Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014.

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM                      TO                     .

 

Commission File Number:  001-33807

 

EchoStar Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada

 

26-1232727

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

100 Inverness Terrace East, Englewood, Colorado

 

80112-5308

(Address of Principal Executive Offices)

 

(Zip Code)

 

(303) 706-4000

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  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 x

 

Accelerated filer o

 

Non-accelerated filer o

 

Smaller reporting

 

 

 

 

(Do not check if a smaller
reporting company)

 

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  x

 

As of April 25, 2014, the Registrant’s outstanding common stock consisted of 43,244,359 shares of Class A common stock and 47,687,039 shares of Class B common stock.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

Disclosure Regarding Forward-Looking Statements

i

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

 

 

Condensed Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013

1

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013 (Unaudited)

2

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2014 and 2013 (Unaudited)

3

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2014 and 2013 (Unaudited)

4

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (Unaudited)

5

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

39

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

54

Item 4.

Controls and Procedures

56

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

57

Item 1A.

Risk Factors

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 3.

Defaults upon Senior Securities

None

Item 4.

Mine Safety Disclosures

None

Item 5.

Other Information

None

Item 6.

Exhibits

59

 

Signatures

60

 



Table of Contents

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, in particular, statements about our estimates, expectations, plans, objectives, strategies, results of operations and financial condition, expected impact of regulatory developments and legal proceedings, opportunities in our industries and businesses and other trends and projections for the next fiscal quarter and beyond. All statements, other than statements of historical facts, may be forward-looking statements. Forward-looking statements may also be identified by words such as “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “estimate,” “expect,” “predict,” “continue,” “future,” “will,” “would,” “could,” “can,” “may” and similar terms.  These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and represent management’s current views and assumptions.  Forward-looking statements are not guarantees of future performance, events or results and involve potential known and unknown risks, uncertainties and other factors, many of which may be beyond our control and may pose a risk to our operating and financial condition.  Accordingly, actual performance, events or results could differ materially from those expressed or implied in the forward-looking statements due to a number of factors including, but not limited to:

 

·      our reliance on our primary customer, DISH Network Corporation (“DISH Network”), for a significant portion of our revenue;

 

·      the impact of variable demand and the adverse pricing environment for digital set-top boxes;

 

·      dependence on our ability to successfully manufacture and sell our digital set-top boxes in increasing volumes on a cost-effective basis and with acceptable quality;

 

·      our ability to bring advanced technologies to market to keep pace with our competitors;

 

·      significant risks related to the construction, launch and operation of our satellites, such as risk of material malfunction on one or more of our satellites, changes in the space weather environment that could interfere with the operation of our satellites, and our general lack of commercial insurance coverage on our satellites;

 

·      uncertainty in global economic conditions, which may, among others, cause consumers and enterprise customers to defer purchases;

 

·      the failure to adequately anticipate the need for satellite capacity or the inability to obtain satellite capacity for our Hughes segment; and

 

·      the failure of third-party providers for components, manufacturing, installation services and customer support services to appropriately deliver the contracted goods or services.

 

Other factors that could cause or contribute to such differences include, but are not limited to, those discussed under the caption “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K (“10-K”) filed with the Securities and Exchange Commission (“SEC”), those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the 10-K and those discussed in other documents we file with the SEC.

 

All cautionary statements made herein should be read as being applicable to all forward-looking statements wherever they appear. Investors should consider the risks and uncertainties described herein and should not place undue reliance on any forward-looking statements. We do not undertake, and specifically disclaim, any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except for as required by federal securities laws.

