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 JUNE 30, 2009.
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
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26-1232727 |
(State or other jurisdiction of incorporation or
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(I.R.S. Employer Identification No.) |
organization) |
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100 Inverness Terrace East |
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Englewood, Colorado
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80112 |
(Address of principal executive offices)
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(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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o 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.
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):
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Large accelerated filer þ | |
Accelerated filer o | |
Non-accelerated filer o | |
Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 July 24, 2009, the registrants outstanding common stock consisted of 37,930,647 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:
General Risks Affecting Our Business
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Weakening economic conditions, including the recent downturn in financial markets and
reduced consumer spending, may adversely affect our ability to grow or maintain our
business. |
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We currently depend on DISH Network Corporation, or DISH Network, and Bell TV for
substantially all of our revenue. The loss as a customer of, or a significant reduction in
orders from or a decrease in selling prices of digital set-top boxes, transponder leasing,
digital broadcast operations and/or other products or services to DISH Network or Bell TV
would significantly reduce our revenue and adversely impact our results of operations. |
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Adverse developments in DISH Networks business, such as the recent termination of its
distribution relationship with AT&T, may adversely affect us. |
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We currently have substantial unused satellite capacity, and our results of operations
may be materially adversely affected if we are not able to utilize more of this capacity. |
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Our sales to DISH Network could be terminated or substantially curtailed on short notice
which would have a detrimental effect on us. |
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We may need additional capital, which may not be available on acceptable terms or at
all, in order to continue investing in our business and to finance acquisitions and other
strategic transactions. |
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We may experience significant financial losses on our existing investments. |
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We may pursue acquisitions and other strategic transactions to complement or expand our
business which may not be successful and in which we may lose the entire value of our
investment. |
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We intend to make significant investments in new products, services, technologies and
business areas that may not be profitable. |
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We are party to various lawsuits which, if adversely decided, could have a significant
adverse impact on our business, particularly lawsuits regarding intellectual property. |
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We have not been an independent company for a significant amount of time and we may be
unable to make, on a timely or cost-effective basis, the changes necessary to operate as an
independent company. |
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If we are unable to properly respond to technological changes, our business could be
significantly harmed. |
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We rely on key personnel and the loss of their services may negatively affect our
businesses. |
i
Risks Affecting Our Digital Set-Top Box Business
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We depend on sales of digital set-top boxes for nearly all of our revenue and a decline
in sales of our digital set-top boxes would have a material adverse effect on our financial
position and results of operations. |
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Our business may suffer if direct-to-home satellite service providers, who currently
comprise our customer base, do not compete successfully with existing and emerging
alternative platforms for delivering digital television, including cable television
operators, terrestrial broadcasters, and Internet protocol television. |
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Our future financial performance depends in part on our ability to penetrate new markets
for digital set-top boxes. |
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We may be exposed to the risk of inflation which could have a material adverse effect on
our results of operations. |
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The average selling price and gross margins of our digital set-top boxes has been
decreasing and may decrease even further, which could negatively impact our financial
position and results of operations. |
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Our ability to sell our digital set-top boxes to other operators depends on our ability
to obtain licenses to use the conditional access systems utilized by these other operators. |
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Growth in our Digital Set-Top Box business likely requires expansion of our sales to
international customers; we may be unsuccessful in expanding international sales. |
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The digital set-top box business is extremely competitive. |
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We expect to continue to face competition from new market entrants, principally located
in Asia, that offer low cost set-top boxes. |
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Our digital set-top boxes are highly complex and may experience quality or supply
problems. |
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If significant numbers of television viewers are unwilling to pay for premium
programming packages that utilize digital set-top boxes, we may not be able to sustain our
current revenue level. |
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Our reliance on a single supplier or a limited number of suppliers for several key
components used in our digital set-top boxes could restrict production and result in higher
digital set-top box costs. |
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Our future growth depends on market acceptance of high definition, or HD, television. |
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If we are unsuccessful in overturning the District Courts ruling on Tivos motion for contempt,
we are not successful in developing and deploying potential new alternative technology and we
are unable to reach a license agreement with Tivo on reasonable terms, we would be subject to
substantial liability and would be prohibited from offering DVR functionality that would in turn
place us at a significant disadvantage to our competitors and significantly decrease sales of digital
set-top boxes to DISH Network and others.
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Risks Affecting Our Satellite Services Business
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We currently face competition from established competitors in the satellite service
business and may face competition from others in the future. |
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Our satellites in orbit are subject to significant operational and environmental risks that could
limit our ability to utilize these satellites. |
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Our satellites have minimum design lives of 12 years, but could fail or suffer reduced
capacity before then. |
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Our satellites under construction are subject to risks related to launch that could
limit our ability to utilize these satellites. |
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Our Satellite Services business is subject to risks of adverse government regulation. |
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Our business depends substantially on Federal Communications Commission, or FCC,
licenses that can expire or be revoked or modified and applications for FCC licenses that
may not be granted. |
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We may not be aware of certain foreign government regulations. |
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Our dependence on outside contractors could result in delays related to the design,
manufacture and launch of our new satellites, which could in turn adversely affect our
operating results. |
ii
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We currently have no commercial insurance coverage on the satellites we own and could
face significant impairment charges if one of our satellites fails. |
Risks Relating to the Spin-Off
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We have potential conflicts of interest with DISH Network due to our common ownership
and management. |
Risks Relating to our Common Stock and the Securities Market
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We cannot assure you that there will not be deficiencies leading to material weaknesses
in our internal control over financial reporting. |
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It may be difficult for a third party to acquire us, even if doing so may be beneficial
to our shareholders, because of our capital structure. |
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We are controlled by one principal shareholder who is our Chairman, President and Chief
Executive Officer. |
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We do not intend to pay dividends for the foreseeable future. |
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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, or 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
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Item 1. |
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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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June 30, |
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December 31, |
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2009 |
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2008 |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
63,457 |
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$ |
24,467 |
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Marketable investment securities |
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886,738 |
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804,194 |
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Trade accounts receivable DISH Network, net of allowance
for doubtful accounts of zero |
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222,779 |
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297,629 |
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Trade accounts receivable other, net of allowance for doubtful accounts of $3,402 and $7,182, respectively |
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35,362 |
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29,216 |
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Inventories, net |
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47,995 |
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46,493 |
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Deferred tax assets |
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12,123 |
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9,484 |
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Other current assets |
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36,482 |
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17,230 |
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Total current assets |
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1,304,936 |
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1,228,713 |
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Noncurrent Assets: |
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Restricted cash and marketable investment securities |
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11,846 |
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2,846 |
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Property and equipment, net of accumulated depreciation of $1,523,896 and $1,447,572, respectively |
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1,183,822 |
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1,182,048 |
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FCC authorizations |
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69,810 |
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69,810 |
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Deferred tax assets |
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8,047 |
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Intangible assets, net |
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168,487 |
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185,143 |
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Marketable and other investment securities |
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315,373 |
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156,717 |
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Other noncurrent assets, net |
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54,149 |
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56,475 |
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Total noncurrent assets |
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1,803,487 |
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1,661,086 |
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Total assets |
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$ |
3,108,423 |
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$ |
2,889,799 |
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Liabilities and Stockholders Equity (Deficit) |
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Current Liabilities: |
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Trade accounts payable other |
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$ |
189,302 |
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$ |
205,660 |
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Trade accounts payable DISH Network |
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20,456 |
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21,570 |
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Accrued expenses and other |
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91,196 |
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89,324 |
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Current portion of capital lease obligations, mortgages and other notes payable |
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51,894 |
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52,778 |
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Total current liabilities |
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352,848 |
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369,332 |
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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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270,036 |
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293,661 |
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Deferred tax liabilities |
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51,014 |
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Other long-term liabilities |
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16,200 |
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15,220 |
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Total long-term obligations, net of current portion |
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337,250 |
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308,881 |
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Total liabilities |
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690,098 |
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678,213 |
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Commitments and Contingencies (Note 10) |
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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, 42,571,145 and
42,382,704 shares issued, 38,463,466 and 38,764,208 shares outstanding, respectively |
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43 |
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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 issued and outstanding |
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48 |
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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, $.001 par value, 800,000,000 shares authorized, none issued and outstanding |
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Additional paid-in capital |
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3,257,363 |
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3,248,327 |
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Accumulated other comprehensive income (loss) |
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94,179 |
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(10,598 |
) |
Accumulated earnings (deficit) |
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(857,019 |
) |
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(958,188 |
) |
Treasury stock, at cost |
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(75,547 |
) |
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(68,045 |
) |
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Total EchoStar stockholders equity (deficit) |
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2,419,067 |
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2,211,586 |
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Noncontrolling interest |
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(742 |
) |
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Total stockholders equity (deficit) |
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2,418,325 |
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2,211,586 |
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Total liabilities and stockholders equity (deficit) |
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$ |
3,108,423 |
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$ |
2,889,799 |
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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
AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except per share amounts)
(Unaudited)
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For the Three Months |
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For the Six Months |
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Ended June 30, |
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Ended June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenue: |
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Equipment revenue DISH Network |
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$ |
204,284 |
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$ |
301,039 |
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$ |
524,603 |
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$ |
672,733 |
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Equipment revenue other |
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70,077 |
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76,951 |
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126,988 |
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151,773 |
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Services and other revenue DISH Network |
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99,484 |
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93,019 |
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|
191,369 |
|
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|
185,489 |
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Services and other revenue other |
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9,303 |
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|
12,331 |
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19,735 |
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27,916 |
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Total revenue |
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383,148 |
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483,340 |
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|
862,695 |
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1,037,911 |
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Costs and Expenses: |
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Cost of sales equipment |
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231,637 |
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317,483 |
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558,654 |
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699,908 |
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Cost of sales services and other (exclusive of depreciation shown below
Note 11) |
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48,267 |
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57,699 |
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101,051 |
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110,215 |
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Research and development expenses |
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11,222 |
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7,473 |
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|
20,814 |
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16,619 |
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Selling, general and administrative expenses |
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27,099 |
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|
33,117 |
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52,894 |
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|
62,616 |
|
General and administrative expenses DISH Network |
|
|
8,498 |
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|
6,942 |
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|
13,256 |
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|
13,296 |
|
Depreciation and amortization (Note 11) |
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|
59,475 |
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|
63,015 |
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|
121,424 |
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|
123,985 |
|
Impairments of goodwill, indefinite-lived and long-lived assets |
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12,799 |
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Total costs and expenses |
|
|
386,198 |
|
|
|
485,729 |
|
|
|
868,093 |
|
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|
1,039,438 |
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Operating income (loss) |
|
|
(3,050 |
) |
|
|
(2,389 |
) |
|
|
(5,398 |
) |
|
|
(1,527 |
) |
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Other Income (Expense): |
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Interest income |
|
|
5,489 |
|
|
|
7,491 |
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|
|
14,778 |
|
|
|
17,956 |
|
Interest expense, net of amounts capitalized |
|
|
(7,229 |
) |
|
|
(8,278 |
) |
|
|
(14,515 |
) |
|
|
(16,561 |
) |
Unrealized and realized gains (losses) on marketable
investment securities and other investments |
|
|
(4,277 |
) |
|
|
67,848 |
|
|
|
(2,954 |
) |
|
|
66,805 |
|
Unrealized gains (losses) on investments
accounted for at fair value, net |
|
|
110,063 |
|
|
|
(7,689 |
) |
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|
116,950 |
|
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|
3,215 |
|
Other, net |
|
|
(2,460 |
) |
|
|
(3,363 |
) |
|
|
(5,045 |
) |
|
|
(5,605 |
) |
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|
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|
|
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|
Total other income (expense) |
|
|
101,586 |
|
|
|
56,009 |
|
|
|
109,214 |
|
|
|
65,810 |
|
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|
|
|
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|
|
Income (loss) before income taxes |
|
|
98,536 |
|
|
|
53,620 |
|
|
|
103,816 |
|
|
|
64,283 |
|
Income tax (provision) benefit, net |
|
|
2,536 |
|
|
|
(5,796 |
) |
|
|
(3,389 |
) |
|
|
(10,758 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
101,072 |
|
|
|
47,824 |
|
|
|
100,427 |
|
|
|
53,525 |
|
Less: Net income (loss) attributable to noncontrolling interest |
|
|
(742 |
) |
|
|
|
|
|
|
(742 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to EchoStar common shareholders |
|
$ |
101,814 |
|
|
$ |
47,824 |
|
|
$ |
101,169 |
|
|
$ |
53,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
101,072 |
|
|
$ |
47,824 |
|
|
$ |
100,427 |
|
|
$ |
53,525 |
|
Foreign currency translation adjustments |
|
|
1,420 |
|
|
|
416 |
|
|
|
1,163 |
|
|
|
(784 |
) |
Unrealized holding gains (losses) on available-for-sale securities |
|
|
39,809 |
|
|
|
(22,316 |
) |
|
|
166,529 |
|
|
|
(63,653 |
) |
Recognition of previously unrealized (gains) losses on
available-for-sale securities included in net income (loss) |
|
|
(1,183 |
) |
|
|
(34,716 |
) |
|
|
(2,506 |
) |
|
|
(35,690 |
) |
Deferred income tax (expense) benefit |
|
|
(15,395 |
) |
|
|
3,912 |
|
|
|
(60,409 |
) |
|
|
20,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
|
125,723 |
|
|
|
(4,880 |
) |
|
|
205,204 |
|
|
|
(26,117 |
) |
Less: Comprehensive income (loss) attributable to noncontrolling interest |
|
|
(742 |
) |
|
|
|
|
|
|
(742 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to EchoStar common shareholders |
|
$ |
126,465 |
|
|
$ |
(4,880 |
) |
|
$ |
205,946 |
|
|
$ |
(26,117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding Class A and B common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
86,539 |
|
|
|
89,863 |
|
|
|
86,505 |
|
|
|
89,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
86,609 |
|
|
|
90,261 |
|
|
|
86,805 |
|
|
|
91,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share Class A and B common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share attributable to EchoStar common shareholders |
|
$ |
1.18 |
|
|
$ |
0.53 |
|
|
$ |
1.17 |
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share attributable to EchoStar common shareholders |
|
$ |
1.18 |
|
|
$ |
0.53 |
|
|
$ |
1.17 |
|
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Six Months |
|
|
|
Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
100,427 |
|
|
$ |
53,525 |
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
121,424 |
|
|
|
123,985 |
|
Equity in losses (earnings) of affiliates |
|
|
4,922 |
|
|
|
2,696 |
|
Unrealized and realized (gains) losses on marketable investment securities and other investments |
|
|
2,954 |
|
|
|
(66,805 |
) |
Unrealized (gains) losses on investments accounted for at fair value, net |
|
|
(116,950 |
) |
|
|
(3,215 |
) |
Impairments of goodwill, indefinite-lived and long-lived assets |
|
|
|
|
|
|
12,799 |
|
Non-cash, stock-based compensation |
|
|
6,861 |
|
|
|
11,021 |
|
Deferred tax expense (benefit) |
|
|
(4,877 |
) |
|
|
(17,628 |
) |
Other, net |
|
|
(7,777 |
) |
|
|
(703 |
) |
Change in noncurrent assets |
|
|
(636 |
) |
|
|
(13,904 |
) |
Changes in current assets and current liabilities, net |
|
|
11,209 |
|
|
|
(105,906 |
) |
|
|
|
|
|
|
|
Net cash flows from operating activities |
|
|
117,557 |
|
|
|
(4,135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
Purchases of marketable investment securities |
|
|
(633,816 |
) |
|
|
(1,194,985 |
) |
Sales and maturities of marketable investment securities |
|
|
728,271 |
|
|
|
1,113,858 |
|
Purchases of property and equipment |
|
|
(105,746 |
) |
|
|
(92,931 |
) |
Proceeds from insurance settlement |
|
|
|
|
|
|
40,750 |
|
Change in restricted cash and marketable investment securities |
|
|
(9,050 |
) |
|
|
564 |
|
Purchase of strategic investments included in marketable and other investment securities |
|
|
(31,247 |
) |
|
|
(133,692 |
) |
Other, net |
|
|
6,155 |
|
|
|
(86 |
) |
|
|
|
|
|
|
|
Net cash flows from investing activities |
|
|
(45,433 |
) |
|
|
(266,522 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
Repayment of capital lease obligations, mortgages and other notes payable |
|
|
(26,592 |
) |
|
|
(23,051 |
) |
Contribution of cash and cash equivalents from DISH Network in connection with the Spin-off |
|
|
|
|
|
|
544,065 |
|
Repurchases of Class A common stock |
|
|
(7,502 |
) |
|
|
|
|
Net proceeds from Class A common stock options exercised and Class A common stock issued
under the Employee Stock Purchase Plan |
|
|
960 |
|
|
|
5,175 |
|
|
|
|
|
|
|
|
Net cash flows from financing activities |
|
|
(33,134 |
) |
|
|
526,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
38,990 |
|
|
|
255,532 |
|
Cash and cash equivalents, beginning of period |
|
|
24,467 |
|
|
|
41,082 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
63,457 |
|
|
$ |
296,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
14,039 |
|
|
$ |
16,065 |
|
|
|
|
|
|
|
|
Cash received for interest |
|
$ |
13,010 |
|
|
$ |
9,783 |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
25,168 |
|
|
$ |
19,978 |
|
|
|
|
|
|
|
|
Vendor financing |
|
$ |
2,083 |
|
|
$ |
13,946 |
|
|
|
|
|
|
|
|
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 |
|
$ |
|
|
|
$ |
1,533,485 |
|
|
|
|
|
|
|
|
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
EchoStar Corporation is a holding company, whose subsidiaries (which together with EchoStar
Corporation are referred to as EchoStar, the Company, we, us and/or our) operate two
primary business units:
|
|
|
Digital Set-Top Box Business which designs, develops and distributes digital
set-top boxes and related products, including our Slingbox placeshifting technology,
primarily for satellite TV service providers, telecommunication and cable companies and,
with respect to Slingboxes, directly to consumers via retail outlets. Our digital set-top
box business also provides digital broadcast operations including satellite
uplinking/downlinking, transmission services, signal processing, conditional access
management and other services provided primarily to DISH Network. |
|
|
|
Satellite Services Business which uses our eight owned and leased in-orbit
satellites and related FCC licenses to lease capacity on a full time and occasional-use
basis to enterprise, broadcast news and government organizations. We currently lease
capacity primarily to DISH Network, and secondarily to government entities, Internet
service providers, broadcast news organizations and private enterprise customers. |
Effective January 1, 2008, DISH Network Corporation (DISH Network) completed its
distribution to us (the Spin-off) of its digital set-top box business and certain infrastructure
and other assets, including certain of its satellites, uplink and satellite transmission assets,
real estate and other assets and related liabilities. We and DISH Network now operate as separate
publicly-traded companies, and neither entity has any ownership interest in the other. However, a
substantial majority of the voting power of both companies is owned beneficially by Charles W.
