other primarily includes sales of set-top boxes and
related components to Bell ExpressVu and other international customers, including sales of
Slingboxes and related hardware products.
Satellite services, digital broadcast operations and other services DISH Network. Satellite
services, digital broadcast operations and other services DISH Network primarily includes
revenue associated with satellite and transponder leasing, satellite uplinking/downlinking, signal
processing, conditional access management, telemetry, tracking and control, professional services,
facilities rental revenue and other services provided to DISH Network.
Satellite and other services other. Satellite services and other services other primarily
includes revenue associated with satellite and transponder leasing, satellite uplinking/downlinking
and other services provided to customers other than DISH Network.
Cost of sales equipment. Cost of sales equipment principally includes costs associated
with set-top boxes and related components sold to DISH Network, Bell ExpressVu and other
international customers, including costs associated with Slingboxes and related hardware products.
Satellite services, digital broadcast operations and other cost of sales. Satellite services,
digital broadcast operations and other cost of sales principally includes costs associated with
satellite and transponder leasing, satellite uplinking/downlinking, signal processing, conditional
access management, telemetry, tracking and control, professional services and facilities rental
revenue.
Research and development expenses. Research and development expenses consist primarily of costs
associated with the design and development of our set-top boxes, Slingboxes and related components,
including among other things, salaries and consulting fees.
Selling, general and administrative expenses. Selling, general and administrative expenses
consists primarily of selling and marketing costs and employee-related costs associated with
administrative services, including non-cash, stock-based compensation expense. It also includes
professional fees (i.e., legal, information systems and accounting services) and other items
associated with facilities and administration provided by DISH Network and other third parties.
Interest expense. Interest expense primarily includes interest expense associated with our
capital lease obligations.
Other income (expense). The main components of Other income and expense are unrealized gains
and losses from changes in fair value of marketable and non-marketable strategic investments
accounted for at fair value, equity in earnings and losses of our affiliates, gains and losses
realized on the sale of investments and impairment of marketable and non-marketable investment
securities.
Earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA is defined as
Net income (loss) plus Interest expense net of Interest income, Income taxes and
Depreciation and amortization. This non-GAAP measure is reconciled to net income (loss) in our
discussion of Results of Operations below.
Free cash flow. We define free cash flow as Net cash flows from operating activities less
Purchases of property and equipment, as shown on our Condensed Consolidated Statements of Cash
Flows.
39
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Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued |
RESULTS OF OPERATIONS
Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
|
|
|
Ended September 30, |
|
|
Variance |
|
|
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
% |
|
Statements of Operations Data |
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment sales DISH Network |
|
$ |
461,675 |
|
|
$ |
342,434 |
|
|
$ |
119,241 |
|
|
|
34.8 |
|
Equipment sales other |
|
|
55,110 |
|
|
|
61,919 |
|
|
|
(6,809 |
) |
|
|
(11.0 |
) |
Satellite services, digital broadcast operations and other services DISH Network |
|
|
91,388 |
|
|
|
|
|
|
|
91,388 |
|
|
NM |
Satellite and other services other |
|
|
8,000 |
|
|
|
63 |
|
|
|
7,937 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
616,173 |
|
|
|
404,416 |
|
|
|
211,757 |
|
|
|
52.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales equipment |
|
|
446,970 |
|
|
|
378,568 |
|
|
|
68,402 |
|
|
|
18.1 |
|
% of Total equipment sales |
|
|
86.5 |
% |
|
|
93.6 |
% |
|
|
|
|
|
|
|
|
Satellite services, digital broadcast operations and other cost of sales |
|
|
52,670 |
|
|
|
185 |
|
|
|
52,485 |
|
|
NM |
% of Total satellite services, digital broadcast operations and other services |
|
|
53.0 |
% |
|
NM |
|
|
|
|
|
|
|
|
Research and development expense |
|
|
10,227 |
|
|
|
15,653 |
|
|
|
(5,426 |
) |
|
|
(34.7 |
) |
% of Total revenue |
|
|
1.7 |
% |
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
34,444 |
|
|
|
17,236 |
|
|
|
17,208 |
|
|
|
99.8 |
|
% of Total revenue |
|
|
5.6 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
69,781 |
|
|
|
1,482 |
|
|
|
68,299 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
614,092 |
|
|
|
413,124 |
|
|
|
200,968 |
|
|
|
48.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
2,081 |
|
|
|
(8,708 |
) |
|
|
10,789 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
21,436 |
|
|
|
1,919 |
|
|
|
19,517 |
|
|
NM |
Interest expense |
|
|
(7,839 |
) |
|
|
(248 |
) |
|
|
(7,591 |
) |
|
NM |
Other |
|
|
(318,567 |
) |
|
|
1,548 |
|
|
|
(320,115 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(304,970 |
) |
|
|
3,219 |
|
|
|
(308,189 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(302,889 |
) |
|
|
(5,489 |
) |
|
|
(297,400 |
) |
|
NM |
Income tax (provision) benefit, net |
|
|
(5,041 |
) |
|
|
(1,161 |
) |
|
|
(3,880 |
) |
|
NM |
Effective tax rate |
|
|
(1.7 |
%) |
|
|
(21.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(307,930 |
) |
|
$ |
(6,650 |
) |
|
$ |
(301,280 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
(246,705 |
) |
|
$ |
(5,678 |
) |
|
$ |
(241,027 |
) |
|
NM |
40
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|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued |
Equipment sales DISH Network. Equipment sales DISH Network totaled $462 million during the
three months ended September 30, 2008, an increase of $119 million or 34.8% compared to the same
period in 2007. This change resulted from an increase in the sale of advanced set-top boxes, such
as HD receivers and HD DVRs, and related components, partially offset by a decrease in unit sales
of set-top boxes. In addition, following the Spin-off, set-top boxes and related components, which
were previously sold to DISH Network at cost, are sold at cost plus an agreed upon margin,
discussed below.
In the near term, we expect DISH Network to remain the primary customer of our set-top box business
and the primary source of our total revenue. Pursuant to the commercial agreements we entered into
with DISH Network, we will continue to be obligated to sell set-top boxes to DISH Network at cost
plus an additional amount that is equal to a fixed percentage of our cost for a period of two years
from the date of the Spin-off, although DISH Network will have no obligations to purchase set-top
boxes from us during or after this two year period.
Equipment sales other. Equipment sales other totaled $55 million during the three months
ended September 30, 2008, a decrease of $7 million or 11.0% compared to the same period during
2007. This change principally resulted from a decrease in sales of set-top boxes and related
components to Bell ExpressVu and other international customers, partially offset by an increase in
sales of Slingboxes and related hardware products. The decrease in sales to Bell ExpressVu was
related to the sale of lower priced set-top boxes, partially offset by an increase in the number of
units sold.
We currently have certain binding purchase orders from Bell ExpressVu our primary non-DISH Network
customer extending into the first quarter of 2009. However, Bell ExpressVu has no future
obligation to purchase set-top boxes from us. Cancellations or reductions of customer orders could
result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory
and operating expenses.
Satellite services, digital broadcast operations and other services DISH Network. Satellite
services, digital broadcast operations and other services DISH Network totaled $91 million
during the three months ended September 30, 2008 resulting from the sales of services to DISH
Network including satellite and transponder leasing, and digital broadcast operations.
Satellite and other services other. Satellite services and other services other totaled $8
million during the three months ended September 30, 2008, an increase of $8 million compared to the
same period during 2007. This change principally resulted from an increase in satellite and
transponder leasing and other services provided to customers other than DISH Network.