 

i



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.   FINANCIAL STATEMENTS

 

ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

702,007

 

$

634,119

 

Marketable investment securities

 

1,006,258

 

986,533

 

Trade accounts receivable, net of allowance for doubtful accounts of $14,368 and $13,237, respectively

 

155,718

 

159,292

 

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

 

379,470

 

355,135

 

Inventory

 

64,622

 

66,084

 

Prepaid expenses

 

60,149

 

55,400

 

Deferred tax assets

 

69,735

 

69,633

 

Other current assets

 

11,277

 

29,930

 

Total current assets

 

2,449,236

 

2,356,126

 

Noncurrent Assets:

 

 

 

 

 

Restricted cash and marketable investment securities

 

19,104

 

16,137

 

Property and equipment, net of accumulated depreciation of $2,598,240 and $2,499,889, respectively

 

3,004,534

 

2,546,377

 

Regulatory authorizations, net

 

584,641

 

583,900

 

Goodwill

 

504,173

 

504,173

 

Other intangible assets, net

 

239,879

 

262,039

 

Other investments

 

165,523

 

169,771

 

Other receivable - DISH Network

 

90,083

 

89,811

 

Other noncurrent assets, net

 

181,419

 

173,629

 

Total noncurrent assets

 

4,789,356

 

4,345,837

 

Total assets

 

$

7,238,592

 

$

6,701,963

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Trade accounts payable

 

$

207,339

 

$

201,416

 

Trade accounts payable - DISH Network

 

83,920

 

55,743

 

Current portion of long-term debt and capital lease obligations

 

61,404

 

69,791

 

Deferred revenue and prepayments

 

58,252

 

57,592

 

Accrued compensation

 

34,070

 

30,940

 

Accrued royalties

 

22,731

 

24,010

 

Accrued interest

 

44,440

 

7,838

 

Accrued expenses and other

 

122,326

 

111,115

 

Total current liabilities

 

634,482

 

558,445

 

Noncurrent Liabilities:

 

 

 

 

 

Long-term debt and capital lease obligations, net of current portion

 

2,345,199

 

2,352,597

 

Deferred tax liabilities

 

631,570

 

488,206

 

Other noncurrent liabilities

 

113,202

 

76,484

 

Total noncurrent liabilities

 

3,089,971

 

2,917,287

 

Total liabilities

 

3,724,453

 

3,475,732

 

Commitments and Contingencies (Note 14)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred Stock, $.001 par value, 20,000,000 shares authorized, none issued and outstanding

 

 

 

Hughes Retail Preferred Tracking Stock, $.001 par value, 13,000,000 shares authorized, 6,290,499 and zero shares issued and 6,290,499 and zero shares outstanding, respectively

 

6

 

 

Class A common stock, $.001 par value, 1,600,000,000 shares authorized, 48,757,838 and 48,370,956 shares issued, and 43,225,520 and 42,838,638 shares outstanding, respectively

 

49

 

48

 

Class B common stock, $.001 par value, 800,000,000 shares authorized, 47,687,039 shares issued and outstanding

 

48

 

48

 

Class C common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding

 

 

 

Class D common stock, $.001 par value, 800,000,000 shares authorized, none issued and outstanding

 

 

 

Additional paid-in capital

 

3,685,477

 

3,502,005

 

Accumulated other comprehensive loss

 

(9,662

)

(14,655

)

Accumulated deficit

 

(159,859

)

(171,914

)

Treasury stock, at cost

 

(98,162

)

(98,162

)

Total EchoStar stockholders’ equity

 

3,417,897

 

3,217,370

 

Noncontrolling interest in HSS Tracking Stock

 

86,847

 

 

Other noncontrolling interests

 

9,395

 

8,861

 

Total stockholders’ equity

 

3,514,139

 

3,226,231

 

Total liabilities and stockholders’ equity

 

$

7,238,592

 

$

6,701,963

 

 

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

 

1



Table of Contents

 

ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (In thousands, except per share amounts)

(Unaudited)

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2014

 

2013

 

Revenue:

 

 

 

 

 

Equipment revenue - DISH Network

 

$

305,682

 

$

308,875

 

Equipment revenue - other

 

68,930

 

102,090

 

Services and other revenue - DISH Network

 

184,564

 

139,925

 

Services and other revenue - other

 

266,847

 

244,564

 

Total revenue

 

826,023

 

795,454

 

Costs and Expenses:

 

 

 

 

 

Cost of sales - equipment (exclusive of depreciation and amortization)

 

320,670

 

353,855

 

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

 

210,093

 

179,294

 

Selling, general and administrative expenses

 

87,632

 