Ergen, our Chairman, President and Chief Executive Officer or by certain trusts established by Mr.
Ergen for the benefit of his family.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the 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 six months ended June 30, 2009 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2009. For further information, refer to the
Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for
the year ended December 31, 2008 (2008 10-K). Certain prior period amounts have been
reclassified to conform to the current period presentation. Further, in connection with
preparation of the condensed consolidated financial statements and in accordance with the recently
issued Statement of Financial Accounting Standards No. 165 Subsequent Events (SFAS 165), we
evaluated subsequent events after the balance sheet date of June 30, 2009 through August 10, 2009.
4
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Principles of Consolidation
We consolidate all majority owned subsidiaries and investments in entities in which we have
controlling influence. Non-majority owned investments are accounted for using the equity method
when we have the ability to significantly influence the operating decisions of the investee. When
we do not have the ability to significantly influence the operating decisions of an investee, the
cost method is used. 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 revenue
and expenses for each reporting period. Estimates are used in accounting for, among other things,
allowances for doubtful accounts, allowance for sales returns, 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. Illiquid credit markets and general downward economic
conditions have increased the inherent uncertainty in the estimates and assumptions indicated
above. 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.
Revision of Previously Issued Financial Statements
During the three months ended March 31, 2009, we identified an additional $14 million adjustment
related to investments in certain marketable investment securities that should have been recorded
in the quarter ended December 31, 2008. We have determined that the impact of the prior period
amount is not considered material to our consolidated results of operations or financial position
for the year ended December 31, 2008. Consistent with the provisions of SAB 108 Considering the
Effects of Prior Year Misstatements When Quantifying Misstatements in the Current Year Financial
Statements, we revised our previously issued 2008 consolidated financial statements as reflected
in the December 31, 2008 Condensed Consolidated Balance Sheets as presented in this Form 10-Q.
The revision increased the loss in our previously reported Unrealized gains (losses) on
investments accounted for at fair value, net, changing Total other income (expense), Income
(loss) before income taxes, Net income (loss) for 2008 by $14 million and our basic and diluted
net loss per share by $0.16 to $10.73. Further, our Other noncurrent assets, net, Total
noncurrent assets, Total assets, Accumulated earnings (deficit), Total EchoStar stockholders
equity (deficit), Total stockholders equity (deficit) and Total liabilities and stockholders
equity (deficit) were decreased by $14 million. The revision had no impact on the 2008 total cash
flows from operating, investing or financing activities in our Consolidated Statements of Cash
Flows.
5
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
3. 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) attributable to EchoStar common
shareholders by the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if stock awards were exercised.
The potential dilution from stock awards 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 Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except per share data) |
|
Net income (loss) attributable to EchoStar common shareholders |
|
$ |
101,814 |
|
|
$ |
47,824 |
|
|
$ |
101,169 |
|
|
$ |
53,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding Class A and B common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
86,539 |
|
|
|
89,863 |
|
|
|
86,505 |
|
|
|
89,795 |
|
Dilutive impact of stock awards outstanding |
|
|
70 |
|
|
|
398 |
|
|
|
300 |
|
|
|
1,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
86,609 |
|
|
|
90,261 |
|
|
|
86,805 |
|
|
|
91,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share Class A and B common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share attributable to EchoStar
common shareholders |
|
$ |
1.18 |
|
|
$ |
0.53 |
|
|
$ |
1.17 |
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share attributable to EchoStar
common shareholders |
|
$ |
1.18 |
|
|
$ |
0.53 |
|
|
$ |
1.17 |
|
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009 and 2008, there were stock awards to purchase 4.8 million and 0.6 million
shares, respectively, of Class A common stock outstanding not included in the above denominator, as
their effect is antidilutive.
Vesting of options and rights to acquire shares of our Class A common stock (Restricted
performance units) granted pursuant to our long-term incentive plan is contingent upon meeting a
certain long-term goal which has not yet been achieved. As a consequence, the following are not
included in the diluted EPS calculation:
|
|
|
|
|
|
|
|
|
|
|
As of June 30, |
|
|
2009 |
|
2008 |
|
|
(In thousands) |
Performance-based options |
|
|
796 |
|
|
|
1,913 |
|
Restricted performance units |
|
|
104 |
|
|
|
115 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
900 |
|
|
|
2,028 |
|
|
|
|
|
|
|
|
|
|
6
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
4. Marketable Investment Securities, Restricted Cash and Other Investment Securities
Our marketable and other investment securities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Marketable investment securities: |
|
|
|
|
|
|
|
|
Current marketable investment securities VRDNs |
|
$ |
449,645 |
|
|
$ |
621,740 |
|
Current marketable investment securities strategic |
|
|
302,836 |
|
|
|
151,050 |
|
Current marketable investment securities other |
|
|
134,257 |
|
|
|
31,404 |
|
|
|
|
|
|
|
|
Total current marketable investment securities |
|
|
886,738 |
|
|
|
804,194 |
|
Restricted marketable investment securities (1) |
|
|
2,795 |
|
|
|
2,846 |
|
|
|
|
|
|
|
|
Total marketable investment securities |
|
|
889,533 |
|
|
|
807,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and cash equivalents (1) |
|
|
9,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable and other investment securities: |
|
|
|
|
|
|
|
|
Marketable and other investment securities cost method |
|
|
27,913 |
|
|
|
27,913 |
|
Marketable and other investment securities equity method |
|
|
50,386 |
|
|
|
20,841 |
|
Marketable and other investment securities fair value method |
|
|
237,074 |
|
|
|
107,963 |
|
|
|
|
|
|
|
|
Total marketable and other investment securities |
|
|
315,373 |
|
|
|
156,717 |
|
|
|
|
|
|
|
|
Total marketable investment securities, restricted cash and
other investment securities |
|
$ |
1,213,957 |
|
|
$ |
963,757 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Restricted marketable investment securities and restricted cash and cash equivalents
are included in Restricted cash and marketable investment securities on our Condensed
Consolidated Balance Sheets. |
Marketable Investment Securities
Our marketable investment securities portfolio consists of various debt and equity instruments, all
of which are classified as available-for-sale.
Current Marketable Investment Securities VRDNs
Variable rate demand notes (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. Our VRDN portfolio is comprised of many
municipalities and financial institutions that serve as the pledged liquidity source. While they
are classified as marketable investment securities, the put option allows for VRDNs to be
liquidated on a same day or on a five business day settlement basis.
Current Marketable Investment Securities Strategic
Our strategic marketable investment securities are highly speculative and have experienced and
continue to experience volatility. As of June 30, 2009, a significant portion of our strategic
investment portfolio consisted of securities of a few issuers and the value of that portfolio
therefore depends on those issuers.
We account for debt securities
purchased at a discount that is related to credit quality pursuant
to the guidance of Statement of Position 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer, (SOP 03-3). SOP 03-3 limits the yield that may be accreted (accretable
yield) to the excess of our estimate of undiscounted
7
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
expected principal, interest, and other cash
flows (including the effects of prepayments) expected to be collected
over our initial investment. These investments are accounted for under the cost recovery method,
partial accrual or full accrual methods based on managements quarterly evaluation of these
securities.
During 2008, we purchased certain debt securities at a credit related discount and prior to the
second quarter we accounted for these securities under the cost-recovery method and classified the
entire discount as non-accretable yield in accordance with SOP 03-3. As a result of our second
quarter 2009 evaluation, these investments are now accounted for under the full accrual method.
The face value of these securities as of June 30, 2009 and December 31, 2008 was $175 million and
$199 million, respectively. The carrying value, which is equal to fair value, of these securities
at June 30, 2009 and December 31, 2008 was $172 million and $88 million, respectively.
Current Marketable Investment Securities Other
Our other current marketable investment securities portfolio includes investments in various debt
instruments including corporate bonds and government bonds.
Restricted Marketable Investment Securities
As of June 30, 2009 and December 31, 2008, restricted marketable investment securities included
amounts required under our letters of credit.
Marketable and Other Investment Securities
We account for our unconsolidated debt and equity investments under the fair value, equity or cost
method of accounting. We have several strategic investments in certain equity securities that are
included in noncurrent Marketable and other investment securities on our Condensed Consolidated
Balance Sheets.
Marketable and Other Investment Securities Fair Value
We elect the fair value method for certain investments in affiliates whose equity is publicly
traded, when we believe the fair value method of accounting provides more meaningful information to
our investors. For our investments carried at fair value, interest and dividends are measured at
fair value and those amounts are recorded in Unrealized gains (losses) on investments accounted
for at fair value, net.
Marketable and Other Investment Securities Cost and Equity
Non-majority owned investments are generally accounted for using the equity method when we have the
ability to significantly influence the operating decisions of an investee. However, when we do not
have the ability to significantly influence the operating decisions of an investee, the cost method
is used.
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.
Unrealized Gains (Losses) on Marketable Investment Securities
As of June 30, 2009 and December 31, 2008, we had accumulated net unrealized gains of $154 million,
excluding $60 million of related tax effect, and net unrealized losses of $10 million, with no
related tax effect, respectively, as a part of Accumulated other comprehensive income (loss)
within Total stockholders equity (deficit). A full valuation allowance has been established
against the deferred tax assets associated with the 2008 unrealized capital losses. The components
of our available-for-sale investments are detailed in the table below.
8
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009 |
|
|
As of December 31, 2008 |
|
|
|
Marketable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable |
|
|
|
|
|
|
Investment |
|
|
Unrealized |
|
|
Investment |
|
|
Unrealized |
|
|
|
Securities |
|
|
Gains |
|
|
Losses |
|
|
Net |
|
|
Securities |
|
|
Gains |
|
|
Losses |
|
|
Net |
|
|
|
(In thousands) |
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VRDNs |
|
$ |
449,645 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
621,740 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Other (including restricted) |
|
|
314,279 |
|
|
|
103,958 |
|
|
|
(82 |
) |
|
|
103,876 |
|
|
|
127,803 |
|
|
|
|
|
|
|
(13,244 |
) |
|
|
(13,244 |
) |
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
125,609 |
|
|
|
49,727 |
|
|
|
|
|
|
|
49,727 |
|
|
|
57,497 |
|
|
|
2,825 |
|
|
|
|
|
|
|
2,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable investment
securities |
|
$ |
889,533 |
|
|
$ |
153,686 |
|
|
$ |
(82 |
) |
|
$ |
153,604 |
|
|
$ |
807,040 |
|
|
$ |
2,825 |
|
|
$ |
(13,244 |
) |
|
$ |
(10,419 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009, restricted and non-restricted marketable investment securities include debt
securities of $748 million with contractual maturities of one year or less and $16 million with
contractual maturities greater than one year. Actual maturities may differ from contractual
maturities as a result of our ability to sell these securities prior to maturity.
Marketable Investment Securities in a Loss Position
In accordance with the guidance of FASB Staff Position No. 115-1 (FSP 115-1) The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments, 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.
We are not aware of any specific factors indicating that the underlying issuers of these debt
securities would not be able to pay interest as it becomes due or repay the principal at maturity.
Therefore, we believe that these changes in the estimated fair values of these marketable
investment securities are related to temporary market fluctuations. In addition, we have the
ability and intent to hold our investments in these debt securities until they recover or mature.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary |
|
|
As of June 30, 2009 |
|
|
|
Reason for |
|
|
Total |
|
|
Less than Six Months |
|
|
Six to Nine Months |
|
|
Nine Months or More |
|
Investment |
|
Unrealized |
|
|
Fair |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Category |
|
Loss |
|
|
Value |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
|
|
|
|
|
(In thousands) |
|
Debt securities |
|
Temporary market fluctuations |
|
$ |
32,560 |
|
|
$ |
32,319 |
|
|
$ |
(69 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
241 |
|
|
$ |
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
32,560 |
|
|
$ |
32,319 |
|
|
$ |
(69 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
241 |
|
|
$ |
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary |
|
|
As of December 31, 2008 |
|
|
|
Reason for |
|
|
Total |
|
|
Less than Six Months |
|
|
Six to Nine Months |
|
|
Nine Months or More |
|
Investment |
|
Unrealized |
|
|
Fair |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Category |
|
Loss |
|
|
Value |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
|
Temporary market fluctuations |
|
$ |
109,219 |
|
|
$ |
103,380 |
|
|
$ |
(13,184 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
5,839 |
|
|
$ |
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
109,219 |
|
|
$ |
103,380 |
|
|
$ |
(13,184 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
5,839 |
|
|
$ |
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Fair Value Measurements
SFAS 157 Fair Value Measurements established a new framework for measuring fair value for all
financial and non-financial instruments and expanded 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
established 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. |
Our assets measured at fair value on a recurring basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value as of June 30, 2009 |
|
Assets |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
(In thousands) |
|
Marketable investment securities |
|
$ |
889,533 |
|
|
$ |
127,605 |
|
|
$ |
761,928 |
|
|
$ |
|
|
Marketable and other investment securities |
|
|
237,074 |
|
|
|
45,900 |
|
|
|
158,654 |
|
|
|
32,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
1,126,607 |
|
|
$ |
173,505 |
|
|
$ |
920,582 |
|
|
$ |
32,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Level 3 instruments are as follows (in thousands):
|
|
|
|
|
|
|
Level 3 |
|
|
|
Investment |
|
|
|
Securities |
|
Balance as of December 31, 2008 |
|
$ |
23,821 |
|
Net realized and unrealized gains (losses) included in earnings |
|
|
6,241 |
|
Purchases, issuances and settlements, net |
|
|
2,458 |
|
|
|
|
|
Balance as of June 30, 2009 |
|
$ |
32,520 |
|
|
|
|
|
Unrealized and Realized Gains (Losses) on Marketable Investment Securities and Other Investments
Unrealized and realized gains (losses) on marketable investment securities and other investments
on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) includes
changes in the carrying amount of our investments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Unrealized and realized gains (losses) on marketable
investment securities and other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable investment securities gains (losses) on sales/exchange |
|
$ |
2,494 |
|
|
$ |
44,874 |
|
|
$ |
3,817 |
|
|
$ |
45,254 |
|
Gain on sale of a company which held certain FCC authorizations |
|
|
|
|
|
|
67,624 |
|
|
|
|
|
|
|
67,624 |
|
Marketable and other investment securities other-than-temporary
impairments |
|
|
(6,771 |
) |
|
|
(44,650 |
) |
|
|
(6,771 |
) |
|
|
(46,073 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized and realized gains (losses) on marketable
investment securities and other investments |
|
$ |
(4,277 |
) |
|
$ |
67,848 |
|
|
$ |
(2,954 |
) |
|
$ |
66,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Investment in TerreStar
We currently account for our investment in TerreStar using the fair value method of accounting. We
have two representatives on TerreStars board of directors and have the ability to exert
significant influence and believe that the fair value approach provides our investors with the most
meaningful information.
We report the TerreStar financial information on a one-quarter lag as TerreStar is a public company
but not a large accelerated filer, as defined by the Securities and Exchange Commission. As
such, the statements of operations data, shown below, includes the three months ended March 31 for
each respective period presented. 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 table provides summarized financial information
from TerreStar:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
Statements of Operations Data (unaudited): |
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Operating expenses |
|
$ |
35,952 |
|
|
$ |
67,194 |
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
$ |
(49,463 |
) |
|
$ |
(102,950 |
) |
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(49,463 |
) |
|
$ |
(102,950 |
) |
|
|
|
|
|
|
|
Net income (loss) available to common stockholders |
|
$ |
(52,077 |
) |
|
$ |
(101,499 |
) |
|
|
|
|
|
|
|
In August 2009, TerreStar filed its quarterly report on Form 10-Q for the quarter ended June 30,
2009. This report included a disclosure that TerreStar estimates its cash and cash equivalents
will not be sufficient to cover its estimated funding needs for 2010 based upon its current plans.
We account for our investment in TerreStar using the fair value method of accounting and its
financial position as indicated in their Form 10-Q for the quarter ended June 30, 2009 could have a
material impact on the fair value of our investment in subsequent periods.
5. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Finished goods |
|
$ |
10,967 |
|
|
$ |
17,814 |
|
Raw materials |
|
|
28,081 |
|
|
|
16,756 |
|
Work-in-process |
|
|
14,820 |
|
|
|
15,168 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
53,868 |
|
|
|
49,738 |
|
Inventory allowance |
|
|
(5,873 |
) |
|
|
(3,245 |
) |
|
|
|
|
|
|
|
Inventories, net |
|
$ |
47,995 |
|
|
$ |
46,493 |
|
|
|
|
|
|
|
|
6. Satellites
We currently utilize six owned and two leased satellites in geostationary orbit approximately
22,300 miles above the equator. Our 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.
11
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Prior to 2009, certain satellites in our fleet have experienced anomalies, some of which have had a
significant adverse impact on their remaining life and commercial operation. There can be no
assurance that future anomalies will not further impact the remaining life or commercial operation
of any of these satellites. See Long-Lived Satellite Assets below for further discussion of
evaluation of impairment. There can be no assurance that we can recover critical transmission
capacity in the event one or more of our in-orbit satellites were to fail. We do not anticipate
carrying insurance for any of the in-orbit satellites that we own, and we will bear the risk
associated with any in-orbit satellite failures. Recent developments with respect to our
satellites are discussed below.
Owned Satellites
EchoStar XII. Prior to 2009, EchoStar XII experienced anomalies resulting in the loss of
electrical power available from its solar arrays. During March and May 2009, EchoStar XII
experienced more of these anomalies, which further reduced the electrical power available to
operate EchoStar XII. We currently operate EchoStar XII in full continental United States (CONUS)/spot
beam hybrid mode. If we continue to operate the satellite in this mode, as a result of this loss
of electrical power, we would be unable to use the full complement of its available transponders
for the 12-year design life of the satellite. However, since the number of useable transponders on
EchoStar XII depends on, among other things, whether EchoStar XII is operated in CONUS, spot beam,
or hybrid CONUS/spot beam mode, we are unable to determine at this time the actual number of
transponders that will be available at any given time or how many transponders can be used during
the remaining estimated life of the satellite. However, there can be no assurance future anomalies
will not cause further losses, which could impact the remaining useful life or commercial operation
of EchoStar XII. As a result of the May 2009 anomalies on EchoStar XII, we determined that we had
a triggering event related to EchoStar XII. See discussion of evaluation of impairment in
Long-Lived Satellite Assets below. Based on this triggering event we performed an impairment
review of the satellite using an undiscounted cash flow model and concluded that the estimated
undiscounted cash flows associated with EchoStar XII were still in excess of its carrying value and
therefore no impairment was required.
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. Other than the evaluation discussed in EchoStar XII
above, 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 because the projected cash flows have not been significantly affected by these anomalies.
12
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
7. Intangible Assets
As of June 30, 2009 and December 31, 2008, our identifiable intangible assets subject to
amortization consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Intangible |
|
|
Accumulated |
|
|
Intangible |
|
|
Accumulated |
|
|
|
Assets |
|
|
Amortization |
|
|
Assets |
|
|
Amortization |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Contract-based |
|
$ |
190,566 |
|
|
$ |
(83,418 |
) |
|
$ |
190,566 |
|
|
$ |
(75,104 |
) |
Customer relationships |
|
|
23,600 |
|
|
|
(13,767 |
) |
|
|
23,600 |
|
|
|
(9,833 |
) |
Technology-based |
|
|
73,314 |
|
|
|
(21,808 |
) |
|
|
73,297 |
|
|
|
(17,383 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
287,480 |
|
|
$ |
(118,993 |
) |
|
$ |
287,463 |
|
|
$ |
(102,320 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Estimated future amortization of our identifiable intangible assets as of June 30, 2009 is as
follows (in thousands):
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
|
2009 (remaining six months) |
|
$ |
16,674 |
|
2010 |
|
|
31,381 |
|
2011 |
|
|
25,005 |
|
2012 |
|
|
23,185 |
|
2013 |
|
|
23,180 |
|
Thereafter |
|
|
49,062 |
|
|
|
|
|
Total |
|
$ |
168,487 |
|
|
|
|
|
8. Stockholders Equity (Deficit)
Common Stock Repurchase Program
Our board of directors authorized stock repurchases of up to $500 million of our Class A common
stock through and including December 31, 2009. During the six months ended June 30, 2009, we repurchased 0.5 million shares of our common
stock for $8 million. As of June 30, 2009, we may repurchase up to $463 million under this plan.
9. Stock-Based Compensation
Stock Incentive Plans
In connection with the Spin-off, as permitted by DISH Networks existing stock incentive plans and
consistent with the Spin-off exchange ratio, each DISH Network stock option was converted into two
stock 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. |
13
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.
Stock awards under these plans include both performance and non-performance based stock incentives.
As of June 30, 2009, we had outstanding under these plans stock options to acquire 6.3 million
shares of our Class A common stock and 0.2 million restricted stock units. Stock options granted
through June 30, 2009 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 stock awards have been subject to vesting, typically at the rate of 20% to 25%
per year, however, some stock awards have been granted with immediate vesting and other stock
awards vest only upon the achievement of certain company-wide objectives. As of June 30, 2009, we
had 8.4 million shares of our Class A common stock available for future grant under our stock
incentive plans.
As of June 30, 2009, the following stock awards were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009 |
|
|
|
EchoStar Awards |
|
|
DISH Network Awards |
|
|
|
|
|
|
|
Restricted |
|
|
|
|
|
|
Restricted |
|
|
|
Stock |
|
|
Stock |
|
|
Stock |
|
|
Stock |
|
Stock Awards Outstanding |
|
Options |
|
|
Units |
|
|
Options |
|
|
Units |
|
Held by EchoStar employees |
|
|
4,801,087 |
|
|
|
82,065 |
|
|
|
3,534,866 |
|
|
|
410,374 |
|
Held by DISH Network employees |
|
|
1,533,770 |
|
|
|
77,366 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,334,857 |
|
|
|
159,431 |
|
|
|
3,534,866 |
|
|
|
410,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We are responsible for fulfilling all stock awards related to EchoStar common stock and DISH
Network is responsible for fulfilling all stock awards related to DISH Network common stock,
regardless of whether such stock 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 stock awards outstanding at the Spin-off date, is based on the stock awards held by
our employees regardless of whether such stock awards were issued by EchoStar or DISH Network.
Accordingly, stock-based compensation that we expense with respect to DISH Network stock awards is
included in Additional paid-in capital on our Condensed Consolidated Balance Sheets.
14
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Stock Award Activity
Our stock option activity for the six months ended June 30, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
Ended June 30, 2009 |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
Options |
|
Exercise Price |
Total options outstanding, beginning of period |
|
|
5,184,415 |
|
|
$ |
28.61 |
|
Granted |
|
|
1,473,000 |
|
|
|
14.97 |
|
Exercised |
|
|
(34,540 |
) |
|
|
6.03 |
|
Forfeited and cancelled |
|
|
(288,018 |
) |
|
|
27.39 |
|
|
|
|
|
|
|
|
|
|
Total options outstanding, end of period |
|
|
6,334,857 |
|
|
|
25.81 |
|
|
|
|
|
|
|
|
|
|
Performance based options outstanding, end of period (1) |
|
|
795,850 |
|
|
|
25.61 |
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
|
|
1,885,600 |
|
|
|
29.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These stock options, which are included in the caption Total options outstanding, end of
period, were issued pursuant to a long-term, performance-based stock incentive plan. Vesting of
these stock options is contingent upon meeting certain long-term company goals. See discussion of
the 2005 LTIP below. |
We realized tax benefits from stock awards exercised during the three and six months ended June 30,
2009 and 2008 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Tax benefit from stock awards exercised |
|
$ |
148 |
|
|
$ |
1,127 |
|
|
$ |
292 |
|
|
$ |
1,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on the closing market price of our Class A common stock on June 30, 2009, the aggregate
intrinsic value of our stock options was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009 |
|
|
|
Options |
|
|
Options |
|
|
|
Outstanding |
|
|
Exercisable |
|
|
|
(In thousands) |
|
Aggregate intrinsic value |
|
$ |
1,792 |
|
|
$ |
218 |
|
|
|
|
|
|
|
|
15
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Our restricted stock unit activity for the six months ended June 30, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
Ended June 30, 2009 |
|
|
|
|
|
|
Weighted- |
|
|
Restricted |
|
Average |
|
|
Stock |
|
Grant Date |
|
|
Units |
|
Fair Value |
Total restricted stock units outstanding, beginning of period |
|
|
272,856 |
|
|
$ |
29.40 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(4,000 |
) |
|
|
25.42 |
|
Forfeited and cancelled |
|
|
(109,425 |
) |
|
|
31.55 |
|
|
|
|
|
|
|
|
|
|
Total restricted stock units outstanding, end of period |
|
|
159,431 |
|
|
|
28.03 |
|
|
|
|
|
|
|
|
|
|
Restricted performance units outstanding, end of period (1) |
|
|
104,356 |
|
|
|
26.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These restricted performance units, which are included in the caption Total restricted stock
units outstanding, end of period, were issued pursuant to a long-term, performance-based stock
incentive plan. Vesting of these restricted performance units is contingent upon meeting certain
long-term company goals. See discussion of the 2005 LTIP below. |
Long-Term Performance-Based Plans
2005 LTIP. In 2005, DISH Network adopted a long-term, performance-based stock incentive plan (the
2005 LTIP), that certain of our employees participated in prior to the Spin-off, within the terms
of its 1999 Stock Incentive Plan. The 2005 LTIP provides stock options and restricted stock 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 stock awards is
subject to a performance condition that a company-specific goal is achieved prior to March 31,
2015.
Contingent compensation related to the 2005 LTIP will not be recorded in 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 the goal was not probable as of June 30,
2009, that assessment could change at any time.
In accordance with SFAS 123R, if all of the stock awards under the 2005 LTIP were vested and the
goal had been met or if we had determined that achievement of the goal was probable during the six
months ended June 30, 2009, we would have recorded total non-cash, stock-based compensation expense
for our employees as indicated in the table below. If the goal is met and there are unvested stock
awards at that time, the vested amounts would be expensed immediately on our Condensed Consolidated
Statements of Operations and Comprehensive Income (Loss), with the unvested portion recognized
ratably over the remaining vesting period.
|
|
|
|
|
|
|
|
|
|
|
2005 LTIP |
|
|
|
|
|
|
|
Vested |
|
|
|
Total |
|
|
Portion |
|
|
|
(In thousands) |
|
DISH Network awards held by EchoStar employees |
|
$ |
17,757 |
|
|
$ |
6,681 |
|
EchoStar awards held by EchoStar employees |
|
|
3,605 |
|
|
|
1,356 |
|
|
|
|
|
|
|
|
Total |
|
$ |
21,362 |
|
|
$ |
8,037 |
|
|
|
|
|
|
|
|
16
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Of the 6.3 million stock options and 0.2 million restricted stock units outstanding under our stock
incentive plans as of June 30, 2009, the following awards were outstanding pursuant to the 2005
LTIP:
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009 |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
Number of |
|
Exercise |
|
|
Awards |
|
Price |
Stock options |
|
|
795,850 |
|
|
$ |
25.61 |
|
Restricted performance units |
|
|
104,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
900,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation
Total non-cash, stock-based compensation expense for all of our employees is shown in the following
table for the three and six months ended June 30, 2009 and 2008 and was allocated to the same
expense categories as the base compensation for such employees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Cost of sales services and other |
|
$ |
|
|
|
$ |
172 |
|
|
$ |
|
|
|
$ |
375 |
|
Research and development expenses |
|
|
998 |
|
|
|
1,349 |
|
|
|
1,937 |
|
|
|
3,023 |
|
Selling, general and administrative expenses |
|
|
2,409 |
|
|
|
4,030 |
|
|
|
4,924 |
|
|
|
7,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-cash, stock based compensation |
|
$ |
3,407 |
|
|
$ |
5,551 |
|
|
$ |
6,861 |
|
|
$ |
11,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009, our total unrecognized compensation cost related to our non-performance based
unvested stock awards was $34 million and includes compensation expense that we will recognize for
DISH Network stock awards held by our employees as a result of the Spin-off. This cost is based on
an estimated future forfeiture rate of approximately 1.2% per year and will be recognized over a
weighted-average period of approximately three years. Share-based compensation expense is
recognized based on stock 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 stock award for the three and six months ended June 30, 2009 and 2008 was
estimated at the date of the grant using a Black-Scholes option pricing model with the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
For the Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
Stock Options |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Risk-free interest rate |
|
|
2.92 |
% |
|
|
3.42 |
% |
|
|
2.00% - 2.92 |
% |
|
|
2.74% - 3.42 |
% |
Volatility factor |
|
|
28.91 |
% |
|
|
21.86 |
% |
|
|
28.48% - 28.91 |
% |
|
|
19.98% - 21.86 |
% |
Expected term of options in years |
|
|
6.3 |
|
|
|
6.0 |
|
|
|
6.2 - 6.3 |
|
|
|
6.0 - 6.1 |
|
Weighted-average fair value of
options granted |
|
$ |
5.58 |
|
|
$ |
9.29 |
|
|
$ |
4.76 - $5.58 |
|
|
$ |
7.85 - $9.29 |
|
We do not currently plan to pay dividends on our common stock, and therefore the dividend
yield percentage is set at zero for all periods presented. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded stock options which have no
vesting restrictions and are fully transferable. Consequently, our
17
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
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 our stock
options as new events or changes in circumstances become known.
10. Commitments and Contingencies
Contingencies
In connection with the Spin-off, we
entered into a separation agreement with DISH Network, which
provides among other things for the division of certain liabilities, including liabilities
resulting from
litigation. Under the terms of the separation agreement, we have assumed certain liabilities
that relate to
our business including certain designated liabilities for acts or omissions
prior to the Spin-off. Certain
specific provisions govern intellectual property related claims under which,
generally, we will only be
liable for our acts or omissions following the Spin-off and DISH Network will indemnify
us for any
liabilities or damages resulting from intellectual property claims relating
to the period prior to the Spin-off
as well as DISH Networks acts or omissions following 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
entity that seeks to license an acquired patent portfolio without itself practicing any of the
claims recited therein. The suit alleges infringement of United States Patent Nos. 5,132,992,
5,253,275, 5,550,863, 6,002,720 and 6,144,702, which relate to certain systems and methods for
transmission of digital data. In March 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, which we have done. The Court has not yet ruled on those motions.
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.
During 2001, Broadcast Innovation, L.L.C. (Broadcast Innovation) filed a lawsuit against DISH
Network, DirecTV, Thomson Consumer Electronics and others in United States 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. 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
found the 094 patent invalid in a parallel case filed by Broadcast Innovation against Charter and
Comcast. In 2005, the United
18
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
States Court of Appeals for the Federal Circuit overturned the 094
patent finding of invalidity and remanded the Charter 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 Charter case pending reexamination,
and our case has been 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.
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).
During 2006, we and 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 we do not infringe, and have not infringed, any valid claim of the 505
patent. During April 2008, the Federal Circuit reversed the judgment against DirecTV and ordered a
new trial. Our case is stayed until the DirecTV action is resolved.
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
During April 2007, Global Communications, Inc. (Global) filed a patent infringement action
against us and 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), which
relates to satellite reception. In October 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.
During June 2009, Global filed a patent infringement action against us and DISH Network in the
United States District Court for the Northern District of Florida. The suit alleges infringement
of United States Patent No. 7,542,717 (the 717 patent), which relates to satellite reception.
We intend to vigorously defend these cases. In the event that a Court ultimately determines that
we infringe the 702 patent and/or the 717 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.
19
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Guardian Media
During December 2008, Guardian Media Technologies LTD (Guardian) filed suit against us, EchoStar
Technologies L.L.C., DISH Network, DirecTV and several other defendants in the United States
District Court for
the Central District of California alleging infringement of United States Patent Nos. 4,930,158 and
4,930,160. Both patents are expired and relate to certain parental lock features.
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. 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.
Multimedia Patent Trust
On February 13, 2009, Multimedia Patent Trust (MPT) filed suit against us, DISH Network, DirecTV
and several other defendants in the United States District Court for the Southern District of
California alleging infringement of United States Patent Nos. 4,958,226, 5,227,878, 5,136,377,
5,500,678 and 5,563,593, which relate to video encoding, decoding and compression technology. MPT
is an entity that seeks to license an acquired patent portfolio without itself practicing any of
the claims recited therein.
We intend to vigorously defend this case. In the event that a Court ultimately determines that
we infringe any of the asserted patents, we may be subject to substantial damages, which may
include 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.
NorthPoint Technology
On July 2, 2009, NorthPoint Technology, Ltd (Northpoint) filed suit against us, DISH Network, and
DirecTV in the United States District Court for the Western District of Texas alleging infringement
of United States Patent No. 6,208,636 (the 636 patent). The 636 patent relates to the use of
multiple low-noise block converter feedhorns, or LNBFs, which are antennas used for satellite
reception.
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 features
that we currently offer to consumers. We cannot predict with any degree of certainty the outcome
of the suit or determine the extent of any potential liability or damages.
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, 5,109,414, 4,965,825, 5,233,654, 5,335,277,
and 5,887,243, which relate to satellite signal processing.
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
20
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
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.
