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, 2008. |
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO . |
Commission File Number: 001-33807
EchoStar Corporation
(Exact name of registrant as specified in its charter)
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Nevada
(State or other jurisdiction of incorporation or organization)
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26-1232727
(I.R.S. Employer Identification No.) |
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90 Inverness Circle E.
Englewood, Colorado
(Address of principal executive offices)
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80112
(Zip code) |
(303) 706-4000
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of July 25, 2008, the registrants outstanding common stock consisted of 42,243,376 shares of
Class A common stock and 47,687,039 shares of Class B common stock.
PART I FINANCIAL INFORMATION
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995 throughout this report. Whenever you read a statement that is not simply a statement
of historical fact (such as when we describe what we believe, intend, plan, estimate,
expect or anticipate will occur and other similar statements), you must remember that our
expectations may not be achieved, even though we believe they are reasonable. We do not guarantee
that any future transactions or events described herein will happen as described or that they will
happen at all. You should read this report completely and with the understanding that actual
future results may be materially different from what we expect. Whether actual events or results
will conform with our expectations and predictions is subject to a number of risks and
uncertainties. The risks and uncertainties include, but are not limited to, the following:
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We may not realize the potential benefits that we expect from our separation
(Spin-off) from DISH Network including the ability to market our products and services to
entities that are competitors of DISH Network. Certain of these benefits depend upon
market acceptance of our separation from DISH Network which we cannot predict and which may
be affected by significant cross-ownership by our Chairman and Chief Executive Officer as
well as interlocks between management and the board of directors of us and DISH Network. |
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We will incur significant costs as a newly independent company, which may exceed our
estimates. There will also be negative effects arising from our separation from DISH
Network, including loss of access to its financial resources. |
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We currently depend on DISH Network for substantially all of our revenue, and the loss
of, or a significant reduction in orders from, or a decrease in selling prices of set-top
boxes, transponder leasing, digital broadcast operations and/or other services to DISH
Network would significantly reduce our revenue and adversely impact our results of
operations. Many of our agreements with DISH Network for these services expire on January
1, 2010 and there can be no assurance that we will be able to renew these agreements on
substantially similar terms. In addition, a second customer, Bell ExpressVu, accounts for
a majority of our revenue that is not from DISH Network. |
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We expect that for the foreseeable future, DISH Network will continue to be the primary
source of revenue for each of our principle businesses. Therefore, weaknesses in the
economy and other factors adversely affecting DISH Network could indirectly have an adverse
impact on us. |
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We currently have substantial unused satellite capacity. Future costs associated with
this excess capacity will negatively impact our margins if we do not generate revenue to
offset these costs. In addition, because a substantial portion of the capacity of each of
our AMC-15 and AMC-16 satellites remains without long-term contracts for their capacity,
there is a significant risk that in the future, in addition to reporting lower than
expected revenues and profitability, we could be required to record a substantial
impairment charge relating to one or both of these satellites. We currently estimate that
these potential charges could aggregate up to approximately $200 million, which, if
incurred, would have a material adverse effect on our results of operations and financial
position. |
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We have suspended construction of the CMBStar satellite and in future periods may
conclude it appropriate to record an impairment charge. During April 2008, we notified the
State Administration of Radio, Film and Television of China that we were suspending
construction of the CMBStar satellite pending, among other things, further analysis
relating to efforts to meet the satellite performance criteria and/or confirmation that
alternative performance criteria would be acceptable. We are currently evaluating
potential alternative uses for the CMBStar satellite. If these alternative uses are unable
to recover the carrying value invested to date in the satellite, we may be required to
record an impairment charge in a future period relating to the CMBStar satellite. We
currently estimate that this potential charge could be as much as $100 million, which would
have a material adverse effect on our results of operations and financial position. |
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Our 2007 combined financial information included in this report is not indicative of our
future financial position, future results of operations or future cash flows, nor does it
necessarily reflect what our financial position, results of operations or cash flows would
have been as a separate company during the periods prior to the Spin-off that are presented
in this report. We were not profitable during 2007, as our operations have historically
been dedicated primarily to support DISH Network and we provided our products and services
to DISH Network at cost. |
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We may face actual or perceived conflicts of interest with DISH Network in a number of
areas relating to our past, ongoing and future relationships, including (i)
cross-officerships, directorships and stock ownership, (ii) intercompany transactions,
(iii) intercompany agreements, and (iv) business opportunities. |
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Our ability to increase our income or to generate additional revenues will depend in
part on our ability to grow our business. This 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 pricing of financing, particularly in the high yield debt and
leveraged credit markets, may significantly constrain our ability to obtain financing to
support our growth initiatives. These developments in the credit markets may have a
significant effect on our cost of financing and our liquidity position and may, as a
result, cause us to defer or abandon business strategies that we would otherwise pursue if
financing were available on acceptable terms. |
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We may use a significant portion of our existing cash and marketable securities to fund
stock buyback programs. Our board of directors has approved a program in which we may
repurchase up to $1.0 billion of our Class A common stock during 2008. There can be no
assurance however, that we will repurchase any of our common stock, which will depend on
our views of the relative benefits of alternative uses of our capital. |
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Our relationship with DISH Network could be terminated or substantially curtailed with
little or no advance notice, particularly if DISH Network enters into a business
combination transaction, or if Mr. Ergen no longer controls a majority of the voting power
of DISH Network or of us. Any material reduction in our sales due to a change in control
of DISH Network would have a significant material adverse effect on our business and
financial position. |
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Our future success may depend on our ability to identify and successfully exploit
opportunities to acquire other businesses or technologies to complement, enhance or expand
our current business or products or otherwise offer us growth opportunities. We may not be
able to pursue these growth opportunities successfully. |
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We have entered into certain strategic transactions and investments, and we may increase
our strategic investment activity in the United States and in international markets. These
investments, which we believe could become substantial over time, involve a high degree of
risk, are concentrated in a few companies and could expose us to significant financial
losses if the underlying ventures are not successful. These investment opportunities may
also cause us to defer or suspend share repurchases. |
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Our business relies on intellectual property, some of which is owned by third parties,
the patents and proprietary rights of which we may inadvertently infringe. We may be
required to cease developing or marketing infringing products, to obtain licenses from the
holders of the intellectual property at a material cost, or to redesign those products in
such a way as to avoid infringing the patent claims of others. |
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We depend on sales of set-top boxes for the majority of our revenue, and if sales of our
set-top boxes decline, our business and financial position will suffer. |
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Our commercial success in selling our set-top boxes to cable operators and other
providers of digital television depends significantly on our ability to obtain licenses to
use the conditional access systems deployed by these operators in our set-top boxes. The
owners of these conditional access systems are in many cases competitors of ours. There
can be no assurance we will be able to obtain such licenses on acceptable terms or at all. |
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In order to grow our set-top box revenue and business and to build a large customer
base, we believe we will be required to increase our sales of set-top boxes in
international markets. To succeed in expanding these sales efforts, we believe we must
develop and manage new relationships with cable operators and other providers of digital
television in international markets. |
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The future growth of our satellite and transponder leasing, digital broadcast
operations, professional services and related businesses, will depend on a number of
factors, including: the level of market acceptance and demand for these services, our
ability to introduce new services that meet market demand, our ability to develop
relationships with and make sales of these services to cable operators and other providers
of digital television that are competitors of our former parent, DISH Network, our ability
to maintain the health, capacity and control of our existing satellite network, the
effectiveness of our competitors in developing and offering similar services and products
and our ability to hire additional sales personnel to development and manage new customer
relationships. |
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Our set-top boxes are extremely complex and can have defects in design, manufacture or
associated software. We could incur significant expenses, lost revenue, and reputational
harm if we fail to detect or effectively address such issues through design, testing or
warranty repairs. |
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We obtain many components for our set-top boxes from a single supplier or a limited
group of suppliers. Our reliance on a single or limited group of suppliers, particularly
foreign suppliers, and our increasing reliance on subcontractors, involves several risks.
These risks include a potential inability to obtain an adequate supply of required
components, and reduced control over pricing, quality, and timely delivery of these
components. |
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Future demand for our set-top boxes will depend significantly on the growing market
acceptance of high definition television, or HDTV. The effective delivery of HDTV will
depend on digital television operators developing and building infrastructure to provide
wide-spread HDTV programming. |
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If we are unsuccessful in our appeal to the United States Supreme Court in the Tivo
case, or in defending against Tivos motion for contempt or any subsequent claims that our
alternative technology infringes Tivos patent, we could be prohibited from distributing
DVRs, or be required to modify or eliminate certain user-friendly DVR features that we
currently offer to consumers. In that event, we would be at a significant disadvantage to
our competitors who could offer this functionality. We could also have to pay substantial
additional damages. |
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The satellite services industry is highly competitive and is characterized by long-term
leases and high switching costs. It will be difficult to displace customers from their
current relationships with our competitors and we may face competition from others in the
future. |
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Satellites are subject to significant operational risks while in orbit. While we
believe that our satellite fleet is generally in good condition, certain satellites in our
fleet have experienced malfunctions or anomalies, some of which have had a significant
adverse impact on their commercial operation. There can be no assurance that we can
recover critical transmission capacity in the event one or more of our in-orbit satellites
were to fail. Therefore, the loss of a satellite or other satellite malfunctions or
anomalies could have a material adverse effect on us. |
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We are subject to comprehensive governmental regulation by the FCC for our domestic
satellite operations. We are also regulated by other federal agencies, state and local
authorities and the International Telecommunication Union. Domestic and international
regulations regarding the licensing, authorization and operations of satellite
communications providers may restrict our satellite services operations. |
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We do not anticipate carrying insurance for any of the in-orbit satellites that we will
own, and we will bear the risk of any failures in our in-orbit satellites. Because we bear
this risk, failures in our in-orbit satellites could have a material adverse effect on our
results of operations and financial position. |
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We may face other risks described from time to time in periodic and current reports we
file with the Securities and Exchange Commission (SEC). |
All cautionary statements made herein should be read as being applicable to all forward-looking
statements wherever they appear. In this connection, investors should consider the risks described
herein and should not place undue reliance on any forward-looking statements. We assume no
responsibility for updating forward-looking information contained or incorporated by reference
herein or in other reports we file with the SEC.
In this report, the words EchoStar, the Company, we, our and us refer to EchoStar
Corporation and its subsidiaries, unless the context otherwise requires. DISH Network refers to
DISH Network Corporation and its subsidiaries, unless the context otherwise requires.
iii
Item 1. FINANCIAL STATEMENTS
ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
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As of |
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June 30, |
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December 31, |
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2008 |
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2007 |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
802,149 |
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$ |
41,082 |
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Marketable investment securities |
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260,164 |
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491,185 |
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Trade accounts receivable DISH Network |
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278,478 |
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Trade accounts receivable Other, net of allowance for uncollectible
accounts of $34 and $51, respectively |
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54,584 |
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34,154 |
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Inventories, net |
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59,496 |
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21,043 |
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Other current assets |
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46,354 |
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23,290 |
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Total current assets |
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1,501,225 |
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610,754 |
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Restricted cash and marketable investment securities |
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2,586 |
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Property and equipment, net of accumulated depreciation
of $1,325,595 and $32,857, respectively |
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1,477,537 |
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213,837 |
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FCC authorizations |
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108,531 |
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42,873 |
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Intangible assets, net |
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197,926 |
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71,646 |
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Goodwill |
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247,856 |
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248,428 |
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Marketable and non-marketable investment securities |
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471,863 |
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59,160 |
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Other noncurrent assets, net |
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66,757 |
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14,212 |
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Total assets |
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$ |
4,074,281 |
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$ |
1,260,910 |
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Liabilities and Stockholders Equity (Deficit) |
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Current Liabilities: |
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Trade accounts payable DISH Network |
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$ |
51,134 |
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$ |
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Trade accounts payable Other |
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184,125 |
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22,786 |
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Deferred revenue and other |
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2,107 |
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4,055 |
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Accrued expenses DISH Network |
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|
966 |
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Accrued expenses and other |
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66,576 |
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22,191 |
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Current portion of capital lease obligations, mortgages and other notes payable |
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49,724 |
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1,365 |
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Total current liabilities |
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354,632 |
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50,397 |
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Long-term obligations, net of current portion: |
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Capital lease obligations, mortgages and other notes payable, net of current portion |
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323,590 |
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2,344 |
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Deferred tax liabilities |
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144,628 |
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651 |
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Other long-term liabilities |
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840 |
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Total long-term obligations, net of current portion |
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469,058 |
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2,995 |
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Total liabilities |
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823,690 |
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53,392 |
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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,
42,241,956 shares and no shares issued and outstanding, respectively |
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42 |
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Class B common stock, $.001 par value, 800,000,000 shares authorized,
47,687,039 shares and no shares issued and outstanding, respectively |
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48 |
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Class C common stock, $.001 par value, 800,000,000 shares authorized,
none issued and outstanding |
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Class D common stock, $.001 par value, 800,000,000 shares authorized,
none issued and outstanding |
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Additional paid-in capital |
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3,242,701 |
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Accumulated other comprehensive income (loss) |
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(45,725 |
) |
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66,696 |
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Accumulated earnings (deficit) |
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53,525 |
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Owners net investment |
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1,140,822 |
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Total stockholders equity (deficit) |
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3,250,591 |
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1,207,518 |
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Total liabilities and stockholders equity (deficit) |
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$ |
4,074,281 |
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$ |
1,260,910 |
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The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
1
ECHOSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
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For the Three Months |
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For the Six Months |
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Ended June 30, |
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Ended June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenue: |
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Equipment sales DISH Network |
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$ |
301,039 |
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$ |
274,973 |
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$ |
672,733 |
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$ |
673,813 |
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Equipment sales other |
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76,951 |
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|
53,644 |
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151,773 |
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|
|
98,752 |
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Satellite services, digital broadcast operations and other services DISH Network |
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|
93,019 |
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185,489 |
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Satellite and other services other |
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12,331 |
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1,972 |
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27,916 |
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5,787 |
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Total revenue |
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483,340 |
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|
|
330,589 |
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|
|
1,037,911 |
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|
778,352 |
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Costs and Expenses: |
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Cost of sales equipment |
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|
317,483 |
|
|
|
310,310 |
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|
|
699,908 |
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|
|
738,009 |
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Satellite services, digital broadcast operations and other cost of sales |
|
|
57,699 |
|
|
|
925 |
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|
|
110,215 |
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|
|
4,259 |
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Research and development expense |
|
|
13,899 |
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|
|
14,923 |
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|
|
27,565 |
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|
|
29,044 |
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Selling, general and administrative expenses |
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26,691 |
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|
|
5,931 |
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|
|
51,670 |
|
|
|
12,512 |
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General and administrative expenses DISH Network |
|
|
6,942 |
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|
|
10,574 |
|
|
|
13,296 |
|
|
|
23,079 |
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Depreciation and amortization (Note 11) |
|
|
63,015 |
|
|
|
1,414 |
|
|
|
123,985 |
|
|
|
2,909 |
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Total costs and expenses |
|
|
485,729 |
|
|
|
344,077 |
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|
|
1,026,639 |
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|
|
809,812 |
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Operating income (loss) |
|
|
(2,389 |
) |
|
|
(13,488 |
) |
|
|
11,272 |
|
|
|
(31,460 |
) |
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Other Income (Expense): |
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|
|
|
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Interest income |
|
|
19,444 |
|
|
|
568 |
|
|
|
40,813 |
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|
|
942 |
|
Interest expense |
|
|
(8,278 |
) |
|
|
(270 |
) |
|
|
(16,561 |
) |
|
|
(537 |
) |
Casualty loss expense (Note 6) |
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|
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|
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(12,799 |
) |
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Unrealized gains (losses) due to changes in the fair value of certain debt and equity investments, net |
|
|
(19,643 |
) |
|
|
|
|
|
|
(19,643 |
) |
|
|
|
|
Other (Note 5) |
|
|
64,486 |
|
|
|
(602 |
) |
|
|
61,201 |
|
|
|
(766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
56,009 |
|
|
|
(304 |
) |
|
|
53,011 |
|
|
|
(361 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
53,620 |
|
|
|
(13,792 |
) |
|
|
64,283 |
|
|
|
(31,821 |
) |
Income tax (provision) benefit, net (Note 9) |
|
|
(5,796 |
) |
|
|
(997 |
) |
|
|
(10,758 |
) |
|
|
(1,472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
47,824 |
|
|
$ |
(14,789 |
) |
|
$ |
53,525 |
|
|
$ |
(33,293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted net income (loss) per share Class A and B common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share weighted-average common shares outstanding |
|
|
89,863 |
|
|
|
89,712 |
|
|
|
89,795 |
|
|
|
89,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share weighted-average common shares outstanding |
|
|
90,261 |
|
|
|
89,712 |
|
|
|
91,285 |
|
|
|
89,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share Class A and B common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) |
|
$ |
0.53 |
|
|
$ |
(0.16 |
) |
|
$ |
0.60 |
|
|
$ |
(0.37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) |
|
$ |
0.53 |
|
|
$ |
(0.16 |
) |
|
$ |
0.59 |
|
|
$ |
(0.37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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, |
|
|
|
2008 |
|
|
2007 |
|
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
53,525 |
|
|
$ |
(33,293 |
) |
Adjustments to reconcile net income (loss) to net cash flows from operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
123,985 |
|
|
|
2,909 |
|
Equity in losses (earnings) of affiliates |
|
|
2,696 |
|
|
|
2,668 |
|
Realized and unrealized losses (gains) on investments |
|
|
(47,162 |
) |
|
|
(4,533 |
) |
Non-cash, stock-based compensation recognized |
|
|
11,021 |
|
|
|
1,989 |
|
Deferred tax expense (benefit) |
|
|
(17,628 |
) |
|
|
6 |
|
Other, net |
|
|
12,096 |
|
|
|
292 |
|
Change in noncurrent assets |
|
|
(13,904 |
) |
|
|
|
|
Changes in current assets and current liabilities, net |
|
|
(128,764 |
) |
|
|
267 |
|
|
|
|
|
|
|
|
Net cash flows from operating activities |
|
|
(4,135 |
) |
|
|
(29,695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
Purchases of marketable investment securities |
|
|
(97,754 |
) |
|
|
|
|
Sales and maturities of marketable investment securities |
|
|
416,443 |
|
|
|
|
|
Purchases of property and equipment |
|
|
(92,931 |
) |
|
|
(84,983 |
) |
Proceeds from insurance settlement |
|
|
40,750 |
|
|
|
|
|
Change in restricted cash and marketable investment securities |
|
|
564 |
|
|
|
|
|
Purchase of strategic investments included in noncurrent assets and other |
|
|
(133,692 |
) |
|
|
(40,000 |
) |
Other |
|
|
(86 |
) |
|
|
(261 |
) |
|
|
|
|
|
|
|
Net cash flows from investing activities |
|
|
133,294 |
|
|
|
(125,244 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
Repayment of capital lease obligations, mortgages and other notes payable |
|
|
(23,051 |
) |
|
|
|
|
Contribution of cash and cash equivalents from DISH Network in connection with the Spin-off (Note 1) |
|
|
649,784 |
|
|
|
|
|
Changes in advances from owner |
|
|
|
|
|
|
153,223 |
|
Net proceeds from Class A common stock options exercised and Class A common stock issued
under the Employee Stock Purchase Plan |
|
|
5,175 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities |
|
|
631,908 |
|
|
|
153,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
761,067 |
|
|
|
(1,716 |
) |
Cash and cash equivalents, beginning of period |
|
|
41,082 |
|
|
|
29,621 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
802,149 |
|
|
$ |
27,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
16,065 |
|
|
$ |
27 |
|
|
|
|
|
|
|
|
Cash received for interest |
|
$ |
9,783 |
|
|
$ |
591 |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
19,978 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Vendor financing |
|
$ |
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 |
|
$ |
2,085,747 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
3
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Business Activities
Principal Business
The spin-off by DISH Network Corporation (DISH Network) of technology and infrastructure assets
to EchoStar Corporation (EchoStar, the Company, we, and/or us) was completed on January 1,
2008 through a distribution of 100% of the common stock of EchoStar to the holders of DISH
Networks common stock (the Spin-off). The Spin-off was made pursuant to a separation agreement
by which DISH Network contributed to EchoStar the subsidiaries and assets that operated DISH
Networks set-top box business, satellite services, digital broadcast operations, certain real
estate and other assets and liabilities. The Company has received a private letter ruling from the
Internal Revenue Service and an opinion from tax counsel indicating that the Spin-off was tax free
to the stockholders of DISH Network and EchoStar.
The EchoStar business consists of the following segments:
|
|
|
Equipment sales and digital broadcast operations Equipment sales include the sales of
set-top boxes and related components including Slingboxes to DISH Network and international
customers. Digital broadcast operations include satellite uplinking/downlinking,
transmission services, signal processing, conditional access management, telemetry,
tracking and control, and other services provided primarily to DISH Network. |
|
|
|
|
Satellite Services Satellite services consists principally of transponder leasing
provided primarily to DISH Network, and secondarily to other customers. |
The table below summarizes the assets and liabilities which were contributed to us in connection
with the Spin-off in addition to the assets included in our historical financial statements. The
contribution was accounted for at DISH Networks historical cost given the nature of the
distribution.