Cost of sales equipment. Cost of sales equipment totaled $447 million during the three
months ended September 30, 2008, an increase of $68 million or 18.1% compared to the same period in
2007. This change primarily resulted from an increase in the cost of sales of advanced set-top
boxes and related components sold to DISH Network, partially offset by a decrease in unit sales of
set-top boxes. Cost of sales equipment represented 86.5% and 93.6% of total equipment sales
during the three months ended September 30, 2008 and 2007, respectively. Prior to the Spin-off,
set-top boxes and related components were historically sold to DISH Network at cost. The decrease
in the expense to revenue ratio principally resulted from the sale of set-top boxes and related
components sold to DISH Network at cost plus a fixed margin during the three months ended September
30, 2008. This decrease was partially offset by a decline in margins on sales to Bell ExpressVu
and other international customers.
Satellite services, digital broadcast operations and other cost of sales. Satellite services,
digital broadcast operations and other cost of sales totaled $53 million during the three months
ended September 30, 2008, an increase of $52 million compared to the same period in 2007. This
increase principally resulted from the costs associated with digital broadcast operations and
professional services primarily provided to DISH Network. The majority of the costs associated
with our satellites utilized in our satellite services business are included in Depreciation and
amortization expense discussed below.
41
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued |
Selling, general and administrative expenses. Selling, general and administrative expenses
totaled $34 million during the three months ended September 30, 2008, an increase of $17 million
compared to the same period in 2007. This increase was attributable to an increase in certain
management and administrative services including non-cash, stock-based compensation expense,
primarily including those costs associated with the acquisition of Sling Media. Selling, general
and administrative expenses represented 5.6% and 4.3% of Total revenue during the three months
ended September 30, 2008 and 2007, respectively. The increase in the ratio of those expenses to
Total revenue was primarily attributable to the increase in expenses relative to the growth in
revenue, discussed previously.
Depreciation and amortization. Depreciation and amortization expense totaled $70 million during
the three months ended September 30, 2008, a $68 million increase compared to the same period in
2007. The increase in Depreciation and amortization expense was primarily attributable to the
Depreciation and amortization expense associated with the contribution of satellites, digital
broadcast assets, real estate and other assets by DISH Network in connection with the Spin-off.
Interest income. Interest income totaled $21 million during the three months ended September 30,
2008, a $20 million increase compared to the same period in 2007. This change resulted from the
interest earned on cash and marketable investment securities contributed by DISH Network to us in
the Spin-off.
Interest expense, net of amounts capitalized. Interest expense totaled $8 million during the
three months ended September 30, 2008, an $8 million increase compared to the same period in 2007.
This change resulted from the interest expense associated with our capital leases contributed to us
in the Spin-off.
Other. Other expense totaled $319 million during the three months ended September 30, 2008, a
$320 million increase compared to the same period in 2007. This change primarily resulted from a
$163 million unrealized loss on marketable investment securities accounted for at fair value, a $80
million charge to earnings for other than temporary declines in fair value of our marketable and
non-marketable investment securities, a $39 million impairment on FCC authorizations and a $30
million loss on the sale and exchange of marketable investment securities.
Earnings before interest, taxes, depreciation and amortization. EBITDA was a negative $247 million
during the three months ended September 30, 2008, a decrease of $241 million compared to the same
period in 2007. EBITDA for the three months ended September 30, 2008 was negatively impacted by
the $320 million increase in Other expense discussed above. The following table reconciles
EBITDA to the accompanying financial statements.
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
EBITDA |
|
$ |
(246,705 |
) |
|
$ |
(5,678 |
) |
Less: |
|
|
|
|
|
|
|
|
Interest expense (income), net |
|
|
(13,597 |
) |
|
|
(1,671 |
) |
Income tax provision (benefit), net |
|
|
5,041 |
|
|
|
1,161 |
|
Depreciation and amortization |
|
|
69,781 |
|
|
|
1,482 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(307,930 |
) |
|
$ |
(6,650 |
) |
|
|
|
|
|
|
|
EBITDA is not a measure determined in accordance with accounting principles generally accepted in
the United States, or GAAP, and should not be considered a substitute for operating income, net
income or any other measure determined in accordance with GAAP. Conceptually, EBITDA measures the
amount of income generated each period that could be used to service debt, pay taxes and fund
capital expenditures. EBITDA should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with GAAP.
EBITDA is used by our management as a measure of operating efficiency and overall financial
performance for benchmarking against our peers and competitors. Management believes EBITDA
provides meaningful supplemental information regarding liquidity and the underlying operating
performance of our business. Management also believes that EBITDA is useful to investors because
it is frequently used by securities analysts, investors and other interested parties to evaluate
companies in the digital set-top box industry.
42
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued |
Income tax (provision) benefit, net. Our income tax provision was $5 million during the three
months ended September 30, 2008, a $4 million increase compared to the same period in 2007. This
increase is primarily attributable to the establishment of a $102 million valuation allowance on
the deferred tax assets related to unrealized losses on marketable investment securities accounted
for at fair value and the impairment of certain marketable and non-marketable investment
securities.
Net income (loss). Net loss was $308 million during the three months ended September 30, 2008, a
decrease of $301 million compared to the same period in 2007. The decline was primarily
attributable to the changes in revenue and expenses discussed above.
43
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
|
|
|
Ended September 30, |
|
|
Variance |
|
|
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
% |
|
Statements of Operations Data |
|
(In thousands) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment sales DISH Network |
|
$ |
1,134,408 |
|
|
$ |
1,016,247 |
|
|
$ |
118,161 |
|
|
|
11.6 |
|
Equipment sales other |
|
|
206,883 |
|
|
|
160,671 |
|
|
|
46,212 |
|
|
|
28.8 |
|
Satellite services, digital broadcast operations and other
services DISH Network |
|
|
276,877 |
|
|
|
|
|
|
|
276,877 |
|
|
NM |
Satellite and other services other |
|
|
35,916 |
|
|
|
5,850 |
|
|
|
30,066 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
1,654,084 |
|
|
|
1,182,768 |
|
|
|
471,316 |
|
|
|
39.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales equipment |
|
|
1,146,878 |
|
|
|
1,116,577 |
|
|
|
30,301 |
|
|
|
2.7 |
|
% of Total equipment sales |
|
|
85.5 |
% |
|
|
94.9 |
% |
|
|
|
|
|
|
|
|
Satellite services, digital broadcast operations and other cost of sales |
|
|
162,885 |
|
|
|
4,444 |
|
|
|
158,441 |
|
|
NM |
% of Total satellite services, digital broadcast operations and other
services |
|
|
52.1 |
% |
|
|
76.0 |
% |
|
|
|
|
|
|
|
|
Research and development expense |
|
|
37,792 |
|
|
|
44,697 |
|
|
|
(6,905 |
) |
|
|
(15.4 |
) |
% of Total revenue |
|
|
2.3 |
% |
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
99,409 |
|
|
|
52,827 |
|
|
|
46,582 |
|
|
|
88.2 |
|
% of Total revenue |
|
|
6.0 |
% |
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
193,767 |
|
|
|
4,391 |
|
|
|
189,376 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
1,640,731 |
|
|
|
1,222,936 |
|
|
|
417,795 |
|
|
|
34.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
13,353 |
|
|
|
(40,168 |
) |
|
|
53,521 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
62,249 |
|
|
|
2,861 |
|
|
|
59,388 |
|
|
NM |
Interest expense |
|
|
(24,400 |
) |
|
|
(785 |
) |
|
|
(23,615 |
) |
|
NM |
Casualty loss |
|
|
(12,799 |
) |
|
|
|
|
|
|
(12,799 |
) |
|
NM |
Other |
|
|
(277,010 |
) |
|
|
782 |
|
|
|
(277,792 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(251,960 |
) |
|
|
2,858 |
|
|
|
(254,818 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(238,607 |
) |
|
|
(37,310 |
) |
|
|
(201,297 |
) |
|
NM |
Income tax (provision) benefit, net |
|
|
(15,798 |
) |
|
|
(2,633 |
) |
|
|
(13,165 |
) |
|
NM |
Effective tax rate |
|
|
(6.6 |
%) |
|
|
(7.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(254,405 |
) |
|
$ |
(39,943 |
) |
|
$ |
(214,462 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
(82,689 |
) |
|
$ |
(34,995 |
) |
|
$ |
(47,694 |
) |
|
NM |
44
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
Equipment sales DISH Network. Equipment sales DISH Network totaled $1.134 billion during
the nine months ended September 30, 2008, an increase of $118 million or 11.6% compared to the same
period in 2007. This change resulted from an increase in the sale of advanced set-top boxes, such
as HD receivers and HD DVRs, and related components, partially offset by a decrease in unit sales
of set-top boxes. In addition, following the Spin-off, set-top boxes and related components, which
were previously sold to DISH Network at cost, are sold at cost plus an agreed upon margin,
discussed below.