94,176

 

Research and development expenses

 

14,582

 

17,494

 

Depreciation and amortization

 

133,226

 

126,699

 

Total costs and expenses

 

766,203

 

771,518

 

Operating income

 

59,820

 

23,936

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

Interest income

 

2,598

 

1,977

 

Interest expense, net of amounts capitalized

 

(46,044

)

(49,100

)

Realized gains on marketable investment securities and other investments (includes reclassification of realized gains on available-for-sale (“AFS”) securities out of accumulated other comprehensive loss of $28 and $16,530, respectively), net

 

28

 

19,463

 

Equity in losses of unconsolidated affiliates, net

 

(1,851

)

(3,905

)

Other, net

 

636

 

5,481

 

Total other expense, net

 

(44,633

)

(26,084

)

Income (loss) before income taxes

 

15,187

 

(2,148

)

Income tax benefit (provision), net

 

(3,157

)

5,646

 

Net income

 

12,030

 

3,498

 

Less: Net loss attributable to noncontrolling interest in HSS Tracking Stock

 

(324

)

 

Less: Net income attributable to other noncontrolling interests

 

299

 

40

 

Net income attributable to EchoStar

 

12,055

 

3,458

 

Less: Net loss attributable to EchoStar Preferred Tracking Stock

 

(598

)

 

Net income attributable to EchoStar common stock

 

$

12,653

 

$

3,458

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic

 

90,689

 

88,178

 

Diluted

 

92,336

 

89,600

 

 

 

 

 

 

 

Earnings per share - Class A and B common stock:

 

 

 

 

 

Basic

 

$

0.14

 

$

0.04

 

Diluted

 

$

0.14

 

$

0.04

 

 

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

 

2



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ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2014

 

2013

 

Comprehensive Income (Loss)

 

 

 

 

 

Net income

 

$

12,030

 

$

3,498

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Foreign currency translation adjustments

 

4,507

 

1,950

 

Unrealized gains on AFS securities and other

 

749

 

7,529

 

Recognition of previously unrealized gains on AFS securities in net income

 

(28

)

(16,530

)

Total other comprehensive income (loss), net of tax

 

5,228

 

(7,051

)

Comprehensive income (loss)

 

17,258

 

(3,553

)

Less: Comprehensive loss attributable to noncontrolling interest in HSS Tracking Stock

 

(324

)

 

Less: Comprehensive income attributable to other noncontrolling interests

 

534

 

62

 

Comprehensive income (loss) attributable to EchoStar

 

$

17,048

 

$

(3,615

)

 

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

 

3



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ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

Class

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Noncontrolling

 

 

 

 

 

A and B

 

Hughes Retail

 

Additional

 

Other

 

 

 

 

 

Other

 

Interests in

 

 

 

 

 

Common

 

Preferred

 

Paid-In

 

Comprehensive

 

Accumulated

 

Treasury

 

Noncontrolling

 

HSS Tracking

 

 

 

 

 

Stock

 

Tracking Stock

 

Capital

 

Income (Loss)

 

Deficit

 

Stock

 

Interests

 

Stock

 

Total

 

Balance, December 31, 2012

 

$

93

 

$

 

$

3,394,646

 

$

18,752

 

$

(174,439

)

$

(98,162

)

$

9,337

 

$

 

$

3,150,227

 

Issuances of Class A common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

1

 

 

17,958

 

 

 

 

 

 

17,959

 

Employee benefits

 

 

 

4,756

 

 

 

 

 

 

4,756

 

Employee Stock Purchase Plan

 

 

 

1,975

 

 

 

 

 

 

1,975

 

Stock-based compensation

 

 

 

4,984

 

 

 

 

 

 

4,984

 

Other, net

 

 

 

179

 

 

 

 

(467

)

 

(288

)

Net income

 

 

 

 

 

3,458

 

 

40

 

 

3,498

 

Unrealized losses on AFS securities, net and other

 

 

 

 

(9,001

)

 

 

 

 

(9,001

)

Foreign currency translation adjustment

 

 

 

 

1,928

 

 

 

22

 

 

1,950

 