Technology Development Licensing
On January 22, 2009, Technology Development and Licensing LLC (TechDev) filed suit against us and
DISH Network in the United States District Court for the Northern District of Illinois alleging
infringement of United
States Patent No. 35, 952, which relates to certain favorite channel features. In July 2009, the
Court granted our motion to stay the case pending two re-examination petitions before the Patent
and Trademark Office.
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.
Tivo Inc.
During January 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 January 2008 decision, the Federal Circuit affirmed the jurys verdict of
infringement on Tivos software claims, and upheld
the award of damages from the District Court.
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, DISH
Network paid approximately $105 million to Tivo.
We also developed and deployed next-generation DVR software. This improved
software was automatically downloaded to our current customers DVRs, and is fully operational (our original
alternative technology). The download was completed as of April 2007. We received written legal opinions
from outside counsel that concluded our original alternative technology does not infringe, literally or
under the doctrine of equivalents, either the hardware or software claims of Tivos patent. Tivo filed a
motion for contempt alleging that we are in violation of the Courts injunction. We opposed this motion on
the grounds that the injunction did not apply to DVRs that have received our original alternative
technology, that our original alternative technology does not
infringe Tivos patent, and that we were in
compliance with the injunction.
On June 2, 2009, the District Court granted Tivos contempt motion, finding that our original alternative
technology was not more than colorably different than the products found by the jury to infringe Tivos
patent, that the original alternative technology still infringed the software claims, and that even if the
original alternative technology was non-infringing, the original injunction by its terms required that
DISH Network disable DVR functionality in all but approximately 192,000 digital set-top boxes in the
field. The District Court awarded Tivo $103 million in supplemental damages and interest for the period
from September 2006 to April 2008, based on an assumed $1.25 per subscriber per month royalty rate.
DISH Network posted a bond to secure that award pending appeal of the contempt order. This award does not include sanctions for
contempt, which could be substantial.
On July 1, 2009, the Federal Circuit Court of Appeals granted a permanent stay of the District Courts
contempt order pending resolution of our appeal. In so doing, the Federal Circuit found, at a minimum,
that we had a substantial case on the merits. The Federal Circuit set an expedited briefing schedule for the
appeal with oral argument possible as early as November 2009.
The District Court held a hearing on July 28, 2009 on Tivos claims for contempt sanctions, but has
ordered that enforcement of any sanctions award will be stayed pending our appeal of the contempt order.
Tivo is seeking up to $975 million in contempt sanctions for the period from April 2008 to June 2009 based
on, among other things, profits Tivo alleges DISH Network made from subscribers using DVRs. We
opposed Tivos request arguing, among other things, that sanctions are inappropriate because we made
good faith efforts to comply with the Courts injunction. We also challenged Tivos calculation of profits.
21
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
On August 3, 2009, the Patent and Trademark Office (the PTO) issued an initial office action rejecting
the software claims of the 389 patent as being invalid in light of two prior patents. These are the same software claims
that we were found to have infringed and which underlie the contempt ruling now pending on appeal.
We believe that the PTOs conclusions are relevant to the issues on appeal as well as the pending sanctions
proceedings in the District Court. The PTOs conclusions support our position that our original
alternative technology is more than colorably different than the devices found to infringe by the jury; that
our original alternative technology does not infringe; and that we acted in good faith to design around Tivos patent.
In light of the District Courts finding of contempt,
and its description of the manner in which it believes our original alternative technology infringed the 389 patent, we are also developing and testing potential new alternative technology in an engineering environment.
If we are unsuccessful in overturning the District Courts ruling on Tivos motion for contempt, we are not
successful in developing and deploying potential new alternative technology and we are unable to reach a
license agreement with Tivo on reasonable terms, we would be required to cease distribution of digital set-top boxes with DVR functionality. In that event, our sales of digital set-top boxes to DISH Network and
others would likely significantly decrease and could even potentially cease for a period of time.
Furthermore, the inability to offer DVR functionality would place us at a significant disadvantage to our
competitors and make it even more difficult for us to penetrate new markets for digital set-top boxes. The
adverse effect on our financial position and results of operations if the District Courts contempt order is
upheld is likely to be significant.
If we are successful in overturning the District Courts ruling on Tivos motion for contempt, but
unsuccessful in defending against any subsequent claim that our original alternative technology or any
potential new alternative technology infringes Tivos patent, we could be prohibited from distributing
DVRs. In that event we would be at a significant disadvantage to our competitors who could continue
offering DVR functionality and the adverse effect on our business could be material.
Because both we and DISH Network are defendants in the Tivo lawsuit, we and DISH Network are jointly
and severally liable to Tivo for any final damages and sanctions that may be awarded by the Court. DISH
Network has agreed that it is obligated under the agreements entered into in connection with the Spin-off to
indemnify us for substantially all liability arising from this lawsuit. We have agreed to contribute an
amount equal to our $5 million intellectual property liability limit under the Receiver Agreement. We and
DISH Network have further agreed that our $5 million contribution would not exhaust our liability to DISH
Network for other intellectual property claims that may arise under
the Receiver Agreement. Therefore, during the three months ended
June 30, 2009, we recorded a charge included in General and administrative expenses DISH Network on our
Condensed Statement of Operations and Comprehensive Income (Loss) of $5 million to reflect this
contribution. We and DISH Network also agreed that we would each be entitled to joint ownership of, and
a cross-license to use, any intellectual property developed in connection with any potential new alternative
technology.
Because we are jointly and severally liable with DISH Network, to the extent that DISH Network does not
or is unable to pay any damages or sanctions arising from this lawsuit, we would then be liable for any
portion of these damages and sanctions not paid by DISH Network. Any amounts that DISH Network may
be required to pay could impair its ability to pay us and also negatively impact our future liquidity.
If we become liable for any portion of these damages or sanctions, we may be required to raise additional
capital at a time and in circumstances in which we would normally not raise capital. Therefore, any capital
we raise may be on terms that are unfavorable to us, which might adversely affect our financial position
and results of operations and might also impair our ability to raise capital on acceptable terms in the future
to fund our own operations and initiatives.
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.
22
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
11. Depreciation and Amortization Expense
Depreciation and amortization expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Satellites |
|
$ |
25,570 |
|
|
$ |
34,785 |
|
|
$ |
51,141 |
|
|
$ |
69,571 |
|
Furniture, fixtures, equipment and other |
|
|
24,011 |
|
|
|
18,574 |
|
|
|
50,581 |
|
|
|
35,136 |
|
Identifiable intangible assets subject
to amortization |
|
|
8,265 |
|
|
|
8,222 |
|
|
|
16,528 |
|
|
|
16,444 |
|
Buildings and improvements |
|
|
1,629 |
|
|
|
1,434 |
|
|
|
3,174 |
|
|
|
2,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
59,475 |
|
|
$ |
63,015 |
|
|
$ |
121,424 |
|
|
$ |
123,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales and operating expense categories included in our accompanying Condensed Consolidated
Statements of Operations and Comprehensive Income (Loss) do not include depreciation expense
related to satellites.
12. 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 operate as two business
units.
|
|
|
Digital Set-Top Box Business which designs, develops and distributes digital
set-top boxes and related products, including our Slingbox placeshifting technology,
primarily for satellite TV service providers, telecommunication and cable companies and,
with respect to Slingboxes, directly to consumers via retail outlets. Our Digital Set-Top
Box business also provides digital broadcast operations including satellite
uplinking/downlinking, transmission services, signal processing, conditional access
management and other services provided primarily to DISH Network. |
|
|
|
Satellite Services Business which uses our eight owned and leased in-orbit
satellites and related FCC licenses to lease capacity on a full time and occasional-use
basis to enterprise, broadcast news and government organizations. We currently lease
capacity primarily to DISH Network, and secondarily to government entities, Internet
service providers, broadcast news organizations and private enterprise customers. |
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.
23
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital set-top box |
|
$ |
338,088 |
|
|
$ |
429,553 |
|
|
$ |
771,945 |
|
|
$ |
923,168 |
|
Satellite services |
|
|
40,417 |
|
|
|
48,613 |
|
|
|
81,352 |
|
|
|
104,817 |
|
All other |
|
|
4,643 |
|
|
|
5,174 |
|
|
|
9,398 |
|
|
|
9,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
383,148 |
|
|
$ |
483,340 |
|
|
$ |
862,695 |
|
|
$ |
1,037,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to EchoStar common Shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital set-top box |
|
$ |
(8,943 |
) |
|
$ |
(9,261 |
) |
|
$ |
(15,219 |
) |
|
$ |
(6,679 |
) |
Satellite services |
|
|
(1,923 |
) |
|
|
(2,944 |
) |
|
|
(3,435 |
) |
|
|
(11,866 |
) |
All other |
|
|
112,680 |
|
|
|
60,029 |
|
|
|
119,823 |
|
|
|
72,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net income (loss) attributable to EchoStar common
shareholders |
|
$ |
101,814 |
|
|
$ |
47,824 |
|
|
$ |
101,169 |
|
|
$ |
53,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. All other revenue includes transactions with customers in Europe, Africa,
South America, and the Middle East. The following table summarizes total long-lived assets and
revenue attributed to the United States and foreign locations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United |
|
|
All |
|
|
|
|
|
|
States |
|
|
Other |
|
|
Total |
|
|
|
(In thousands) |
|
Long-lived assets, including FCC authorizations: |
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009 |
|
$ |
1,313,585 |
|
|
$ |
108,534 |
|
|
$ |
1,422,119 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
$ |
1,340,229 |
|
|
$ |
96,772 |
|
|
$ |
1,437,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2009 |
|
$ |
843,089 |
|
|
$ |
19,606 |
|
|
$ |
862,695 |
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2008 |
|
$ |
981,007 |
|
|
$ |
56,904 |
|
|
$ |
1,037,911 |
|
|
|
|
|
|
|
|
|
|
|
24
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Transactions with Major Customers. The following table summarizes sales to our major customers for
the three and six months ended June 30, 2009 and 2008 and their respective percentage of total
revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Total revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH Network |
|
$ |
303,768 |
|
|
$ |
394,058 |
|
|
$ |
715,972 |
|
|
$ |
858,222 |
|
Bell TV |
|
|
53,505 |
|
|
|
66,838 |
|
|
|
98,962 |
|
|
|
109,801 |
|
Other |
|
|
25,875 |
|
|
|
22,444 |
|
|
|
47,761 |
|
|
|
69,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
383,148 |
|
|
$ |
483,340 |
|
|
$ |
862,695 |
|
|
$ |
1,037,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH Network |
|
|
79.3 |
% |
|
|
81.5 |
% |
|
|
83.0 |
% |
|
|
82.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bell TV |
|
|
14.0 |
% |
|
|
13.8 |
% |
|
|
11.5 |
% |
|
|
10.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Related Party Transactions
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 Chairman, President and Chief Executive
Officer, Charles W. Ergen.
In connection with the Spin-off, we and DISH Network entered into certain transitional services and
other agreements pursuant to which we obtain certain services and rights from DISH Network, DISH
Network obtains certain services and rights from us, and we and DISH Network have indemnified each
other against certain liabilities arising from our respective businesses. Subsequent to the
Spin-off, we have entered into certain agreements with DISH Network and may enter into additional
agreements with DISH Network in the future. 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. However, except
as otherwise noted below, DISH Network has no obligation to purchase digital set-top boxes,
satellite services or digital broadcast operation services from us after January 1, 2010 because
these services are provided pursuant to contracts that generally expire on 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 before that date, there could be a
significant adverse effect on our business, results of operations and financial position.
Generally, the prices charged for products and services provided under the agreements entered into
in connection with the Spin-off are based on our cost plus a fixed margin, which varies depending
on the nature of the products and services provided.
Equipment revenue DISH Network
Receiver Agreement. We entered into a receiver agreement pursuant to which DISH Network has the
right but not the obligation to purchase digital set-top boxes, related accessories, and other
equipment from us for a two year period ending on January 1, 2010. DISH Network has the right, but
not the obligation, to extend the receiver agreement annually for up to two years. DISH Network
has exercised its right to renew this agreement for an additional year. The receiver agreement
allows DISH Network to purchase digital set-top boxes, related
accessories, and other equipment from us at cost plus a fixed margin, which varies depending on the
nature of the equipment purchased. We 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
25
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
written notice. We may terminate this agreement if certain entities
were to acquire DISH Network. The receiver agreement also includes an indemnification provision,
whereby the parties will indemnify each other for certain intellectual property matters.
Services and other revenue DISH Network
Broadcast Agreement. We entered into a broadcast agreement pursuant to which DISH Network receives
broadcast services, including teleport services such as transmission and downlinking, channel
origination services, and channel management services from us for a two year period ending on
January 1, 2010. DISH Network has the right, but not the obligation, to extend the broadcast
agreement annually for up to two years. DISH Network has exercised its right to renew this
agreement for an additional year. 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 must pay us a sum equal to the aggregate amount of the remainder of the expected cost of
providing the teleport services.
Satellite Capacity Agreements. We entered into satellite capacity agreements pursuant to which a
DISH Network subsidiary 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, among other things, upon 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) January 1, 2010.
We expect to enter into agreements pursuant to which DISH Network will continue to lease satellite
capacity on certain satellites owned or leased by us after January 1, 2010.
Nimiq 5 Lease Agreement. During March 2008, we entered into a fifteen-year satellite service
agreement with Bell TV to receive service on 16 DBS transponders on the Nimiq 5 satellite at the
72.7 degree orbital location. The Nimiq 5 satellite is expected to be launched in the second half
of 2009. Bell TV currently has the right to receive service on the entire communications capacity
of the Nimiq 5 satellite pursuant to an agreement with Telesat Canada. During March 2008, we also
entered into a transponder service agreement (Nimiq 5 Transponder Agreement) with DISH Network
pursuant to which DISH Network will receive service from us on all of the DBS transponders covered
by our satellite service agreement with Bell TV. DISH Network guaranteed certain of our
obligations under our satellite service agreement with Bell TV.
Under the terms of the Nimiq 5 Transponder Agreement, DISH Network will make certain monthly
payments to us commencing when the Nimiq 5 satellite is placed into service and continuing through
the service term. Unless earlier terminated under the terms and conditions of the Nimiq 5
Transponder Agreement, the service term will expire ten years following the date it is placed in
service. Upon expiration of the initial term, DISH Network has the option to renew the Nimiq 5
Transponder 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 Network has certain rights to receive service from us on a replacement
satellite.
QuetzSat-1 Lease Agreement. During November 2008, we entered into a ten-year satellite service
agreement with SES Latin America S.A. (SES), which provides, among other things, for the
provision by SES to us of service on 32 DBS transponders on the QuetzSat-1 satellite expected to be
placed in service at the 77 degree orbital location. During November 2008, we also entered into a
transponder service agreement (QuetzSat-1 Transponder Agreement) with DISH Network pursuant to
which they will receive service from us on 24 of the DBS transponders on QuetzSat-1. The remaining
eight DBS transponders on QuetzSat-1 are expected to be used by DISH Mexico.
Under the terms of the QuetzSat-1 Transponder Agreement, DISH Network will make certain monthly
payments to us commencing when the QuetzSat-1 satellite is placed into service and continuing
through the service term. Unless
earlier terminated under the terms and conditions of the QuetzSat-1 Transponder Agreement, the
service term will expire ten years following the actual service commencement date. Upon expiration
of the initial term, DISH Network has the option to renew the QuetzSat-1 Transponder Agreement on a
year-to-year basis through the end-of-
26
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
life of the QuetzSat-1 satellite. Upon a launch failure,
in-orbit failure or end-of-life of the QuetzSat-1 satellite, and in certain other circumstances,
DISH Network has certain rights to receive service from us on a replacement satellite.
TT&C Agreement. We entered into a telemetry, tracking and control (TT&C) agreement pursuant to
which we provide TT&C services to DISH Network and its subsidiaries for a two year period ending on
January 1, 2010. DISH Network has the right, but not the obligation, to extend the agreement
annually for up to two years. DISH Network has exercised its right to renew this agreement for an
additional year. The fees for the services provided under the TT&C agreement are equal to our cost
plus a fixed margin which varies depending on the nature of the services provided. DISH Network
may terminate the TT&C agreement for any reason upon sixty days prior written notice.
Real Estate Lease Agreements. We entered into certain lease agreements with DISH Network. The
rent on a per square foot basis for each of the leases is comparable to per square foot rental
rates of similar commercial property in the same geographic area, 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 ending on January 1, 2010. In August 2009, we and DISH Network agreed to extend this agreement through January 1, 2011.
Meridian Lease Agreement. The lease for 9601 S. Meridian Blvd. in Englewood, Colorado,
is for a period of two years ending on January 1, 2010 with annual renewal options for
up to three additional years. DISH Network has exercised its right to renew this agreement for an additional year.
Santa Fe Lease Agreement. The lease for 5701 S. Santa Fe Dr. in Littleton, Colorado, is
for a period of two years ending on January 1, 2010 with annual renewal options for up
to three additional years. DISH Network has exercised its right to renew this agreement for an additional year.
Gilbert Lease Agreement. The lease for 801 N. DISH Dr. in Gilbert, Arizona, is for a
period of two years ending on January 1, 2010 with annual renewal options for up to
three additional years.
EDN Sublease Agreement. The sublease for 211 Perimeter Center in Atlanta, Georgia, is
for a period of three years ending on April 30, 2011.