4
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
|
|
|
|
|
|
|
January 1, 2008 |
|
|
|
(In thousands) |
|
Assets |
|
|
|
|
Current Assets: |
|
|
|
|
Cash and cash equivalents |
|
$ |
649,784 |
|
Marketable investment securities |
|
|
350,216 |
|
Trade accounts receivable, net |
|
|
3,900 |
|
Inventories, net |
|
|
9,957 |
|
Other current assets |
|
|
9,061 |
|
|
|
|
|
Total current assets |
|
|
1,022,918 |
|
Restricted cash and marketable investment securities |
|
|
3,150 |
|
Property and equipment, net |
|
|
1,302,767 |
|
FCC authorizations |
|
|
123,121 |
|
Intangible assets, net |
|
|
142,898 |
|
Other noncurrent assets, net |
|
|
20,335 |
|
|
|
|
|
Total assets |
|
$ |
2,615,189 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
Current Liabilities: |
|
|
|
|
Trade accounts payable |
|
$ |
|
|
Deferred revenue and other accrued expenses |
|
|
11,586 |
|
Current portion of capital lease obligations, mortgages and other notes payable |
|
|
39,168 |
|
|
|
|
|
Total current liabilities |
|
|
50,754 |
|
|
|
|
|
|
|
|
|
|
Long-term obligations, net of current portion: |
|
|
|
|
Capital lease obligations, mortgages and other notes payable, net of current portion |
|
|
339,542 |
|
Deferred tax liabilities |
|
|
139,146 |
|
|
|
|
|
Total long-term obligations, net of current portion |
|
|
478,688 |
|
|
|
|
|
Total liabilities |
|
|
529,442 |
|
|
|
|
|
|
|
|
|
|
Net assets contributed |
|
$ |
2,085,747 |
|
|
|
|
|
2. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States (GAAP) and with the
instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information.
Accordingly, these statements do not include all of the information and notes required for complete
financial statements. In our opinion, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Certain prior year amounts have
been reclassified to conform to the current year presentation. For further information, refer to
the Consolidated Financial Statements and notes thereto included in our Annual Report on Form
10-K/A for the year ended December 31, 2007 (2007 10-K/A).
The unaudited Condensed Consolidated Financial Statements in this quarterly report for the periods
presented prior to the Spin-off are presented on a combined basis and principally represent the
digital set-top box business and other net assets transferred to us as part of the Spin-off. The
assets and liabilities presented have been reflected on a historical basis, as prior to the
Spin-off such assets and liabilities were 100% owned by DISH Network. Our historical combined
financial statements do not include the satellites, digital broadcast operations assets, certain
real estate and other assets and related liabilities that were contributed to us by DISH Network in
the Spin-off. Also, the combined financial statements for the periods presented prior to the
Spin-off do not include all of the actual expenses that would have been incurred had EchoStar been
a stand-alone entity during the periods presented and do
5
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
not reflect EchoStars combined results of operations, financial position and cash flows had we
been a stand-alone company during the periods presented. The results of operations and the cash
flows for any interim period are not necessarily indicative of the results that may be expected for
a fiscal year or any other future period.
Principles of Consolidation
We consolidate all majority owned subsidiaries and investments in entities in which we have
controlling influence. For entities that are considered variable interest entities we apply the
provisions of Financial Accounting Standards Board (FASB) Interpretation No. 46R, Consolidation
of Variable Interest Entities An Interpretation of ARB No. 51 (FIN 46R). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses for each reporting period. Estimates are used in accounting for, among other things,
allowances for uncollectible accounts, inventory allowances, warranty obligations, self-insurance
obligations, deferred taxes and related valuation allowances, uncertain tax positions, loss
contingencies, fair values of financial instruments, fair value of options granted under our
stock-based compensation plans, fair value of assets and liabilities acquired in business
combinations, capital leases, asset impairments, useful lives of property, equipment and intangible
assets, and royalty obligations. Actual results may differ from previously estimated amounts, and
such differences may be material to the Condensed Consolidated Financial Statements. Estimates and
assumptions are reviewed periodically, and the effects of revisions are reflected prospectively
beginning in the period they occur.
Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Net income (loss) |
|
$ |
47,824 |
|
|
$ |
(14,789 |
) |
|
$ |
53,525 |
|
|
$ |
(33,293 |
) |
Foreign currency translation adjustments |
|
|
416 |
|
|
|
988 |
|
|
|
(784 |
) |
|
|
856 |
|
Unrealized holding gains (losses) on available-for-sale securities |
|
|
(22,316 |
) |
|
|
1,564 |
|
|
|
(63,653 |
) |
|
|
3,661 |
|
Recognition of previously unrealized (gains) losses on available-for-sale
securities included in net income (loss) |
|
|
(34,716 |
) |
|
|
(3,048 |
) |
|
|
(35,690 |
) |
|
|
(3,048 |
) |
Deferred income tax (expense) benefit |
|
|
3,912 |
|
|
|
|
|
|
|
20,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(4,880 |
) |
|
$ |
(15,285 |
) |
|
$ |
(26,117 |
) |
|
$ |
(31,824 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) presented on the accompanying Condensed
Consolidated Balance Sheets consists of the accumulated net unrealized gains (losses) on
available-for-sale securities and foreign currency translation adjustments, net of deferred taxes.
6
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
|
|
|
|
|
|
|
Accumulated |
|
|
|
Other |
|
|
|
Comprehensive |
|
|
|
Income |
|
|
|
(In thousands) |
|
Balance, December 31, 2007 |
|
$ |
66,696 |
|
Accumulated other comprehensive income
adjustments in connection with the Spin-off |
|
|
(32,779 |
) |
Foreign currency translation |
|
|
(784 |
) |
Change in unrealized holding gains (losses) on available-for-sale securities, net |
|
|
(99,343 |
) |
Deferred income tax (expense) benefit |
|
|
20,485 |
|
|
|
|
|
Balance, June 30, 2008 |
|
$ |
(45,725 |
) |
|
|
|
|
Basic and Diluted Income (Loss) Per Share
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128) requires
entities to present both basic earnings per share (EPS) and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income (loss) by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if
stock options were exercised.
The number of shares presented for the three and six months ended June 30, 2008 represents the
actual weighted-average number of shares outstanding for the period. Prior to January 1, 2008, we
were a wholly-owned subsidiary of DISH Network and had only a nominal number of shares outstanding.
Accordingly for all periods prior to the completion of the Spin-off on January 1, 2008, basic and
diluted earnings per share are computed using EchoStars shares outstanding as of January 1, 2008.
The potential dilution from stock options exercisable into common stock was computed using the
treasury stock method based on the average market value of our Class A common stock. The following
table reflects the basic and diluted weighted-average shares outstanding used to calculate basic
and diluted earnings per share. Earnings per share amounts for all periods are presented below in
accordance with the requirements of SFAS 128.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic net income (loss) per share Net income (loss) |
|
$ |
47,824 |
|
|
$ |
(14,789 |
) |
|
$ |
53,525 |
|
|
$ |
(33,293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per common share
weighted-average common shares outstanding |
|
|
89,863 |
|
|
|
89,712 |
|
|
|
89,795 |
|
|
|
89,712 |
|
Dilutive impact of options outstanding |
|
|
398 |
|
|
|
|
|
|
|
1,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share
weighted-average diluted common shares outstanding |
|
|
90,261 |
|
|
|
89,712 |
|
|
|
91,285 |
|
|
|
89,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share Class A and B common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) |
|
$ |
0.53 |
|
|
$ |
(0.16 |
) |
|
$ |
0.60 |
|
|
$ |
(0.37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) |
|
$ |
0.53 |
|
|
$ |
(0.16 |
) |
|
$ |
0.59 |
|
|
$ |
(0.37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008 and 2007, there were options to purchase 0.6 million shares of Class A common
stock outstanding not included in the above denominator as their effect is antidilutive.
7
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Vesting of options and rights to acquire shares of our Class A common stock granted pursuant to our
long-term incentive plans is contingent upon meeting certain long-term goals which have not yet
been achieved. As a consequence, the following are not included in the diluted EPS calculation:
|
|
|
|
|
|
|
As of |
|
|
|
June 30, 2008 |
|
|
|
(In thousands) |
|
Performance based options |
|
|
1,913 |
|
Restricted performance units |
|
|
115 |
|
|
|
|
|
Total |
|
|
2,028 |
|
|
|
|
|
Fair Value Measurements
Effective January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS 157), for all financial instruments and non-financial instruments
accounted for at fair value on a recurring basis. SFAS 157 establishes a new framework for
measuring fair value and expands related disclosures. Broadly, the SFAS 157 framework requires
fair value to be determined based on the exchange price that would be received for an asset or paid
to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants. SFAS 157 establishes market or
observable inputs as the preferred source of values, followed by unobservable inputs or assumptions
based on hypothetical transactions in the absence of market inputs.
|
|
|
Level 1, defined as observable inputs being quoted prices in active markets for
identical assets; |
|
|
|
|
Level 2, defined as observable inputs including quoted prices for similar assets; and |
|
|
|
|
Level 3, defined as unobservable inputs in which little or no market data exists,
therefore requiring assumptions based on the best information available. |
Our assets measured at fair value on a recurring basis were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable investment securities |
|
$ |
260,164 |
|
|
$ |
254,536 |
|
|
$ |
5,628 |
|
|
$ |
|
|
Marketable and non-marketable investment securities |
|
|
416,055 |
|
|
|
353,895 |
|
|
|
|
|
|
|
62,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
676,219 |
|
|
$ |
608,431 |
|
|
$ |
5,628 |
|
|
$ |
62,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Level 3 instruments are as follows (in thousands):
|
|
|
|
|
|
|
Level 3 |
|
|
|
Investment |
|
Other Investment Securities |
|
Securities |
|
Balance as of January 1, 2008 |
|
$ |
|
|
Net realized/unrealized gains/(losses) included in earnings |
|
|
(6,143 |
) |
Net realized/unrealized gains/(losses) included in other comprehensive income |
|
|
|
|
Purchases, issuances and settlements, net |
|
|
68,303 |
|
|
|
|
|
Balance as of June 30, 2008 |
|
$ |
62,160 |
|
|
|
|
|
8
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
New Accounting Pronouncements
Revised Business Combinations
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R (revised
2007), Business Combinations (SFAS 141R). SFAS 141R replaces SFAS 141 and establishes
principles and requirements for how an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, including goodwill, the liabilities assumed and any
non-controlling interest in the acquiree. SFAS 141R also establishes disclosure requirements to
enable users of the financial statements to evaluate the nature and financial effects of the
business combination. This statement is effective for fiscal years beginning after December 15,
2008. We do not expect the adoption of SFAS 141R to have a material impact on our financial
position or results of operations.
Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements (SFAS 160). SFAS 160 establishes
accounting and reporting standards for ownership interests in subsidiaries held by parties other
than the parent, the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parents ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes
reporting requirements to clearly identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. This standard is effective for fiscal years beginning
after December 15, 2008. We are currently evaluating the impact the adoption of SFAS 160 will have
on our financial position and results of operations.
3. Stock-Based Compensation
Stock Incentive Plans
In connection with the Spin-off, as provided in DISH Networks existing stock incentive plans and
consistent with the Spin-off exchange ratio, each DISH Network stock option was converted into two
options as follows:
|
|
an adjusted DISH Network stock option for the same number of shares that were exercisable
under the original DISH Network stock option, with an exercise price equal to the exercise
price of the original DISH Network stock option multiplied by 0.831219. |
|
|
|
a new EchoStar stock option for one-fifth of the number of shares that were exercisable
under the original DISH Network stock option, with an exercise price equal to the exercise
price of the original DISH Network stock option multiplied by 0.843907. |
Similarly, each holder of DISH Network restricted stock units retained his or her DISH Network
restricted stock units and received one EchoStar restricted stock unit for every five DISH Network
restricted stock units that they held.
Consequently, the fair value of the DISH Network stock award and the new EchoStar stock award
immediately following the Spin-off was equivalent to the fair value of such stock award immediately
prior to the Spin-off.
We maintain stock incentive plans to attract and retain officers, directors and key employees.
Awards under these plans include both performance and non-performance based equity incentives. As
of June 30, 2008, we had outstanding under our plans options to acquire 6.2 million shares of our
Class A common stock and 0.3 million restricted stock awards. Stock options granted through June
30, 2008 were granted with exercise prices equal to or greater than the market value of our Class A common stock at the date of grant and with a maximum
term of ten years. Historically, our options have been subject to vesting, typically at the rate
of 20% to 25% per year, however,
9
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
some options have been granted with immediate vesting. As of June 30, 2008, we had 9.5 million
shares of our Class A common stock available for future grant under our stock incentive plans.
As of June 30, 2008, the following stock incentive awards were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008 |
|
|
|
|
|
|
EchoStar Awards |
|
Dish Network Awards |
|
|
|
|
|
|
Restricted |
|
|
|
|
|
Restricted |
|
|
Stock |
|
Stock |
|
Stock |
|
Stock |
Stock Incentive Awards Outstanding |
|
Options |
|
Units |
|
Options |
|
Units |
Held by EchoStar employees |
|
|
3,012,663 |
|
|
|
237,656 |
|
|
|
5,578,570 |
|
|
|
1,188,332 |
|
Held by DISH Network employees |
|
|
3,214,186 |
|
|
|
93,314 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,226,849 |
|
|
|
330,970 |
|
|
|
5,578,570 |
|
|
|
1,188,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We are responsible for fulfilling all stock incentive awards related to EchoStar common stock and
DISH Network is responsible for fulfilling all stock incentive awards related to DISH Network
common stock regardless of whether such stock incentive awards are held by our or DISH Networks
employees. Notwithstanding the foregoing, based on the requirements of SFAS 123R, our non-cash,
stock-based compensation expense, resulting from awards outstanding at the Spin-off date, is based
on the stock incentive awards held by our employees regardless of whether such awards were issued
by EchoStar or DISH Network. Accordingly, non-cash, stock-based compensation that we expense with
respect to DISH Network stock incentive awards is included in Additional paid-in capital on our
Condensed Consolidated Balance Sheet.
Stock Award Activity
Our stock option activity (including performance and non-performance based options) for the six
months ended June 30, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
Ended June 30, 2008 |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
Options |
|
Exercise Price |
Total options outstanding, beginning of period |
|
|
4,182,755 |
|
|
$ |
22.96 |
|
Granted |
|
|
2,403,500 |
|
|
|
29.55 |
|
Exercised |
|
|
(188,838 |
) |
|
|
24.66 |
|
Forfeited and cancelled |
|
|
(170,568 |
) |
|
|
27.73 |
|
|
|
|
|
|
|
|
|
|
Total options outstanding, end of period |
|
|
6,226,849 |
|
|
|
25.32 |
|
|
|
|
|
|
|
|
|
|
Performance based options outstanding, end of period * |
|
|
1,912,600 |
|
|
|
16.67 |
|
|
|
|
|
|
|
|
|
|
Total options exercisable at end of period |
|
|
1,250,452 |
|
|
|
29.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
These options, which are included in the caption Total options outstanding, end of period,
were issued pursuant to two separate long-term, performance-based stock incentive plans, which are
discussed below. Vesting of these options is contingent upon meeting certain long-term goals which
management has determined are not probable as of June 30, 2008. |
We realized $1 million of tax benefits from stock options exercised during the six months ended
June 30, 2008. Based on the closing market price of our Class A common stock on June 30, 2008, the
aggregate intrinsic value of our outstanding stock options was $33 million. Of that amount,
options with an aggregate intrinsic value of $5 million were exercisable at the end of the period.
10
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Our restricted stock award activity (including performance and non-performance based options) for
the six months ended June 30, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
Ended June 30, 2008 |
|
|
|
|
|
|
Weighted- |
|
|
Restricted |
|
Average |
|
|
Stock |
|
Grant Date |
|
|
Awards * |
|
Fair Value |
Total restricted stock awards outstanding, beginning of period |
|
|
343,386 |
|
|
$ |
29.69 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(4,000 |
) |
|
|
25.45 |
|
Forfeited and cancelled |
|
|
(8,416 |
) |
|
|
31.84 |
|
|
|
|
|
|
|
|
|
|
Total restricted stock awards outstanding, end of period |
|
|
330,970 |
|
|
|
29.69 |
|
|
|
|
|
|
|
|
|
|
Restricted performance units outstanding, end of period * |
|
|
114,970 |
|
|
|
26.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
These restricted performance units, which are included in the caption Total restricted stock
awards outstanding, end of period, were issued pursuant to a long-term, performance-based stock
incentive plan, which is discussed below. Vesting of these restricted performance units is
contingent upon meeting a long-term company goal which management has determined is not probable as
of June 30, 2008. |
Long-Term Performance-Based Plans
We have two long-term, performance-based stock incentive plans, the 1999 LTIP and the 2005 LTIP.
The 1999 LTIP provided stock options to key employees which vest over five years at the rate of 20%
per year. Exercise of the options is also contingent on achieving a company-specific goal in
relation to an industry-related metric prior to December 31, 2008. The 2005 LTIP provides stock
options and restricted performance units, either alone or in combination, which vest over seven
years at the rate of 10% per year during the first four years, and at the rate of 20% per year
thereafter. Exercise of the options is also subject to a performance condition that a
company-specific goal is achieved prior to March 31, 2015.
Contingent compensation related to the 1999 LTIP and the 2005 LTIP will not be recorded 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 either of the
goals was not probable as of June 30, 2008, that assessment could change with respect to either
goal at any time. In accordance with SFAS 123R, if all of the awards under each plan were vested
and each goal had been met during the six months ended June 30, 2008, we would have recorded total
non-cash, stock-based compensation expense for our employees as indicated in the table below. If
the goals are met and there are unvested options at that time, the vested amounts would be expensed
immediately on our Condensed Consolidated Statements of Operations, with the unvested portion
recognized ratably over the remaining vesting period. During the six months ended June 30, 2008,
if we had determined each goal was probable, we would have recorded total non-cash, stock-based
compensation expense for our employees as indicated in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Vested Portion |
|
|
|
1999 LTIP |
|
|
2005 LTIP |
|
|
1999 LTIP |
|
|
2005 LTIP |
|
|
|
(In thousands) |
|
DISH Network awards held by EchoStar
employees |
|
$ |
10,470 |
|
|
$ |
18,425 |
|
|
$ |
10,470 |
|
|
$ |
5,105 |
|
EchoStar awards held by EchoStar employees |
|
|
2,126 |
|
|
|
3,741 |
|
|
|
2,126 |
|
|
|
1,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,596 |
|
|
$ |
22,166 |
|
|
$ |
12,596 |
|
|
$ |
6,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Of the 6.2 million options outstanding under our stock incentive plans as of June 30, 2008, the
following options were outstanding pursuant to the 1999 LTIP and the 2005 LTIP:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
June 30, 2008 |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
Long-Term Performance-Based Plans |
|
Stock Options |
|
Exercise Price |
1999 LTIP |
|
|
1,018,600 |
|
|
$ |
8.84 |
|
2005 LTIP |
|
|
894,000 |
|
|
$ |
25.60 |
|
Further, pursuant to the 2005 LTIP, there were also 114,970 outstanding restricted performance
units as of June 30, 2008 with a weighted-average grant date fair value of $26.37. No awards were
granted under the 1999 LTIP or 2005 LTIP during the six months ended June 30, 2008.
Stock-Based Compensation
Total non-cash, stock-based compensation expense, net of related tax effects, for all of our
employees is shown in the following table for the three and six months ended June 30, 2008 and 2007
and was allocated to the same expense categories as the base compensation for such employees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Satellite services, digital broadcast operations and other cost of sales |
|
$ |
108 |
|
|
$ |
|
|
|
$ |
234 |
|
|
$ |
|
|
Research and development expense |
|
|
1,568 |
|
|
|
380 |
|
|
|
3,134 |
|
|
|
809 |
|
Selling, general and administrative expenses |
|
|
3,012 |
|
|
|
234 |
|
|
|
5,874 |
|
|
|
434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-cash, stock based compensation |
|
$ |
4,688 |
|
|
$ |
614 |
|
|
$ |
9,242 |
|
|
$ |
1,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008, our total unrecognized compensation cost related to our non-performance based
unvested stock options was $54 million and includes compensation expense that we will recognize for
DISH Network stock options held by our employees as a result of the Spin-off. This cost is based
on an estimated future forfeiture rate of approximately 4.5% per year and will be recognized over a
weighted-average period of approximately four years. Share-based compensation expense is
recognized based on awards ultimately expected to vest and is reduced for estimated forfeitures.
SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. Changes in the estimated
forfeiture rate can have a significant effect on share-based compensation expense since the effect
of adjusting the rate is recognized in the period the forfeiture estimate is changed.
The fair value of each award for the three and six months ended June 30, 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, |
|
|
2008 |
|
2008 |
Risk-free interest rate |
|
|
3.42 |
% |
|
|
2.74% 3.42 |
% |
Volatility factor |
|
|
21.86 |
% |
|
|
19.98% 21.86 |
% |
Expected term of options in years |
|
|
6.0 |
|
|
|
6.0 6.1 |
|
Weighted-average fair value of options granted |
|
$ |
9.29 |
|
|
$ |
7.85 $9.29 |
|
12
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
We do not currently plan to pay dividends on our common stock, and therefore the dividend yield
percentage is set at zero. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions and are fully
transferable. Consequently, our estimate of fair value may differ from other valuation models.