Equipment sales other. Equipment sales other totaled $207 million during the nine months
ended September 30, 2008, an increase of $46 million or 28.8% compared to the same period during
2007. This change principally resulted from an increase in sales of set-top boxes and related
components to Bell ExpressVu, and an increase in the sales of Slingboxes and related hardware
products.
Satellite services, digital broadcast operations and other services DISH Network. Satellite
services, digital broadcast operations and other services DISH Network totaled $277 million
during the nine months ended September 30, 2008 resulting from the sales of services to DISH
Network including satellite and transponder leasing, and digital broadcast operations in connection
with the Spin-off.
Satellite and other services other. Satellite services and other services other totaled $36
million during the nine months ended September 30, 2008, an increase of $30 million compared to the
same period during 2007. This change principally resulted from the increase in satellite and
transponder leasing and other services provided to customers other than DISH Network.
Cost of sales equipment. Cost of sales equipment totaled $1.147 billion during the nine
months ended September 30, 2008, an increase of $30 million or 2.7% compared to the same period in
2007. This change primarily resulted from an increase in sales of set-top boxes and related
components to Bell ExpressVu and the sales of Slingboxes and related hardware products, partially
offset by a slight decrease in the cost of sales to DISH Network. Cost of sales equipment
represented 85.5% and 94.9% of total equipment sales during the nine months ended September 30,
2008 and 2007, respectively. Prior to the Spin-off, set-top boxes and related components were
historically sold to DISH Network at cost. The decrease in the expense to revenue ratio principally
resulted from the sale of set-top boxes and related components sold to DISH Network at cost plus a
fixed margin during the nine months ended September 30, 2008. This decrease was partially offset by
a decline in margins on sales of set-top boxes and related components to Bell ExpressVu.
Satellite services, digital broadcast operations and other cost of sales. Satellite services,
digital broadcast operations and other cost of sales totaled $163 million during the nine months
ended September 30, 2008, an increase of $158 million compared to the same period in 2007. This
increase principally resulted from the costs associated with digital broadcast operations and
professional services primarily provided to DISH Network. Satellite services, digital broadcast
operations and other cost of sales represented 52.1% and 76.0% of total Satellite services,
digital broadcast operations and other revenue during the nine months ended September 30, 2008 and
2007, respectively. The decrease in this expense to revenue ratio principally resulted from the
introduction of DISH Network sales with margins which did not exist in the prior year. The majority
of the costs associated with our satellites utilized in our satellite services business are
included in Depreciation and amortization expense discussed below.
Selling, general and administrative expenses. Selling, general and administrative expenses
totaled $99 million during the nine months ended September 30, 2008, an increase of $47 million
compared to the same period in 2007. This increase was attributable to selling costs and certain
management and administrative services including non-cash, stock-based compensation expense,
primarily related to the costs associated with the acquisition of Sling Media. Selling, general
and administrative expenses represented 6.0% and 4.5% of Total revenue during the nine months
ended September 30, 2008 and 2007, respectively. The increase in the ratio of those expenses to Total
revenue was primarily attributable to the increase in expenses relative to the growth in revenue,
discussed previously.
Depreciation and amortization. Depreciation and amortization expense totaled $194 million during
the nine months ended September 30, 2008, a $189 million increase compared to the same period in
2007. The increase was primarily
attributable to expense associated with the contribution of satellites, digital broadcast assets,
real estate and other assets by DISH Network in connection with the Spin-off.
45
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
Interest income. Interest income totaled $62 million during the nine months ended September 30,
2008, a $59 million increase compared to the same period in 2007. This increase resulted from the
interest earned on cash and marketable investment securities contributed by DISH Network to us in
the Spin-off.
Interest expense, net of amounts capitalized. Interest expense totaled $24 million during the
nine months ended September 30, 2008, a $24 million increase compared to the same period in 2007.
This change resulted from the interest expense associated with our capital leases contributed to us
in the Spin-off.
Casualty loss. Casualty loss totaled $13 million during the nine months ended September 30, 2008.
In connection with the AMC-14 launch failure, we wrote-off certain deposits, capitalized interest
and insurance costs, net of insurance proceeds (see Note 6 in the Notes to our Condensed
Consolidated Financial Statements).
Other. Other expense totaled $277 million during the nine months ended September 30, 2008, a $278
million increase compared to the same period in 2007. This change primarily resulted from a $183
million unrealized loss on marketable investment securities accounted for at fair value, a $127
million charge to earnings for other than temporary declines in fair value of our marketable and
non-marketable investment securities and a $39 million impairment on FCC authorizations, partially
offset by a $68 million gain on the sale of a company which held certain FCC authorizations for a
publicly traded stock and a $15 million net gain on the exchanges and sales of marketable
investment securities.
Earnings before interest, taxes, depreciation and amortization. EBITDA was a negative $83 million
during the nine months ended September 30, 2008, a decrease of $48 million compared to the same
period in 2007. EBITDA for the nine months ended September 30, 2008 was negatively impacted by the
$278 million increase in Other expense discussed above. The following table reconciles EBITDA to
the accompanying financial statements.
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
EBITDA |
|
$ |
(82,689 |
) |
|
$ |
(34,995 |
) |
Less: |
|
|
|
|
|
|
|
|
Interest expense (income), net |
|
|
(37,849 |
) |
|
|
(2,076 |
) |
Income tax provision (benefit), net |
|
|
15,798 |
|
|
|
2,633 |
|
Depreciation and amortization |
|
|
193,767 |
|
|
|
4,391 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(254,405 |
) |
|
$ |
(39,943 |
) |
|
|
|
|
|
|
|
EBITDA is not a measure determined in accordance with accounting principles generally accepted in
the United States, or GAAP, and should not be considered a substitute for operating income, net
income or any other measure determined in accordance with GAAP. Conceptually, EBITDA measures the
amount of income generated each period that could be used to service debt, pay taxes and fund
capital expenditures. EBITDA should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with GAAP.
EBITDA is used by our management as a measure of operating efficiency and overall financial
performance for benchmarking against our peers and competitors. Management believes EBITDA provides
meaningful supplemental information regarding liquidity and the underlying operating performance of our
business. Management also believes that EBITDA is useful to investors because it is frequently used
by securities analysts, investors and other interested parties to evaluate companies in the digital
set-top box industry.
Income tax (provision) benefit, net. Our income tax provision was $16 million during the nine
months ended September 30, 2008, a $13 million increase compared to the same period in 2007. This
increase is primarily attributable to the establishment of an $88 million valuation allowance on
the deferred tax assets related to unrealized losses on marketable investment securities accounted
for at fair value and the impairment of certain marketable and non-marketable investment
securities.
Net income (loss). Net loss was $254 million during the nine months ended September 30, 2008, a
decrease of $214 million compared to the same period in 2007. The decline was primarily
attributable to the changes in revenue and expenses discussed above.