Balance, March 31, 2013

 

$

94

 

$

 

$

3,424,498

 

$

11,679

 

$

(170,981

)

$

(98,162

)

$

8,932

 

$

 

$

3,176,060

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

$

96

 

$

 

$

3,502,005

 

$

(14,655

)

$

(171,914

)

$

(98,162

)

$

8,861

 

$

 

$

3,226,231

 

Issuances of Class A common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

1

 

 

2,777

 

 

 

 

 

 

2,778

 

Employee benefits

 

 

 

10,310

 

 

 

 

 

 

10,310

 

Employee Stock Purchase Plan

 

 

 

2,810

 

 

 

 

 

 

2,810

 

Stock-based compensation

 

 

 

3,557

 

 

 

 

 

 

3,557

 

Issuance of Hughes Retail Preferred Tracking Stock (Note 2)

 

 

6

 

163,510

 

 

 

 

 

87,171

 

250,687

 

Other, net

 

 

 

508

 

 

 

 

 

 

508

 

Net income (loss)

 

 

 

 

 

12,055

 

 

299

 

(324

)

12,030

 

Unrealized gains on AFS securities, net and other

 

 

 

 

721

 

 

 

 

 

721

 

Foreign currency translation adjustment

 

 

 

 

4,272

 

 

 

235

 

 

4,507

 

Balance, March 31, 2014

 

$

97

 

$

6

 

$

3,685,477

 

$

(9,662

)

$

(159,859

)

$

(98,162

)

$

9,395

 

$

86,847

 

$

3,514,139

 

 

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

 

4



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ECHOSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2014

 

2013

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

 

$

12,030

 

$

3,498

 

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

 

 

 

 

 

Depreciation and amortization

 

133,226

 

126,699

 

Equity in losses of unconsolidated affiliates, net

 

1,851

 

3,905

 

Realized gains on marketable investment securities and other investments, net

 

(28

)

(19,463

)

Stock-based compensation

 

3,557

 

4,984

 

Deferred tax provision (benefit)

 

22

 

(9,189

)

Changes in current assets and current liabilities, net

 

47,824

 

(64,000

)

Changes in noncurrent assets and noncurrent liabilities, net

 

(7,134

)

3,999

 

Other, net

 

10,124

 

(249

)

Net cash flows from operating activities

 

201,472

 

50,184

 

Cash Flows from Investing Activities:

 

 

 

 

 

Purchases of marketable investment securities

 

(299,563

)

(181,709

)

Sales and maturities of marketable investment securities

 

285,985

 

213,577

 

Purchases of property and equipment

 

(113,625

)

(72,620

)

Changes in restricted cash and marketable investment securities

 

(2,967

)

7,577

 

Purchase of strategic investments

 

(16

)

(7,156

)

Other, net

 

(2,818

)

(2,889

)

Net cash flows from investing activities

 

(133,004

)

(43,220

)

Cash Flows from Financing Activities:

 

 

 

 

 

Net proceeds from Class A common stock options exercised and stock issued under the Employee Stock Purchase Plan

 

5,588

 

19,934

 

Repayment of long-term debt and capital lease obligations

 

(18,528

)

(21,450

)

Net proceeds from issuance of Tracking Stock (Note 2)

 

10,720

 

 

Other

 

514

 

292

 

Net cash flows from financing activities

 

(1,706

)

(1,224

)

Effect of exchange rates on cash and cash equivalents

 

1,126

 

56

 

Net increase in cash and cash equivalents

 

67,888

 

5,796

 

Cash and cash equivalents, beginning of period

 

634,119

 

731,614

 

Cash and cash equivalents, end of period

 

$

702,007

 

$

737,410

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid for interest (including capitalized interest)

 

$

11,933

 

$

14,912

 

Capitalized interest

 

$

3,209

 

$

200

 

Cash paid for income taxes

 

$

3,487

 

$

2,286

 

Employee benefits paid in Class A common stock

 

$

10,310

 

$

4,756

 

Satellites and other assets financed under capital lease obligations

 

$

1,292

 

$

1,848

 

Capitalized in-orbit incentive obligations

 