Further, the Black-Scholes model requires the input of highly subjective assumptions. Changes in
the subjective input assumptions can materially affect the fair value estimate. Therefore, we do
not believe the existing models provide as reliable a single measure of the fair value of
stock-based compensation awards as a market-based model would.
We will continue to evaluate the assumptions used to derive the estimated fair value of options for
our stock as new events or changes in circumstances become known.
4. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Finished goods |
|
$ |
18,081 |
|
|
$ |
16,969 |
|
Raw materials |
|
|
31,694 |
|
|
|
4,042 |
|
Work-in-process |
|
|
10,298 |
|
|
|
205 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
60,073 |
|
|
|
21,216 |
|
Inventory allowance |
|
|
(577 |
) |
|
|
(173 |
) |
|
|
|
|
|
|
|
Inventories, net |
|
$ |
59,496 |
|
|
$ |
21,043 |
|
|
|
|
|
|
|
|
5. Marketable and Non-Marketable Investment Securities
Gains and losses on investment securities accounted for at fair value are recognized currently as
unrealized gains and losses on our Condensed Consolidated Statements of Operations. Interest
income on fair value method debt investment securities is recorded in Interest income on our
Condensed Consolidated Statements of Operations. Gains and losses on investment securities accounted for as available-for-sale are reported at fair value with the
related temporary unrealized gains and losses reported as a separate component of Accumulated
other comprehensive income (loss) within Total stockholders equity (deficit), net of related
deferred income tax on our Condensed Consolidated Balance Sheets.
Declines in the fair value of an available-for-sale investment security which are determined to be
other than temporary are recognized in the Condensed Consolidated Statements of Operations in the
Other component of Other Income (Expense), thus establishing a new cost basis for the
investment. We evaluate our available-for-sale investment securities portfolio on a quarterly
basis to determine whether declines in the fair value of these securities are other than temporary.
This quarterly evaluation consists of reviewing, among other things, the fair value of our
marketable investment securities compared to the carrying amount, the historical volatility of the
price of each security and any market and company-specific factors related to each security.
Generally, absent specific factors to the contrary, declines in the fair value of investments below
cost basis for a continuous period of less than six months are considered to be temporary.
Declines in the fair value of investments for a continuous period of six to nine months are
evaluated on a case by case basis to determine whether any company or market-specific factors exist
which would indicate that such declines are other than temporary. Declines in the fair value of
investments below cost basis for a continuous period greater than nine months are considered other
than temporary and are recorded as charges to earnings, absent specific factors to the contrary.
13
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
For the equity securities that are not publicly traded, it is not practical to regularly estimate
the fair value of the investments; however, these investments are subject to an evaluation for
other than temporary impairment on a quarterly basis. This quarterly evaluation consists of
reviewing, among other things, company business plans and current financial statements, if
available, for factors that may indicate an impairment of our investment. Such factors may
include, but are not limited to, cash flow concerns, material litigation, violations of debt
covenants and changes in business strategy. The fair value of these equity investments is not
estimated unless there are identified changes in circumstances that may indicate an impairment
exists and these changes are likely to have a significant adverse effect on the fair value of the
investment.
We also have an investment in non-marketable convertible debt which is included in Marketable and
non-marketable investment securities on our Condensed Consolidated Balance Sheets. This debt is
fair valued each reporting period based upon inputs other than quoted market prices that are
observable for the debt, either directly or indirectly, with changes in fair value recorded as
unrealized gains and losses on our Condensed Consolidated Statements of Operations. The fair value
analysis takes into consideration the price of the underlying company stock as well as changes in
the credit market, including yield curves and interest rates.
Our ability to realize value from our strategic investments in companies that are not publicly
traded depends on the success of those companies businesses and their ability to obtain sufficient
capital to execute their business plans. Because private markets are not as liquid as public
markets, there is also increased risk that we will not be able to sell these investments, or that
when we desire to sell them we will not be able to obtain fair value for them.
Current Marketable Investment Securities
As of June 30, 2008 and December 31, 2007, the fair values of our marketable investment securities
and strategic marketable investment securities, which are included in Marketable investment
securities on our Condensed Consolidated Balance Sheets, were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Marketable investment securities |
|
$ |
81,199 |
|
|
$ |
|
|
Marketable investment securities strategic |
|
|
178,965 |
|
|
|
491,185 |
|
|
|
|
|
|
|
|
Total marketable investment securities |
|
$ |
260,164 |
|
|
$ |
491,185 |
|
|
|
|
|
|
|
|
At June 30, 2008, we hold approximately $354 million of investment securities reported as
non-current in Marketable and non-marketable investments securities on our Condensed Consolidated
Balance Sheets that are publicly traded. Of this amount, $207 million was previously included in
Marketable investment securities at December 31, 2007.
Our strategic marketable investment securities are highly speculative and are concentrated in a
small number of companies. Additionally, during the six months ended June 30, 2008 our strategic
investments have experienced and continue to experience volatility. If the fair value of our
strategic marketable investment securities portfolio, accounted for as available-for-sale, does not
remain above cost basis or if we become aware of any market or company-specific factors that indicate that the carrying value of certain of our securities is
impaired, we may be required to record charges to earnings in future periods equal to the amount of
the decline in fair value.
As of June 30, 2008 and December 31, 2007, we had accumulated unrealized losses of $48 million, net
of related tax effect, and unrealized gains of $64 million, net of related tax effect, as a part of
Accumulated other comprehensive income (loss) within Total stockholders equity (deficit),
respectively.
14
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Marketable Investment Securities in a Loss Position. The following table reflects the length of
time that the individual securities, accounted for as available-for-sale, have been in an
unrealized loss position, aggregated by investment category. The unrealized losses on our
investments in corporate equity securities represent investments in the common stock of five
companies and losses on our investments in corporate debt represent investments in the marketable
corporate debt of two companies. Of our investments in debt and equity securities, five are in
companies in the communications industry and one is in the technology industry. We are not aware
of any specific factors which indicate the unrealized loss in these investments is due to anything
other than temporary market fluctuations. In addition, we have the ability and intent to hold our
investments in Corporate bonds until maturity when the issuers are required to redeem them at
their full face value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008 |
|
|
|
|
|
|
|
Less than Six Months |
|
|
Six to Nine Months |
|
|
Nine Months or More |
|
|
|
Primary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment |
|
Reason for |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Category |
|
Unrealized Loss |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
|
|
|
|
|
(In thousands) |
|
Corporate bonds |
|
Temporary market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fluctuations |
|
$ |
33,074 |
|
|
$ |
(958 |
) |
|
$ |
16,770 |
|
|
$ |
(2,503 |
) |
|
$ |
|
|
|
$ |
|
|
Corporate equity securities |
|
Temporary market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fluctuations |
|
|
19,384 |
|
|
|
(2,338 |
) |
|
|
84,539 |
|
|
|
(46,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
52,458 |
|
|
$ |
(3,296 |
) |
|
$ |
101,309 |
|
|
$ |
(49,497 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Current Marketable and Non-Marketable Investment Securities
We account for our unconsolidated equity investments under the fair value, equity or cost method of
accounting. Non-majority owned investments are generally accounted for using the equity method
when we have the ability to significantly influence the operating decisions of the issuer.
However, when we believe the fair value method of accounting provides more meaningful information to our
investors, we elect the fair value method for certain investments in affiliates whose equity is
publicly traded. When we do not have the ability to significantly influence the operating
decisions of an issuer, the cost method is used.
We also have several strategic debt and equity investments and other equity securities which are
included in Marketable and non-marketable investment securities on our Condensed Consolidated
Balance Sheets. These consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Fair value method |
|
$ |
416,055 |
|
|
$ |
|
|
Cost method |
|
|
38,389 |
|
|
|
39,046 |
|
Equity method |
|
|
17,419 |
|
|
|
20,114 |
|
|
|
|
|
|
|
|
Total |
|
$ |
471,863 |
|
|
$ |
59,160 |
|
|
|
|
|
|
|
|
During the six months ended June 30, 2008, we recorded $20 million of unrealized losses due to
changes in the fair value of certain debt and equity securities on our Condensed Consolidated
Statements of Operations.
15
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Other income and expense included on our Condensed Consolidated Statements of Operations includes
other changes in the carrying amount of our current and non-current marketable investment securities
and other items as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Gain on sale of a company which held certain FCC authorizations |
|
$ |
67,624 |
|
|
$ |
|
|
|
$ |
67,624 |
|
|
$ |
|
|
Gains on sale of marketable investment securities |
|
|
44,873 |
|
|
|
|
|
|
|
45,253 |
|
|
|
1,984 |
|
Other than temporary impairments |
|
|
(44,650 |
) |
|
|
|
|
|
|
(46,073 |
) |
|
|
|
|
Other |
|
|
(3,361 |
) |
|
|
(602 |
) |
|
|
(5,603 |
) |
|
|
(2,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
64,486 |
|
|
$ |
(602 |
) |
|
$ |
61,201 |
|
|
$ |
(766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Master Investment Agreement with TerreStar
On February 7, 2008, we completed several transactions under a Master Investment Agreement, dated
as of February 5, 2008 between us, TerreStar Corporation (TerreStar) and TerreStar Networks, Inc.
(TerreStar Networks). Under the Master Investment Agreement, we acquired $50 million in
aggregate principal amount of TerreStar Networks 61/2% Senior Exchangeable Paid-in-Kind Notes due
June 15, 2014 (Exchangeable Notes). In addition, we acquired $50 million aggregate principal
amount of TerreStar Networks 15% Senior Secured Paid-in-Kind Notes due February 15, 2014 (15% PIK
Notes).
The Exchangeable Notes are guaranteed by TerreStar License Inc. and TerreStar National Services,
Inc. and matures on June 15, 2014. The Exchangeable Notes are exchangeable for shares of TerreStar
common stock based on a conversion price of $5.57 per share. TerreStar Networks may be obligated
to repurchase all or a part of the Exchangeable Notes under certain circumstances, including upon a
change of control of TerreStar Networks. The Exchangeable Notes bear interest at 6.5% per annum,
with such interest being payable in additional Exchangeable Notes through March 2011 and cash
thereafter. Additional cash interest may be payable in the event that certain milestones are not
satisfied.
We also entered into a Purchase Money Credit Agreement with TerreStar Networks and Harbinger
Capital Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund LP
(collectively, Harbinger), in which we and Harbinger each committed to provide up to $50 million
in secured financing, the proceeds of which may be advanced to TerreStar Networks from time to time
as required for TerreStar Networks to make required payments in connection with a communications
satellite to be constructed and launched for TerreStar Networks. Pursuant to a Security Agreement,
dated as of February 5, 2008, from TerreStar Networks in favor of US Bank National Association, as
Collateral Agent, TerreStar Networks granted a security interest to the Collateral Agent in certain
of TerreStar Networks assets to be financed by the proceeds of the loan, including, among other
things, the communications satellite and related raw materials, work-in-progress, and finished
goods. As of June 30, 2008, we had advanced approximately $17 million to TerreStar Networks under
the terms of this agreement.
Also, on February 5, 2008, we entered into a Spectrum Agreement (Spectrum Agreement) with
TerreStar, which provided for the lease to TerreStar of our holdings of 1.4 GHz spectrum along with
an option for TerreStar to acquire the company through which we held these licenses in exchange for
the issuance of 30 million shares of TerreStars common stock (Common Stock). On June 10, 2008,
TerreStar completed the acquisition of the company under the Spectrum Agreement and issued 30
million shares of Common Stock to us. The $68 million gain resulting from our sale of the company
which held certain FCC authorizations was recorded in Other on our Condensed Consolidated
Statements of Operations.
16
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
We have two representatives on TerreStars board of directors and have the ability to exert
significant influence. We currently account for all of our investments in TerreStar using the
fair value method of accounting as we believe that the fair value approach provides our investors
with the most meaningful information. All of our investments in
TerreStar are included in Marketable
and non-marketable investment securities on our Condensed Consolidated Balance Sheets.
We rely on TerreStars management to provide us with accurate summary financial information. We
are not aware of any errors in or possible misstatements of the financial information provided to
us that would have a material effect on our Condensed Consolidated Financial Statements. The
following tables provide summarized financial information for TerreStar:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
June 30, |
|
|
December 31, |
|
Balance Sheets (unaudited) |
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
$ |
235,610 |
|
|
$ |
107,558 |
|
Noncurrent assets |
|
|
1,374,607 |
|
|
|
1,135,665 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,610,217 |
|
|
$ |
1,243,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity (Deficit) |
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
38,086 |
|
|
$ |
52,611 |
|
Long-term liabilities |
|
|
1,035,920 |
|
|
|
753,254 |
|
Minority interest |
|
|
|
|
|
|
12,141 |
|
Cumulative preferred dividend |
|
|
408,500 |
|
|
|
408,500 |
|
Stockholders equity (deficit) |
|
|
127,711 |
|
|
|
16,717 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit) |
|
$ |
1,610,217 |
|
|
$ |
1,243,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
Statement of Operations (unaudited) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Operating expenses |
|
$ |
57,280 |
|
|
$ |
50,298 |
|
|
$ |
124,474 |
|
|
$ |
89,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(66,715 |
) |
|
$ |
(56,168 |
) |
|
$ |
(161,289 |
) |
|
$ |
(123,758 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders |
|
$ |
(73,640 |
) |
|
$ |
(63,155 |
) |
|
$ |
(175,139 |
) |
|
$ |
(137,631 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Cash and Marketable Investment Securities
As of June 30, 2008, restricted cash and marketable investment securities included amounts required
for our letters of credit.
17
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
6. Property and Equipment
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable |
|
|
As of |
|
|
|
Life |
|
|
June 30, |
|
|
December 31, |
|
|
|
(In Years) |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(In thousands) |
|
Land |
|
|
|
|
|
$ |
30,066 |
|
|
$ |
2,509 |
|
Buildings and improvements |
|
|
1-40 |
|
|
|
211,521 |
|
|
|
17,482 |
|
Furniture, fixtures, equipment
and other |
|
|
1-10 |
|
|
|
621,585 |
|
|
|
41,292 |
|
Satellites: |
|
|
|
|
|
|
|
|
|
|
|
|
EchoStar III |
|
|
12 |
|
|
|
234,083 |
|
|
|
|
|
EchoStar IV fully depreciated |
|
|
N/A |
|
|
|
78,511 |
|
|
|
|
|
EchoStar VI |
|
|
12 |
|
|
|
244,305 |
|
|
|
|
|
EchoStar VIII |
|
|
12 |
|
|
|
175,801 |
|
|
|
|
|
EchoStar IX |
|
|
12 |
|
|
|
127,376 |
|
|
|
|
|
EchoStar XII |
|
|
10 |
|
|
|
190,051 |
|
|
|
|
|
Satellites acquired under
capital leases |
|
|
10 |
|
|
|
551,628 |
|
|
|
|
|
Construction in process |
|
|
|
|
|
|
338,205 |
|
|
|
185,411 |
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment |
|
|
|
|
|
$ |
2,803,132 |
|
|
$ |
246,694 |
|
Accumulated depreciation |
|
|
|
|
|
|
(1,325,595 |
) |
|
|
(32,857 |
) |
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
$ |
1,477,537 |
|
|
$ |
213,837 |
|
|
|
|
|
|
|
|
|
|
|
|
The majority of the increase in property and equipment in the table above is associated with the
assets contributed to us in connection to the Spin-off (see Note 1).
Construction in process consists of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Progress amounts for satellite construction and launch costs |
|
$ |
248,688 |
|
|
$ |
185,411 |
|
Digital broadcast equipment |
|
|
79,167 |
|
|
|
|
|
Software and other |
|
|
10,350 |
|
|
|
|
|
|
|
|
|
|
|
|
Construction in progress |
|
$ |
338,205 |
|
|
$ |
185,411 |
|
|
|
|
|
|
|
|
Satellites
In connection with the Spin-off, DISH Network contributed six of its owned satellites and two of
its satellite lease agreements to us. The two leased satellites are accounted for as capital
leases pursuant to Statement of Financial Accounting Standards No. 13, Accounting for Leases
(SFAS 13) and are depreciated over the ten-year terms of the satellite service agreements.
We believe that overall our satellites are generally in good condition. Prior to 2008, certain of
these satellites have experienced anomalies, some of which have had a significant adverse impact on
their commercial operation. There can be no assurance future anomalies will not cause further
losses, which could impact the remaining life or commercial operation of any of these satellites.
See discussion of evaluation of impairment in Long-Lived Assets below. Certain of these
anomalies are discussed below.
18
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
EchoStar III
EchoStar III was originally designed to operate a maximum of 32 DBS transponders in CONUS, which
provides service to the entire continental United States, at approximately 120 watts per channel,
switchable to 16 transponders operating at over 230 watts per channel, and was equipped with a
total of 44 traveling wave tube amplifier (TWTA) to provide redundancy. As a result of past TWTA
failures, only 18 transponders are currently available for use. Due to redundancy switching
limitations and specific channel authorizations, we can only operate on 15 of the 19 FCC authorized
frequencies at the 61.5 degree location. While we do not expect a large number of additional TWTAs
to fail in any year, and the failures have not reduced the original minimum 12-year design life of
the satellite, it is likely that additional TWTA failures will occur from time to time in the
future and those failures will further impact commercial operation of the satellite.
EchoStar IV
EchoStar IV currently operates at the 77 degree orbital location, which is licensed by the
government of Mexico. The satellite was originally designed to operate a maximum of 32 DBS
transponders in CONUS at approximately 120 watts per channel, switchable to 16 transponders
operating at over 230 watts per channel. As a result of past TWTA failures, only six transponders
are currently available for use and the satellite has been fully depreciated. There can be no
assurance that further material degradation, or total loss of use, of EchoStar IV will not occur in
the immediate future. Based on the remaining fuel life, EchoStar IV is not expected to be in
operation beyond the first quarter of 2009.
EchoStar VI
EchoStar VI was originally equipped with 108 solar array strings, approximately 102 of which are
required to assure full power availability for the original minimum 12-year useful life of the
satellite. Prior to 2008, EchoStar VI experienced anomalies resulting in the loss of 22 solar
array strings, reducing the number of functional solar array strings to 86. While the useful life
of the satellite has not been affected, commercial operability has been reduced. The satellite was
designed to operate 32 DBS transponders in CONUS at approximately 125 watts per channel, switchable
to 16 transponders operating at approximately 225 watts per channel. The power reduction resulting
from the solar array failures currently limits us to operation of a maximum of 26 transponders in
standard power mode, or 13 transponders in high power mode. These numbers are expected to decrease
to 25 and 12, respectively, by September 2008. The number of transponders to which power can be
provided is expected to continue to decline in the future at the rate of approximately one
transponder every three years.
EchoStar VIII
EchoStar VIII was designed to operate 32 DBS transponders in CONUS at approximately 120 watts per
channel, switchable to 16 transponders operating at approximately 240 watts per channel. EchoStar
VIII also includes spot-beam technology. This satellite has experienced several anomalies since
launch, but none have reduced the 12-year estimated useful life of the satellite.
EchoStar IX
EchoStar IX was designed to operate 32 fixed satellite service (FSS) band transponders in CONUS
at approximately 110 watts per channel, along with transponders that can provide services in the
Ka-Band (a Ka-band payload). The satellite also includes a C-band payload which is owned by a
third party. Prior to 2007, EchoStar IX experienced the loss of one of its three momentum wheels,
two of which are utilized during normal operations. A spare wheel was switched in at the time and
the loss did not reduce the 12-year estimated useful life of the satellite. During 2007, the
satellite experienced anomalies resulting in the loss of three solar array strings. The anomalies
have not impacted commercial operation of the satellite to date.
19
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
EchoStar XII
EchoStar XII was designed to operate 13 DBS transponders at 270 watts per channel in CONUS mode, or
22 spot beams using a combination of 135 and 65 watt TWTAs. We currently operate the satellite in
spot beam/CONUS hybrid mode. EchoStar XII has a total of 24 solar array circuits, approximately 22
of which are required to assure full power for the original minimum 12-year design life of the
satellite. Prior to 2008, eight solar array circuits on EchoStar XII have experienced anomalous
behavior resulting in both temporary and permanent solar array circuit failures. Although the
design life of the satellite has not been affected, these circuit failures have resulted in a
reduction in power to the satellite which will preclude us from using the full complement of
transponders on EchoStar XII for the 12-year design life of the satellite. The extent of this
impact has not been determined.
AMC14
In connection with the Spin-off, DISH Network contributed its AMC-14 satellite services contract to
us. During March 2008, AMC-14 experienced a launch anomaly and failed to reach its intended orbit.
SES Americom subsequently declared the AMC-14 satellite a total loss due to a lack of viable
options to reposition the satellite to its proper geostationary orbit. Therefore, we have no
obligation to make any future monthly lease payments to SES Americom with respect to the satellite.
However, we did make up-front payments with respect to the satellite prior to launch and recorded
capitalized interest and insurance costs related to the satellite. These amounts, net of insurance
proceeds of $41 million, totaled $13 million and were written-off during the first quarter of 2008.
The insurance proceeds were collected during the second quarter of 2008.