46
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents and Marketable Investment Securities
We consider all liquid investments purchased within 90 days of their maturity to be cash
equivalents. See Item 3. Quantitative and Qualitative Disclosures about Market Risk for
further discussion regarding our marketable investment securities. Our restricted and unrestricted
cash, cash equivalents and current marketable investment securities as of September 30, 2008
totaled $966 million, including $3 million of restricted cash and marketable investment securities,
compared to $532 million of cash and marketable investment securities as of December 31, 2007. The
$434 million increase in restricted and unrestricted cash, cash equivalents and current marketable
investment securities was primarily related to the contribution of approximately $1.0 billion of
cash, cash equivalents and marketable investment securities to EchoStar in connection with the
Spin-off, offset by the purchase of non-current marketable and non-marketable securities.
As of September 30, 2008, we held approximately $235 million of publicly traded investment
securities which are reported as non-current in Marketable and non-marketable investments
securities on our Condensed Consolidated Balance Sheets. Of this amount, $207 million were
previously included in Marketable investment securities at December 31, 2007.
We have investments in various debt and equity instruments
including corporate bonds, corporate equity securities, government bonds, and VRDNs. VRDNs are long-term floating rate
municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest.
All of the put options are secured by a pledged liquidity source. While they are classified as marketable investment
securities, VRDNs can be liquidated per the put option on a same day or on a five business day settlement basis.
As of September 30, 2008 and December 31, 2007, we held VRDNs with fair values of $454 million and zero, respectively.
In connection with the Spin-off, DISH Network contributed its AMC-14 satellite services contract to
us. During March 2008, AMC-14 experienced a launch anomaly and failed to reach its intended orbit.
SES Americom subsequently declared the AMC-14 satellite a total loss due to a lack of viable
options to reposition the satellite to its proper geostationary orbit. Therefore, we have no
obligation to make any future monthly lease payments to SES Americom with respect to the satellite.
However, we did make up-front payments with respect to the satellite prior to launch and recorded
capitalized interest and insurance costs related to the satellite. These amounts, net of insurance
proceeds of $41 million, totaled $13 million and were written-off during the first quarter of 2008.
The insurance proceeds were collected during the second quarter of 2008.
The following discussion highlights our free cash flow and cash flow activities during the nine
months ended September 30, 2008 compared to the same period in 2007.
Free Cash Flow
We define free cash flow as Net cash flows from operating activities less Purchases of property
and equipment, as shown on our Condensed Consolidated Statements of Cash Flows. We believe free
cash flow is an important liquidity metric because it measures, during a given period, the amount
of cash generated that is available to repay debt obligations, make investments, fund acquisitions
and for certain other activities. Free cash flow is not a measure determined in accordance with
GAAP and should not be considered a substitute for Operating income, Net income, Net cash
flows from operating activities or any other measure determined in accordance with GAAP. Since
free cash flow includes investments in operating assets, we believe this non-GAAP liquidity measure
is useful in addition to the most directly comparable GAAP measure Net cash flows from
operating activities.
During the nine months ended September 30, 2008 and 2007, free cash flow was significantly impacted
by changes in operating assets and liabilities as shown in the Net cash flows from operating
activities section of our Condensed Consolidated Statements of Cash Flows included herein.
Operating asset and liability balances can fluctuate significantly from period to period and there
can be no assurance that free cash flow will not be negatively impacted by material changes in
operating assets and liabilities in future periods, since these changes depend upon, among other
things, managements timing of payments and control of inventory levels, and cash receipts. In
47
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
addition to fluctuations resulting from changes in operating assets and liabilities, free cash flow
can vary significantly from period to period depending upon, among other things, operating
efficiencies, increases or decreases in purchases of property and equipment and other factors.
The following table reconciles free cash flow to Net cash flows from operating activities.
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Free cash flow |
|
$ |
(113,847 |
) |
|
$ |
(154,352 |
) |
Add back: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
147,268 |
|
|
|
120,076 |
|
|
|
|
|
|
|
|
Net cash flows from operating activities |
|
$ |
33,421 |
|
|
$ |
(34,276 |
) |
|
|
|
|
|
|
|
The $41 million improvement in free cash flow during the nine months ended September 30, 2008
compared to the same period in 2007 resulted from an increase in Net cash flows from operating
activities of $68 million, partially offset by an increase in Purchases of property and
equipment of $27 million. The increase in Net cash flows from operating activities was primarily
attributable to a $198 million increase in net income, adjusted to exclude non-cash changes in
Realized and unrealized losses (gains) on investments, Depreciation and amortization expense,
Deferred tax expense (benefit), and the Impairment of FCC authorizations. This increase was
partially offset by a decline in cash resulting from changes in operating assets and liabilities of
$146 million, including a $420 million increase in net receivables from DISH Network and a $37
million decrease in noncurrent assets, partially offset by an increase in accounts payable of $215
million and an increase in accrued expenses of $107 million.
Our improvement in free cash flow, discussed above, is not indicative of future changes in free
cash flow. Our 2007 free cash flow does not necessarily reflect what our free cash flow would have
been as a separate company during the periods prior to the Spin-off as our operations have
historically been dedicated primarily to supporting DISH Network and, prior to 2008, we provided
our products and services to DISH Network at cost.
Our future capital expenditures are likely to increase if we make additional investments in
infrastructure necessary to support and expand our satellite services business, if we make
additional investments in new businesses, products and technologies, or if we decide to purchase
one or more additional satellites. Conversely, our future capital expenditures are likely to
decrease if we are unable to successfully compete in the market for satellite services, or if we do
not make material investments in new businesses, products and technology.
Obligations and Future Capital Requirements
Contractual Obligations
Future maturities of our contractual obligations as of September 30, 2008 are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
Total |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
|
(In thousands) |
|
Satellite-related obligations |
|
$ |
927,036 |
|
|
$ |
75,164 |
|
|
$ |
198,207 |
|
|
$ |
124,481 |
|
|
$ |
63,767 |
|
|
$ |
48,961 |
|
|
$ |
47,717 |
|
|
$ |
368,739 |
|
Capital lease obligations |
|
|
349,912 |
|
|
|
13,818 |
|
|
|
46,922 |
|
|
|
47,729 |
|
|
|
52,463 |
|
|
|
57,971 |
|
|
|
63,989 |
|
|
|
67,020 |
|
Operating lease obligations |
|
|
15,781 |
|
|
|
1,805 |
|
|
|
5,657 |
|
|
|
4,126 |
|
|
|
1,982 |
|
|
|
976 |
|
|
|
788 |
|
|
|
447 |
|
Purchase obligations |
|
|
1,498,095 |
|
|
|
1,485,873 |
|
|
|
8,889 |
|
|
|
3,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages and other notes payable |
|
|
10,056 |
|
|
|
302 |
|
|
|
1,923 |
|
|
|
1,185 |
|
|
|
852 |
|
|
|
808 |
|
|
|
873 |
|
|
|
4,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,800,880 |
|
|
$ |
1,576,962 |
|
|
$ |
261,598 |
|
|
$ |
180,854 |
|
|
$ |
119,064 |
|
|
$ |
108,716 |
|
|
$ |
113,367 |
|
|
$ |
440,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In certain circumstances the dates on which we are obligated to make these payments could be
delayed. These amounts will increase to the extent we procure insurance for our satellites or
contract for the construction, launch or lease of additional satellites.