Product Support Agreement. We entered into a product support agreement pursuant to which DISH
Network has the right, but not the obligation, to receive product support (including certain
engineering and technical support services) for all digital set-top boxes and related accessories
that our subsidiaries have previously sold and in the future sell to DISH Network. The fees for
the services provided under the product support agreement are equal to our cost plus a fixed
margin, which varies depending on the nature of the services provided. 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. In the event of an early termination of this agreement, DISH Network shall
be entitled to a refund of any unearned fees paid to us for the services.
Satellite Procurement Agreement. We entered into a satellite procurement agreement pursuant to
which DISH Network has the right, but not the obligation, to engage us to manage the process of
procuring new satellite capacity for DISH Network. The satellite procurement agreement has a two
year term expiring on January 1, 2010.
The fees for the services to be provided under the satellite
procurement agreement are equal to our cost
27
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
plus a fixed margin, which varies depending on the
nature of the services provided. DISH Network may terminate the satellite procurement agreement
for any reason upon sixty days prior written notice. We and DISH
Network have agreed that
following January 1, 2010 DISH Network will continue to have
the right, but not the obligation, to engage us to manage the process of procuring new satellite
capacity for DISH Network
for a one-year period and for successive one-year periods
thereafter; however, DISH Network may terminate these services
upon sixty days prior
written notice.
Services Agreement. We entered into a services agreement pursuant to which DISH Network has the
right, but not the obligation, to receive logistics, procurement and quality assurance services
from us. The fees for the services provided under this services agreement are equal to our cost
plus a fixed margin, which varies depending on the nature of the services provided. This agreement
has a term of two years ending on January 1, 2010.
DISH Network
may terminate the services agreement with respect to a particular service for any reason upon sixty
days prior written notice.
We and DISH Network have agreed that following January 1, 2010 DISH Network will continue to have the right, but not the
obligation, to receive from us the services previously provided under the services agreement
for a one-year period and for successive one-year periods
thereafter; however, DISH Network may terminate these
services upon sixty days prior
written notice.
General and administrative expenses DISH Network
Management Services Agreement. 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. Effective March 30, 2009, Carl E. Vogel resigned from
the Board of Directors of EchoStar and from his position as Senior Advisor of EchoStar and its
subsidiaries. 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 is for a one year period commencing on January 1, 2008, 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; or (iii) by DISH Network upon written
notice to us, following certain changes in control.
Real Estate Lease Agreement. During 2008, we entered into an agreement to sublease 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 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, legal, accounting and tax, and other support services. The fees for the services provided
under the transition services agreement are equal to our cost plus a fixed margin, which varies
depending on the nature of the services provided. The transition services agreement has a term of
two years, ending on January 1, 2010. We may terminate the transition services agreement with
respect to a particular service for any reason upon thirty days prior
written notice. We and DISH Network have agreed that following January 1, 2010 we will continue to have the
right, but not the obligation, to receive certain of the services previously provided by DISH Network under
the transition services agreement for a one-year period and for
successive one-year periods thereafter; however, we may
terminate these services
upon sixty days prior
written notice.
Other Agreements DISH Network
Packout Services Agreement. We entered into a packout services agreement, whereby we have the
right, but not the obligation, to engage a DISH Network subsidiary to package and ship satellite
receivers to customers that are not associated with DISH Network or its subsidiaries. The fees
charged by DISH Network for the services provided
28
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
under the packout services agreement are equal to
our cost plus a fixed margin, which varies depending on the nature of the services provided. The
original one year term of the packout services agreement, which expired on January 1, 2009, was
extended for an additional one year. We may terminate this agreement for any reason upon sixty
days prior written notice to DISH Network. In the event of an early termination of this agreement,
we will be entitled to a refund of any unearned fees paid to DISH Network for the services.
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 ending on January 1, 2010.
In August 2009, we and DISH Network agreed to extend this agreement through January 1, 2011.
Under the
remanufactured receiver agreement, we have the right, but not the obligation, to purchase
remanufactured receivers and accessories from DISH Network at cost plus a fixed margin, which
varies depending on the nature of the equipment purchased. We may terminate the remanufactured
receiver agreement for any reason upon sixty days written notice to DISH Network.
Tax Sharing Agreement. We entered into a tax sharing agreement with DISH Network which governs our
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.
Tivo. Because both we and DISH Network are defendants in the Tivo lawsuit, we and DISH Network are
jointly and severally liable to Tivo for any final damages and sanctions that may be awarded by the Court. DISH Network has agreed that it is obligated under the
agreements entered into in connection with the
Spin-off to indemnify us for substantially all liability arising from this lawsuit. We have agreed to
contribute an amount equal to our $5 million intellectual property liability limit under the Receiver
Agreement. We and DISH Network have further agreed that our $5 million contribution would not exhaust
our liability to DISH Network for other intellectual property claims that may arise under the Receiver
Agreement. Therefore, during the three months ended June 30, 2009, we
recorded a charge included in General and administrative
expenses DISH Network on our Condensed Statement of Operations and Comprehensive Income (Loss) of $5
million to reflect this contribution. We and DISH Network also agreed that we would each be entitled to
joint ownership of, and a cross-license to use, any intellectual property developed in connection with any
potential new alternative technology.
Related Party Transactions with NagraStar
We purchase security access devices from NagraStar. The table below summarizes our transactions
with NagraStar.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Purchases: |
|
(In thousands) |
|
Purchases from NagraStar |
|
$ |
16,115 |
|
|
$ |
12,211 |
|
|
$ |
20,473 |
|
|
$ |
19,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Amounts Payable and Commitments: |
|
(In thousands) |
|
Amounts payable to NagraStar |
|
$ |
35,460 |
|
|
$ |
32,504 |
|
|
|
|
|
|
|
|
Commitments to purchase from NagraStar during 2009 |
|
$ |
24,417 |
|
|
$ |
29,151 |
|
|
|
|
|
|
|
|
29
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Related Party Transactions with DISH Mexico
During November 2008, we entered into a joint venture for a direct-to-home, or DTH, service in
Mexico known as DISH Mexico, S. de R.L. de C.V., or DISH Mexico. Pursuant to these arrangements,
we provide certain broadcast services and satellite capacity and may sell hardware such as digital
set-top boxes and related equipment to DISH Mexico. Subject to a number of conditions, including
regulatory approvals and compliance with various other arrangements, we committed to provide
approximately $112 million of value over an initial ten year period, of which $46 million has been
satisfied in the form of cash, equipment and services, leaving $66 million remaining under this
commitment. Of the remaining commitment, approximately $28 million is expected to be paid in cash
and the remaining amounts may be satisfied in the form of certain services or equipment. During
the three months ended June 30, 2009, we sold $5 million of set-top boxes and related accessories
to DISH Mexico that are not related to the original commitment associated with our investment in
DISH Mexico. As of June 30, 2009, amounts receivable from DISH Mexico totaled $4 million.
Related Party Transactions with a Taiwanese Joint Venture
During June of 2009, we entered into an agreement to form a Taiwanese joint venture, for a DTH
service in Taiwan and certain other targeted regions in Asia. Pursuant to these arrangements, we
sell hardware such as digital set-top boxes and provide certain technical support services.
Subject to a number of conditions, including regulatory approvals and entry into various other
arrangements, we committed to provide approximately $36 million of value over an initial three year
period, of which $18 million will be satisfied in the form of cash and $18 million will be
satisfied in the form of a loan.
30
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read the following discussion and analysis of our financial condition and results of
operations together with the condensed consolidated financial statements and notes to the financial
statements included elsewhere in this quarterly report. This managements discussion and analysis
is intended to help provide an understanding of our financial condition, changes in financial
condition and results of our operations and contains forward-looking statements that involve risks
and uncertainties. The forward-looking statements are not historical facts, but rather are based
on current expectations, estimates, assumptions and projections about our industry, business and
future financial results. Our actual results could differ materially from the results contemplated
by these forward-looking statements due to a number of factors, including those discussed in our
Annual Report on Form 10-K for the year ended December 31, 2008 and this Quarterly Report on Form
10-Q, under the caption Item 1A. Risk Factors.
EXECUTIVE SUMMARY
Overview
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. We currently operate two primary business units: (i) our
Digital Set-Top Box business, and (ii) our Satellite Services business.
Digital Set-Top Box Business
Our Digital Set-Top Box business designs, develops and distributes digital set-top boxes and
related products and technology, including our Slingbox placeshifting technology, primarily for
satellite TV service providers, telecommunication and cable companies and, with respect to
Slingboxes, directly to consumers via retail outlets. Most of our digital set-top boxes are sold
to DISH Network, but we also sell a significant number of digital set-top boxes to Bell TV in
Canada and other international customers. As part of the Spin-off, DISH Network contributed Sling
Media, Inc., a leading innovator in the digital-lifestyle space to us, to complement our existing
product line. Slingbox placeshifting technology allows consumers to watch and control their home
digital video and audio content anywhere in the world via a broadband Internet connection.
Our Digital Set-Top Box business also provides digital broadcast operations including satellite
uplinking/downlinking, transmission services, signal processing, conditional access management and
other services provided primarily to DISH Network.
We believe opportunities exist to expand our business by selling equipment and services in both the
U.S. and international markets. As a result of our extensive experience with digital set-top boxes
and digital broadcast operations, we can provide end-to-end pay TV delivery systems incorporating
our satellite and backhaul capacity, customized digital set-top boxes and related components, and
network design and management.
During November 2008, we entered into a joint venture for a direct-to-home, or DTH, service in
Mexico known as DISH Mexico, S. de R.L. de C.V., or DISH Mexico. Pursuant to these arrangements,
we provide certain broadcast services and satellite capacity and may sell hardware such as digital
set-top boxes and related equipment to DISH Mexico. Subject to a number of conditions, including
regulatory approvals and compliance with various other arrangements, we committed to provide
approximately $112 million of value over an initial ten year period, of which $46 million has been
satisfied in the form of cash, equipment and services, leaving $66 million remaining under this
commitment. Of the remaining commitment, approximately $28 million is expected to be paid in cash
and the remaining amounts may be satisfied in the form of certain services or equipment.
During June of 2009, we entered into an agreement to form a Taiwanese joint venture, for a DTH
service in Taiwan and certain other targeted regions in Asia. Pursuant to these arrangements, we
sell hardware such as digital set-top boxes and provide certain technical support services.
Subject to a number of conditions, including regulatory approvals and entry into various other
arrangements, we committed to provide approximately $36 million of value over an initial
three year period, of which $18 million will be satisfied in the form of cash and $18 million will
be satisfied in the form of a loan.
31
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
Dependence on DISH Network. We currently depend on DISH Network for a substantial portion of the
revenue for our Digital Set-Top Box business and we expect for the foreseeable future that DISH
Network will continue to be the primary source of revenue for each of our 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. In addition, because the number of
potential new customers for our Digital Set-Top Box business is small and may be limited by our
common ownership and related management with DISH Network, our current customer concentration is
likely to continue for the foreseeable future.
Changes in DISH Network subscriber growth could have a material adverse affect on our digital
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 agreement with DISH
Network effective January 31, 2009, may have an adverse impact on us. According to DISH Networks
Form 10-K for the year ended December 31, 2008, its relationship with AT&T accounted for
approximately 17% of DISH Networks gross subscriber additions. Furthermore, DISH Network has in
the last six months 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 digital 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 Network digital set-top boxes to new technologies such as
MPEG-4 digital compression technology or Slingbox placeshifting technology. However, there can be
no assurance that any of these factors will mitigate declining subscriber growth at DISH Network.
In addition, although we expect DISH Network to continue to purchase products and services from us,
there can be no assurance that DISH Network will continue to purchase products and services from us
in the future.
We may experience significant pressure on margins we earn on the sale of digital set-top boxes and
other equipment, including on sales to DISH Network. This pressure may be due to current economic
conditions, advancements in the technology and functionality of digital set-top boxes and other
equipment. The margins we earn on sales are determined largely through periodic negotiations that
could result in pricing reflecting, among other things, the digital 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.
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 as a result of common ownership and related
management with DISH Network. If we do not develop relationships with new customers, we may not be
able to expand our customer base and our ability to increase or even maintain our revenue will be
impacted.
Additional Challenges for our Digital Set-Top Box Business. We believe that our best
opportunities for developing potential new customers for our Digital Set-Top Box business over
the near term 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 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 low cost competitors that are principally located in Asia. If we do not otherwise
compete effectively, demand for our
32
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
products could decline, our gross margins could decrease, we
could lose market share, our revenues and earnings may decline and our growth prospects would be
diminished.
The current economic downturn and tightened credit markets may cause certain suppliers that we rely
on to cease operations which, in turn, may cause us to suffer disruptions to our supply chain or
incur higher production costs.
Our ability to sustain or increase profitability will also depend in large part on our ability to
control or reduce our costs of producing digital set-top boxes. The market for our digital 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 digital set-top boxes and the profitability of our
Digital Set-Top Box business.
Satellite Services Business
Our satellite services segment consists principally of transponder leasing provided primarily to
DISH Network, and secondarily to government entities, Internet service providers, broadcast news
organizations and private enterprise customers. We began operating the Satellite Services
business following the completion of the Spin-off using our owned and leased in-orbit satellites,
multiple digital broadcast centers and other transmission assets. We are also pursuing expanding
our business offerings by providing value added services such as telemetry, tracking and control
services to third parties. However, there can be no assurance that we will be able to effectively
compete against our competitors due to their significant resources and operating history.
Dependence on DISH Network. We currently depend on DISH Network for a substantial portion of the
revenue for our Satellite Services business. 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.
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, including the
launch of its own additional satellites. 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.
In addition, because the number of potential new customers for our Satellite Services business is
small and may 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
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 Satellite Services Business. 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. However, there can be no assurance that we would be able to develop
successful alternative services or the sales and marketing expertise necessary to sell these
services profitably.
Adverse Economic Conditions
Our ability to grow or maintain our business may be adversely affected by weakening global and
domestic economic conditions, including wavering consumer confidence and constraints on
discretionary purchasing, unemployment, tight credit markets, declines in global and domestic stock
markets, falling home prices and other factors that may adversely affect the markets in which we
operate. 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
33
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
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 digital set-top boxes to DISH Network, Bell TV and other international customers to
decline materially because consumers may delay purchasing decisions or reduce or reallocate their
discretionary spending.
Future Capital Sources
We primarily rely on our existing cash and marketable investment securities balances, as well as cash flow
generated through operations to fund our investment needs. Since we currently depend on DISH Network
for a substantial portion of our revenue, our cash flow from operations depend heavily on their needs for
equipment and services. As a result, there can be no assurances that we will always have positive cash
flows from operations and should our cash flows turn negative, our existing cash and marketable
investment securities balances may be reduced. In addition, if we are unsuccessful in overturning the
District Courts ruling on Tivos motion for contempt, we are not successful in developing and deploying
potential new alternative technology and we are unable to reach a license agreement with Tivo on
reasonable terms, we would be required to cease distribution of digital set-top boxes with DVR
functionality. In that event, our sales of digital set-top boxes to DISH Network and others would likely
significantly decrease and could even potentially cease for a period of time. Furthermore, the inability to
offer DVR functionality would place us at a significant disadvantage to our competitors and make it even
more difficult for us to penetrate new markets for digital set-top boxes. The adverse effect on our financial
position and results of operations if the District Courts contempt order is upheld is likely to be significant.
If we are successful in overturning the District Courts ruling on Tivos motion for contempt, but
unsuccessful in defending against any subsequent claim that our original alternative technology or any
potential new alternative technology infringes Tivos patent, we could be prohibited from distributing
DVRs. In that event we would be at a significant disadvantage to our competitors who could continue
offering DVR functionality and the adverse effect on our business could be material.
Because both we and DISH Network are defendants in the Tivo lawsuit, we and DISH Network are jointly
and severally liable to Tivo for any final damages and sanctions that may be awarded by the Court. DISH
Network has agreed that it is obligated under the agreements entered into in connection with the Spin-off to
indemnify us for substantially all liability arising from this lawsuit. We have agreed to contribute an
amount equal to our $5 million intellectual property liability limit under the Receiver Agreement. We and
DISH Network have further agreed that our $5 million contribution would not exhaust our liability to DISH
Network for other intellectual property claims that may arise under the Receiver Agreement. Therefore, during the three months ended June 30, 2009, we recorded a charge included in General and administrative expenses DISH Network on our
Condensed Statement of Operations and Comprehensive Income (Loss) of $5 million to reflect this
contribution. We and DISH Network also agreed that we would each be entitled to joint ownership of, and
a cross-license to use, any intellectual property developed in connection with any potential new alternative
technology.
Because we are jointly and severally liable with DISH Network, to the extent that DISH Network does not
or is unable to pay any damages or sanctions arising from this lawsuit, we would then be liable for any
portion of these damages and sanctions not paid by DISH Network. Any amounts that DISH Network may
be required to pay could impair its ability to pay us and also negatively impact our future liquidity.
If we become liable for any portion of these damages or sanctions, we may be required to raise additional
capital at a time and in circumstances in which we would normally not raise capital. Therefore, any capital
we raise may be on terms that are unfavorable to us, which might adversely affect our financial position
and results of operations and might also impair our ability to raise capital on acceptable terms in the future
to fund our own operations and initiatives.
Other Risks
Our profitability is also 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 other expenses that we incur as a separate publicly-traded company. These
costs are 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
34
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Item 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
may also incur additional costs to conform our digital set-top boxes to comply
with local laws or local specifications and to ship our digital set-top boxes to our international
customers.