AMC16
DISH Network contributed its AMC-16 satellite services contract to us in connection with the
Spin-off. During the first quarter of 2008 SES Americom notified us that the satellite had
experienced an anomaly and is no longer capable of operating at full capacity. Pursuant to the
satellite services agreement, we are entitled to a reduction of our monthly recurring payment in
the event of a partial loss of satellite capacity. We will record a reduction in our capital lease
obligation and the corresponding asset by the same amount when the new monthly recurring payment is
finalized with SES Americom.
CMBStar
We have suspended construction of the CMBStar satellite and in future periods may conclude it
appropriate to record an impairment charge. During April 2008, we notified the State
Administration of Radio, Film and Television of China that we were suspending construction of the
CMBStar satellite pending, among other things, further analysis relating to efforts to meet the
satellite performance criteria and/or confirmation that alternative performance criteria would be
acceptable. We are currently evaluating potential alternative uses for the CMBStar satellite. If
these alternative uses are unable to recover the carrying value invested to date in the satellite,
we may be required to record an impairment charge in a future period relating to the CMBStar
satellite. We currently estimate that this potential charge could be as much as $100 million,
which would have a material adverse effect on our results of operations and financial position.
20
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Long-Lived Satellite Assets
We account for impairments of long-lived satellite assets in accordance with the provisions of
Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144). SFAS 144 requires a long-lived asset or asset group to be tested
for recoverability whenever events or changes in circumstance indicate that its carrying amount may
not be recoverable. Based on the guidance under SFAS 144, we evaluate our satellites for
recoverability at the lowest level for which identifiable cash flows are largely independent of the
cash flows of other assets and liabilities. While certain of the anomalies discussed above, and
previously disclosed, may be considered to represent a significant adverse change in the physical
condition of a particular satellite, based on the redundancy designed within each satellite, these
anomalies are not considered to be significant events that would require evaluation for impairment
recognition pursuant to the guidance under SFAS 144.
In connection with the Spin-off, we performed an impairment analysis in accordance with SFAS 144
and currently expect the undiscounted cash flows of each satellite to be greater than the current
carrying amounts. Should we be unable to achieve our business plan, or if conditions require us to
change that plan, one or more of our satellites could become partially or fully impaired, which
could have a material adverse effect on our results of operations and financial position.
7. Goodwill, FCC Authorizations and Intangible Assets
Goodwill and FCC Authorizations
We account for our goodwill and intangible assets in accordance with the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), which
requires goodwill and intangible assets with indefinite useful lives not be amortized, but to be
tested for impairment annually or whenever indicators of impairments arise. Intangible assets that
have finite useful lives continue to be amortized over their estimated useful lives. Generally, we
have determined that our FCC licenses have indefinite useful lives due to the following:
|
|
|
FCC spectrum is a non-depleting asset; |
|
|
|
|
replacement satellite applications are generally authorized by the FCC subject to
certain conditions, without substantial cost under a stable regulatory, legislative and
legal environment; |
|
|
|
|
maintenance expenditures in order to obtain future cash flows are not significant;
and |
|
|
|
|
we intend to use these assets indefinitely. |
Intangible Assets
As of June 30, 2008 and December 31, 2007, our identifiable intangibles subject to amortization
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Intangible |
|
|
Accumulated |
|
|
Intangible |
|
|
Accumulated |
|
|
|
Assets |
|
|
Amortization |
|
|
Assets |
|
|
Amortization |
|
|
|
(In thousands) |
|
Contract-based |
|
$ |
190,566 |
|
|
$ |
(66,789 |
) |
|
$ |
4,640 |
|
|
$ |
(373 |
) |
Customer relationships |
|
|
27,602 |
|
|
|
(9,902 |
) |
|
|
23,600 |
|
|
|
(1,967 |
) |
Technology-based |
|
|
69,797 |
|
|
|
(13,348 |
) |
|
|
50,297 |
|
|
|
(4,551 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
287,965 |
|
|
$ |
(90,039 |
) |
|
$ |
78,537 |
|
|
$ |
(6,891 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
21
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Amortization of these intangible assets, recorded on a straight line basis over an average finite
useful life primarily ranging from approximately three to 20 years, was $8 million for the three
months ended June 30, 2008 and $16 million for the six months ended June 30, 2008.
Estimated future amortization of our identifiable intangible assets as of June 30, 2008 is as
follows (in thousands):
|
|
|
|
|
For the Years Ending December 31, |
|
|
|
|
2008 (remaining six months) |
|
$ |
16,088 |
|
2009 |
|
|
32,176 |
|
2010 |
|
|
30,209 |
|
2011 |
|
|
24,028 |
|
2012 |
|
|
23,182 |
|
2013 |
|
|
23,174 |
|
Thereafter |
|
|
49,069 |
|
|
|
|
|
Total |
|
$ |
197,926 |
|
|
|
|
|
8. Long-Term Debt
Capital Lease Obligations, Mortgages and Notes Payable
Capital lease obligations, mortgages and notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Capital lease obligations: |
|
|
|
|
|
|
|
|
Satellites financed under capital lease obligations |
|
$ |
351,439 |
|
|
$ |
|
|
Other equipment financed under capital lease obligations |
|
|
10,378 |
|
|
|
|
|
8% note payable for EchoStar IX satellite vendor financing, payable over 14 years
from launch |
|
|
8,139 |
|
|
|
|
|
Other mortgages and notes payable in installments through 2017 with interest ranging
from 4% to 20% |
|
|
3,358 |
|
|
|
3,709 |
|
|
|
|
|
|
|
|
Total |
|
$ |
373,314 |
|
|
$ |
3,709 |
|
Less current portion |
|
|
(49,724 |
) |
|
|
(1,365 |
) |
|
|
|
|
|
|
|
Capital lease obligations, mortgages and other notes payable, net of current portion |
|
$ |
323,590 |
|
|
$ |
2,344 |
|
|
|
|
|
|
|
|
Capital Lease Obligations
In connection with the Spin-off, the satellite lease contracts for AMC-15 and AMC-16 were
contributed to EchoStar. These satellites are accounted for as capital leases pursuant to SFAS 13
and are depreciated over the ten-year terms of the satellite service agreements.
AMC15. AMC-15, an FSS satellite, commenced commercial operation during January 2005. This lease
is renewable by us on a year-to-year basis following the initial term, and provides us with certain
rights to lease capacity on replacement satellites.
AMC16. AMC-16, an FSS satellite, commenced commercial operation during February 2005. This lease
is renewable by us on a year-to-year basis following the initial term, and provides us with certain
rights to lease capacity on replacement satellites.
22
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Future minimum lease payments under these capital lease obligations, together with the present
value of the net minimum lease payments as of June 30, 2008 are as follows (in thousands):
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
|
2008 (remaining six months) |
|
$ |
50,311 |
|
2009 |
|
|
89,918 |
|
2010 |
|
|
86,351 |
|
2011 |
|
|
86,351 |
|
2012 |
|
|
86,351 |
|
2013 |
|
|
86,351 |
|
Thereafter |
|
|
81,673 |
|
|
|
|
|
Total minimum lease payments |
|
|
567,306 |
|
Less: Amount representing lease of the orbital location and estimated executory costs (primarily
insurance and maintenance) including profit thereon, included in total minimum lease payments |
|
|
(94,246 |
) |
|
|
|
|
Net minimum lease payments |
|
|
473,060 |
|
Less: Amount representing interest |
|
|
(111,243 |
) |
|
|
|
|
Present value of net minimum lease payments |
|
|
361,817 |
|
Less: Current portion |
|
|
(47,505 |
) |
|
|
|
|
Long-term portion of capital lease obligations |
|
$ |
314,312 |
|
|
|
|
|
9. Income Tax
As of June 30, 2008, we had net operating loss carryforwards (NOLs) for federal income tax
purposes of approximately $35 million and tax benefits related to credit carryforwards of less than
$1 million. The NOLs and credit carryforwards begin to expire in the year 2024.
Our income tax policy is to record the estimated future tax effects of temporary differences
between the tax bases of assets and liabilities and amounts reported on our Condensed Consolidated
Balance Sheets, as well as probable operating loss, tax credit and other carryforwards. We follow
the guidelines set forth in SFAS 109 regarding the recoverability of any tax assets recorded on the
balance sheet and provide any necessary valuation allowances as required. In accordance with SFAS
109, we periodically evaluate our need for a valuation allowance. Determining necessary valuation
allowances requires us to make assessments about historical financial information as well as the
timing of future events, including the probability of expected future taxable income and available
tax planning opportunities.
In connection with the Spin-off, our tax basis of assets and liabilities changed significantly.
Furthermore, we had income before taxes for the six months ended June 30, 2008 and project taxable
ordinary income into the future. As a result of the Spin-off and the related tax requirements
governing the use of our tax assets by DISH Network, we adjusted our deferred tax assets and
corresponding valuation allowance to report our net deferred tax assets at an amount that is more
likely than not realizable. The use of our deferred tax assets by DISH Network and related effect
on our valuation allowance was recorded as a deemed distribution to DISH Network. As of June 30,
2008, we had a valuation allowance against deferred tax assets that are capital in nature, that we
currently believe are not realizable.
23
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
The actual tax provision for the six months ended June 30, 2008 reconciles to the amounts computed
by applying the statutory Federal tax rate to income before taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
For the |
|
For the |
|
|
Three Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
|
June 30, 2008 |
|
June 30, 2008 |
|
|
% of pre-tax (income)/loss |
Statutory rate |
|
|
(35.0 |
) |
|
|
(35.0 |
) |
State income taxes, net of Federal benefit |
|
|
0.6 |
|
|
|
(0.9 |
) |
Foreign taxes and income not U.S. taxable |
|
|
(1.0 |
) |
|
|
(1.9 |
) |
Stock option compensation |
|
|
(0.8 |
) |
|
|
(0.4 |
) |
Change in valuation allowance related to investment gains (losses) |
|
|
25.1 |
|
|
|
20.9 |
|
Other . |
|
|
0.3 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
Total benefit (provision) for income taxes |
|
|
(10.8 |
) |
|
|
(16.7 |
) |
|
|
|
|
|
|
|
|
|
We have a
valuation allowance against net deferred tax assets that are capital
in nature as it is
not more likely than not that such assets will be realized. The change in our valuation allowance
resulted from changes in these net deferred tax assets primarily
related to changes in the fair value in
our investments accounted for under the fair value method.
10. Commitments and Contingencies
Commitments
Future maturities of our contractual obligations as of June 30, 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
Total |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite-related obligations |
|
$ |
1,071,841 |
|
|
$ |
292,577 |
|
|
$ |
172,977 |
|
|
$ |
86,491 |
|
|
$ |
54,576 |
|
|
$ |
48,865 |
|
|
$ |
47,662 |
|
|
$ |
368,693 |
|
Capital lease obligations |
|
|
361,817 |
|
|
|
26,635 |
|
|
|
46,319 |
|
|
|
47,420 |
|
|
|
52,463 |
|
|
|
57,971 |
|
|
|
63,989 |
|
|
|
67,020 |
|
Operating lease obligations |
|
|
16,673 |
|
|
|
3,168 |
|
|
|
5,418 |
|
|
|
3,958 |
|
|
|
1,918 |
|
|
|
976 |
|
|
|
788 |
|
|
|
447 |
|
Purchase obligations |
|
|
1,059,294 |
|
|
|
1,040,128 |
|
|
|
15,833 |
|
|
|
3,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages and other notes payable |
|
|
11,497 |
|
|
|
1,743 |
|
|
|
1,923 |
|
|
|
1,185 |
|
|
|
852 |
|
|
|
808 |
|
|
|
873 |
|
|
|
4,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,521,122 |
|
|
$ |
1,364,251 |
|
|
$ |
242,470 |
|
|
$ |
142,387 |
|
|
$ |
109,809 |
|
|
$ |
108,620 |
|
|
$ |
113,312 |
|
|
$ |
440,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingencies
Separation Agreement
In connection with the Spin-off, we have entered into a separation agreement with DISH Network,
which provides for, among other things, the division of liability resulting from litigation. Under
the terms of the separation agreement, we have assumed liability for any acts or omissions that
relate to our business whether such acts or omissions occurred before or after the Spin-off.
Certain exceptions are provided, including for intellectual property related claims generally,
whereby we will only be liable for our acts or omissions that occurred following the Spin-off.
Therefore, we have been indemnified by DISH Network for any potential liability or damages
resulting from intellectual property claims relating to the period prior to the effective date of
the Spin-off.
24
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Acacia
During 2004, Acacia Media Technologies, (Acacia) filed a lawsuit against us and DISH Network in
the United States District Court for the Northern District of California. The suit also named
DirecTV, Comcast, Charter, Cox and a number of smaller cable companies as defendants. Acacia is an
intellectual property holding company which seeks to license the patent portfolio that it has
acquired. The suit alleges infringement of United States Patent Nos. 5,132,992 (the 992 patent),
5,253,275 (the 275 patent), 5,550,863 (the 863 patent), 6,002,720 (the 720 patent) and 6,144,702
(the 702 patent). The 992, 863, 720 and 702 patents have been asserted against us.
The patents relate to various systems and methods related to the transmission of digital data. The
992 and 702 patents have also been asserted against several Internet content providers in the
United States District Court for the Central District of California. During 2004 and 2005, the
Court issued Markman rulings which found that the 992 and 702 patents were not as broad as Acacia
had contended, and that certain terms in the 702 patent were indefinite. The Court issued
additional claim construction rulings on December 14, 2006, March 2, 2007, October 19, 2007, and
February 13, 2008. On March 12, 2008, the Court issued an order outlining a schedule for filing
dispositive invalidity motions based on its claim constructions. Acacia has agreed to stipulate
that all claims in the suit are invalid according to various of the Courts claim constructions and
argues that the case should proceed immediately to the Federal Circuit on appeal. The Court,
however, is permitting us to file additional invalidity motions.
Acacias various patent infringement cases have been consolidated for pre-trial purposes in the
United States District Court for the Northern District of California. We intend to vigorously
defend this case. In the event that a Court ultimately determines that we infringe any of the
patents, we may be subject to substantial damages, which may include treble damages and/or an
injunction that could require us to materially modify certain user-friendly features that we
currently offer to consumers. We are being indemnified by DISH Network for any potential liability
or damages resulting from this suit relating to the period prior to the effective date of the
Spin-off. We cannot predict with any degree of certainty the outcome of the suit or determine the
extent of any potential liability or damages.
Broadcast Innovation, L.L.C.
In 2001, Broadcast Innovation, L.L.C. (Broadcast Innovation) filed a lawsuit against DISH
Network, DirecTV, Thomson Consumer Electronics and others in Federal District Court in Denver,
Colorado. The suit alleges infringement of United States Patent Nos. 6,076,094 (the 094 patent)
and 4,992,066 (the 066 patent). The 094 patent relates to certain methods and devices for
transmitting and receiving data along with specific formatting information for the data. The 066
patent relates to certain methods and devices for providing the scrambling circuitry for a pay
television system on removable cards. We examined these patents and believe that they are not
infringed by any of our products or services. Subsequently, DirecTV and Thomson settled with
Broadcast Innovation leaving us as the only defendant.
During 2004, the judge issued an order finding the 066 patent invalid. Also in 2004, the Court
ruled the 094 patent invalid in a parallel case filed by Broadcast Innovation against Charter and
Comcast. In 2005, the United States Court of Appeals for the Federal Circuit overturned the 094
patent finding of invalidity and remanded the case back to the District Court. During June 2006,
Charter filed a reexamination request with the United States Patent and Trademark Office. The
Court has stayed the case pending reexamination. Our case remains stayed pending resolution of the
Charter case.
We intend to vigorously defend this case. In the event that a Court ultimately determines that we
infringe any of the patents, we may be subject to substantial damages, which may include treble
damages and/or an injunction that could require us to materially modify certain user-friendly
features that we currently offer to consumers. We are being indemnified by DISH Network for any
potential liability or damages resulting from this suit relating to the period prior to the
effective date of the Spin-off. We cannot predict with any degree of certainty the outcome of the
suit or determine the extent of any potential liability or damages.
25
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Datasec
During April 2008, Datasec Corporation (Datasec) sued us, DISH Network and DirecTV Corporation
in the United States District Court for the Central District of California, alleging infringement
of U.S. Patent No. 6,075,969 (the 969 patent). The 969 patent was issued in 2000 to inventor
Bruce Lusignan, and is entitled Method for Receiving Signals from a Constellation of Satellites
in Close Geosynchronous Orbit.
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 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.
Finisar Corporation
Finisar Corporation (Finisar) obtained a $100 million verdict in the United States District Court
for the Eastern District of Texas against DirecTV for patent infringement. Finisar alleged that
DirecTVs electronic program guide and other elements of its system infringe United States Patent
No. 5,404,505 (the 505 patent).
In July 2006, DISH Network, together with NagraStar LLC, filed a Complaint for Declaratory Judgment
in the United States District Court for the District of Delaware against Finisar that asks the
Court to declare that they and we do not infringe, and have not infringed, any valid claim of the
505 patent. Trial is not currently scheduled. The District Court has stayed our action until the
Federal Circuit has resolved DirecTVs appeal. During April 2008, the Federal Circuit reversed the
judgment against DirecTV and ordered a new trial. We are evaluating the Federal Circuits decision
to determine the impact on our action.
We intend to vigorously prosecute this case. In the event that a Court ultimately determines that
we infringe this patent, we may be subject to substantial damages, which may include treble damages
and/or an injunction that could require us to modify our system architecture. We are being
indemnified by DISH Network for any potential liability or damages resulting from this suit
relating to the period prior to the effective date of the Spin-off. We cannot predict with any
degree of certainty the outcome of the suit or determine the extent of any potential liability or
damages.
Global Communications
On April 19, 2007, Global Communications, Inc., which we refer to as Global, filed a patent
infringement action against DISH Network in the United States District Court for the Eastern
District of Texas. The suit alleges infringement of United States Patent No. 6,947,702 (the 702
patent). This patent, which involves satellite reception, was issued in September 2005. On
October 24, 2007, the United States Patent and Trademark Office granted our request for
reexamination of the 702 patent and issued an Office Action finding that all of the claims of the
702 patent were invalid. Based on the PTOs decision, we have asked the District Court to stay
the litigation until the reexamination proceeding is concluded.
We intend to vigorously defend this case. In the event that a Court ultimately determines that we
infringe the 702 patent, we may be subject to substantial damages, which may include treble
damages and/or an injunction that could require us to materially modify certain user-friendly
features that we currently offer to consumers. We are being indemnified by DISH Network for any
potential liability or damages resulting from this suit relating to the period prior to the
effective date of the Spin-off. We cannot predict with any degree of certainty the outcome of the
suit or determine the extent of any potential liability or damages.
26
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Personalized Media Communications
In February 2008, Personalized Media Communications, Inc. filed suit against us, DISH Network and
Motorola, Inc. in the United States District Court for the Eastern District of Texas alleging
infringement of United States Patent Nos. 4,694,490 (the 490 patent), 5,109,414 (the 414
patent), 4,965,825 (the 825 patent), 5,233,654 (the 654 patent), 5,335,277 (the 277 patent),
and 5,887,243 (the 243 patent), all of which were issued to John Harvey and James Cuddihy as
named inventors. The 490 patent, the 414 patent, the 825 patent, the 654 patent and the 277
patent are defined as the Harvey Patents. The Harvey Patents are entitled Signal Processing
Apparatus and Methods. The lawsuit alleges, among other things, that our DBS system receives
program content at broadcast reception and satellite uplinking facilities and transmits such
program content, via satellite, to remote satellite receivers. The lawsuit further alleges that
we infringe the Harvey Patents by transmitting and using a DBS signal specifically encoded to
enable the subject receivers to function in a manner that infringes the Harvey Patents, and by
selling services via DBS transmission processes which infringe the Harvey Patents.
We intend to vigorously defend this case. In the event that a Court ultimately determines that we
infringe any of the asserted patents, we may be subject to substantial damages, which may include
treble damages and/or an injunction that could require us to materially modify certain
user-friendly features that we currently offer to consumers. We are being indemnified by DISH
Network for any potential liability or damages resulting from this suit relating to the period
prior to the effective date of the Spin-off. We cannot predict with any degree of certainty the
outcome of the suit or determine the extent of any potential liability or damages.
Superguide
During 2000, Superguide Corp. (Superguide) filed suit against us. DISH Network, DirecTV, Thomson
and others in the United States District Court for the Western District of North Carolina,
Asheville Division, alleging infringement of United States Patent Nos. 5,038,211 (the 211 patent),
5,293,357 (the 357 patent) and 4,751,578 (the 578 patent) which relate to certain electronic
program guide functions, including the use of electronic program guides to control VCRs.
Superguide sought injunctive and declaratory relief and damages in an unspecified amount.
On summary judgment, the District Court ruled that none of the asserted patents were infringed by
us. These rulings were appealed to the United States Court of Appeals for the Federal Circuit.
During 2004, the Federal Circuit affirmed in part and reversed in part the District Courts
findings and remanded the case back to the District Court for further proceedings. In 2005,
Superguide indicated that it would no longer pursue infringement allegations with respect to the
211 and 357 patents and those patents have now been dismissed from the suit. The District Court
subsequently entered judgment of non-infringement in favor of all defendants as to the 211 and
357 patents and ordered briefing on Thomsons license defense as to the 578 patent. During
December 2006, the District Court found that there were disputed issues of fact regarding Thomsons
license defense, and ordered a trial solely addressed to that issue. That trial took place in
March 2007. In July 2007, the District Court ruled in favor of Superguide. As a result,
Superguide will be able to proceed with its infringement action against us, DirecTV and Thomson.