$

 

$

18,000

 

Reduction of capital lease obligation for AMC-16

 

$

 

$

6,694

 

Changes in capital expenditures included in accounts payable

 

$

30,193

 

$

5,812

 

Net assets transferred from DISH Network in exchange for Tracking Stock (Note 2)

 

$

398,095

 

$

 

 

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

 

5



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.                     Organization and Business Activities

 

Principal Business

 

EchoStar Corporation (together with its subsidiaries is referred to as “EchoStar,” the “Company,” “we,” “us” and/or “our”) is a holding company that was organized in October 2007 as a corporation under the laws of the State of Nevada.  We are a global provider of satellite operations, video delivery solutions, digital set-top boxes, and broadband satellite technologies and services for home and office, delivering innovative network technologies, managed services, and solutions for enterprises and governments.

 

We currently operate in three business segments.

 

·                  EchoStar Technologies (“ETC”) — which designs, develops and distributes digital set-top boxes and related products and technology, primarily for satellite TV service providers, telecommunication companies and international cable companies.  Our EchoStar Technologies segment also provides digital broadcast operations, including satellite uplinking/downlinking, transmission services, signal processing, conditional access management, and other services, primarily to DISH Network Corporation and its subsidiaries (“DISH Network”).  In addition, we provide our Slingboxes directly to consumers via retail outlets and online.

 

·                  Hughes — which provides satellite broadband internet access to North American consumers and broadband network services and equipment to domestic and international enterprise markets.  The Hughes segment also provides managed services to large enterprises and solutions to customers for mobile satellite systems.

 

·                  EchoStar Satellite Services (“ESS”) — which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite services on a full-time and occasional-use basis primarily to DISH Network and also to Dish Mexico, S. de R.L. de C.V. (“Dish Mexico”), a joint venture that we entered into in 2008, as well as to United States (“U.S.”) government service providers, state agencies, internet service providers, broadcast news organizations, programmers, and private enterprise customers.

 

In 2008, DISH Network completed its distribution to us of its digital set-top box business and certain infrastructure and other assets, including certain of their satellites, uplink and satellite transmission assets, real estate, and other assets and related liabilities (the “Spin-off”).  Since the Spin-off, EchoStar and DISH Network have operated as separate publicly-traded companies.  However, as a result of the Satellite and Tracking Stock Transaction, described in Note 2 below, DISH Network owns preferred tracking stock representing an aggregate 80.0% economic interest in the residential retail satellite broadband business of our Hughes segment.  In addition, a substantial majority of the voting power of the shares of DISH Network and EchoStar is owned beneficially by Charles W. Ergen, our Chairman, and by certain trusts established by Mr. Ergen for the benefit of his family.  Our Class A common stock is publicly traded on the Nasdaq Global Select Market under the symbol “SATS.”

 

Note 2.                     Hughes Retail Preferred Tracking Stock

 

Satellite and Tracking Stock Transaction

 

On February 20, 2014, EchoStar entered into agreements with certain subsidiaries of DISH Network pursuant to which effective March 1, 2014, (i) EchoStar issued shares of its newly authorized Hughes Retail Preferred Tracking Stock (the “EchoStar Tracking Stock”) and Hughes Satellite Systems Corporation (“HSS”), a subsidiary of EchoStar, also issued shares of its newly authorized Hughes Retail Preferred Tracking Stock (the “HSS Tracking Stock” and together with the EchoStar Tracking Stock, the “Tracking Stock”) to DISH Network in exchange for five satellites (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI, and EchoStar XIV) (including the assumption of related in-orbit incentive obligations) and $11.4 million in cash and (ii) DISH Network began receiving certain satellite services on these five satellites from us (the “Satellite and Tracking Stock Transaction”).  The

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Tracking Stock tracks the residential retail satellite broadband business of our Hughes segment, including certain operations, assets and liabilities attributed to such business (collectively, the “Hughes Retail Group” or “HRG”).