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Equipment revenue DISH Network. Equipment revenue DISH Network primarily includes sales of
digital set-top boxes and related components to DISH Network, including Slingboxes and related
hardware products.
Equipment revenue other. Equipment revenue other primarily includes sales of digital
set-top boxes and related components to Bell TV, DISH Mexico and other international customers,
including sales of Slingboxes and related hardware products.
Services and other revenue DISH Network. Services and other revenue 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.
Services and other revenue other. Services and other revenue 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 digital set-top boxes and related components sold to DISH Network, Bell TV, DISH Mexico and
other international customers, including costs associated with Slingboxes and related hardware
products.
Cost of sales services and other. Cost of sales services and other principally includes
costs 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.
Research and development expenses. Research and development expenses consist primarily of costs
associated with the design and development of our digital 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 (i.e., information systems, human resources and other 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.
Impairments of goodwill, indefinite-lived and long-lived assets. Impairments of goodwill,
indefinite-lived and long-lived assets consists primarily of impairments of goodwill, FCC
authorizations and satellites.
Interest income. Interest income consists primarily of interest earned on our cash, cash
equivalents and marketable investment securities, including accretion on debt securities.
Interest expense. Interest expense primarily includes interest expense associated with our
capital lease obligations.
Unrealized and realized gains (losses) on marketable investment securities and other investments.
Unrealized and realized gains (losses) on marketable investment securities and other investments
consists primarily of gains and losses realized on the sale or exchange of investments and
other-than-temporary impairments of marketable and other investment securities.
35
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Item 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
Unrealized gains (losses) on investments accounted for at fair value, net. Unrealized gains
(losses) on investments accounted for at fair value, net consists of unrealized gains and losses
from changes in fair value of marketable and other strategic investments accounted for at fair
value.
Other, net. The main component of Other, net is primarily equity in earnings and losses of our
affiliates.
Earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA is defined as
Net income (loss) attributable to EchoStar common shareholders plus Interest expense net of
Interest income, Income taxes and Depreciation and amortization. This non-GAAP measure is
reconciled to Net income (loss) attributable to EchoStar common shareholders in our discussion of
Results of Operations below.
36
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Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
RESULTS OF OPERATIONS
Three Months Ended June 30, 2009 Compared to the Three Months Ended June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
|
|
|
Ended June 30, |
|
|
Variance |
|
|
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
% |
|
Statements of Operations Data |
|
(In thousands) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment revenue DISH Network |
|
$ |
204,284 |
|
|
$ |
301,039 |
|
|
$ |
(96,755 |
) |
|
|
(32.1 |
) |
Equipment revenue other |
|
|
70,077 |
|
|
|
76,951 |
|
|
|
(6,874 |
) |
|
|
(8.9 |
) |
Services and other revenue DISH Network |
|
|
99,484 |
|
|
|
93,019 |
|
|
|
6,465 |
|
|
|
7.0 |
|
Services and other revenue other |
|
|
9,303 |
|
|
|
12,331 |
|
|
|
(3,028 |
) |
|
|
(24.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
383,148 |
|
|
|
483,340 |
|
|
|
(100,192 |
) |
|
|
(20.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales equipment |
|
|
231,637 |
|
|
|
317,483 |
|
|
|
(85,846 |
) |
|
|
(27.0 |
) |
% of Total equipment revenue |
|
|
84.4 |
% |
|
|
84.0 |
% |
|
|
|
|
|
|
|
|
Cost of sales services and other |
|
|
48,267 |
|
|
|
57,699 |
|
|
|
(9,432 |
) |
|
|
(16.3 |
) |
% of Total services and other revenue |
|
|
44.4 |
% |
|
|
54.8 |
% |
|
|
|
|
|
|
|
|
Research and development expenses |
|
|
11,222 |
|
|
|
7,473 |
|
|
|
3,749 |
|
|
|
50.2 |
|
% of Total revenue |
|
|
2.9 |
% |
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
35,597 |
|
|
|
40,059 |
|
|
|
(4,462 |
) |
|
|
(11.1 |
) |
% of Total revenue |
|
|
9.3 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
59,475 |
|
|
|
63,015 |
|
|
|
(3,540 |
) |
|
|
(5.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
386,198 |
|
|
|
485,729 |
|
|
|
(99,531 |
) |
|
|
(20.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(3,050 |
) |
|
|
(2,389 |
) |
|
|
(661 |
) |
|
|
27.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
5,489 |
|
|
|
7,491 |
|
|
|
(2,002 |
) |
|
|
(26.7 |
) |
Interest expense, net of amounts capitalized |
|
|
(7,229 |
) |
|
|
(8,278 |
) |
|
|
1,049 |
|
|
|
12.7 |
|
Unrealized and realized gains (losses) on marketable
investment securities and other investments |
|
|
(4,277 |
) |
|
|
67,848 |
|
|
|
(72,125 |
) |
|
NM |
|
Unrealized gains (losses) on investments
accounted for at fair value, net |
|
|
110,063 |
|
|
|
(7,689 |
) |
|
|
117,752 |
|
|
NM |
|
Other, net |
|
|
(2,460 |
) |
|
|
(3,363 |
) |
|
|
903 |
|
|
|
26.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
101,586 |
|
|
|
56,009 |
|
|
|
45,577 |
|
|
|
81.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
98,536 |
|
|
|
53,620 |
|
|
|
44,916 |
|
|
|
83.8 |
|
Income tax (provision) benefit, net |
|
|
2,536 |
|
|
|
(5,796 |
) |
|
|
8,332 |
|
|
NM |
|
Effective tax rate |
|
|
2.6 |
% |
|
|
(10.8% |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
101,072 |
|
|
$ |
47,824 |
|
|
$ |
53,248 |
|
|
NM |
|
Less: Net income (loss) attributable to noncontrolling interest |
|
|
(742 |
) |
|
|
|
|
|
|
(742 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to EchoStar common shareholders |
|
$ |
101,814 |
|
|
$ |
47,824 |
|
|
$ |
53,990 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
160,493 |
|
|
$ |
117,422 |
|
|
$ |
43,071 |
|
|
|
36.7 |
|
37
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Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
Equipment revenue DISH Network. Equipment revenue DISH Network totaled $204 million
during the three months ended June 30, 2009, a decrease of $97 million or 32.1% compared to the
same period in 2008. This change resulted primarily from a 31% decrease in unit sales of set-top
boxes and an 18% decline in average revenue per unit resulting from a change in the mix of
receivers sold.
In the near term, we expect DISH Network to remain the primary customer of our Digital Set-Top
Box business and the primary source of our total revenue. Pursuant to the commercial agreements
we entered into with DISH Network, we are obligated to sell digital set-top boxes to DISH Network
at cost plus a fixed margin through January 1, 2011, although DISH Network has no obligation to
purchase digital set-top boxes from us during or after this period. In addition, if DISH Networks
subscriber growth continues to decline, it may have a material adverse effect on our financial
position and results of operations.
Equipment revenue other. Equipment revenue other totaled $70 million during the three
months ended June 30, 2009, a decrease of $7 million or 8.9% compared to the same period in 2008.
This change resulted primarily from a $13 million decrease in sales to Bell TV, partially offset by
an increase in sales to DISH Mexico and sales of Slingboxes and related hardware products. The
number of units sold and average revenue per unit to Bell TV decreased versus the same quarter in
2008 due to a change in sales mix and as a result of the February 6, 2009 amendment to our
agreement with Bell TV, discussed below. The sales to DISH Mexico are not part of the original
commitment associated with our investment in DISH Mexico.
A substantial majority of our international revenue during the three months ended June 30, 2009 was
attributable to sales of equipment to Bell TV. In early 2009, we completed a multi-year contract
extension with Bell TV that makes us the exclusive provider of certain digital set-top boxes to
Bell TV. The agreement includes fixed pricing over the term of the agreement as well as providing
future engineering development for enhanced Bell TV service offerings. There can be no assurance
that sales to Bell TV will continue at historical levels, and any decline could adversely affect
our gross margins and profitability.
Services and other revenue DISH Network. Services and other revenue DISH Network totaled
$99 million during the three months ended June 30, 2009, an increase of $6 million or 7.0% compared
to the same period during 2008. This change was primarily attributable to an increase in uplink
services provided to DISH Network related to the launch of Ciel II which commenced commercial
operations in February 2009 and continued expansion of DISH Networks HD local markets, partially
offset by a slight decrease in the transponder capacity leased by DISH Network.
Cost of sales equipment. Cost of sales equipment totaled $232 million during the three
months ended June 30, 2009, a decrease of $86 million or 27% compared to the same period in 2008.
This change primarily resulted from a decrease in sales of digital set-top boxes and related
components to DISH Network and to Bell TV, partially offset by an increase in sales to DISH Mexico
and sales of Slingboxes and related hardware products. Cost of sales equipment represented
84.4% and 84.0% of total equipment sales during the three months ended June 30, 2009 and 2008,
respectively.
Cost of sales services and other. Cost of sales services and other totaled $48 million
during the three months ended June 30, 2009, a decrease of $9 million or 16.3% compared to the same
period during 2008. Cost of sales services and other represented 44.4% and 54.8% of total
Services and other revenue during the three months ended June 30, 2009 and 2008, respectively.
The overall decrease and the decline in this expense to revenue ratio were primarily driven by a
decrease in costs associated with fiber backhaul and a decrease in costs related to certain
international programming events.
Selling, general and administrative expenses. Selling, general and administrative expenses
totaled $36 million during the three months ended June 30, 2009, a decrease of $4 million or 11.1%
compared to the same period in 2008. This decrease was attributable to a reduction of our
marketing and advertising expenses for Slingboxes and related hardware products and the collection
of previously reserved receivables, partially offset by an increase in litigation expense.
Selling, general and administrative expenses represented 9.3% and 8.3% of Total revenue during
the three months ended June 30, 2009 and 2008, respectively.
38
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Item 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
Depreciation and amortization. Depreciation and amortization expense totaled $59 million during
the three months ended June 30, 2009, a $4 million or 5.6% decrease compared to the same period in
2008. The decrease in Depreciation and amortization expense was primarily due to less
depreciation expense on AMC-15 and AMC-16, partially offset by assets placed in service during
2009. In 2008, we impaired AMC-15 and AMC-16 by the combined amount of $218 million.
Interest income. Interest income totaled $5 million during the three months ended June 30, 2009,
a $2 million decrease compared to the same period in 2008. This decrease principally resulted from
lower cash and marketable investment securities balances and lower percentage returns earned
on our cash and marketable investment securities during the second quarter of 2009.
Unrealized and realized gains (losses) on marketable investment securities and other investments.
Unrealized and realized gains (losses) on marketable investment securities and other investments
for the three months ended June 30, 2009 was a net loss of $4 million compared to a net gain of $68
million during the same period in 2008. The change is primarily attributable to a 2008 gain on the
sale of a company, which held certain FCC authorizations, for a publicly traded stock.
Unrealized gains (losses) on investments accounted for at fair value, net. Unrealized gains
(losses) on investments accounted for at fair value, net totaled $110 million during the three
months ended June 30, 2009, a $118 million increase compared to the same period in 2008. This
change is attributable to increases in fair value related to investments accounted for under the
fair value method.
Earnings before interest, taxes, depreciation and amortization. EBITDA was $160 million during the
three months ended June 30, 2009, an increase of $43 million compared to the same period in 2008.
The following table reconciles EBITDA to the accompanying financial statements.
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
EBITDA |
|
$ |
160,493 |
|
|
$ |
117,422 |
|
Less: |
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
1,740 |
|
|
|
787 |
|
Income tax provision (benefit), net |
|
|
(2,536 |
) |
|
|
5,796 |
|
Depreciation and amortization |
|
|
59,475 |
|
|
|
63,015 |
|
|
|
|
|
|
|
|
Net income (loss) attributable to EchoStar common shareholders |
|
$ |
101,814 |
|
|
$ |
47,824 |
|
|
|
|
|
|
|
|
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.
During the three months ended June 30, 2009, we recorded an income tax benefit totaling $3 million
compared to an income tax provision of $6 million during the same period in 2008. This change
resulted from the decrease in our effective tax rate which was positively impacted by the release
of certain previously recognized valuation allowances established against certain deferred tax
assets that are capital in nature.
39
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Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
Net income (loss) attributable to EchoStar common shareholders. Our net income attributable to
EchoStar common shareholders was $102 million during the three months ended June 30, 2009, an
increase of $54 million compared to the same period in 2008. This increase was primarily
attributable to the changes in revenue and expenses discussed above.
40
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|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30, 2008.
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For the Six Months |
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Ended June 30, |
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Variance |
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2009 |
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|
2008 |
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Amount |
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% |
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Statements of Operations Data |
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(In thousands) |
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Revenue: |
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|
|
|
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|
|
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Equipment revenue DISH Network |
|
$ |
524,603 |
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$ |
672,733 |
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|
$ |
(148,130 |
) |
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(22.0 |
) |
Equipment revenue other |
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|
126,988 |
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|
151,773 |
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(24,785 |
) |
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(16.3 |
) |
Services and other revenue DISH Network |
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|
191,369 |
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|
|
185,489 |
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|
5,880 |
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3.2 |
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Services and other revenue other |
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19,735 |
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27,916 |
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(8,181 |
) |
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(29.3 |
) |
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|
|
|
|
|
|
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Total revenue |
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|
862,695 |
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|
|
1,037,911 |
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|
|
(175,216 |
) |
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|
(16.9 |
) |
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Costs and Expenses: |
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Cost of sales equipment |
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558,654 |
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|
699,908 |
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|
|
(141,254 |
) |
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(20.2 |
) |
% of Total equipment revenue |
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85.7 |
% |
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84.9 |
% |
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|
|
|
|
|
|
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Cost of sales services and other |
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|
101,051 |
|
|
|
110,215 |
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|
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(9,164 |
) |
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(8.3 |
) |
% of Total services and other revenue |
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47.9 |
% |
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51.6 |
% |
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Research and development expenses |
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20,814 |
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16,619 |
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|
|
4,195 |
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|
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25.2 |
|
% of Total revenue |
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2.4 |
% |
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1.6 |
% |
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|
|
|
|
|
|
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Selling, general and administrative expenses |
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66,150 |
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|
|
75,912 |
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|
|
(9,762 |
) |
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(12.9 |
) |
% of Total revenue |
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7.7 |
% |
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7.3 |
% |
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|
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Depreciation and amortization |
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|
121,424 |
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|
|
123,985 |
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|
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(2,561 |
) |
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(2.1 |
) |
Impairments of goodwill, indefinite-lived and long-lived assets |
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|
|
|
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12,799 |
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(12,799 |
) |
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(100.0 |
) |
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|
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|
|
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Total costs and expenses |
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868,093 |
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1,039,438 |
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(171,345 |
) |
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(16.5 |
) |
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|
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|
|
|
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|
|
|
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|
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|
|
|
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Operating income (loss) |
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|
(5,398 |
) |
|
|
(1,527 |
) |
|
|
(3,871 |
) |
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NM |
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Other Income (Expense): |
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|
|
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|
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|
|
|
|
|
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Interest income |
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14,778 |
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|
17,956 |
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(3,178 |
) |
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(17.7 |
) |
Interest expense, net of amounts capitalized |
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(14,515 |
) |
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(16,561 |
) |
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|
2,046 |
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12.4 |
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Unrealized and realized gains (losses) on marketable
investment securities and other investments |
|
|
(2,954 |
) |
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|
66,805 |
|
|
|
(69,759 |
) |
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NM |
Unrealized gains (losses) on investments
accounted for at fair value, net |
|
|
116,950 |
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|
|
3,215 |
|
|
|
113,735 |
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NM |
Other, net |
|
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(5,045 |
) |
|
|
(5,605 |
) |
|
|
560 |
|
|
|
10.0 |
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|
|
|
|
|
|
|
|
|
|
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Total other income (expense) |
|
|
109,214 |
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|
|
65,810 |
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|
|
43,404 |
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|
|
66.0 |
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Income (loss) before income taxes |
|
|
103,816 |
|
|
|
64,283 |
|
|
|
39,533 |
|
|
|
61.5 |
|
Income tax (provision) benefit, net |
|
|
(3,389 |
) |
|
|
(10,758 |
) |
|
|
7,369 |
|
|
|
(68.5 |
) |
Effective tax rate |
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|
(3.3% |
) |
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|
(16.7% |
) |
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|
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|
|
Net income (loss) |
|
$ |
100,427 |
|
|
$ |
53,525 |
|
|
$ |
46,902 |
|
|
|
87.6 |
|
Less: Net income (loss) attributable to noncontrolling interest |
|
|
(742 |
) |
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|
|
|
|
|
(742 |
) |
|
NM |
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|
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|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to EchoStar common shareholders |
|
$ |
101,169 |
|
|
$ |
53,525 |
|
|
$ |
47,644 |
|
|
|
89.0 |
|
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|
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|
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|
|
Other Data: |
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|
|
|
|
|
|
|
EBITDA |
|
$ |
225,719 |
|
|
$ |
186,873 |
|
|
$ |
38,846 |
|
|
|
20.8 |
|
41
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|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
Equipment revenue DISH Network. Equipment revenue DISH Network totaled $525 million
during the six months ended June 30, 2009, a decrease of $148 million or 22% compared to the same
period in 2008. This change resulted primarily from a 20% decrease in unit sales of set-top boxes
and a 15% decline in average revenue per unit resulting from a change in the mix of receivers sold.