In June 2008, we moved for summary judgment asking the Court to find, among other things, that the
578 patent is invalid.
We intend to vigorously defend this case. In the event that a Court ultimately determines that we
infringe the 578 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
electronic programming guide and related features that we currently offer to consumers. We are
being indemnified by DISH Network for any potential liability or damages resulting from this suit
relating to the period prior to the effective date of the Spin-off. We cannot predict with any
degree of certainty the outcome of the suit or determine the extent of any potential liability or
damages.
27
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Tivo Inc.
On January 31, 2008, the U.S. Court of Appeals for the Federal Circuit affirmed in part and
reversed in part the April 2006 jury verdict concluding that certain of our digital video
recorders, or DVRs, infringed a patent held by Tivo. In its decision, the Federal Circuit affirmed
the jurys verdict of infringement on Tivos software claims, upheld the award of damages from
the district court, and ordered that the stay of the district courts injunction against us, which
was issued pending appeal, will dissolve when the appeal becomes final. The Federal Circuit,
however, found that we did not literally infringe Tivos hardware claims, and remanded such
claims back to the district court for further proceedings. We are appealing the Federal Circuits
ruling to the United States Supreme Court.
In addition, we have developed and deployed next-generation DVR software to our customers DVRs.
This improved software is fully operational and has been automatically downloaded to current
customers (our alternative technology). We have formal legal opinions from outside counsel that
conclude that our alternative technology does not infringe, literally or under the doctrine of
equivalents, either the hardware or software claims of Tivos patent. Tivo has filed a motion for
contempt alleging that we are in violation of the Courts injunction. We have vigorously opposed
the motion arguing that the Courts injunction does not apply to DVRs that have received our
alternative technology, that our alternative technology does not infringe Tivos patent, and that
we are in compliance with the Injunction. The Court has set September 4, 2008 as the hearing date
for Tivos motion for contempt.
If we are unsuccessful in our appeal to the United States Supreme Court, or in defending against
Tivos motion for contempt or any subsequent claim that our alternative technology infringes Tivos
patent, we could be prohibited from distributing DVRs, or be required to modify or eliminate
certain user-friendly DVR features that we currently offer to consumers. In that event we would be
at a significant disadvantage to our competitors who could offer this functionality. We could also
have to pay substantial additional damages. We are being indemnified by DISH Network for any
potential liability or damages resulting from this suit relating to the period prior to the
effective date of the Spin-off. Although we believe that we do not infringe under any of the
claims asserted against us and DISH Network, we cannot predict with any degree of certainty the
outcome of the suit or determine the extent of any potential liability or damages.
Other
In addition to the above actions, we are subject to various other legal proceedings and claims
which arise in the ordinary course of business. In our opinion, the amount of ultimate liability
with respect to any of these actions is unlikely to materially affect our financial position,
results of operations or liquidity.
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, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Satellites |
|
$ |
34,785 |
|
|
$ |
|
|
|
$ |
69,571 |
|
|
$ |
|
|
Furniture, fixtures, equipment and other |
|
|
18,574 |
|
|
|
1,005 |
|
|
|
35,136 |
|
|
|
2,092 |
|
Identifiable intangible assets subject to amortization |
|
|
8,222 |
|
|
|
294 |
|
|
|
16,444 |
|
|
|
588 |
|
Buildings and improvements |
|
|
1,434 |
|
|
|
115 |
|
|
|
2,834 |
|
|
|
229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
63,015 |
|
|
$ |
1,414 |
|
|
$ |
123,985 |
|
|
$ |
2,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales and operating expense categories included in our accompanying Condensed Consolidated
Statements of Operations do not include depreciation expense related to satellites.
28
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
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 currently
operate as two business units.
|
|
|
Equipment sales and digital broadcast operations Equipment sales include the sales of
set-top boxes and related components including Slingboxes to DISH Network and international
customers. Digital broadcast operations include satellite uplinking/downlinking,
transmission services, signal processing, conditional access management, telemetry,
tracking and control, and other services provided primarily to DISH Network. |
|
|
|
|
Satellite Services Satellite services consists principally of transponder leasing
provided primarily to DISH Network, and secondarily to other customers. |
The All Other category consists of revenue and net income (loss) from other operations including
our corporate investment portfolio for which the disclosure requirements of SFAS 131 do not apply.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment sales and digital broadcast operations |
|
$ |
429,553 |
|
|
$ |
330,589 |
|
|
$ |
923,168 |
|
|
$ |
778,352 |
|
Satellite services |
|
|
48,628 |
|
|
|
|
|
|
|
104,832 |
|
|
|
|
|
All other |
|
|
5,159 |
|
|
|
|
|
|
|
9,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
483,340 |
|
|
$ |
330,589 |
|
|
$ |
1,037,911 |
|
|
$ |
778,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment sales and digital broadcast operations |
|
$ |
(823 |
) |
|
$ |
(14,789 |
) |
|
$ |
8,683 |
|
|
$ |
(33,293 |
) |
Satellite services |
|
|
(2,501 |
) |
|
|
|
|
|
|
(11,378 |
) |
|
|
|
|
All other |
|
|
51,148 |
|
|
|
|
|
|
|
56,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net income (loss) |
|
$ |
47,824 |
|
|
$ |
(14,789 |
) |
|
$ |
53,525 |
|
|
$ |
(33,293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
29
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
13. |
|
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 Sates and international customers.
The following table summarizes total long-lived assets and revenue attributed to foreign locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United |
|
|
|
|
|
|
|
|
|
|
|
|
States |
|
|
Europe |
|
|
Asia |
|
|
Total |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Long-lived assets, including FCC
authorizations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008 |
|
$ |
1,799,168 |
|
|
$ |
22,147 |
|
|
$ |
210,535 |
|
|
$ |
2,031,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 |
|
$ |
379,826 |
|
|
$ |
12,679 |
|
|
$ |
184,279 |
|
|
$ |
576,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2008 |
|
$ |
981,007 |
|
|
$ |
56,904 |
|
|
$ |
|
|
|
$ |
1,037,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2007 |
|
$ |
733,037 |
|
|
$ |
45,315 |
|
|
$ |
|
|
|
$ |
778,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions with Major Customers
During the three and six months ended June 30, 2008 and 2007, the North America revenue primarily
includes sales to two major customers, DISH Network and Bell ExpressVu. The following table
summarizes sales to each customer and its percentage of total revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Total revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH Network |
|
$ |
394,058 |
|
|
$ |
274,973 |
|
|
$ |
858,222 |
|
|
$ |
673,813 |
|
Bell ExpressVu |
|
|
66,838 |
|
|
|
33,895 |
|
|
|
109,801 |
|
|
|
69,184 |
|
Other |
|
|
22,444 |
|
|
|
21,721 |
|
|
|
69,888 |
|
|
|
35,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
483,340 |
|
|
$ |
330,589 |
|
|
$ |
1,037,911 |
|
|
$ |
778,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH Network |
|
|
81.5 |
% |
|
|
83.2 |
% |
|
|
82.7 |
% |
|
|
86.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bell ExpressVu |
|
|
13.8 |
% |
|
|
10.3 |
% |
|
|
10.6 |
% |
|
|
8.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
14. Related Party Transactions
Related Party Transactions with NagraStar
During each of the three months ended June 30, 2008 and 2007, we purchased $12 million of security
access devices from NagraStar and during the six months ended June 30, 2008 and 2007, we purchased
$20 million and $31 million, respectively. As of June 30, 2008 and December 31, 2007, amounts
payable to NagraStar totaled $13 million and $3 million, respectively. Additionally, as of June
30, 2008, we were committed to purchase $40 million of security access devices from NagraStar
during 2008.
30
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Related Party Transactions with DISH Network
Following the Spin-off, we and DISH Network have operated as separate public companies and DISH
Network has no ownership interest in us. However, a substantial majority of the voting power of
the shares of both companies is owned beneficially by our Chief Executive Officer and Chairman,
Charles W. Ergen.
We and DISH Network entered into certain transitional services agreements pursuant to which we will
obtain certain services and rights from DISH Network, DISH Network will obtain certain services and
rights from us, and we and DISH Network have indemnified each other against certain liabilities
arising from our respective businesses. The following is a summary of the terms of the principal
agreements that we have entered into with DISH Network that have an impact on our results of
operations.
In the near term, we expect that DISH Network will remain our principal customer. Pursuant to the
commercial agreements we entered into with DISH Network, we will sell equipment, including set-top
boxes, to DISH Network and we will provide digital broadcast operations and other products and
services to DISH Network. Generally, all agreements entered into in connection with the Spin-off
are based on pricing at cost plus an additional amount equal to an agreed percentage of our cost,
which will vary depending on the nature of the products and services provided. These commercial
agreements also provide for an arbitration mechanism in the event we are unable to reach agreement
with DISH Network as to the additional amounts payable for products and services, under which the
arbitrator will determine the additional amounts payable by reference to fair market value of the
products and services supplied.
Equipment sales DISH Network
|
|
|
Receiver Agreement. We entered into a receiver agreement for the sale of receivers and
other satellite television programming accessories to DISH Network. Under the receiver
agreement, DISH Network will have the right but not the obligation to purchase receivers,
accessories, and other equipment from us for a two year period. Additionally, we will
provide DISH Network with standard manufacturer warranties for the goods sold under the
receiver agreement. DISH Network may terminate the receiver agreement for any reason upon
sixty days written notice. We may also terminate this agreement if certain entities were
to acquire DISH Network. DISH Network has the right, but not the obligation, to extend the
receiver agreement annually for up to two years. The receiver agreement also includes an
indemnification provision, whereby the parties will indemnify each other for certain
intellectual property matters. |
Satellite services, digital broadcast operations and other services DISH Network
|
|
|
Broadcast Agreement. We entered into a broadcast agreement with DISH Network, whereby
DISH Network receives broadcast services, including teleport services such as transmission
and downlinking, channel origination, and channel management services from us, thereby
enabling DISH Network to deliver satellite television programming to subscribers. The
broadcast agreement has a term of two years beginning on January 1, 2008; however, DISH
Network has the right, but not the obligation, to extend the agreement annually for
successive one-year periods for up to two additional years. DISH Network may terminate
channel origination services and channel management services for any reason and without any
liability upon sixty days written notice to us. If DISH Network terminates teleport
services for a reason other than our breach, DISH Network shall pay us a sum equal to the
aggregate amount of the remainder of the expected cost of providing the teleport services. |
|
|
|
|
Real Estate Lease Agreements. We entered into lease agreements with DISH Network so
that DISH Network can continue to operate certain properties that were contributed to us in
the Spin-off. The rent on a per square foot basis for each of the leases is comparable to
per square foot rental rates of similar commercial property in the same geographic area,
and 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: |
31
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
Inverness Lease Agreement. The lease for 90 Inverness Circle East in Englewood,
Colorado, is for a period of two years.
Meridian Lease Agreement. The lease for 9601 S. Meridian Blvd. in Englewood, Colorado,
is for a period of two years with annual renewal options for up to three additional
years.
Santa Fe Lease Agreement. The lease for 5701 S. Santa Fe Dr. in Littleton, Colorado, is
for a period of two years with annual renewal options for up to three additional years.
|
|
|
Product Support Agreement. DISH Network needs us to provide product support (including
certain engineering and technical support services and IPTV functionality) for all
receivers and related accessories that our subsidiaries have sold and will sell to DISH
Network. As a result, we entered into a product support agreement, under which DISH
Network has the right, but not the obligation, to receive product support services in
respect of such receivers and related accessories. The term of the product support
agreement is the economic life of such receivers and related accessories, unless terminated
earlier. DISH Network may terminate the product support agreement for any reason upon sixty
days prior written notice. |
|
|
|
|
Satellite Capacity Agreements. We entered into satellite capacity agreements whereby a
DISH Network subsidiary, on a transitional basis, leases satellite capacity on satellites
owned or leased by us. The fees for the services to be provided under the satellite
capacity agreements are based on spot market prices for similar satellite capacity and
depend upon, among other things, the orbital location of the satellite and the frequency on
which the satellite provides services. Generally, each satellite capacity agreement will
terminate upon the earlier of: (i) the end of life or replacement of the satellite; (ii)
the date the satellite fails; (iii) the date that the transponder on which service is being
provided under the agreement fails; or (iv) two years from the effective date of such
agreement. |
|
|
|
|
Services Agreement. We entered into a services agreement with DISH Network under which
DISH Network has the right, but not the obligation, to receive logistics, procurement and
quality assurance services from us. This agreement has a term of two years. This
limited-term agreement is designed to facilitate the separation of us and DISH Network.
DISH Network may terminate the services agreement with respect to a particular service for
any reason upon sixty days prior written notice. |
General and administrative expenses DISH Network
|
|
|
Management Services Agreement. In connection with the Spin-off, we entered into a
management services agreement with DISH Network pursuant to which DISH Network makes
certain of its officers available to provide services (which are primarily legal and
accounting services) to EchoStar. Specifically, Bernard L. Han, R. Stanton Dodge and Paul
W. Orban remain employed by DISH Network, but serve as EchoStars Executive Vice President
and Chief Financial Officer, Executive Vice President and General Counsel, and Senior Vice
President and Controller, respectively. In addition, Carl E. Vogel remains employed by
DISH Network but provides services to EchoStar as an advisor. We will 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 will be 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 will also reimburse DISH Network for direct
out-of-pocket costs incurred by DISH Network for management services provided to us. We
and DISH Network evaluate all charges for reasonableness at least annually and make any
adjustments to these charges as we and DISH Network mutually agree upon. |
|
|
|
|
The management services agreement will continue in effect until January 1, 2009, and will be
renewed automatically for successive one-year periods thereafter, unless terminated earlier
(i) by us at any time upon at least 30 days prior written notice, (ii) by DISH Network at
the end of any renewal term, upon at least 180 days prior notice; and (iii) by DISH Network
upon written notice to us, following certain changes in control. |
32
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
|
|
|
Transition Services Agreement. We entered into a transition services agreement with
DISH Network pursuant to which DISH Network, or one of its subsidiaries, provides certain
transitional services to us. Under the transition services agreement, we have the right,
but not the obligation, to receive the following services from DISH Network: finance,
information technology, benefits administration, travel and event coordination, human
resources, human resources development (training), program management, internal audit and
corporate quality, legal, accounting and tax, and other support services. The transition
services agreement has a term of two years. |
Tax Sharing Agreement
|
|
|
We entered into a tax sharing agreement with DISH Network which governs our and DISH
Networks respective rights, responsibilities and obligations after the Spin-off with
respect to taxes for the periods ending on or before the Spin-off. Generally, all
pre-Spin-off taxes, including any taxes that are incurred as a result of restructuring
activities undertaken to implement the Spin-off, will be borne by DISH Network, and DISH
Network will indemnify us for such taxes. However, DISH Network will not be liable for and
will not indemnify us for any taxes that are incurred as a result of the Spin-off or
certain related transactions failing to qualify as tax-free distributions pursuant to any
provision of Section 355 or Section 361 of the Code because of (i) a direct or indirect
acquisition of any of our stock, stock options or assets, (ii) any action that we take or
fail to take or (iii) any action that we take that is inconsistent with the information and
representations furnished to the IRS in connection with the request for the private letter
ruling, or to counsel in connection with any opinion being delivered by counsel with
respect to the Spin-off or certain related transactions. In such case, we will be solely
liable for, and will indemnify DISH Network for, any resulting taxes, as well as any
losses, claims and expenses. The tax sharing agreement terminates after the later of the
full period of all applicable statutes of limitations, including extensions, or once all
rights and obligations are fully effectuated or performed. |
Other DISH Network Transactions
|
|
|
Nimiq 5 Lease Agreement. On March 11, 2008, we entered into a transponder service
agreement (the Transponder Agreement) with Bell ExpressVu Inc., in its capacity as
General Partner of Bell ExpressVu Limited Partnership (Bell ExpressVu), which provides,
among other things, for the provision by Bell ExpressVu to us of service on sixteen (16)
BSS transponders on the Nimiq 5 satellite at the 72.7 W.L. orbital location.. The Nimiq 5
satellite is expected to be launched in the second half of 2009. Bell ExpressVu currently
has the right to receive service on the entire communications capacity of the Nimiq 5
satellite pursuant to an agreement with Telesat Canada. On March 11, 2008, we also entered
into a transponder service agreement with DISH Network L.L.C. (DISH L.L.C.), a
wholly-owned subsidiary of DISH Network, pursuant to which DISH L.L.C. will receive service
from EchoStar on all of the BSS transponders covered by the Transponder Agreement (the
DISH Agreement). DISH Network guaranteed certain of our obligations under the
Transponder Agreement. |
|
|
|
|
Under the terms of the Transponder Agreement, we will make certain up-front payments to Bell
ExpressVu through the service commencement date on the Nimiq 5 satellite and thereafter will
make certain monthly payments to Bell ExpressVu for the remainder of the service term.
Unless earlier terminated under the terms and conditions of the Transponder Agreement, the
service term will expire fifteen years following the actual service commencement date of the
Nimiq 5 satellite. Upon expiration of this initial term, we have the option to continue to
receive service on the Nimiq 5 satellite on a month-to-month basis. Upon a launch failure,
in-orbit failure or end-of-life of the Nimiq 5 satellite, and in certain other
circumstances, we have certain rights to receive service from Bell ExpressVu on a
replacement satellite. |
|
|
|
|
Under the terms of the DISH Agreement, DISH L.L.C. will make certain monthly payments to us
commencing when the Nimiq 5 satellite is placed into service (the In-Service Date) and
continuing through the service term. Unless earlier terminated under the terms and
conditions of the DISH Agreement, the service term will expire ten years following the
In-Service Date. Upon expiration of the initial term, DISH L.L.C. has the option to renew
the DISH Agreement on a year-to-year basis through the
|
33
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Unaudited)
|
|
|
end-of-life of the Nimiq 5 satellite. Upon a launch failure, in-orbit failure or
end-of-life of the Nimiq 5 satellite, and in certain other circumstances, DISH L.L.C. has
certain rights to receive service from EchoStar on a replacement satellite. |
34
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Spin-off. Effective January 1, 2008, DISH Network Corporation (DISH Network) completed its
distribution to us (the Spin-off) of its set top box business and certain infrastructure and
other assets, including certain of its satellites, uplink and satellite transmission assets, real
estate and other assets and related liabilities. Our business now consists of the following
segments:
|
|
|
Equipment sales and digital broadcast operations Equipment sales include the sales of
set-top boxes and related components including Slingboxes to DISH Network and international
customers. Digital broadcast operations include satellite uplinking/downlinking,
transmission services, signal processing, conditional access management, telemetry,
tracking and control, and other services provided primarily to DISH Network. |
|
|
|
|
Satellite Services Satellite services consists principally of transponder leasing
provided primarily to DISH Network, and secondarily to other customers. |
Dependence on DISH Network. We currently depend on DISH Network for substantially all of the
revenue for each of our primary businesses. We expect that for the foreseeable future, DISH
Network will continue to be the primary source of revenue for each of these businesses. Therefore,
our results of operations are and will for the foreseeable future be closely linked to the
performance of DISH Networks satellite pay-TV business.
Changes in DISH Network subscriber growth could have a material adverse affect on our set-top box
sales. However, the impact to us of declining DISH Network subscriber growth may be offset over
the near term by an increase in sales to DISH Network resulting from the upgrade of DISH Network
subscribers to advanced products such as high definition (HD) receivers, digital video recorders
(DVRs) and HD DVRs, as well as by the upgrade of DISH set-top boxes to new technologies such as
MPEG-4. However we cannot assure you that any of these factors will mitigate declining subscriber
growth at DISH Network. In addition, because all of our sales to DISH Network are made pursuant to
short-term contracts, we can not assure you that DISH Network will continue to purchase products
and services from us on a long-term basis.
We expect to experience significant pressure on margins we earn on the sale of set-top boxes and
other equipment, including on sales to DISH Network. This pressure may be due to advancements in
the technology and functionality of set-top boxes and other equipment, as well as DISH Networks
right under commercial agreements between DISH Network and us that allow DISH Network to terminate
certain agreements on 60 days notice. We expect that the margins we earn on sales will be
determined largely through periodic negotiations which are likely to result in pricing that will
reflect, among other things, the set-top boxes and other equipment that best meet our customers
current sales and marketing priorities, the product and service alternatives available from other
equipment suppliers, and our ability to respond to customer requirements and to differentiate
ourselves from other equipment suppliers on bases other than pricing.
In addition, because the number of potential new customers for our set-top box, satellite services
and digital broadcast operations businesses is small and is likely to be limited by our
relationship with DISH Network, our current customer concentration is likely to continue for the
foreseeable future. Our future success may also depend on the extent to which prospective
customers that have been competitors of DISH Network are willing to purchase products and services
from us. Many of these customers may continue to view us as a competitor given the common
ownership and management team we continue to share with DISH Network.
Additional Challenges for our Set-top Box Business. We believe that our best opportunities for
developing potential new customers for our set-top box business lie in international markets, and
we therefore expect our performance in international markets to be a significant factor in
determining whether we will be able to generate revenue and income growth in future periods.