48
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
We expect that our future working capital, capital expenditure and debt service requirements will
be satisfied primarily from existing cash and marketable investment securities balances and cash
generated from operations. There can be no assurance we will be successful in executing our
business plan. The amount of capital required to fund our future working capital and capital
expenditure needs will vary depending on the levels of investment necessary to support possible
strategic initiatives. Our capital expenditures will vary depending on the number of satellites
leased or under construction at any point in time. Our working capital and capital expenditure
requirements could increase materially in the event of, among other factors, significant satellite
failures, or general economic downturn. These factors could require that we raise additional
capital in the future. There can be no assurance that we could raise all required capital or that
required capital would be available on acceptable terms.
From time to time we evaluate opportunities for strategic investments or acquisitions that may
complement our current services and products, enhance our technical capabilities, improve or
sustain our competitive position, or otherwise offer growth opportunities. Future material
investments or acquisitions may require that we obtain additional capital, or assume third party
debt or other long-term obligations. Also, our board of directors had previously authorized stock
repurchases of up to $1.0 billion of our Class A common stock. During the three and nine months
ended September 30, 2008, we repurchased 0.6 million shares of our common stock for $15 million.
Effective November 6, 2008, our board of directors extended the plan and authorized a reduction in
the maximum dollar value of shares that may be repurchased, such that we are currently authorized
to repurchase up to $500 million of our outstanding shares through and including December 31, 2009,
which could require that we raise
additional capital to fully execute. There can be no assurance that we could raise all required
capital or that required capital would be available on acceptable terms.
Current dislocations in the credit markets, which have significantly impacted the availability and
pricing of financing, particularly in the high yield debt and leveraged credit markets, may
significantly constrain our ability to obtain financing to support our growth initiatives. These
developments in the credit markets may have a significant effect on our cost of financing and our
liquidity position and may, as a result, cause us to defer or abandon profitable business
strategies that we would otherwise pursue if financing were available on acceptable terms.
Interest on Long-Term Debt
As of September 30, 2008, future cash interest payments related to our debt are summarized in the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
Total |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
|
(In thousands) |
|
Mortgages and notes payable |
|
$ |
3,568 |
|
|
$ |
34 |
|
|
$ |
698 |
|
|
$ |
597 |
|
|
$ |
529 |
|
|
$ |
464 |
|
|
$ |
399 |
|
|
$ |
847 |
|
Capital lease obligations |
|
|
103,525 |
|
|
|
7,467 |
|
|
|
27,292 |
|
|
|
23,342 |
|
|
|
19,032 |
|
|
|
14,261 |
|
|
|
8,981 |
|
|
|
3,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
107,093 |
|
|
$ |
7,501 |
|
|
$ |
27,990 |
|
|
$ |
23,939 |
|
|
$ |
19,561 |
|
|
$ |
14,725 |
|
|
$ |
9,380 |
|
|
$ |
3,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
Item 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risks Associated With Financial Instruments
As of September 30, 2008, our restricted and unrestricted cash, cash equivalents and current
marketable investment securities had a fair value of $966 million. Of that amount, a total of $855
million was invested in: (a) cash; (b) debt instruments of the U.S. Government and its agencies;
(c) commercial paper and notes with an overall average maturity of less than one year and rated in
one of the four highest rating categories by at least two nationally recognized statistical rating
organizations; and (d) instruments with similar risk characteristics to the commercial paper
described above. The primary purpose of these investing activities has been to preserve principal
until the cash is required to, among other things, fund operations, make strategic investments and
expand the business. Consequently, the size of this portfolio fluctuates significantly as cash is
received and used in our business.
Our restricted and unrestricted cash, cash equivalents and marketable investment securities had an
average annual return for the nine months ended September 30, 2008 of 7.4%. A hypothetical 10%
decrease in interest rates would result in a decrease of approximately $8 million in annual
interest income. The value of certain of the investments in this portfolio can be impacted by,
among other things, the risk of adverse changes in securities and economic markets, as well as the
risks related to the performance of the companies whose commercial paper and other instruments we
hold. The value of these investments can also be impacted by interest rate fluctuations.
Investments in Debt and Equity Securities
We have investments in various debt and equity instruments
including corporate bonds, corporate equity securities, government bonds, and VRDNs. VRDNs are long-term floating rate
municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest.
All of the put options are secured by a pledged liquidity source. While they are classified as marketable investment
securities, VRDNs can be liquidated per the put option on a same day or on a five business day settlement basis.
As of September 30, 2008 and December 31, 2007, we held VRDNs with fair values of $454 million and zero, respectively.
Marketable Investment Securities
Included in our marketable investment securities portfolio balance is debt and equity of public
companies we hold for strategic and financial purposes. As of September 30, 2008, we held strategic
and financial debt and equity investments of public companies with a fair value of $111 million.
These investments are highly speculative and are concentrated in a small number of companies. We
may make additional strategic and financial investments in debt and other equity securities in the
future. The fair value of our strategic and financial debt and equity investments can be
significantly impacted by the risk of adverse changes in securities markets generally, as well as
risks related to the performance of the companies whose securities we have invested in, risks
associated with specific industries, and other factors. These investments are subject to
significant fluctuations in fair value due to the volatility of the securities markets and of the
underlying businesses. A hypothetical 10% adverse change in the price of our public strategic debt
and equity investments would result in approximately an $11 million decrease in the fair value of
that portfolio. The fair value of our strategic debt investments are currently not materially
impacted by interest rate fluctuations due to the nature of these investments.
Changes in the fair value of marketable investment securities accounted for at fair value are
recognized as unrealized gains and losses on our Condensed Consolidated Statements of Operations.
Interest income on fair value method debt investment securities is recorded in Interest income on
our Condensed Consolidated Statements of Operations. Changes in the fair value of marketable
investment securities accounted for as available-for-sale are reported at fair value with the
related temporary unrealized gains and losses reported as a separate component of Accumulated
other comprehensive income (loss) within Total stockholders equity (deficit), net of related
deferred income tax on our Condensed Consolidated Balance Sheets.
Declines in the fair value of an available-for-sale investment security which are determined to be
other than temporary are recognized in the Condensed Consolidated Statements of Operations in the
Other component of Other Income (Expense), thus establishing a new cost basis for the
investment. We evaluate our available-for-sale investment securities portfolio on a quarterly basis
to determine whether declines in the fair value of these securities are other than temporary. This
quarterly evaluation consists of reviewing, among other things, the fair value of our
marketable investment securities compared to the carrying amount, the historical volatility of the
price of each security and any market and company-specific factors related to each security.
Generally, absent specific factors to the
50
|
|
|
Item 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Continued |
contrary, declines in the fair value of investments below
cost basis for a continuous period of less than six months are considered to be temporary. Declines
in the fair value of investments for a continuous period of six to nine months are evaluated on a
case by case basis to determine whether any company or market-specific factors exist which would
indicate that such declines are other than temporary. Declines in the fair value of investments
below cost basis for a continuous period greater than nine months are considered other than
temporary and are recorded as charges to earnings, absent specific factors to the contrary.
For the equity securities that are not publicly traded, it is not practical to regularly estimate
the fair value of the investments; however, these investments are subject to an evaluation for
other than temporary impairment on a quarterly basis. This quarterly evaluation consists of
reviewing, among other things, company business plans and current financial statements, if
available, for factors that may indicate an impairment of our investment. Such factors may include,
but are not limited to, cash flow concerns, material litigation, violations of debt covenants and
changes in business strategy. The fair value of these equity investments is not estimated unless
there are identified changes in circumstances that may indicate an impairment exists and these
changes are likely to have a significant adverse effect on the fair value of the investment.
We also have an investment in non-marketable convertible debt which is included in Marketable and
non-marketable investment securities on our Condensed Consolidated Balance Sheets. The fair value
of this debt is determined each reporting period based upon inputs other than quoted market prices
that are observable for the debt, either directly or indirectly with changes in fair value recorded
as unrealized gains and losses on our Condensed Consolidated Statements of Operations. The fair
value analysis takes into consideration the price of the underlying company stock as well as
changes in the credit market, including yield curves and interest rates.