Equipment revenue other. Equipment revenue other totaled $127 million during the six
months ended June 30, 2009, a decrease of $25 million or 16.3% compared to the same period in 2008.
This change resulted primarily from a $32 million decrease in sales to Bell TV and other
international customers, partially offset by an increase in sales to DISH Mexico and in sales of
Slingboxes and related hardware products. The number of units sold and average revenue per unit to
Bell TV decreased versus the same period in 2008 due to a change in sales mix and as a result of
the February 6, 2009 amendment to our agreement with Bell TV, previously discussed. Our sales to
international customers other than Bell TV were adversely impacted by low cost competitors that are
principally located in Asia. The sales to DISH Mexico are not part of the original commitment
associated with our investment in DISH Mexico.
Services and other revenue DISH Network. Services and other revenue DISH Network totaled
$191 million during the six months ended June 30, 2009, an increase of $6 million or 3.2% compared
to the same period during 2008. This change was primarily attributable to an increase in uplink
services provided to DISH Network related to the launch of Ciel II which commenced commercial
operations in February 2009 and continued expansion of DISH Networks HD local markets, partially
offset by a slight decrease in the transponder capacity leased by DISH Network.
Services and other revenue other. Services and other revenue other totaled $20 million
during the six months ended June 30, 2009, a decrease of $8 million or 29.3% compared to the same
period during 2008. The change was driven primarily by a decrease in revenue from several
non-recurring sources in the first quarter of 2008 that had minimal associated costs, partially
offset by an increase in transponder leasing provided to customers other than DISH Network.
Cost of sales equipment. Cost of sales equipment totaled $559 million during the six
months ended June 30, 2009, a decrease of $141 million or 20.2% compared to the same period in
2008. This change primarily resulted from a decrease in sales of digital set-top boxes and related
components to DISH Network, Bell TV and to other international customers, partially offset by an
increase in sales to DISH Mexico and sales of Slingboxes and related hardware products. Cost of
sales equipment represented 85.7% and 84.9% of total equipment sales during the six months
ended June 30, 2009 and 2008, respectively. The increase in the expense to revenue ratio
principally resulted from a decline in the number of, and margins on, sales of digital set-top
boxes and related components to Bell TV and other international customers.
Cost of sales services and other. Cost of sales services and other totaled $101 million
during the six months ended June 30, 2009, a decrease of $9 million or 8.3% compared to the same
period in 2008. Cost of sales services and other represented 47.9% and 51.6% of total
Services and other revenue during the six months ended June 30, 2009 and 2008, respectively. The
overall decrease and the decline in the expense to revenue ratio was primarily driven by decreases
in costs related to certain international programming events and in certain transponder leasing
costs which ceased during the first quarter of 2008.
Selling, general and administrative expenses. Selling, general and administrative expenses
totaled $66 million during the six months ended June 30, 2009, a decrease of $10 million or 12.9%
compared to the same period in 2008. This decrease was attributable to a reduction of our
marketing and advertising expenses for Slingboxes and related hardware products and the collection
of previously reserved receivables, partially offset by an increase in litigation expense.
Selling, general and administrative expenses represented 7.7% and 7.3% of Total revenue during
the six months ended June 30, 2009 and 2008, respectively.
Impairments of goodwill, indefinite-lived and long-lived assets. Impairments of goodwill,
indefinite-lived and long-lived assets totaled $13 million during the six months ended June 30,
2008. In connection with the AMC-14 launch anomaly, we wrote-off certain deposits, capitalized
interest and insurance costs, net of insurance proceeds.
42
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
Interest income. Interest income totaled $15 million during the six months ended June 30, 2009,
a $3 million decrease compared to the same period in 2008. This decrease principally resulted from
lower cash and marketable investment securities balances and lower percentage returns earned
on our cash and marketable investment securities during 2009.
Unrealized and realized gains (losses) on marketable investment securities and other investments.
Unrealized and realized gains (losses) on marketable investment securities and other investments
for the six months ended June 30, 2009 was a net loss of $3 million compared to a net gain of $67
million during the same period in 2008. The change is primarily attributable to a 2008 gain on the
sale of a company, which held certain FCC authorizations, for a publicly traded stock.
Unrealized gains (losses) on investments accounted for at fair value, net. Unrealized gains
(losses) on investments accounted for at fair value, net totaled $117 million during the six
months ended June 30, 2009, a $114 million increase compared to the same period in 2008. This
change is attributable to increases in fair value related to investments accounted for under the
fair value method.
Earnings before interest, taxes, depreciation and amortization. EBITDA was $226 million during the
six months ended June 30, 2009, an increase of $39 million compared to the same period in 2008.
The following table reconciles EBITDA to the accompanying financial statements.
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
EBITDA |
|
$ |
225,719 |
|
|
$ |
186,873 |
|
Less: |
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(263 |
) |
|
|
(1,395 |
) |
Income tax provision (benefit), net |
|
|
3,389 |
|
|
|
10,758 |
|
Depreciation and amortization |
|
|
121,424 |
|
|
|
123,985 |
|
|
|
|
|
|
|
|
Net income (loss) attributable to EchoStar common shareholders |
|
$ |
101,169 |
|
|
$ |
53,525 |
|
|
|
|
|
|
|
|
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. During the six months ended June 30, 2009, we recorded an
income tax provision totaling $3 million compared to $11 million during the same period in 2008.
The change resulted from a decrease in our effective tax rate primarily related to the release of
certain previously recognized valuation allowances established against certain deferred tax assets
that are capital in nature, partially offset by an increase in Income (loss) before income taxes.
Net income (loss) attributable to EchoStar common shareholders. Our net income attributable to
common shareholders was $101 million during the six months ended June 30, 2009, an increase of $48
million compared to the same period in 2008. This increase 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 |
LIQUIDITY AND CAPITAL RESOURCES
Cash, 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. As of June 30, 2009, our cash,
cash equivalents and current marketable investment securities totaled $950 million compared to $829
million as of December 31, 2008. As of June 30, 2009 our $950 million of cash, cash equivalents
and current marketable investment securities included $197 million of securities of a single
issuer. The $121 million increase in cash, cash equivalents and current marketable investment
securities was primarily related to an increase in the value of certain marketable investment
securities and cash generated from operations, partially offset by capital expenditures, purchases
of marketable investment securities, repayment of debt and repurchases of our Class A common stock.
We have investments in various debt and equity instruments including corporate bonds, corporate
equity securities, government bonds, and variable rate demand notes (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. Our VRDN portfolio is comprised of many municipalities and financial institutions that
serve as the pledged liquidity source. While they are classified as marketable investment
securities, the put option allows VRDNs to be liquidated on a same day or on a five business day
settlement basis. As of June 30, 2009 and December 31, 2008, we held VRDNs with fair values of
$450 million and $622 million, respectively.
The following discussion highlights our cash flow activities during the six months ended June 30,
2009.
Cash Flow
Cash flows from operating activities
For the six months ended June 30, 2009, we reported net cash flows from operating activities of
$118 million. This amount primarily includes net income adjusted for Depreciation and
amortization and Unrealized (gains) losses on investments accounted for at fair value, net of
$105 million and changes in working capital.
Cash flows from investing activities
For the six months ended June 30, 2009, we reported net cash outflows from investing activities of
$45 million primarily related to capital expenditures of $106 million and purchases of strategic
investments of $31 million, partially offset by net sales of marketable investment securities of
$94 million. The capital expenditures include $62 million of satellite related capital
expenditures and $44 million of other corporate capital expenditures.
Cash flows from financing activities
For the six months ended June 30, 2009, we reported net cash outflows from financing activities of
$33 million primarily resulting from debt repayments and repurchases of our Class A common stock.
Future Capital Sources
We primarily rely on our existing cash and marketable investment securities balances, as well as cash flow
generated through operations to fund our investment needs. Since we currently depend on DISH Network
for a substantial portion of our revenue, our cash flow from operations depend heavily on their needs for
equipment and services. As a result, there can be no assurances that we will always have positive cash
flows from operations and should our cash flows turn negative, our existing cash and marketable
investment securities balances may be reduced. In addition, if we are unsuccessful in overturning the
District Courts ruling on Tivos motion for contempt, we are not successful in developing and deploying
potential new alternative technology and we are unable to reach a license agreement with Tivo on
reasonable terms, we would be required to cease distribution of digital set-top boxes with DVR
functionality. In that event, our sales of digital set-top boxes to DISH Network and others would likely
significantly decrease and could even potentially cease for a period of time. Furthermore, the inability to
offer DVR functionality would place us at a significant disadvantage to our competitors and make it even
more difficult for us to penetrate new markets for digital set-top boxes. The adverse effect on our financial
position and results of operations if the District Courts contempt order is upheld is likely to be significant.
If we are successful in overturning the District Courts ruling on Tivos motion for contempt, but
unsuccessful in defending against any subsequent claim that our original alternative technology or any
potential new alternative technology infringes Tivos patent, we could be prohibited from distributing
DVRs. In that event we would be at a significant disadvantage to our competitors who could continue
offering DVR functionality and the adverse effect on our business could be material.
Because both we and DISH Network are defendants in the Tivo lawsuit, we and DISH Network are jointly
and severally liable to Tivo for any final damages and sanctions that may be awarded by the Court. DISH
Network has agreed that it is obligated under the agreements entered into in connection with the Spin-off to
indemnify us for substantially all liability arising from this lawsuit. We have agreed to contribute an
amount equal to our $5 million intellectual property liability limit under the Receiver Agreement. We and
DISH Network have further agreed that our $5 million contribution would not exhaust our liability to DISH
Network for other intellectual property claims that may arise under the Receiver Agreement. Therefore, during the three months ended June 30, 2009, we recorded a charge included in General and administrative expenses DISH Network on our
Condensed Statement of Operations and Comprehensive Income (Loss) of $5 million to reflect this
contribution. We and DISH Network also agreed that we would each be entitled to joint ownership of, and
a cross-license to use, any intellectual property developed in connection with any potential new alternative
technology.
Because we are jointly and severally liable with DISH Network, to the extent that DISH Network does not
or is unable to pay any damages or sanctions arising from this lawsuit, we would then be liable for any
portion of these damages and sanctions not paid by DISH Network. Any amounts that DISH Network may
be required to pay could impair its ability to pay us and also negatively impact our future liquidity.
If we become liable for any portion of these damages or sanctions, we may be required to raise additional
capital at a time and in circumstances in which we would normally not raise capital. Therefore, any capital
we raise may be on terms that are unfavorable to us, which might adversely affect our financial position
and results of operations and might also impair our ability to raise capital on acceptable terms in the future
to fund our own operations and initiatives.
44
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued |
Off-Balance Sheet Arrangements
In general, we do not engage in off-balance sheet financing activities.
|
|
|
Item 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risks Associated With Financial Instruments
Our investments and debt are exposed to market risks, discussed below.
Cash, Cash Equivalents and Marketable Investment Securities. As of June 30, 2009, our restricted
and unrestricted cash, cash equivalents and current marketable investment securities had a fair
value of $962 million. Of that amount, a total of $659 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. As
of June 30, 2009, all of the $659 million was invested in fixed or variable rate instruments. The
value of these investments can be impacted by interest rate fluctuations, but while an increase in
interest rates would ordinarily adversely impact the fair value of fixed rate investments, we
normally hold these investments to maturity. Further, the value could be lowered by credit losses
should economic conditions worsen.
Strategic Marketable Investment Securities. In general, our marketable investment securities
portfolio includes debt and equity of public companies we hold for strategic and financial
purposes. As of June 30, 2009, we held strategic and financial debt and equity investments of
public companies with a fair value of $303 million. These investments, which are concentrated in a
few companies, are highly speculative and have experienced and continue to experience volatility.
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
45
|
|
|
Item 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Continued |
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 a $30 million decrease in the fair value of these investments.
Marketable and Other Investment Securities. We are exposed to equity risk as it relates to changes
in the market value of our other investments which totaled $315 million as of June 30, 2009. We
invest in equity instruments of public and private companies for operational, financial and
strategic business purposes. These securities are subject to significant fluctuations in market
value due to volatility of the stock market and the industry in which the companies operate. A
hypothetical 10% adverse change in the price of these equity instruments would result in an
approximate $32 million decrease in the value of these investments.
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.
Interest Rate Risk. Our cash, cash equivalents and marketable investment securities had an average
annual return for the six months ended June 30, 2009 of 4.0%. A hypothetical 10% decrease in the
average interest rates would result in a decrease of approximately $3 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.
Long Term Debt. As of June 30, 2009, we had $322 million of long-term debt, of which $314 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 (FAS 107).
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.
|
|
|
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 |
In connection with the Spin-off, we
entered into a separation agreement with DISH Network, which
provides among other things for the division of certain liabilities, including liabilities
resulting from
litigation. Under the terms of the separation agreement, we have assumed certain liabilities
that relate to
our business including certain designated liabilities for acts or omissions
prior to the Spin-off. Certain
specific provisions govern intellectual property related claims under which,
generally,
46
PART II OTHER INFORMATION Continued
we will only be
liable for our acts or omissions following the Spin-off and DISH Network will indemnify
us for any
liabilities or damages resulting from intellectual property claims relating
to the period prior to the Spin-off
as well as DISH Networks acts or omissions following 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
entity that seeks to license an acquired patent portfolio without itself practicing any of the
claims recited therein. The suit alleges infringement of United States Patent Nos. 5,132,992,
5,253,275, 5,550,863, 6,002,720 and 6,144,702, which relate to certain systems and methods for
transmission of digital data. In March 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, which we have done. The Court has not yet ruled on those motions.
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.
During 2001, Broadcast Innovation, L.L.C. (Broadcast Innovation) filed a lawsuit against DISH
Network, DirecTV, Thomson Consumer Electronics and others in United States 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. 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
found 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 Charter 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 Charter case pending reexamination, and our case has been 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.
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).
During 2006, we and 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 we do not infringe, and have not infringed, any valid claim of the 505
patent. During April 2008, the Federal Circuit
47
PART II OTHER INFORMATION Continued
reversed the judgment against DirecTV and ordered a new trial. Our case is stayed until the
DirecTV action is resolved.
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
During April 2007, Global Communications, Inc. (Global) filed a patent infringement action
against us and 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), which
relates to satellite reception. In October 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.
During June 2009, Global filed a patent infringement action against us and DISH Network in the
United States District Court for the Northern District of Florida. The suit alleges infringement
of United States Patent No. 7,542,717 (the 717 patent), which relates to satellite reception.
We intend to vigorously defend these cases. In the event that a Court ultimately determines that
we infringe the 702 patent and/or the 717 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.
Guardian Media
During December 2008, Guardian Media Technologies LTD (Guardian) filed suit against us, EchoStar
Technologies L.L.C., DISH Network, DirecTV and several other defendants in the United States
District Court for the Central District of California alleging infringement of United States Patent
Nos. 4,930,158 and 4,930,160. Both patents are expired and relate to certain parental lock
features.
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. 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.
Multimedia Patent Trust
On February 13, 2009, Multimedia Patent Trust (MPT) filed suit against us, DISH Network, DirecTV
and several other defendants in the United States District Court for the Southern District of
California alleging infringement of United States Patent Nos. 4,958,226, 5,227,878, 5,136,377,
5,500,678 and 5,563,593, which relate to video encoding, decoding and compression technology. MPT
is an entity that seeks to license an acquired patent portfolio without itself practicing any of
the claims recited therein.
We intend to vigorously defend this case. In the event that a Court ultimately determines that
we infringe any of the asserted patents, we may be subject to substantial damages, which may
include 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
48
PART II OTHER INFORMATION Continued
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.
NorthPoint Technology
On July 2, 2009, NorthPoint Technology, Ltd (Northpoint) filed suit against us, DISH Network, and
DirecTV in the United States District Court for the Western District of Texas alleging infringement
of United States Patent No. 6,208,636 (the 636 patent). The 636 patent relates to the use of
multiple low-noise block converter feedhorns, or LNBFs, which are antennas used for satellite
reception.
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 features
that we currently offer to consumers. We cannot predict with any degree of certainty the outcome
of the suit or determine the extent of any potential liability or damages.
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, 5,109,414, 4,965,825, 5,233,654, 5,335,277,
and 5,887,243, which relate to satellite signal processing.
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.
Technology Development Licensing
On January 22, 2009, Technology Development and Licensing LLC (TechDev) filed suit against us and
DISH Network in the United States District Court for the Northern District of Illinois alleging
infringement of United States Patent No. 35, 952, which relates to certain favorite channel
features. In July 2009, the Court granted our motion to stay the case pending two re-examination
petitions before the Patent and Trademark Office.
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.
Tivo Inc.
During January 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 January 2008 decision, the Federal Circuit affirmed the jurys verdict of
infringement on Tivos software claims, and upheld the award of damages from the District Court. 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, DISH
Network paid approximately $105 million to Tivo.
We also developed and deployed next-generation DVR software. This improved
software was automatically downloaded to our current customers
DVRs, and is fully operational (our original
alternative technology). The download was completed as of April
2007. We received written legal opinions
from outside counsel that concluded our original alternative technology does not infringe, literally or
under the doctrine of equivalents, either the hardware or software claims of Tivos patent. Tivo filed a
motion for contempt alleging that we are in violation of the Courts injunction. We opposed this motion on
the grounds that the injunction did not apply to DVRs that have received our original alternative
technology, that our original alternative technology does not
infringe Tivos patent, and that we were in
compliance with the injunction.