However, there can be no assurance that we will be able to sustain or grow our international
business.
In addition, unfavorable events in the economy, including a continuation or further deterioration
in the credit and equity markets, could cause consumer demand for pay-TV services and consequently
sales of our set-top boxes to
35
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Continued
materially decline because consumers may delay purchasing decisions or change or reduce their
discretionary spending.
Our ability to sustain or increase profitability will also depend in large part on our ability to
control or reduce our costs of producing set-top boxes. The market for our set-top boxes, like
other electronic products, has been characterized by regular reductions in selling prices and
production costs. Therefore, we will likely be required to reduce production costs in order to
maintain the margins we earn on set-top boxes and the profitability of our set-top box business.
Additional Challenges for our Satellite Services business. Following completion of the Spin-off,
we have begun to operate a satellite services business. This business is being developed using our
six owned and two leased in-orbit satellites, multiple digital broadcast centers and other
transmission assets. As with our set-top box business, DISH Network currently accounts for
substantially all of our satellite services revenue. While we expect to continue to provide
satellite services to DISH Network for the foreseeable future, its satellite capacity requirements
may change for a variety of reasons. In particular, DISH Network may reduce its purchase of
satellite services from us if it successfully completes the launch and orbital placement of
satellites that it has previously announced. Any termination or reduction in the services we
provide to DISH Network would increase excess capacity on our satellites and require that we
aggressively pursue alternative sources of revenue for this business.
However, our ability to expand revenues in the satellite services business will likely require that
we displace incumbent suppliers that generally have well established business models and often
benefit from long term contracts with customers. As a result, in order to grow our satellite
services business we may need to develop or otherwise acquire access to new satellite-delivered
services so that we may offer customers differentiated services or we may be required to compete
aggressively on the basis of pricing, either or both of which may affect our profitability.
We currently have substantial unused satellite capacity. Future costs associated with this excess
capacity will negatively impact our margins if we do not generate revenue to offset these costs.
In addition, because a substantial portion of the capacity of each of our AMC-15 and AMC-16
satellites remains without long-term contracts for their capacity, there is a significant risk that
in the future, in addition to reporting lower than expected revenues and profitability, we could be
required to record a substantial impairment charge relating to one or both of these satellites. We
currently estimate that these potential charges could aggregate up to approximately $200 million,
which, if incurred, would have a material adverse effect on our results of operations and financial
position.
We have suspended construction of the CMBStar satellite and in future periods may conclude it
appropriate to record an impairment charge. During April 2008, we notified the State
Administration of Radio, Film and Television of China that we were suspending construction of the
CMBStar satellite pending, among other things, further analysis relating to efforts to meet the
satellite performance criteria and/or confirmation that alternative performance criteria would be
acceptable. We are currently evaluating potential alternative uses for the CMBStar satellite. If
these alternative uses are unable to recover the carrying value invested to date in the satellite,
we may be required to record an impairment charge in a future period relating to the CMBStar
satellite. We currently estimate that this potential charge could be as much as $100 million,
which would have a material adverse effect on our results of operations and financial position.
General Risks. Our profitability will also be affected by costs associated with our efforts to
expand our sales, marketing, product development and general and administrative capabilities in all
of our businesses, as well as expenses that we incur as a separate publicly-traded company. These
costs include costs associated with, among other things, financial reporting, information
technology, complying with federal securities laws (including compliance with the Sarbanes-Oxley
Act of 2002), tax administration and human resources related functions. As we expand
internationally, we may also incur additional costs to conform our set-top boxes to comply with
local laws or local specifications and to ship our set-top boxes to our international customers.
36
Item 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Equipment sales DISH Network. Equipment sales DISH Network primarily includes sales of
set-top boxes and related components to DISH Network, including Slingboxes and related hardware
products.
Equipment sales other. Equipment sales other primarily includes sales of set-top boxes and
related components to Bell ExpressVu and other international customers, including sales of
Slingboxes and related hardware products.
Satellite services, digital broadcast operations and other services DISH Network. Satellite
services, digital broadcast operations and other services DISH Network primarily includes
revenue associated with satellite and transponder leasing, satellite uplinking/downlinking, signal
processing, conditional access management, telemetry, tracking and control, professional services
and facilities rental revenue.
Satellite and other services other. Satellite services and other services other primarily
includes revenue associated with satellite and transponder leasing, satellite uplinking/downlinking
and other services provided to customers other than DISH Network.
Cost of sales equipment. Cost of sales equipment principally includes costs associated
with set-top boxes and related components sold to DISH Network, Bell ExpressVu and other
international customers, including costs associated with Slingboxes and related hardware products.
Satellite services, digital broadcast operations and other cost of sales. Satellite services,
digital broadcast operations and other cost of sales principally includes costs associated with
satellite and transponder leasing, satellite uplinking/downlinking, signal processing, conditional
access management, telemetry, tracking and control, professional services and facilities rental
revenue.
Research and development expenses. Research and development expenses consist primarily of costs
associated with the design and development of our set-top boxes, Slingboxes and related components,
including among other things, salaries and consulting fees.
Selling, general and administrative expenses. Selling, general and administrative expenses
consists primarily of selling and marketing costs and employee-related costs associated with
administrative services including non-cash, stock-based compensation expense. It also includes
professional fees (i.e., legal, information systems and accounting services) and other items
associated with facilities and administration provided by DISH Network and other third parties.
Interest expense. Interest expense primarily includes interest expense associated with our
capital lease obligations.
Other income (expense). The main components of Other income and expense are unrealized gains
and losses from changes in fair value of marketable and non-marketable strategic investments
accounted for at fair value, equity in earnings and losses of our affiliates, gains and losses
realized on the sale of investments, and impairment of marketable and non-marketable investment
securities.
Earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA is defined as
Net income (loss) plus Interest expense net of Interest income, Income taxes and
Depreciation and amortization. This non-GAAP measure is reconciled to net income (loss) in our
discussion of Results of Operations below.
Free cash flow. We define free cash flow as Net cash flows from operating activities less
Purchases of property and equipment, as shown on our Condensed Consolidated Statements of Cash
Flows.
37
Item 2. MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
RESULTS OF OPERATIONS
Three Months Ended June 30, 2008 Compared to the Three Months Ended June 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
|
|
|
Ended June 30, |
|
|
Variance |
|
|
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
% |
|
Statements of Operations Data |
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment sales DISH Network |
|
$ |
301,039 |
|
|
$ |
274,973 |
|
|
$ |
26,066 |
|
|
|
9.5 |
|
Equipment sales other |
|
|
76,951 |
|
|
|
53,644 |
|
|
|
23,307 |
|
|
|
43.4 |
|
Satellite services, digital broadcast operations and other services DISH Network |
|
|
93,019 |
|
|
|
|
|
|
|
93,019 |
|
|
NM |
Satellite and other services other |
|
|
12,331 |
|
|
|
1,972 |
|
|
|
10,359 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
483,340 |
|
|
|
330,589 |
|
|
|
152,751 |
|
|
|
46.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales equipment |
|
|
317,483 |
|
|
|
310,310 |
|
|
|
7,173 |
|
|
|
2.3 |
|
% of Total equipment sales |
|
|
84.0 |
% |
|
|
94.4 |
% |
|
|
|
|
|
|
|
|
Satellite services, digital broadcast operations and other cost of sales |
|
|
57,699 |
|
|
|
925 |
|
|
|
56,774 |
|
|
NM |
% of Total satellite services, digital broadcast operations and other services |
|
|
54.8 |
% |
|
|
46.9 |
% |
|
|
|
|
|
|
|
|
Research and development expense |
|
|
13,899 |
|
|
|
14,923 |
|
|
|
(1,024 |
) |
|
|
(6.9 |
) |
% of Total revenue |
|
|
2.9 |
% |
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
33,633 |
|
|
|
16,505 |
|
|
|
17,128 |
|
|
NM |
% of Total revenue |
|
|
7.0 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
63,015 |
|
|
|
1,414 |
|
|
|
61,601 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
485,729 |
|
|
|
344,077 |
|
|
|
141,652 |
|
|
|
41.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(2,389 |
) |
|
|
(13,488 |
) |
|
|
11,099 |
|
|
|
82.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
19,444 |
|
|
|
568 |
|
|
|
18,876 |
|
|
NM |
Interest expense |
|
|
(8,278 |
) |
|
|
(270 |
) |
|
|
(8,008 |
) |
|
NM |
Other |
|
|
44,843 |
|
|
|
(602 |
) |
|
|
45,445 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
56,009 |
|
|
|
(304 |
) |
|
|
56,313 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
53,620 |
|
|
|
(13,792 |
) |
|
|
67,412 |
|
|
NM |
Income tax (provision) benefit, net |
|
|
(5,796 |
) |
|
|
(997 |
) |
|
|
(4,799 |
) |
|
NM |
Effective tax rate |
|
|
10.8 |
% |
|
|
(7.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
47,824 |
|
|
$ |
(14,789 |
) |
|
$ |
62,613 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
105,469 |
|
|
$ |
(12,676 |
) |
|
$ |
118,145 |
|
|
NM |
38
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Equipment sales DISH Network. Equipment sales DISH Network totaled $301 million during the
three months ended June 30, 2008, an increase of $26 million or 9.5% compared to the same period in
2007. This change resulted from an increase in the sale of advanced products such as receivers
with multiple tuners, HD receivers, and HD DVRs, partially offset by a decrease in unit sales of
set-top boxes. In addition, in connection with the Spin-off, set-top boxes and related components,
which were previously sold to DISH Network at cost, are sold at cost plus an agreed upon margin,
discussed below.
In the near term, we expect DISH Network to remain the primary customer of our set-top box business
and the primary source of our total revenue. Pursuant to the commercial agreements we entered into
with DISH Network, we will continue to be obligated to sell set-top boxes to DISH Network at cost
plus an additional amount that is equal to a fixed percentage of our cost for a period of two years
from the date of the Spin-off, although DISH Network will have no obligations to purchase set-top
boxes from us during or after this two year period.
Equipment sales other. Equipment sales other totaled $77 million during the three months
ended June 30, 2008, an increase of $23 million or 43.4% compared to the same period during 2007.
This change principally resulted from an increase in unit sales of set-top boxes and a shift to
higher priced units sold to Bell ExpressVu, partially offset by a decrease in sales to other
international customers.
We currently have certain binding purchase orders from Bell ExpressVu our primary non-DISH Network
customer extending into the fourth quarter of 2008. However, Bell ExpressVu has no future
obligation to purchase set-top boxes from us. Cancellations or reductions of customer orders could
result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory
and operating expenses.
Satellite services, digital broadcast operations and other services DISH Network. Satellite
services, digital broadcast operations and other services DISH Network totaled $93 million
during the three months ended June 30, 2008 resulting from the sales of services to DISH Network
including satellite and transponder leasing, and digital broadcast operations.
Satellite and other services other. Satellite services and other services other totaled
$12 million during the three months ended June 30, 2008, an increase of $10 million compared to the
same period during 2007. This change principally resulted from an increase in satellite and
transponder leasing and other services provided to customers other than DISH Network.
Cost of sales equipment. Cost of sales equipment totaled $317 million during the three
months ended June 30, 2008, an increase of $7 million or 2.3% compared to the same period in 2007.
This change primarily resulted from an increase in unit sales to Bell ExpressVu and in the cost per
unit of set-top boxes sold to Bell ExpressVu and DISH Network, partially offset by a decrease in
unit volume of set-top boxes sold to DISH Network and other international customers. Cost of
sales equipment represented 84.0% and 94.4% of total equipment sales during the three months
ended June 30, 2008 and 2007, respectively. Prior to the Spin-off, set-top boxes and related
components were historically sold to DISH Network at cost. The decrease in the expense to revenue
ratio principally resulted from the sale of set-top boxes and related components sold to DISH
Network at cost plus a fixed margin during the three months ended June 30, 2008. This decrease was
partially offset by a decline in margins on sales to Bell ExpressVu and other international
customers.
Satellite services, digital broadcast operations and other cost of sales. Satellite services,
digital broadcast operations and other cost of sales totaled $58 million during the three months
ended June 30, 2008, an increase of $57 million compared to the same period in 2007. This increase
principally resulted from the costs associated with digital broadcast operations and professional
services primarily provided to DISH Network. Satellite services, digital broadcast operations and
other cost of sales represented 54.8% and 46.9% of total Satellite services, digital broadcast
operations and other services revenue during the three months ended June 30, 2008 and 2007,
respectively. The increase in this expense to revenue ratio principally resulted from the
introduction of margins on DISH Network sales which did not exist in the prior year. The majority
of the costs associated with our satellites utilized in our satellite services business are
included in Depreciation and amortization expense discussed below.
39
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Selling, general and administrative expenses. Selling, general and administrative expenses
totaled $34 million during the three months ended June 30, 2008, an increase of $17 million
compared to the same period in 2007. This increase was attributable to an increase in certain
management and administrative services including non-cash, stock-based compensation expense,
primarily including those costs associated with the acquisition of Sling Media. Selling, general
and administrative expenses represented 7.0% and 5.0% of Total revenue during the three months
ended June 30, 2008 and 2007, respectively. The increase in the ratio of those expenses to Total
revenue was primarily attributable to the increase in expenses relative to the growth in revenue,
discussed previously.
Depreciation and amortization. Depreciation and amortization expense totaled $63 million during
the three months ended June 30, 2008, a $62 million increase compared to the same period in 2007.
The increase in Depreciation and amortization expense was primarily attributable to the
Depreciation and amortization expense associated with the contribution of satellites, digital
broadcast assets, real estate and other assets by DISH Network in connection with the Spin-off.
Interest income. Interest income totaled $19 million during the three months ended June 30,
2008, as a result of the cash and marketable investment securities contributed by DISH Network to
us in the Spin-off.
Interest expense, net of amounts capitalized. Interest expense totaled $8 million during the
three months ended June 30, 2008 as a result of interest associated with our capital leases
contributed to us in the Spin-off.
Other. Other income totaled $45 million during the three months ended June 30, 2008, primarily
resulted from a $68 million gain on the sale of a company which held certain FCC authorizations for
a publicly traded stock and a $45 million gain on the exchange of certain marketable investment
securities, partially offset by a $46 million charge to earnings for other than temporary declines
in fair value of our marketable investment securities. Additionally, the increase was partially
offset by a $20 million unrealized loss on a marketable investment security accounted for at fair
value.
Earnings before interest, taxes, depreciation and amortization. EBITDA was $105 million during the
three months ended June 30, 2008, an increase of $118 million compared to the same period in 2007.
The following table reconciles EBITDA to the accompanying financial statements.
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
EBITDA |
|
$ |
105,469 |
|
|
$ |
(12,676 |
) |
Less: |
|
|
|
|
|
|
|
|
Interest expense (income), net |
|
|
(11,166 |
) |
|
|
(298 |
) |
Income tax provision (benefit), net |
|
|
5,796 |
|
|
|
997 |
|
Depreciation and amortization |
|
|
63,015 |
|
|
|
1,414 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
47,824 |
|
|
$ |
(14,789 |
) |
|
|
|
|
|
|
|
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.
40
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Continued
Income tax (provision) benefit, net. Our income tax provision was $6 million during the three
months ended June 30, 2008. The increase in the provision was primarily related to our improvement
in Income (loss) before income taxes and the change in our effective tax rate resulting from
changes in our net deferred tax asset valuation allowance. Our effective tax rate was lower than the
U.S. Federal and state statutory rate of approximately 38% by 25 percentage points during the
period due to changes in our valuation allowance related to investment gains and losses.
Net income (loss). Net income was $48 million during the three months ended June 30, 2008, an
increase of $63 million compared to the same period in 2007. The improvement was primarily
attributable to the changes in revenue and expenses discussed above.
41
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued |
Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
|
|
|
|
Ended June 30, |
|
|
Variance |
|
|
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
% |
|
Statements of Operations Data |
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment sales DISH Network |
|
$ |
672,733 |
|
|
$ |
673,813 |
|
|
$ |
(1,080 |
) |
|
|
(0.2 |
) |
Equipment sales other |
|
|
151,773 |
|
|
|
98,752 |
|
|
|
53,021 |
|
|
|
53.7 |
|
Satellite services, digital broadcast operations and other services DISH Network |
|
|
185,489 |
|
|
|
|
|
|
|
185,489 |
|
|
NM |
|
Satellite and other services other |
|
|
27,916 |
|
|
|
5,787 |
|
|
|
22,129 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
1,037,911 |
|
|
|
778,352 |
|
|
|
259,559 |
|
|
|
33.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales equipment |
|
|
699,908 |
|
|
|
738,009 |
|
|
|
(38,101 |
) |
|
|
(5.2 |
) |
% of Total equipment sales |
|
|
84.9 |
% |
|
|
95.5 |
% |
|
|
|
|
|
|
|
|
Satellite services, digital broadcast operations and other cost of sales |
|
|
110,215 |
|
|
|
4,259 |
|
|
|
105,956 |
|
|
NM |
|
% of Total satellite services, digital broadcast operations and other
services |
|
|
51.6 |
% |
|
|
73.6 |
% |
|
|
|
|
|
|
|
|
Research and development expense |
|
|
27,565 |
|
|
|
29,044 |
|
|
|
(1,479 |
) |
|
|
(5.1 |
) |
% of Total revenue |
|
|
2.7 |
% |
|
|
3.7 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
64,966 |
|
|
|
35,591 |
|
|
|
29,375 |
|
|
|
82.5 |
|
% of Total revenue |
|
|
6.3 |
% |
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
123,985 |
|
|
|
2,909 |
|
|
|
121,076 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
1,026,639 |
|
|
|
809,812 |
|
|
|
216,827 |
|
|
|
26.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
11,272 |
|
|
|
(31,460 |
) |
|
|
42,732 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
40,813 |
|
|
|
942 |
|
|
|
39,871 |
|
|
NM |
|
Interest expense |
|
|
(16,561 |
) |
|
|
(537 |
) |
|
|
(16,024 |
) |
|
NM |
|
Casualty loss |
|
|
(12,799 |
) |
|
|
|
|
|
|
(12,799 |
) |
|
NM |
|
Other |
|
|
41,558 |
|
|
|
(766 |
) |
|
|
42,324 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
53,011 |
|
|
|
(361 |
) |
|
|
53,372 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
64,283 |
|
|
|
(31,821 |
) |
|
|
96,104 |
|
|
NM |
|
Income tax (provision) benefit, net |
|
|
(10,758 |
) |
|
|
(1,472 |
) |
|
|
(9,286 |
) |
|
NM |
|
Effective tax rate |
|
|
16.7 |
% |
|
|
(4.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
53,525 |
|
|
$ |
(33,293 |
) |
|
$ |
86,818 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
164,016 |
|
|
$ |
(29,317 |
) |
|
$ |
193,333 |
|
|
NM |
|
42
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued |
Equipment sales DISH Network. Equipment sales DISH Network totaled $673 million during the
six months ended June 30, 2008, a decrease of $1 million or 0.2% compared to the same period in
2007. This change resulted from a decrease in unit sales of set-top boxes, partially offset by an
increase in the sale of advanced products such as receivers with multiple tuners, HD receivers, and
HD DVRs. In addition, in connection with the Spin-off, set-top boxes and related components, which
were previously sold to DISH Network at cost, are sold at cost plus an agreed upon margin,
discussed below.
Equipment sales other. Equipment sales other totaled $152 million during the six months
ended June 30, 2008, an increase of $53 million or 53.7% compared to the same period during 2007.
This change principally resulted from an increase in unit sales and a shift to higher priced units
sold to Bell ExpressVu and to other international customers.
Satellite services, digital broadcast operations and other services DISH Network. Satellite
services, digital broadcast operations and other services DISH Network totaled $185 million
during the six months ended June 30, 2008 resulting from the sales of services to DISH Network
including satellite and transponder leasing, and digital broadcast operations in connection with
the Spin-off.
Satellite and other services other. Satellite services and other services other totaled $28
million during the six months ended June 30, 2008, an increase of $22 million compared to the same
period during 2007. This change principally resulted from the increase in satellite and
transponder leasing and other services provided to customers other than DISH Network and a one-time
revenue benefit recognized during the period.
Cost of sales equipment. Cost of sales equipment totaled $700 million during the six
months ended June 30, 2008, a decrease of $38 million or 5.2% compared to the same period in 2007.
This change primarily resulted from a decrease in unit volume partially offset by an increase in
the cost per unit of set-top boxes sold to DISH Network. In addition, this decrease was partially
offset by an increase in unit sales and in the cost per unit of set-top boxes sold to Bell
ExpressVu and other international customers. Cost of sales equipment represented 84.9% and
95.5% of total equipment sales during the six months ended June 30, 2008 and 2007, respectively.
Prior to the Spin-off, set-top boxes and related components were historically sold to DISH Network
at cost. The decrease in the expense to revenue ratio principally resulted from the sale of
set-top boxes and related components sold to DISH Network at cost plus a fixed margin during the
six months ended June 30, 2008. This decrease was partially offset by to a decline in margins on
sales of set-top boxes to Bell ExpressVu.