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.
Current Marketable Investment Securities
As of September 30, 2008 and December 31, 2007, we had accumulated unrealized losses of less than
$1 million, net of related tax effect, and unrealized gains of $64 million, net of related tax
effect, respectively, as a part of Accumulated other comprehensive income (loss) within Total stockholders
equity (deficit). As of September 30, 2008, a full valuation allowance has been
established against the deferred tax assets associated with these unrealized capital losses.
Our strategic marketable investment securities are highly speculative and are concentrated in a
small number of companies. Additionally, during the nine months ended September 30, 2008 our
strategic investments have experienced and continue to experience volatility. If the fair value of
our strategic marketable investment securities portfolio, accounted for as available-for-sale, does
not remain above cost basis or if we become aware of any market or company-specific factors that
indicate that the carrying value of certain of our securities is impaired, we may be required to
record charges to earnings in future periods equal to the amount of the decline in fair value.
During October 2008, the value of our current strategic marketable investment securities of $111 million
declined in excess of 20%.
Noncurrent Marketable and Non-Marketable Investment Securities
We account for our unconsolidated debt and equity investments under the fair value, equity or cost method of
accounting. Non-majority owned investments are generally accounted for using the equity method when
we have the ability to significantly influence the operating decisions of the issuer. However, when
we believe the fair value method of accounting provides more meaningful information to our
investors, we elect the fair value method for certain investments in affiliates whose equity is
publicly traded. When we do not have the ability to significantly influence the operating decisions
of an issuer, the cost method is used.
51
|
|
|
Item 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Continued |
These debt and equity investments are
included in Marketable and non-marketable investment securities on our Condensed Consolidated
Balance Sheets and detailed by accounting method below.
|
|
|
|
|
|
|
As of |
|
|
|
September 30, 2008 |
|
|
|
(In thousands) |
|
Fair value method * |
|
$ |
275,914 |
|
Cost method |
|
|
28,389 |
|
Equity method |
|
|
16,731 |
|
|
|
|
|
Total |
|
$ |
321,034 |
|
|
|
|
|
|
|
|
* |
|
During the nine months ended September 30, 2008, we recorded $183 million of unrealized losses
due to changes in the fair value of certain debt and equity securities, accounted for under the
fair value method, on our Condensed Consolidated Statements of Operations. |
Other income and expense on our Condensed Consolidated Statements of Operations includes
other changes in the carrying amount of our current and non-current marketable investment securities
and other items as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Gain on sale of a company which held certain FCC authorizations |
|
$ |
67,624 |
|
|
$ |
|
|
Impairment on FCC authorizations |
|
|
(38,720 |
) |
|
|
|
|
Gains (losses) on exchanges/sale of marketable investment securities |
|
|
14,969 |
|
|
|
1,984 |
|
Other than temporary impairments on marketable investment securities |
|
|
(116,507 |
) |
|
|
|
|
Other than temporary impairments on non-marketable investment securities |
|
|
(10,000 |
) |
|
|
|
|
Equity in earnings (losses) |
|
|
(6,934 |
) |
|
|
(4,177 |
) |
Other |
|
|
(4,850 |
) |
|
|
2,975 |
|
|
|
|
|
|
|
|
Total |
|
$ |
(94,418 |
) |
|
$ |
782 |
|
|
|
|
|
|
|
|
Long-term Debt
As of September 30, 2008, we had $308 million of long-term debt, of which $300 million represents
our capital lease obligations, which are not subject to the requirements of Financial Accounting
Standards Board Statement No. 107 Disclosures about Fair Value of Financial Instruments
(FAS107).
Derivative Financial Instruments
In general, we do not use derivative financial instruments for hedging or speculative purposes, but
we may do so in the future.
52
|
|
|
Item 4. |
|
CONTROLS AND PROCEDURES |
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
the end of the period covered by this report.
There has been no change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934) during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Separation Agreement
In connection with the Spin-off, we have entered into a separation agreement with DISH Network,
which provides for, among other things, the division of liability resulting from litigation. Under
the terms of the separation agreement, we have assumed liability for any acts or omissions that
relate to our business whether such acts or omissions occurred before or after the Spin-off.
Certain exceptions are provided, including for intellectual property related claims generally,
whereby we will only be liable for our acts or omissions that occurred following the Spin-off.
Therefore, we have been indemnified by DISH Network for any potential liability or damages
resulting from intellectual property claims relating to the period prior to the effective date of
the Spin-off.
Acacia
During 2004, Acacia Media Technologies, (Acacia) filed a lawsuit against us and DISH Network in
the United States District Court for the Northern District of California. The suit also named
DirecTV, Comcast, Charter, Cox and a number of smaller cable companies as defendants. Acacia is an
intellectual property holding company which seeks to license an acquired patent portfolio. The
suit alleges infringement of United States Patent Nos. 5,132,992 (the 992 patent), 5,253,275 (the
275 patent), 5,550,863 (the 863 patent), 6,002,720 (the 720 patent) and 6,144,702 (the 702
patent).
The patents relate to certain systems and methods for transmission of digital data. During 2004
and 2005, the Court issued Markman rulings which found that the 992 and 702 patents were not as
broad as Acacia had contended, and that certain terms in the 702 patent were indefinite. The
Court issued additional claim construction rulings on December 14, 2006, March 2, 2007, October 19,
2007, and February 13, 2008. On March 12, 2008, the Court issued an order outlining a schedule for
filing dispositive invalidity motions based on its claim constructions. Acacia has agreed to
stipulate to invalidity based on the Courts claim constructions in order to proceed immediately to
the Federal Circuit on appeal. The Court, however, has permitted us to file additional invalidity
motions.
Acacias various patent infringement cases have been consolidated for pre-trial purposes in the
United States District Court for the Northern District of California. We intend to vigorously
defend this case. In the event that a Court ultimately determines that we infringe any of the
patents, we may be subject to substantial damages, which may include treble damages and/or an
injunction that could require us to materially modify certain user-friendly features that we
currently offer to consumers. We are being indemnified by DISH Network for any potential liability
or damages resulting from this suit relating to the period prior to the effective date of the
Spin-off. We cannot predict with any degree of certainty the outcome of the suit or determine the
extent of any potential liability or damages.
53
PART II OTHER INFORMATION Continued
Broadcast Innovation, L.L.C.
In 2001, Broadcast Innovation, L.L.C. (Broadcast Innovation) filed a lawsuit against DISH
Network, DirecTV, Thomson Consumer Electronics and others in Federal District Court in Denver,
Colorado. The suit alleges infringement of United States Patent Nos. 6,076,094 (the 094 patent)
and 4,992,066 (the 066 patent). The 094 patent relates to certain methods and devices for
transmitting and receiving data along with specific formatting information for the data. The 066
patent relates to certain methods and devices for providing the scrambling circuitry for a pay
television system on removable cards. We examined these patents and believe that they are not
infringed by any of our products or services. Subsequently, DirecTV and Thomson settled with
Broadcast Innovation leaving us as the only defendant.
During 2004, the judge issued an order finding the 066 patent invalid. Also in 2004, the Court
ruled the 094 patent invalid in a parallel case filed by Broadcast Innovation against Charter and
Comcast. In 2005, the United States Court of Appeals for the Federal Circuit overturned the 094
patent finding of invalidity and remanded the case back to the District Court. During June 2006,
Charter filed a reexamination request with the United States Patent and Trademark Office. The
Court has stayed the case pending reexamination. Our case remains stayed pending resolution of the
Charter case.