On June 2, 2009, the District Court granted Tivos contempt motion, finding that our original alternative
technology was not more than colorably different than the products found by the jury to infringe Tivos
patent, that the original alternative technology still infringed the software claims, and that even if the
original alternative technology was non-infringing, the original injunction by its terms required that
DISH Network disable DVR functionality in all but approximately 192,000 digital set-top boxes in the
field. The District Court awarded Tivo $103 million in supplemental damages and interest for the period
from September 2006 to April 2008, based on an assumed $1.25 per subscriber per month royalty rate.
DISH Network posted a bond to secure that award pending appeal of the
contempt order. This award does not include sanctions for
contempt, which could be substantial.
On July 1, 2009, the Federal Circuit Court of Appeals granted a permanent stay of the District Courts
contempt order pending resolution of our appeal. In so doing, the Federal Circuit found, at a minimum,
that we had a substantial case on the merits. The Federal Circuit set an expedited briefing schedule for the
appeal with oral argument possible as early as November 2009.
The
District Court held a hearing on July 28, 2009 on Tivos claims for contempt sanctions, but has
ordered that enforcement of any sanctions award will be stayed pending our appeal of the contempt order.
Tivo is seeking up to $975 million in contempt sanctions for the period from April 2008 to June 2009 based
on, among other things, profits Tivo alleges DISH Network made from subscribers using DVRs. We
opposed Tivos request arguing, among other things, that sanctions are inappropriate because we made
good faith efforts to comply with the Courts injunction. We
also challenged Tivos calculation of profits.
49
PART II OTHER INFORMATION Continued
On August 3, 2009, the Patent and Trademark Office (the PTO) issued an initial office action rejecting
the software claims of the 389 patent as being invalid in light
of two prior patents. These are the same software claims
that we were found to have infringed and which underlie the contempt ruling now pending on appeal.
We believe that the PTOs conclusions are relevant to the issues on appeal as well as the pending sanctions
proceedings in the District Court. The PTOs conclusions support our position that our original
alternative technology is more than colorably different than the devices found to infringe by the jury; that
our original alternative technology does not infringe; and that we acted in good faith to design around Tivos patent.
In light of the District Courts finding of contempt,
and
its description of the manner in which it believes our original
alternative technology infringed the 389 patent, we are also
developing and testing potential new alternative technology in an engineering environment.
If we are unsuccessful in overturning the District Courts ruling on Tivos motion for contempt, we are not
successful in developing and deploying potential new alternative technology and we are unable to reach a
license agreement with Tivo on reasonable terms, we would be required to cease distribution of digital set-top boxes with DVR functionality. In that event, our sales of digital set-top boxes to DISH Network and
others would likely significantly decrease and could even potentially cease for a period of time.
Furthermore, the inability to offer DVR functionality would place us at a significant disadvantage to our
competitors and make it even more difficult for us to penetrate new markets for digital set-top boxes. The
adverse effect on our financial position and results of operations if the District Courts contempt order is
upheld is likely to be significant.
If we are successful in overturning the District Courts ruling on Tivos motion for contempt, but
unsuccessful in defending against any subsequent claim that our original alternative technology or any
potential new alternative technology infringes Tivos patent, we could be prohibited from distributing
DVRs. In that event we would be at a significant disadvantage to our competitors who could continue
offering DVR functionality and the adverse effect on our business could be material.
Because both we and DISH Network are defendants in the Tivo lawsuit, we and DISH Network are jointly
and severally liable to Tivo for any final damages and sanctions that may be awarded by the Court. DISH
Network has agreed that it is obligated under the agreements entered into in connection with the Spin-off to
indemnify us for substantially all liability arising from this lawsuit. We have agreed to contribute an
amount equal to our $5 million intellectual property liability limit under the Receiver Agreement. We and
DISH Network have further agreed that our $5 million contribution would not exhaust our liability to DISH
Network for other intellectual property claims that may arise under the Receiver Agreement. Therefore, during the three months ended June 30, 2009, we recorded a charge
included in General and administrative expenses DISH
Network
on our
Condensed Statement of Operations and Comprehensive Income (Loss) of $5 million to reflect this
contribution. We and DISH Network also agreed that we would each be entitled to joint ownership of, and
a cross-license to use, any intellectual property developed in connection with any potential new alternative
technology.
Because we are jointly and severally liable with DISH Network, to the extent that DISH Network does not
or is unable to pay any damages or sanctions arising from this lawsuit, we would then be liable for any
portion of these damages and sanctions not paid by DISH Network. Any amounts that DISH Network may
be required to pay could impair its ability to pay us and also negatively impact our future liquidity.
If we become liable for any portion of these damages or sanctions, we may be required to raise additional
capital at a time and in circumstances in which we would normally not raise capital. Therefore, any capital
we raise may be on terms that are unfavorable to us, which might adversely affect our financial position
and results of operations and might also impair our ability to raise capital on acceptable terms in the future
to fund our own operations and initiatives.
50
PART II OTHER INFORMATION Continued
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.
51
PART II OTHER INFORMATION Continued
Item 1A. RISK FACTORS
Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2008
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 for 2008.
If we are unsuccessful in overturning the District Courts ruling on Tivos motion for contempt, we are
not successful in developing and deploying potential new alternative technology and we are unable to
reach a license agreement with Tivo on reasonable terms, we would be subject to substantial liability and
would be prohibited from offering DVR functionality that would in turn place us at a significant
disadvantage to our competitors and significantly decrease sales of digital set-top boxes to DISH
Network and others.
In June 2009, the U.S. District Court granted Tivos motion for contempt finding that our next-generation
DVRs continue to infringe Tivos intellectual property and awarded Tivo an additional $103 million dollars
in supplemental damages.
If we are unsuccessful in overturning the District Courts ruling on Tivos motion for contempt, we are not
successful in developing and deploying potential new alternative technology and we are unable to reach a
license agreement with Tivo on reasonable terms, we would be required to cease distribution of digital set-top boxes with DVR functionality. In that event, our sales of digital set-top boxes to DISH Network and
others would likely significantly decrease and could even potentially cease for a period of time.
Furthermore, the inability to offer DVR functionality would place us at a significant disadvantage to our
competitors and make it even more difficult for us to penetrate new markets for digital set-top boxes. The
adverse effect on our financial position and results of operations if the District Courts contempt order is
upheld is likely to be significant.
If we are successful in overturning the District Courts ruling on Tivos motion for contempt, but
unsuccessful in defending against any subsequent claim that our original alternative technology or any
potential new alternative technology infringes Tivos patent, we could be prohibited from distributing
DVRs. In that event we would be at a significant disadvantage to our competitors who could continue
offering DVR functionality and the adverse effect on our business could be material.
Because both we and DISH Network are defendants in the Tivo lawsuit, we and DISH Network are jointly
and severally liable to Tivo for any final damages and sanctions that may be awarded by the Court. DISH
Network has agreed that it is obligated under the agreements entered into in connection with the Spin-off to
indemnify us for substantially all liability arising from this lawsuit. We have agreed to contribute an
amount equal to our $5 million intellectual property liability limit under the Receiver Agreement. We and
DISH Network have further agreed that our $5 million contribution would not exhaust our liability to DISH
Network for other intellectual property claims that may arise under
the Receiver Agreement. Therefore, during the three months ended June
30, 2009, we recorded a charge included in General and
administrative expenses DISH Network on our
Condensed Statement of Operations and Comprehensive Income (Loss) of $5 million to reflect this
contribution. We and DISH Network also agreed that we would each be entitled to joint ownership of, and
a cross-license to use, any intellectual property developed in connection with any potential new alternative
technology.
Because we are jointly and severally liable with DISH Network, to the extent that DISH Network does not
or is unable to pay any damages or sanctions arising from this lawsuit, we would then be liable for any
portion of these damages and sanctions not paid by DISH Network. Any amounts that DISH Network may
be required to pay could impair its ability to pay us and also
negatively impact our future liquidity. If we become liable for any portion of these damages or sanctions, we may be required to raise additional
capital at a time and in circumstances in which we would normally not raise capital. Therefore, any capital
we raise may be on terms that are unfavorable to us, which might adversely affect our financial position
and results of operations and might also impair our ability to raise capital on acceptable terms in the future
to fund our own operations and initiatives.
The average selling price and gross margins of our digital set-top boxes has been decreasing and
may decrease even further, which could negatively impact our financial position and results of
operations.
The average selling price and gross margins of our digital set-top boxes has been decreasing and
may decrease even further due to, among other things, an increase in the sales of lower-priced
digital set top boxes to DISH Network and increased pricing pressure on our average selling prices,
including sales to Bell TV as a result of the February 6, 2009 amendment to our agreement with Bell
TV. Furthermore, our ability to increase the average selling prices of our digital set-top boxes
is limited and our average selling price may decrease even further in response to competitive
pricing pressures, new product introductions by us or our competitors or other factors. If we are
unable to increase or at least maintain the average selling prices of our digital set-top boxes, or
if such selling prices further
52
PART II OTHER INFORMATION Continued
decline, and we are unable to respond in a timely manner by developing and introducing new products
and continually reducing our product costs, our revenues and gross margin may be negatively
affected, which will harm our financial position and results of operations.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information regarding repurchases of our Class A common stock from
April 1, 2009 through June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Approximate |
|
|
|
Total |
|
|
|
|
|
|
Shares Purchased as |
|
|
Dollar Value of Shares |
|
|
|
Number of |
|
|
Average |
|
|
Part of Publicly |
|
|
that May Yet be |
|
|
|
Shares |
|
|
Price Paid |
|
|
Announced Plans or |
|
|
Purchased Under the |
|
Period |
|
Purchased |
|
|
per Share |
|
|
Programs |
|
|
Plans or Programs (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
April 1 - April 30, 2009 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
470,114 |
|
May 1 - May 31, 2009 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
470,114 |
|
June 1 - June 30, 2009 |
|
|
489,183 |
|
|
$ |
15.34 |
|
|
|
489,183 |
|
|
$ |
462,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
489,183 |
|
|
|
|
|
|
|
489,183 |
|
|
$ |
462,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In November 2007, our Board of Directors authorized the repurchase of up to $1.0 billion of
our Class A common stock during 2008. Effective November 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 Class A common stock through and including December 31, 2009, subject to a
limitation to purchase no more than 20% of our outstanding common stock. 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 the shares authorized for repurchase under this program and we may also enter
into additional share repurchase programs authorized by our Board of Directors. |
53
PART II OTHER INFORMATION Continued
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted upon at the annual meeting of our shareholders held on May 11,
2009:
|
a. |
|
The election of Joseph P. Clayton, R. Stanton Dodge, Michael T. Dugan, Charles
W. Ergen, David K. Moskowitz, Tom A. Ortolf, and C. Michael Schroeder as directors to
serve until the 2010 annual meeting of shareholders; |
|
|
b. |
|
Ratification of the appointment of KPMG LLP as our independent registered
public accounting firm for the fiscal year ending December 31, 2009; |
|
|
c. |
|
Approval to amend and restate our Employee Stock Purchase Plan; and |
|
|
d. |
|
Approval of amendments to existing equity plans to allow for stock award
exchange programs. |
All matters voted on at the annual meeting were approved. The voting results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes |
|
|
|
|
|
|
|
|
Against/ |
|
|
|
|
|
Broker |
|
|
For |
|
Withheld |
|
Abstain |
|
Non-Votes |
Election as directors: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph P. Clayton |
|
|
505,117,587 |
|
|
|
3,443,434 |
|
|
|
|
|
|
|
|
|
R. Stanton Dodge |
|
|
496,594,546 |
|
|
|
11,966,475 |
|
|
|
|
|
|
|
|
|
Michael T. Dugan |
|
|
496,858,585 |
|
|
|
11,702,436 |
|
|
|
|
|
|
|
|
|
Charles W. Ergen |
|
|
502,118,805 |
|
|
|
6,442,216 |
|
|
|
|
|
|
|
|
|
David K. Moskowitz |
|
|
496,596,350 |
|
|
|
11,964,671 |
|
|
|
|
|
|
|
|
|
Tom A. Ortolf |
|
|
505,093,090 |
|
|
|
3,467,931 |
|
|
|
|
|
|
|
|
|
C. Michael Schroeder |
|
|
505,096,251 |
|
|
|
3,464,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratification of the appointment of KPMG LLP as our independent registered
public accounting firm for the fiscal year ending December 31, 2009 |
|
|
508,026,393 |
|
|
|
57,226 |
|
|
|
477,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approval to amend and restate our Employee Stock Purchase Plan |
|
|
500,742,401 |
|
|
|
3,346,425 |
|
|
|
585,418 |
|
|
|
3,886,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approval of amendments to existing equity
plans to allow for stock award exchange programs |
|
|
488,777,173 |
|
|
|
19,191,552 |
|
|
|
592,296 |
|
|
|
|
|
Item 5. OTHER INFORMATION
Satellite Procurement Agreement. We entered into a satellite procurement agreement pursuant to which
DISH Network has the right, but not the obligation, to engage us to manage the process of procuring new
satellite capacity for DISH Network. The satellite procurement agreement has a two year term expiring on
January 1, 2010. The fees for the services to be provided under the satellite procurement agreement are
equal to our cost plus a fixed margin, which varies depending on the nature of the services provided.
DISH Network may terminate the satellite procurement agreement for any reason upon sixty days prior
written notice. We and DISH Network have agreed that following January 1, 2010 DISH Network will
continue to have the right, but not the obligation, to engage us to manage the process of procuring new
satellite capacity for DISH Network for a one-year period and for successive one-year periods thereafter;
however, DISH Network may terminate these services upon sixty days prior written notice.
Services Agreement. We entered into a services agreement pursuant to which DISH Network has the right,
but not the obligation, to receive logistics, procurement and quality assurance services from us. The fees
for the services provided under this services agreement are equal to our cost plus a fixed margin, which
varies depending on the nature of the services provided. This agreement has a term of two years ending on
January 1, 2010. DISH Network may terminate the services agreement with respect to a particular service
for any reason upon sixty days prior written notice. We and DISH Network have agreed that following
January 1, 2010 DISH Network will continue to have the right, but not the obligation, to receive from us
the services previously provided under the services agreement for a one-year period and for successive one-year periods thereafter; however, DISH Network may terminate these services upon sixty days prior written
notice.
Transition Services Agreement. We entered into a transition services agreement with DISH Network
pursuant to which 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, legal, accounting
and tax, and other support services. The fees for the services provided under the transition services
agreement are equal to our cost plus a fixed margin, which varies depending on the nature of the services
provided. The transition services agreement has a term of two years, ending on January 1, 2010. We may
terminate the transition services agreement with respect to a particular service for any reason upon thirty
days prior written notice. We and DISH Network have agreed that following January 1, 2010 we will
continue to have the right, but not the obligation, to receive certain of the services previously provided by
DISH Network under the transition services agreement for a one-year period and for successive one-year
periods thereafter; however, we may terminate these services upon sixty days prior written notice.
Tivo. Because both we and DISH Network are defendants in the Tivo lawsuit, we and DISH Network are
jointly and severally liable to Tivo for any final damages and sanctions that may be awarded by the Court.
DISH Network has agreed that it is obligated under the agreements entered into in connection with the
Spin-off to indemnify us for substantially all liability arising from this lawsuit. We have agreed to
contribute an amount equal to our $5 million intellectual property liability limit under the Receiver
Agreement. We and DISH Network have further agreed that our $5 million contribution would not exhaust
our liability to DISH Network for other intellectual property claims that may arise under the Receiver
Agreement. Therefore, during the three months ended June 30, 2009, we recorded a charge included in
General and administrative expenses - DISH Network on our Condensed Statement of Operations and
Comprehensive Income (Loss) of $5 million to reflect this contribution. We and DISH Network also
agreed that we would each be entitled to joint ownership of, and a cross-license to use, any intellectual
property developed in connection with any potential new alternative technology.
54
PART II OTHER INFORMATION Continued
Item 6. EXHIBITS
(a) Exhibits.
|
|
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10.1*
|
|
Amended and Restated EchoStar Corporation 2008 Employee Stock Purchase Plan
(incorporated by reference to the Definitive Proxy Statement on Form 14 filed on
March 31, 2009, Commission File No. 001-33807). |
|
|
|
10.2*
|
|
Amended and Restated EchoStar Corporation 2008 Stock Incentive Plan (incorporated
by reference to the Definitive Proxy Statement on Form 14 filed on March 31,
2009, Commission File No. 001-33807). |
|
|
|
10.3*
|
|
Amended and Restated EchoStar Corporation 2008 Non-Employee Director Stock Option
Plan (incorporated by reference to the Definitive Proxy Statement on Form 14
filed on March 31, 2009, Commission File No. 001-33807). |
|
|
|
31.1o
|
|
Section 302 Certification by Chairman and Chief Executive Officer. |
|
|
|
31.2o
|
|
Section 302 Certification by Executive Vice President and Chief Financial Officer. |
|
|
|
32.1o
|
|
Section 906 Certification by Chairman and Chief Executive Officer. |
|
|
|
32.2o
|
|
Section 906 Certification by Executive Vice President and Chief Financial Officer. |
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|
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o |
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Filed herewith. |
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* |
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Incorporated by reference. |
55
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
|
|
|
|
Charles W. Ergen |
|
|
|
Chairman, President and Chief Executive Officer
(Duly Authorized Officer) |
|
|
|
|
|
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By: |
/s/ Bernard L. Han
|
|
|
|
Bernard L. Han |
|
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
|
|
Date: August 10, 2009
56