Satellite services, digital broadcast operations and other cost of sales. Satellite services,
digital broadcast operations and other cost of sales totaled $110 million during the six months
ended June 30, 2008, an increase of $106 million compared to the same period in 2007. This
increase principally resulted from the costs associated with digital broadcast operations and
professional services primarily provided to DISH Network. Satellite services, digital broadcast
operations and other cost of sales represented 51.6% and 73.6% of total Satellite services,
digital broadcast operations and other revenue during the six months ended June 30, 2008 and 2007,
respectively. The decrease in this expense to revenue ratio principally resulted from the
introduction of margins on DISH Network sales which did not exist in the prior year. The majority
of the costs associated with our satellites utilized in our satellite services business are
included in Depreciation and amortization expense discussed below.
Selling, general and administrative expenses. Selling, general and administrative expenses
totaled $65 million during the six months ended June 30, 2008, an increase of $29 million compared
to the same period in 2007. This increase was attributable to certain management and
administrative services including non-cash, stock-based compensation expense, primarily including
those costs associated with the acquisition of Sling Media. In addition, the increase related to
higher personal property and real estate taxes as a result of the real estate and other assets
contributed to us in connection with the Spin-off. Selling, general and administrative expenses
represented 6.3% and 4.6% of Total revenue during the six months ended June 30, 2008 and 2007,
respectively. The increase in the ratio of those expenses to Total revenue was primarily
attributable to the increase in expenses relative to the growth in revenue, discussed previously.
Depreciation and amortization. Depreciation and amortization expense totaled $124 million during
the six months ended June 30, 2008, a $121 million increase compared to the same period in 2007.
The increase was primarily attributable to expense associated with the contribution of satellites,
digital broadcast assets, real estate and other assets by DISH Network in connection with the
Spin-off.
43
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued |
Interest income. Interest income totaled $41 million during the six months ended June 30, 2008
as a result of the cash and marketable investment securities contributed by DISH Network to us in
the Spin-off.
Interest expense, net of amounts capitalized. Interest expense totaled $17 million during the
six months ended June 30, 2008 as a result of interest expense associated with our capital leases
contributed to us in the Spin-off.
Casualty loss. Casualty loss totaled $13 million during the six months ended June 30, 2008. In
connection with the AMC-14 launch failure, we wrote-off certain deposits, capitalized interest and
insurance costs, net of insurance proceeds (see Note 6 in the Notes to our Condensed Consolidated
Financial Statements).
Other.
Other income totaled $42 million during the
six months ended June 30, 2008 primarily
resulting from a $68 million gain on the sale of a company which held certain FCC authorizations
for a publicly traded stock and a $45 million gain on the exchange of certain marketable investment
securities, partially offset by a $46 million charge to earnings for other than temporary declines
in fair value of our marketable investment securities. Additionally, the increase was partially
offset by a $20 million unrealized loss on a marketable investment security accounted for at fair
value.
Earnings before interest, taxes, depreciation and amortization. EBITDA was $164 million during the
six months ended June 30, 2008, an increase of $193 million compared to the same period in 2007.
The following table reconciles EBITDA to the accompanying financial statements.
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
EBITDA |
|
$ |
164,016 |
|
|
$ |
(29,317 |
) |
Less: |
|
|
|
|
|
|
|
|
Interest expense (income), net |
|
|
(24,252 |
) |
|
|
(405 |
) |
Income tax provision (benefit), net |
|
|
10,758 |
|
|
|
1,472 |
|
Depreciation and amortization |
|
|
123,985 |
|
|
|
2,909 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
53,525 |
|
|
$ |
(33,293 |
) |
|
|
|
|
|
|
|
EBITDA is not a measure determined in accordance with accounting principles generally accepted in
the United States, or GAAP, and should not be considered a substitute for operating income, net
income or any other measure determined in accordance with GAAP. Conceptually, EBITDA measures the
amount of income generated each period that could be used to service debt, pay taxes and fund
capital expenditures. EBITDA should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with GAAP. EBITDA is used by our management
as a measure of operating efficiency and overall financial
performance for benchmarking against our peers and competitors. Management believes EBITDA
provides meaningful supplemental information regarding liquidity and the underlying operating
performance of our business. Management also believes that EBITDA is useful to investors because
it is frequently used by securities analysts, investors and other interested parties to evaluate
companies in the digital set-top box industry.
Income tax (provision) benefit, net. Our income tax provision was $11 million during the six
months ended June 30, 2008. The increase in the provision was primarily related to the improvement
in Income (loss) before income taxes and the change in our effective tax rate resulting from
changes in our net deferred tax asset valuation allowance. Our effective tax rate was lower than
the U.S. Federal and state statutory rate of approximately 38% by 21 percentage points during the
period due to changes in our valuation allowance related to investment gains and losses.
Net income (loss). Net income was $54 million during the six months ended June 30, 2008, an
increase of $87 million compared to the same period in 2007. The improvement was primarily
attributable to the changes in revenue and expenses discussed above.
44
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued |
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents and Marketable Investment Securities
We consider all liquid investments purchased within 90 days of their maturity to be cash
equivalents. See Item 3. Quantitative and Qualitative Disclosures about Market Risk for
further discussion regarding our marketable investment securities. Our restricted and unrestricted
cash, cash equivalents and current marketable investment securities as of June 30, 2008 totaled
$1.065 billion, including $3 million of restricted cash and marketable investment securities,
compared to $532 million of cash and marketable investment securities as of December 31, 2007. The
$533 million increase in restricted and unrestricted cash, cash equivalents and current marketable
investment securities was primarily related to the contribution of approximately $1.0 billion of
cash, cash equivalents and marketable investment securities to EchoStar in connection with the
Spin-off, offset by the purchase of non-current marketable and non-marketable securities.
At June 30, 2008, we hold approximately $354 million of investment securities reported as
non-current in Marketable and non-marketable investments securities on our Condensed Consolidated
Balance Sheets that are publicly traded. Of this amount, $207 million was previously included in
Marketable investment securities at December 31, 2007.
In connection with the Spin-off, DISH Network contributed its AMC-14 satellite services contract to
us. During March 2008, AMC-14 experienced a launch anomaly and failed to reach its intended orbit.
SES Americom subsequently declared the AMC-14 satellite a total loss due to a lack of viable
options to reposition the satellite to its proper geostationary orbit. Therefore, we have no
obligation to make any future monthly lease payments to SES Americom with respect to the satellite.
However, we did make up-front payments with respect to the satellite prior to launch and recorded
capitalized interest and insurance costs related to the satellite. These amounts, net of insurance
proceeds of $41 million, totaled $13 million and were written-off during the first quarter of 2008.
The insurance proceeds were collected during the second quarter of 2008.
The following discussion highlights our free cash flow and cash flow activities during the six
months ended June 30, 2008 compared to the same period in 2007.
Free Cash Flow
We define free cash flow as Net cash flows from operating activities less Purchases of property
and equipment, as shown on our Condensed Consolidated Statements of Cash Flows. We believe free
cash flow is an important liquidity metric because it measures, during a given period, the amount
of cash generated that is available to repay debt obligations, make investments, fund acquisitions
and for certain other activities. Free cash flow is not a measure determined in accordance with
GAAP and should not be considered a substitute for Operating income, Net income, Net cash
flows from operating activities or any other measure determined in accordance with GAAP. Since
free cash flow includes investments in operating assets, we believe this non-GAAP liquidity measure
is useful in addition to the most directly comparable GAAP measure Net cash flows from
operating activities.
During the six months ended June 30, 2008 and 2007, free cash flow was significantly impacted by
changes in operating assets and liabilities as shown in the Net cash flows from operating
activities section of our Condensed Consolidated Statements of Cash Flows included herein.
Operating asset and liability balances can fluctuate significantly from period to period and there
can be no assurance that free cash flow will not be negatively impacted by material changes in
operating assets and liabilities in future periods, since these changes depend upon, among other
things, managements timing of payments and control of inventory levels, and cash receipts. In
addition to fluctuations resulting from changes in operating assets and liabilities, free cash flow
can vary significantly from period to period depending upon, among other things, operating
efficiencies, increases or decreases in purchases of property and equipment and other factors.
45
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued |
The following table reconciles free cash flow to Net cash flows from operating activities.
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Free cash flow |
|
$ |
(97,066 |
) |
|
$ |
(114,678 |
) |
Add back: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
92,931 |
|
|
|
84,983 |
|
|
|
|
|
|
|
|
Net cash flows from operating activities |
|
$ |
(4,135 |
) |
|
$ |
(29,695 |
) |
|
|
|
|
|
|
|
The $18 million improvement in free cash flow during the six months ended June 30, 2008 compared to
the same period in 2007 resulted from an increase in Net cash flows from operating activities of
$26 million offset by an increase in Purchases of property and equipment of $8 million. The increase
in Net cash flows from operating activities was primarily attributable to a $165 million increase
in net income, adjusted to exclude non-cash changes in Depreciation and amortization expense and
Realized and unrealized losses (gains) on investments. This increase in Net cash flows from
operating activities was partially offset by a decrease in cash resulting from changes in
operating assets and liabilities of $143 million. This decrease in cash resulting from changes in
operating assets and liabilities was primarily attributable to a $227 million increase in net
receivables from DISH Network and a $31 million increase in inventory, partially offset by a $141 million increase in accounts payable.
Our improvement in free cash flow, discussed above, is not indicative of future changes in free
cash flow. Our 2007 free cash flow does not necessarily reflect what our free cash flow would have
been as a separate company during the periods prior to the Spin-off as our operations have
historically been dedicated primarily to support DISH Network and we provided our products and
services to DISH Network at cost.
Our future capital expenditures are likely to increase if we make additional investments in
infrastructure necessary to support and expand our satellite services business, if we increase the
number of set-top boxes that we produce as a result of the expansion of our business because of
improvements in the economy or otherwise, if we make additional investments in new businesses,
products and technologies, and if we decide to purchase one or more additional satellites.
Conversely, our future capital expenditures are likely to decrease if we are unable to successfully
compete in the market for satellite services, if we produce fewer set-top boxes as a result of a
decrease in actual or anticipated set-top box revenues, and if we do not make material investments
in new businesses, products and technology.
Obligations and Future Capital Requirements
Contractual Obligations
Future maturities of our contractual obligations as of June 30, 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
Total |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
|
(In thousands) |
|
Satellite-related obligations |
|
$ |
1,071,841 |
|
|
$ |
292,577 |
|
|
$ |
172,977 |
|
|
$ |
86,491 |
|
|
$ |
54,576 |
|
|
$ |
48,865 |
|
|
$ |
47,662 |
|
|
$ |
368,693 |
|
Capital lease obligations |
|
|
361,817 |
|
|
|
26,635 |
|
|
|
46,319 |
|
|
|
47,420 |
|
|
|
52,463 |
|
|
|
57,971 |
|
|
|
63,989 |
|
|
|
67,020 |
|
Operating lease obligations |
|
|
16,673 |
|
|
|
3,168 |
|
|
|
5,418 |
|
|
|
3,958 |
|
|
|
1,918 |
|
|
|
976 |
|
|
|
788 |
|
|
|
447 |
|
Purchase obligations |
|
|
1,059,294 |
|
|
|
1,040,128 |
|
|
|
15,833 |
|
|
|
3,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages and other notes payable |
|
|
11,497 |
|
|
|
1,743 |
|
|
|
1,923 |
|
|
|
1,185 |
|
|
|
852 |
|
|
|
808 |
|
|
|
873 |
|
|
|
4,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,521,122 |
|
|
$ |
1,364,251 |
|
|
$ |
242,470 |
|
|
$ |
142,387 |
|
|
$ |
109,809 |
|
|
$ |
108,620 |
|
|
$ |
113,312 |
|
|
$ |
440,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In certain circumstances the dates on which we are obligated to make these payments could be
delayed. These amounts will increase to the extent we procure insurance for our satellites or
contract for the construction, launch or lease of additional satellites.
We expect that our future working capital, capital expenditure and debt service requirements will
be satisfied primarily from existing cash and marketable investment securities balances and cash
generated from operations.
46
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Continued |
There can be no assurance we will be successful in executing our business plan. The amount of
capital required to fund our future working capital and capital expenditure needs will vary
depending on the levels of investment necessary to support possible strategic initiatives. Our
capital expenditures will vary depending on the number of satellites leased or under construction
at any point in time. Our working capital and capital expenditure requirements could increase
materially in the event of, among other factors, significant satellite failures, or general
economic downturn. These factors could require that we raise additional capital in the future.
There can be no assurance that we could raise all required capital or that required capital would
be available on acceptable terms.
From time to time we evaluate opportunities for strategic investments or acquisitions that may
complement our current services and products, enhance our technical capabilities, improve or
sustain our competitive position, or otherwise offer growth opportunities. Future material
investments or acquisitions may require that we obtain additional capital, assume third party
debt or other long-term obligations. Also, the plan to repurchase our Class A common stock
extends through December 31, 2008, which could require that we raise additional capital. The
maximum dollar value of shares that may be purchased under the plan is $1.0 billion, although we
have not repurchased any shares of Class A common stock under the plan to date. There can be no
assurance that we could raise all required capital or that required capital would be available on
acceptable terms.
Current dislocations in the credit markets, which have significantly impacted the availability and
pricing of financing, particularly in the high yield debt and leveraged credit markets, may
significantly constrain our ability to obtain financing to support our growth initiatives. These
developments in the credit markets may have a significant effect on our cost of financing and our
liquidity position and may, as a result, cause us to defer or abandon profitable business
strategies that we would otherwise pursue if financing were available on acceptable terms.
Interest on Long-Term Debt
As of June 30, 2008, future cash interest payments related to our debt are summarized in the table
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
Total |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
|
(In thousands) |
|
Mortgages and notes payable |
|
$ |
4,255 |
|
|
$ |
721 |
|
|
$ |
698 |
|
|
$ |
597 |
|
|
$ |
529 |
|
|
$ |
464 |
|
|
$ |
399 |
|
|
$ |
847 |
|
Capital lease obligations |
|
|
111,243 |
|
|
|
15,214 |
|
|
|
27,268 |
|
|
|
23,337 |
|
|
|
19,032 |
|
|
|
14,261 |
|
|
|
8,981 |
|
|
|
3,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
115,498 |
|
|
$ |
15,935 |
|
|
$ |
27,966 |
|
|
$ |
23,934 |
|
|
$ |
19,561 |
|
|
$ |
14,725 |
|
|
$ |
9,380 |
|
|
$ |
3,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
Item 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risks Associated With Financial Instruments
As of June 30, 2008, our restricted and unrestricted cash, cash equivalents and marketable
investment securities had a fair value of $1.065 billion. Of that amount, a total of $886 million
was invested in: (a) cash; (b) debt instruments of the U.S. Government and its agencies; (c)
commercial paper and notes with an overall average maturity of less than one year and rated in one
of the four highest rating categories by at least two nationally recognized statistical rating
organizations; and (d) instruments with similar risk characteristics to the commercial paper
described above. The primary purpose of these investing activities has been to preserve principal
until the cash is required to, among other things, fund operations, make strategic investments and
expand the business. Consequently, the size of this portfolio fluctuates significantly as cash is
received and used in our business.
Our restricted and unrestricted cash, cash equivalents and marketable investment securities had an
average annual return for the six months ended June 30, 2008 of 6.9%. A hypothetical 10% decrease
in interest rates would result in a decrease of approximately $8 million in annual interest income.
The value of certain of the investments in this portfolio can be impacted by, among other things,
the risk of adverse changes in securities and economic markets, as well as the risks related to the
performance of the companies whose commercial paper and other instruments we hold. The value of
these investments can also be impacted by interest rate fluctuations.
Included in our marketable investment securities portfolio balance is debt and equity of public
companies we hold for strategic and financial purposes. As of June 30, 2008, we held strategic and
financial debt and equity investments of public companies with a fair value of $179 million. These
investments are highly speculative and are concentrated in a small number of companies. We may
make additional strategic and financial investments in debt and other equity securities in the
future. The fair value of our strategic and financial debt and equity investments can be
significantly impacted by the risk of adverse changes in securities markets generally, as well as
risks related to the performance of the companies whose securities we have invested in, risks
associated with specific industries, and other factors. These investments are subject to
significant fluctuations in fair value due to the volatility of the securities markets and of the
underlying businesses. A hypothetical 10% adverse change in the price of our public strategic debt
and equity investments would result in a approximately $18 million decrease in the fair value of
that portfolio. The fair value of our strategic debt investments are currently not materially
impacted by interest rate fluctuations due to the nature of these investments.
Gains and losses on investment securities accounted for at fair value are recognized currently as
unrealized gains and losses on our Condensed Consolidated Statements of Operations. Interest
income on fair value method debt investment securities is recorded in Interest income on our
Condensed Consolidated Statements of Operations. Gains and losses on investment securities
accounted for as available-for-sale are reported at fair value with the related temporary
unrealized gains and losses reported as a separate component of Accumulated other comprehensive
income (loss) within Total stockholders equity (deficit), net of related deferred income tax on
our Condensed Consolidated Balance Sheets.
Declines in the fair value of an available-for-sale investment security which are determined to be
other than temporary are recognized in the Condensed Consolidated Statements of Operations in the
Other component of Other Income (Expense), thus establishing a new cost basis for the
investment. We evaluate our available-for-sale investment securities portfolio on a quarterly
basis to determine whether declines in the fair value of these securities are other than temporary.
This quarterly evaluation consists of reviewing, among other things, the fair value of our
marketable investment securities compared to the carrying amount, the historical volatility of the
price of each security and any market and company-specific factors related to each security.
Generally, absent specific factors to the contrary, declines in the fair value of investments below
cost basis for a continuous period of less than six months are considered to be temporary.
Declines in the fair value of investments for a continuous period of six to nine months are
evaluated on a case by case basis to determine whether any company or market-specific factors exist
which would indicate that such declines are other than temporary. Declines in the fair value of
investments below cost basis for a continuous period greater than nine months are considered other
than temporary and are recorded as charges to earnings, absent specific factors to the
contrary.
For the equity securities that are not publicly traded, it is not practical to regularly estimate
the fair value of the investments; however, these investments are subject to an evaluation for
other than temporary impairment on a quarterly basis. This quarterly evaluation consists of
reviewing, among other things, company business plans and
48
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Continued
current financial statements, if available, for factors that may indicate an impairment of our
investment. Such factors may include, but are not limited to, cash flow concerns, material
litigation, violations of debt covenants and changes in business strategy. The fair value of these
equity investments is not estimated unless there are identified changes in circumstances that may
indicate an impairment exists and these changes are likely to have a significant adverse effect on
the fair value of the investment.
We also have an investment in non-marketable convertible debt which is included in Marketable and
non-marketable investment securities on our Condensed Consolidated Balance Sheets. This debt is
fair valued each reporting period based upon inputs other than quoted market prices that are
observable for the debt, either directly or indirectly with changes in fair value recorded as
unrealized gains and losses on our Condensed Consolidated Statements of Operations. The fair value
analysis takes into consideration the price of the underlying company stock as well as changes in
the credit market, including yield curves and interest rates.
Our ability to realize value from our strategic investments in companies that are not publicly
traded depends on the success of those companies businesses and their ability to obtain sufficient
capital to execute their business plans. Because private markets are not as liquid as public
markets, there is also increased risk that we will not be able to sell these investments, or that
when we desire to sell them we will not be able to obtain fair value for them.
Current Marketable Investment Securities
As of June 30, 2008 and December 31, 2007, the fair values of our marketable investment securities
and strategic marketable investment securities, which are included in Marketable investment
securities on our Condensed Consolidated Balance Sheets, were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Marketable investment securities |
|
$ |
81,199 |
|
|
$ |
|
|
Marketable investment securities strategic |
|
|
178,965 |
|
|
$ |
491,185 |
|
|
|
|
|
|
|
|
Total marketable investment securities |
|
$ |
260,164 |
|
|
$ |
491,185 |
|
|
|
|
|
|
|
|
At June 30, 2008, we hold approximately $354 million of investment securities reported as
non-current in Marketable and non-marketable investments securities on our Condensed Consolidated
Balance Sheets that are publicly traded. Of this amount, $207 million was previously included in
Marketable investment securities at December 31, 2007.
Our strategic marketable investment securities are highly speculative and are concentrated in a
small number of companies. Additionally, during the six months ended June 30, 2008 our strategic
investments have experienced and continue to experience volatility. If the fair value of our
strategic marketable investment securities portfolio, accounted for as available-for-sale, does not
remain above cost basis or if we become aware of any market or
company-specific factors that indicate that the carrying value of certain of our securities is
impaired, we may be required to record charges to earnings in future periods equal to the amount of
the decline in fair value.
As of June 30, 2008 and December 31, 2007, we had accumulated unrealized losses of $48 million, net
of related tax effect, and unrealized gains of $64 million, net of related tax effect, as a part of
Accumulated other comprehensive income (loss) within Total stockholders equity (deficit),
respectively.