We intend to vigorously defend this case. In the event that a Court ultimately determines that we
infringe any of the patents, we may be subject to substantial damages, which may include treble
damages and/or an injunction that could require us to materially modify certain user-friendly
features that we currently offer to consumers. We are being indemnified by DISH Network for any
potential liability or damages resulting from this suit relating to the period prior to the
effective date of the Spin-off. We cannot predict with any degree of certainty the outcome of the
suit or determine the extent of any potential liability or damages.
Datasec
During April 2008, Datasec Corporation (Datasec) sued us, DISH Network and DirecTV Corporation
in the United States District Court for the Central District of California, alleging infringement
of U.S. Patent No. 6,075,969 (the 969 patent). The 969 patent was issued in 2000 to inventor
Bruce Lusignan, and is entitled Method for Receiving Signals from a Constellation of Satellites
in Close Geosynchronous Orbit. In September 2008, Datasec voluntarily dismissed its case
without prejudice.
Finisar Corporation
Finisar Corporation (Finisar) obtained a $100 million verdict in the United States District Court
for the Eastern District of Texas against DirecTV for patent infringement. Finisar alleged that
DirecTVs electronic program guide and other elements of its system infringe United States Patent
No. 5,404,505 (the 505 patent).
In July 2006, DISH Network, together with NagraStar LLC, filed a Complaint for Declaratory Judgment
in the United States District Court for the District of Delaware against Finisar that asks the
Court to declare that they and we do not infringe, and have not infringed, any valid claim of the
505 patent. Trial is not currently scheduled. The District Court has stayed our action until the
Federal Circuit has resolved DirecTVs appeal. During April 2008, the Federal Circuit reversed the
judgment against DirecTV and ordered a new trial. We are evaluating the Federal Circuits decision
to determine the impact on our action.
We intend to vigorously prosecute this case. In the event that a Court ultimately determines that
we infringe this patent, we may be subject to substantial damages, which may include treble damages
and/or an injunction that could require us to modify our system architecture. We are being
indemnified by DISH Network for any potential liability or damages resulting from this suit
relating to the period prior to the effective date of the Spin-off. We cannot predict with any
degree of certainty the outcome of the suit or determine the extent of any potential liability or
damages.
54
PART II OTHER INFORMATION Continued
Global Communications
On
April 19, 2007, Global Communications, Inc. (Global) filed a patent
infringement action against DISH Network in the United States District Court for the Eastern
District of Texas. The suit alleges infringement of United States Patent No. 6,947,702 (the 702
patent). This patent, which involves satellite reception, was issued in September 2005. On
October 24, 2007, the United States Patent and Trademark Office granted our request for
reexamination of the 702 patent and issued an Office Action finding that all of the claims of the
702 patent were invalid. At the request of the parties, the District Court stayed the litigation
until the reexamination proceeding is concluded and/or other Global patent applications issue.
We intend to vigorously defend this case. In the event that a Court ultimately determines that we
infringe the 702 patent, we may be subject to substantial damages, which may include treble
damages and/or an injunction that could require us to materially modify certain user-friendly
features that we currently offer to consumers. We are being indemnified by DISH Network for any
potential liability or damages resulting from this suit relating to the period prior to the
effective date of the Spin-off. We cannot predict with any degree of certainty the outcome of the
suit or determine the extent of any potential liability or damages.
Personalized Media Communications
In February 2008, Personalized Media Communications, Inc. filed suit against us, DISH Network and
Motorola, Inc. in the United States District Court for the Eastern District of Texas alleging
infringement of United States Patent Nos. 4,694,490 (the 490 patent), 5,109,414 (the 414
patent), 4,965,825 (the 825 patent), 5,233,654 (the 654 patent), 5,335,277 (the 277 patent),
and 5,887,243 (the 243 patent), all of which were issued to John Harvey and James Cuddihy as
named inventors. The 490 patent, the 414 patent, the 825 patent, the 654 patent and the 277
patent are defined as the Harvey Patents. The Harvey Patents are entitled Signal Processing
Apparatus and Methods. The lawsuit alleges, among other things, that our DBS system receives
program content at broadcast reception and satellite uplinking facilities and transmits such
program content, via satellite, to remote satellite receivers. The lawsuit further alleges that
we infringe the Harvey Patents by transmitting and using a DBS signal specifically encoded to
enable the subject receivers to function in a manner that infringes the Harvey Patents, and by
selling services via DBS transmission processes which infringe the Harvey Patents.
We intend to vigorously defend this case. In the event that a Court ultimately determines that we
infringe any of the asserted patents, we may be subject to substantial damages, which may include
treble damages and/or an injunction that could require us to materially modify certain
user-friendly features that we currently offer to consumers. We are being indemnified by DISH
Network for any potential liability or damages resulting from this suit relating to the period
prior to the effective date of the Spin-off. We cannot predict with any degree of certainty the
outcome of the suit or determine the extent of any potential liability or damages.
Superguide
During 2000, Superguide Corp. (Superguide) filed suit against us. DISH Network, DirecTV, Thomson
and others in the United States District Court for the Western District of North Carolina,
Asheville Division, alleging infringement of United States Patent Nos. 5,038,211 (the 211 patent),
5,293,357 (the 357 patent) and 4,751,578 (the 578 patent) which relate to certain electronic
program guide functions, including the use of electronic program guides to control VCRs.
Superguide sought injunctive and declaratory relief and damages in an unspecified amount. We were
indemnified by DISH Network for any potential liability or damages resulting from this suit
relating to the period prior to the effective date of the Spin-off. In October 2008, a settlement
was reached with Superguide which did not impact our results of operations.
55
PART II OTHER INFORMATION Continued
Tivo Inc.
On January 31, 2008, the U.S. Court of Appeals for the Federal Circuit affirmed in part and
reversed in part the April 2006 jury verdict concluding that certain of our digital video
recorders, or DVRs, infringed a patent held by Tivo. In its decision, the Federal Circuit affirmed
the jurys verdict of infringement on Tivos software claims, upheld the award of damages from
the District Court, and ordered that the stay of the District Courts injunction against us, which
was issued pending appeal, will dissolve when the appeal becomes final. The Federal Circuit,
however, found that we did not literally infringe Tivos hardware claims, and remanded such
claims back to the District Court for further proceedings. On October 6, 2008, the Supreme Court
denied our petition for certiorari. As a result, approximately $105 million dollars was released
by DISH Network from an escrow account to Tivo.
In addition, we have developed and deployed next-generation DVR software to our customers DVRs.
This improved software is fully operational and has been automatically downloaded to current
customers (our alternative technology). We have formal legal opinions from outside counsel that
conclude that our alternative technology does not infringe, literally or under the doctrine of
equivalents, either the hardware or software claims of Tivos patent. Tivo has filed a motion for
contempt alleging that we are in violation of the Courts injunction. We have vigorously opposed
the motion arguing that the Courts injunction does not apply to DVRs that have received our
alternative technology, that our alternative technology does not infringe Tivos patent, and that
we are in compliance with the injunction. A hearing was held on Tivos motion for contempt on
September 4, 2008 and we are waiting for a decision from the District Court.
If we are unsuccessful in defending against Tivos motion for contempt or any subsequent claim that
our alternative technology infringes Tivos patent, we could be prohibited from distributing DVRs,
or could be required to modify or eliminate certain user-friendly DVR features that we currently
offer to consumers. In that event we would be at a significant disadvantage to our competitors who
could offer this functionality. We could also have to pay substantial additional damages. We are
being indemnified by DISH Network for any potential liability or damages resulting from this suit
relating to the period prior to the effective date of the Spin-off. Although we believe that we do
not infringe under any of the claims asserted against us and DISH Network, we cannot predict with
any degree of certainty the outcome of the suit or determine the extent of any potential liability
or damages.
Other
In addition to the above actions, we are subject to various other legal proceedings and claims
which arise in the ordinary course of business. In our opinion, the amount of ultimate liability
with respect to any of these actions is unlikely to materially affect our financial position,
results of operations or liquidity.
56
PART II OTHER INFORMATION Continued
Item 1A. RISK FACTORS
Item 1A, Risk Factors, of our Annual Report on Form 10-K/A for 2007 includes a detailed
discussion of our risk factors. The information presented below updates, and should be read in
conjunction with, the risk factors and information disclosed in our Annual Report on Form 10-K/A
for 2007.
Our operating results may be adversely affected by weakening economic conditions, including the
recent downturn in the financial markets.
Our ability to grow or maintain our business may be adversely affected by weakening global or
domestic economic conditions, wavering consumer confidence, unemployment, tight credit markets,
declines in global and domestic stock markets, falling home prices and other factors adversely
affecting the global and domestic economy. Unfavorable events in the economy, including a further
deterioration in the credit and equity markets, could affect consumer demand for pay-TV services
and consequently cause sales of our set-top boxes to DISH Network, Bell ExpressVu and other
customers to decline materially because consumers may delay purchasing decisions or reduce or
reallocate their discretionary spending.
In addition, financial markets in the United States have been extremely volatile in recent months.
As a result of concerns about the stability of the markets, generally many lenders and
institutional investors have reduced and, in some cases, ceased to provide funding to borrowers
such as us. Furthermore, the recent reduction in our stock price combined with the instability in
the equity markets has made it difficult for us to raise equity financing without incurring
substantial dilution to our existing shareholders. These conditions make it difficult for us to
accurately forecast and plan future business activities because we may not have access to funding
sources necessary for us to pursue organic and strategic business development opportunities.
We currently depend on DISH Network for substantially all of our revenue for satellite services and
digital broadcast operations and adverse developments in DISH Networks business, such as the
termination of its distribution relationship with AT&T, may also adversely affect us.
DISH Network is currently our primary customer of satellite services and digital broadcast
operation services. Because these services are provided pursuant to contracts that generally
expire on January 1, 2010, DISH Network will have no obligation to purchase satellite services or
digital broadcast operation services from us after that date. Therefore, if we are unable to
extend these contracts on similar terms with DISH Network, or if we are otherwise unable to obtain
similar contracts from third parties after that date, there could be a significant adverse effect
on our business, results of operations and financial position.
AT&Ts distribution agreement with DISH Network will terminate on January 31, 2009. DISH Networks
distribution relationship with AT&T has been a substantial contributor to our sales of set-top
boxes to DISH Network over the past several years. For the nine months ended September 30, 2008,
AT&Ts relationship with DISH Network accounted for approximately 17 percent of DISH Networks
gross subscriber additions. If DISH Networks gross subscriber additions are adversely affected by
the loss of its distribution relationship with AT&T, we may experience a decline in our sales of
set-top boxes to DISH Network. Furthermore, DISH Network has in recent quarters experienced
declining and negative subscriber growth. To the extent that this trend continues or intensifies
as a result of deteriorating economic conditions in the United States or otherwise, sales of our
set-top boxes to DISH Network may decline.
We have suspended construction of the CMBStar satellite and in future periods may conclude it
appropriate to record an impairment charge.
During April 2008, we notified the State Administration of Radio, Film and Television of China that
we were suspending construction of the CMBStar satellite pending, among other things, further
analysis relating to efforts to meet the satellite performance criteria and/or confirmation that
alternative performance criteria would be acceptable. We are currently evaluating potential
alternative uses for the CMBStar satellite. If these alternative uses are insufficient to recover
the carrying value invested to date in the satellite, we may be required to record an
impairment charge in a future period relating to the CMBStar satellite. We currently estimate that
this potential
57
PART II OTHER INFORMATION Continued
charge could be as much as $100 million, which would have a material adverse effect
on our results of operations and financial position.
We expect to face additional competition in the future from new market entrants, principally
located in Asia, that offer low cost set-top boxes.
The set-top box market is intensely competitive, and market leadership changes frequently as a
result of new products, designs and pricing. We expect to face additional competition from
companies, principally located in Asia, which offer low cost set-top boxes, including set-top boxes
that are modeled after our products or products of our principal competitors. The entry of these
new competitors may result in pricing pressure in the market. If market prices are substantially
reduced by such new entrants, our business, financial condition or results of operations could be
materially adversely affected. In particular, it may be difficult for us to make profitable sales
in international markets where these new competitors are present and in which we have not
previously made sales of set-top boxes.
If we do not continue to distinguish our products, particularly our retail products, through
distinctive, technologically advanced features and design, as well as continue to build and
strengthen our brand recognition, our business could be harmed as we may not be able to effectively
compete on price alone against new low cost market entrants that are principally located in Asia.
If we do not otherwise compete effectively, demand for our products could decline, our gross
margins could decrease, we could lose market share, and our revenues and earnings could decline.
|
|
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Item 2. |
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Issuer Purchases of Equity Securities
The following table provides information regarding purchases of our Class A common stock from July
1, 2008 through September 30, 2008.
|
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|
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|
|
|
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|
|
Maximum Approximate |
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|
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|
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|
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Total Number of |
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Dollar Value of |
|
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|
|
|
|
|
|
|
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Shares Purchased as |
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Shares that May Yet |
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|
|
|
|
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Average |
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|
Part of Publicly |
|
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be Purchased Under |
|
|
|
Total Number of |
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|
Price Paid |
|
|
Announced Plans or |
|
|
the Plans or |
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Period |
|
Shares Purchased |
|
|
per Share |
|
|
Programs |
|
|
Programs (a) |
|
|
|
(In thousands, except share data) |
|
|
|
|
|
July 1 July 31, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
1,000,000 |
|
August 1 August 31, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
1,000,000 |
|
September 1 September 30,
2008 |
|
|
551,446 |
|
|
$ |
26.81 |
|
|
|
551,446 |
|
|
$ |
985,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total |
|
|
551,446 |
|
|
|
|
|
|
|
551,446 |
|
|
$ |
985,215 |
|
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|
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|
|
|
|
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|
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|
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(a) |
|
In November 2007, our Board of Directors authorized the purchase of up to $1.0 billion of our
Class A common stock during 2008. In September 2008, we repurchased 0.6 million shares of our
Class A common stock for $15 million under this plan. Effective November 6, 2008, our board
of directors extended the plan and authorized a reduction in the maximum dollar value of
shares that may be repurchased, such that we are currently authorized to repurchase up to $500
million of our outstanding shares through and including December 31, 2009. Purchases under
the program may be made through open market purchases, privately negotiated transactions, or
Rule 10b5-1
trading plans, subject to market conditions and other factors. We may elect not to purchase all
of shares authorized for repurchase under this program and we may also enter into additional
share repurchase programs authorized by our Board of Directors. |
58
PART II OTHER INFORMATION Continued
(a) Exhibits.
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31.1o
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Section 302 Certification by Chairman and Chief Executive Officer. |
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31.2o
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Section 302 Certification by Executive Vice President and Chief Financial Officer. |
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32.1o
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Section 906 Certification by Chairman and Chief Executive Officer. |
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32.2o
|
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Section 906 Certification by Executive Vice President and Chief Financial Officer. |
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99.1o
|
|
Amendment No. 1 to Receiver Agreement dated December 31, 2007 between EchoSphere
L.L.C. and EchoStar Technologies L.L.C. |
|
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99.2o
|
|
Amendment No. 1 to Broadcast Agreement dated December 31, 2007 between EchoStar
and EchoStar Satellite L.L.C. |
59
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ECHOSTAR CORPORATION
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By: |
/s/ Charles W. Ergen
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Charles W. Ergen |
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Chairman and Chief Executive Officer
(Duly Authorized Officer) |
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By: |
/s/ Bernard L. Han
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Bernard L. Han |
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Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
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|
Date: November 10, 2008
60