Marketable Investment Securities in a Loss Position. The following table reflects the length of
time that the individual securities, accounted for as available-for-sale, have been in an
unrealized loss position, aggregated by investment category. The unrealized losses on our
investments in corporate equity securities represent investments in the common stock of five
companies and losses on our investments in corporate debt represent investments in the marketable
corporate debt of two companies. Of our investments in debt and equity securities, five are in
companies in the communications industry and one is in the technology industry. We are not aware
of any specific factors which
49
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Continued
indicate the unrealized loss in these investments is due to anything other than temporary market
fluctuations. In addition, we have the ability and intent to hold our investments in Corporate
bonds until maturity when the issuers are required to redeem them at their full face value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008 |
|
|
|
Primary |
|
|
Less than Six Months |
|
|
Six to Nine Months |
|
|
Nine Months or More |
|
Investment |
|
Reason for |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Category |
|
Unrealized Loss |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
Temporary market fluctuations |
|
$ |
33,074 |
|
|
$ |
(958 |
) |
|
$ |
16,770 |
|
|
$ |
(2,503 |
) |
|
$ |
|
|
|
$ |
|
|
Corporate equity securities |
|
Temporary market fluctuations |
|
|
19,384 |
|
|
|
(2,338 |
) |
|
|
84,539 |
|
|
|
(46,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
52,458 |
|
|
$ |
(3,296 |
) |
|
$ |
101,309 |
|
|
$ |
(49,497 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Current Marketable and Non-Marketable Investment Securities
We account for our unconsolidated equity investments under the fair value, equity or cost method of
accounting. Non-majority owned investments are generally accounted for using the equity method
when we have the ability to significantly influence the operating decisions of the issuer.
However, when we believe the fair value method of accounting provides more meaningful information to our
investors, we elect the fair value method for certain investments in affiliates whose equity is
publicly traded. When we do not have the ability to significantly influence the operating
decisions of an issuer, the cost method is used.
We also have several strategic debt and equity investments and other equity securities which are
included in Marketable and non-marketable investment securities on our Condensed Consolidated
Balance Sheets. These consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Fair value method |
|
$ |
416,055 |
|
|
$ |
|
|
Cost method |
|
|
38,389 |
|
|
|
39,046 |
|
Equity method |
|
|
17,419 |
|
|
|
20,114 |
|
|
|
|
|
|
|
|
Total |
|
$ |
471,863 |
|
|
$ |
59,160 |
|
|
|
|
|
|
|
|
During the six months ended June 30, 2008, we recorded $20 million of unrealized losses due to
changes in the fair value of certain debt and equity securities on our Condensed Consolidated
Statements of Operations.
Other income and expense included on our Condensed Consolidated Statements of Operations includes
other changes in the carry amount of our current and non-current marketable investment securities
and other items as follows:
50
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Gain on sale of a company which held certain FCC authorizations |
|
$ |
67,624 |
|
|
$ |
|
|
|
$ |
67,624 |
|
|
$ |
|
|
Gains on sale of marketable investment securities |
|
|
44,873 |
|
|
|
|
|
|
|
45,253 |
|
|
|
1,984 |
|
Other than temporary impairments |
|
|
(44,650 |
) |
|
|
|
|
|
|
(46,073 |
) |
|
|
|
|
Other |
|
|
(3,361 |
) |
|
|
(602 |
) |
|
|
(5,603 |
) |
|
|
(2,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
64,486 |
|
|
$ |
(602 |
) |
|
$ |
61,201 |
|
|
$ |
(766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008, we have $373 million of long-term debt, of which $351 million represents our
capital lease obligations, which are not subject to the requirements of Financial Accounting
Standards Board Statement No. 107 Disclosures about Fair Value of Financial Instruments
(FAS107).
In general, we do not use derivative financial instruments for hedging or speculative purposes, but
we may do so in the future.
51
Item 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
the end of the period covered by this report.
There has been no change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934) during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Separation Agreement
In connection with the Spin-off, we have entered into a separation agreement with DISH Network,
which provides for, among other things, the division of liability resulting from litigation. Under
the terms of the separation agreement, we have assumed liability for any acts or omissions that
relate to our business whether such acts or omissions occurred before or after the Spin-off.
Certain exceptions are provided, including for intellectual property related claims generally,
whereby we will only be liable for our acts or omissions that occurred following the Spin-off.
Therefore, we have been indemnified by DISH Network for any potential liability or damages
resulting from intellectual property claims relating to the period prior to the effective date of
the Spin-off.
Acacia
During 2004, Acacia Media Technologies, (Acacia) filed a lawsuit against us and DISH Network in
the United States District Court for the Northern District of California. The suit also named
DirecTV, Comcast, Charter, Cox and a number of smaller cable companies as defendants. Acacia is an
intellectual property holding company which seeks to license the patent portfolio that it has
acquired. The suit alleges infringement of United States Patent Nos. 5,132,992 (the 992 patent),
5,253,275 (the 275 patent), 5,550,863 (the 863 patent), 6,002,720 (the 720 patent) and 6,144,702
(the 702 patent). The 992, 863, 720 and 702 patents have been asserted against us.
The patents relate to various systems and methods related to the transmission of digital data. The
992 and 702 patents have also been asserted against several Internet content providers in the
United States District Court for the Central District of California. During 2004 and 2005, the
Court issued Markman rulings which found that the 992 and 702 patents were not as broad as Acacia
had contended, and that certain terms in the 702 patent were indefinite. The Court issued
additional claim construction rulings on December 14, 2006, March 2, 2007, October 19, 2007, and
February 13, 2008. On March 12, 2008, the Court issued an order outlining a schedule for filing
dispositive invalidity motions based on its claim constructions. Acacia has agreed to stipulate
that all claims in the suit are invalid according to various of the Courts claim constructions and
argues that the case should proceed immediately to the Federal Circuit on appeal. The Court,
however, is permitting us to file additional invalidity motions.
Acacias various patent infringement cases have been consolidated for pre-trial purposes in the
United States District Court for the Northern District of California. We intend to vigorously
defend this case. In the event that a Court ultimately determines that we infringe any of the
patents, we may be subject to substantial damages, which may include treble damages and/or an
injunction that could require us to materially modify certain user-friendly features that we
currently offer to consumers. We are being indemnified by DISH Network for any potential liability
or damages resulting from this suit relating to the period prior to the effective date of the
Spin-off. We cannot predict with any degree of certainty the outcome of the suit or determine the
extent of any potential liability or damages.
52
PART II OTHER INFORMATION Continued
Broadcast Innovation, L.L.C.
In 2001, Broadcast Innovation, L.L.C. (Broadcast Innovation) filed a lawsuit against DISH
Network, DirecTV, Thomson Consumer Electronics and others in Federal District Court in Denver,
Colorado. The suit alleges infringement of United States Patent Nos. 6,076,094 (the 094 patent)
and 4,992,066 (the 066 patent). The 094 patent relates to certain methods and devices for
transmitting and receiving data along with specific formatting information for the data. The 066
patent relates to certain methods and devices for providing the scrambling circuitry for a pay
television system on removable cards. We examined these patents and believe that they are not
infringed by any of our products or services. Subsequently, DirecTV and Thomson settled with
Broadcast Innovation leaving us as the only defendant.
During 2004, the judge issued an order finding the 066 patent invalid. Also in 2004, the Court
ruled the 094 patent invalid in a parallel case filed by Broadcast Innovation against Charter and
Comcast. In 2005, the United States Court of Appeals for the Federal Circuit overturned the 094
patent finding of invalidity and remanded the case back to the District Court. During June 2006,
Charter filed a reexamination request with the United States Patent and Trademark Office. The
Court has stayed the case pending reexamination. Our case remains stayed pending resolution of the
Charter case.
We intend to vigorously defend this case. In the event that a Court ultimately determines that we
infringe any of the patents, we may be subject to substantial damages, which may include treble
damages and/or an injunction that could require us to materially modify certain user-friendly
features that we currently offer to consumers. We are being indemnified by DISH Network for any
potential liability or damages resulting from this suit relating to the period prior to the
effective date of the Spin-off. We cannot predict with any degree of certainty the outcome of the
suit or determine the extent of any potential liability or damages.
Datasec
During April 2008, Datasec Corporation (Datasec) sued us, DISH Network and DirecTV Corporation
in the United States District Court for the Central District of California, alleging infringement
of U.S. Patent No. 6,075,969 (the 969 patent). The 969 patent was issued in 2000 to inventor
Bruce Lusignan, and is entitled Method for Receiving Signals from a Constellation of Satellites
in Close Geosynchronous Orbit.
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 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.
Finisar Corporation
Finisar Corporation (Finisar) obtained a $100 million verdict in the United States District Court
for the Eastern District of Texas against DirecTV for patent infringement. Finisar alleged that
DirecTVs electronic program guide and other elements of its system infringe United States Patent
No. 5,404,505 (the 505 patent).
In July 2006, DISH Network, together with NagraStar LLC, filed a Complaint for Declaratory Judgment
in the United States District Court for the District of Delaware against Finisar that asks the
Court to declare that they and we do not infringe, and have not infringed, any valid claim of the
505 patent. Trial is not currently scheduled. The District Court has stayed our action until the
Federal Circuit has resolved DirecTVs appeal. During April 2008, the Federal Circuit reversed the
judgment against DirecTV and ordered a new trial. We are evaluating the Federal Circuits decision
to determine the impact on our action.
We intend to vigorously prosecute this case. In the event that a Court ultimately determines that
we infringe this patent, we may be subject to substantial damages, which may include treble damages
and/or an injunction that could
require us to modify our system architecture. We are being indemnified by DISH Network for any
potential liability or damages resulting from this suit relating to the period prior to the
effective date of the Spin-off. We cannot
53
PART II OTHER INFORMATION Continued
predict with any degree of certainty the outcome of the suit or determine the extent of any
potential liability or damages.
Global Communications
On April 19, 2007, Global Communications, Inc., which we refer to as Global, filed a patent
infringement action against DISH Network in the United States District Court for the Eastern
District of Texas. The suit alleges infringement of United States Patent No. 6,947,702 (the 702
patent). This patent, which involves satellite reception, was issued in September 2005. On
October 24, 2007, the United States Patent and Trademark Office granted our request for
reexamination of the 702 patent and issued an Office Action finding that all of the claims of the
702 patent were invalid. Based on the PTOs decision, we have asked the District Court to stay
the litigation until the reexamination proceeding is concluded.
We intend to vigorously defend this case. In the event that a Court ultimately determines that we
infringe the 702 patent, we may be subject to substantial damages, which may include treble
damages and/or an injunction that could require us to materially modify certain user-friendly
features that we currently offer to consumers. We are being indemnified by DISH Network for any
potential liability or damages resulting from this suit relating to the period prior to the
effective date of the Spin-off. We cannot predict with any degree of certainty the outcome of the
suit or determine the extent of any potential liability or damages.
Personalized Media Communications
In February 2008, Personalized Media Communications, Inc. filed suit against us, DISH Network and
Motorola, Inc. in the United States District Court for the Eastern District of Texas alleging
infringement of United States Patent Nos. 4,694,490 (the 490 patent), 5,109,414 (the 414
patent), 4,965,825 (the 825 patent), 5,233,654 (the 654 patent), 5,335,277 (the 277 patent),
and 5,887,243 (the 243 patent), all of which were issued to John Harvey and James Cuddihy as
named inventors. The 490 patent, the 414 patent, the 825 patent, the 654 patent and the 277
patent are defined as the Harvey Patents. The Harvey Patents are entitled Signal Processing
Apparatus and Methods. The lawsuit alleges, among other things, that our DBS system receives
program content at broadcast reception and satellite uplinking facilities and transmits such
program content, via satellite, to remote satellite receivers. The lawsuit further alleges that
we infringe the Harvey Patents by transmitting and using a DBS signal specifically encoded to
enable the subject receivers to function in a manner that infringes the Harvey Patents, and by
selling services via DBS transmission processes which infringe the Harvey Patents.
We intend to vigorously defend this case. In the event that a Court ultimately determines that we
infringe any of the asserted patents, we may be subject to substantial damages, which may include
treble damages and/or an injunction that could require us to materially modify certain
user-friendly features that we currently offer to consumers. We are being indemnified by DISH
Network for any potential liability or damages resulting from this suit relating to the period
prior to the effective date of the Spin-off. We cannot predict with any degree of certainty the
outcome of the suit or determine the extent of any potential liability or damages.
Superguide
During 2000, Superguide Corp. (Superguide) filed suit against us. DISH Network, DirecTV, Thomson
and others in the United States District Court for the Western District of North Carolina,
Asheville Division, alleging infringement of United States Patent Nos. 5,038,211 (the 211 patent),
5,293,357 (the 357 patent) and 4,751,578 (the 578 patent) which relate to certain electronic
program guide functions, including the use of electronic program guides to control VCRs.
Superguide sought injunctive and declaratory relief and damages in an unspecified amount.
On summary judgment, the District Court ruled that none of the asserted patents were infringed by
us. These rulings were appealed to the United States Court of Appeals for the Federal Circuit.
During 2004, the Federal Circuit
affirmed in part and reversed in part the District Courts findings and remanded the case back to
the District Court for further proceedings. In 2005, Superguide indicated that it would no longer
pursue infringement allegations with respect to the 211 and 357 patents and those patents have
now been dismissed from the suit. The District Court subsequently entered judgment of
non-infringement in favor of all defendants as to the 211 and 357 patents and ordered briefing on
Thomsons license defense as to the 578 patent. During December 2006, the District Court
54
PART II OTHER INFORMATION Continued
found that there were disputed issues of fact regarding Thomsons license defense, and ordered a
trial solely addressed to that issue. That trial took place in March 2007. In July 2007, the
District Court ruled in favor of Superguide. As a result, Superguide will be able to proceed with
its infringement action against us, DirecTV and Thomson. In June 2008, we moved for summary
judgment asking the Court to find, among other things, that the 578 patent is invalid.
We intend to vigorously defend this case. In the event that a Court ultimately determines that we
infringe the 578 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
electronic programming guide and related 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.
On January 31, 2008, the U.S. Court of Appeals for the Federal Circuit affirmed in part and
reversed in part the April 2006 jury verdict concluding that certain of our digital video
recorders, or DVRs, infringed a patent held by Tivo. In its decision, the Federal Circuit affirmed
the jurys verdict of infringement on Tivos software claims, upheld the award of damages from
the district court, and ordered that the stay of the district courts injunction against us, which
was issued pending appeal, will dissolve when the appeal becomes final. The Federal Circuit,
however, found that we did not literally infringe Tivos hardware claims, and remanded such
claims back to the district court for further proceedings. We are appealing the Federal Circuits
ruling to the United States Supreme Court.
In addition, we have developed and deployed next-generation DVR software to our customers DVRs.
This improved software is fully operational and has been automatically downloaded to current
customers (our alternative technology). We have formal legal opinions from outside counsel that
conclude that our alternative technology does not infringe, literally or under the doctrine of
equivalents, either the hardware or software claims of Tivos patent. Tivo has filed a motion for
contempt alleging that we are in violation of the Courts injunction. We have vigorously opposed
the motion arguing that the Courts injunction does not apply to DVRs that have received our
alternative technology, that our alternative technology does not infringe Tivos patent, and that
we are in compliance with the Injunction. The Court has set September 4, 2008 as the hearing date
for Tivos motion for contempt.
If we are unsuccessful in our appeal to the United States Supreme Court, or in defending against
Tivos motion for contempt or any subsequent claim that our alternative technology infringes Tivos
patent, we could be prohibited from distributing DVRs, or be required to modify or eliminate
certain user-friendly DVR features that we currently offer to consumers. In that event we would be
at a significant disadvantage to our competitors who could offer this functionality. We could also
have to pay substantial additional damages. We are being indemnified by DISH Network for any
potential liability or damages resulting from this suit relating to the period prior to the
effective date of the Spin-off. Although we believe that we do not infringe under any of the
claims asserted against us and DISH Network, we cannot predict with any degree of certainty the
outcome of the suit or determine the extent of any potential liability or damages.
Other
In addition to the above actions, we are subject to various other legal proceedings and claims
which arise in the ordinary course of business. In our opinion, the amount of ultimate liability
with respect to any of these actions is unlikely to materially affect our financial position,
results of operations or liquidity.
55
PART II OTHER INFORMATION Continued
Item 1A. RISK FACTORS
Item 1A, Risk Factors, of our Annual Report on Form 10-K/A for 2007 includes a detailed
discussion of our risk factors. The information presented below updates, and should be read in
conjunction with, the risk factors and information disclosed in our Annual Report on Form 10-K/A
for 2007.
We currently depend on DISH Network for substantially all of our revenue for satellite services and
digital broadcast operations.
DISH Network is currently our primary customer of satellite services and digital broadcast
operation services. Because these services are provided pursuant to contracts that generally
expire on January 1, 2010, DISH Network will have no obligation to purchase satellite services or
digital broadcast operation services from us after that date. Therefore, if we are unable to
extend these contracts on similar terms with DISH Network, or we are unable to obtain similar
contracts from third parties after that date, there could be a significant adverse effect on our
business, results of operations and financial position.
We have suspended construction of the CMBStar satellite and in future periods may conclude it
appropriate to record an impairment charge.
During April 2008, we notified the State Administration of Radio, Film and Television of China that
we were suspending construction of the CMBStar satellite pending, among other things, further
analysis relating to efforts to meet the satellite performance criteria and/or confirmation that
alternative performance criteria would be acceptable. We are currently evaluating potential
alternative uses for the CMBStar satellite. If these alternative uses are unable to recover the
carrying value invested to date in the satellite, we may be required to record an impairment charge
in a future period relating to the CMBStar satellite. We currently estimate that this potential
charge could be as much as $100 million, which would have a material adverse effect on our results
of operations and financial position.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information regarding purchases of our Class A common stock from April
1, 2008 through June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total Number of |
|
|
Maximum Approximate |
|
|
|
Number of |
|
|
|
|
|
|
Shares Purchased as |
|
|
Dollar Value of Shares |
|
|
|
Shares |
|
|
Average |
|
|
Part of Publicly |
|
|
that May Yet be |
|
|
|
Purchased |
|
|
Price Paid |
|
|
Announced Plans or |
|
|
Purchased Under the |
|
Period |
|
(a) |
|
|
per Share |
|
|
Programs |
|
|
Plans or Programs (b) |
|
|
|
(In thousands, except share data) |
|
|
|
|
|
April 1 April 30, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
1,000,000 |
|
May 1 May 31, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
1,000,000 |
|
June 1 June 30, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
1,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
1,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During the period from April 1, 2008 through June 30, 2008, we did not repurchase any of our
Class A common stock pursuant to our repurchase program. |
|
(b) |
|
In November 2007, our Board of Directors authorized the purchase of up to $1.0 billion of our
Class A common stock during 2008. Purchases under our repurchase 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 the maximum amount of shares allowable under this program and we may
also enter into additional share repurchase programs authorized by our Board of Directors. |
56
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 June 5,
2008:
|
a. |
|
The election of Michael T. Dugan, Charles W. Ergen, Steven R. Goodbarn, David K.
Moskowitz, Tom A. Ortolf, Michael Schroeder, and Carl E. Vogel as directors to serve until
the 2009 annual meeting of shareholders; and |
|
|
b. |
|
Ratification of the appointment of KPMG LLP as our independent registered public
accounting firm for the fiscal year ending December 31, 2008. |
All matters voted on at the annual meeting were approved. The voting results were as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes |
|
|
|
|
|
|
|
|
Against/ |
|
|
|
|
|
Broker |
|
|
For |
|
Withheld |
|
Abstain |
|
Non-Votes |
Election as directors: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael T. Dugan |
|
|
506,813,345 |
|
|
|
5,976,925 |
|
|
|
|
|
|
|
|
|
Charles W. Ergen |
|
|
507,251,914 |
|
|
|
5,538,356 |
|
|
|
|
|
|
|
|
|
Steven R. Goodbarn |
|
|
512,341,869 |
|
|
|
448,401 |
|
|
|
|
|
|
|
|
|
David K. Moskowitz |
|
|
506,839,650 |
|
|
|
5,950,620 |
|
|
|
|
|
|
|
|
|
Tom A. Ortolf |
|
|
512,403,790 |
|
|
|
386,480 |
|
|
|
|
|
|
|
|
|
C. Michael Schroeder |
|
|
512,403,899 |
|
|
|
386,371 |
|
|
|
|
|
|
|
|
|
Carl E. Vogel |
|
|
506,839,621 |
|
|
|
5,950,649 |
|
|
|
|
|
|
|
|
|
Ratification of the appointment of KPMG LLP as
our independent registered
public accounting firm for the fiscal year ending December 31, 2008 |
|
|
512,656,865 |
|
|
|
120,424 |
|
|
|
12,981 |
|
|
|
|
|
Item 6. EXHIBITS
(a) Exhibits.
|
|
|
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. |
|
|
|
o
|
|
Filed herewith. |
|
* |
|
Incorporated by reference. |
57
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.
|
|
|
|
|
|
ECHOSTAR CORPORATION
|
|
|
By: |
/s/ Charles W. Ergen
|
|
|
|
Charles W. Ergen |
|
|
|
Chairman and Chief Executive Officer
(Duly Authorized Officer) |
|
|
|
|
|
|
By: |
/s/ Bernard L. Han
|
|
|
|
Bernard L. Han |
|
|
|
Executive Vice President and Chief Financial Officer
|
|
|
|
(Principal Financial Officer) |
|
|
Date: August 4, 2008
58
EXHIBIT INDEX
|
|
|
Exhibit Number |
|
|
|
|
|
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. |
|
|
|
o
|
|
Filed herewith. |
|
* |
|
Incorporated by reference. |