 

EchoStar and HSS have adopted policy statements (the “Policy Statements”) setting forth management and allocation policies for purposes of attributing all of the business and operations of EchoStar to either the Hughes Retail Group or the EchoStar Group, which consists of all other operations of EchoStar, including all existing and future businesses, other than the Hughes Retail Group.  Among other things, the Policy Statements govern how assets, liabilities, revenue and expenses are attributed or allocated between HRG and the EchoStar Group.  Such attributions and allocations generally do not affect the amounts reported in our consolidated financial statements, except for the attribution of stockholders’ equity and net income or loss between the holders of Tracking Stock and common stock.  The Policy Statements also do not significantly affect the way that management assesses operating performance and allocates resources within our Hughes segment.

 

See Note 9 for information about the five satellites received from DISH Network, Note 14 for information about the assumed in-orbit incentive obligations, and Note 16 for information regarding the related satellite services agreements with DISH Network.  We provide unaudited attributed financial information for HRG and the EchoStar Group in an exhibit to our periodic reports on Form 10-Q and Form 10-K.  Set forth below is information about certain terms of the Satellite and Tracking Stock and the initial recording of the Tracking Stock Transaction in our consolidated financial statements.

 

Description of the Tracking Stock

 

Tracking stock is a type of capital stock that the issuing company intends to reflect or “track” the economic performance of a particular business component within the company, rather than reflect the economic performance of the company as a whole.  The Tracking Stock is intended to track the economic performance of the Hughes Retail Group.  The shares of the Tracking Stock issued to DISH Network represent an aggregate 80.0% economic interest in the Hughes Retail Group (51.89% issued as EchoStar Tracking Stock and 28.11% issued as HSS Tracking Stock).  In addition to the remaining 20.0% economic interest in the Hughes Retail Group, EchoStar retains all economic interest in the wholesale satellite broadband business and other businesses of EchoStar.  The Hughes Retail Group is not a separate legal entity and therefore cannot own assets, issue securities or enter into legally binding agreements.  Holders of the Tracking Stock have no direct claim to the assets of the Hughes Retail Group; rather, holders of the Tracking Stock are stockholders of its respective issuer (EchoStar or HSS) and are subject to all risks and liabilities of the issuer.  Holders of shares of the Tracking Stock vote with holders of the outstanding shares of common stock of its respective issuer, as a single class, with respect to any and all matters presented to stockholders for their action or consideration.  Each share of Tracking Stock is entitled to one-tenth (1/10th) of one vote. The EchoStar Tracking Stock is a series of preferred stock consisting of 13,000,000 authorized shares with a par value of $0.001 per share, of which 6,290,499 shares were issued to DISH Network on March 1, 2014.  The HSS Tracking Stock is a series of HSS preferred stock consisting of 300 authorized shares with a par value of $0.001 per share, of which 81.128 shares were issued to DISH Network on March 1, 2014. Following the issuance of the shares of EchoStar Tracking Stock and the HSS Tracking Stock, DISH Network held 6.5% and 7.5% of the aggregate number of outstanding shares of EchoStar and HSS capital stock, respectively.

 

Investor Rights Agreement

 

In connection with the Satellite and Tracking Stock Transaction, EchoStar, HSS and DISH Network entered into an agreement (the “Investor Rights Agreement”) setting forth certain rights and obligations of the parties with respect to the Tracking Stock.  Among other provisions, the Investor Rights Agreement provides: (i) certain information and consultation rights for DISH Network; (ii) certain transfer restrictions on the Tracking Stock and certain rights and obligations to offer and sell under certain circumstances (including a prohibition on transfer of the Tracking Stock until March 1, 2015), with continuing transfer restrictions (including right of first offer in favor of EchoStar) thereafter, an obligation to sell the Tracking Stock to us in connection with a change of control of DISH Network and a right to require us to repurchase the Tracking Stock in connection with a change of control of EchoStar, in each case subject to certain terms and conditions;

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

and (iii) certain protective covenants afforded to holders of the Tracking Stock.

 

In addition, the Investor Rights Agreement provides that DISH Network may, on or after September 1, 2016, require EchoStar to use its commercially reasonable efforts to register some or all of the outstanding shares of the Tracking Stock under the Securities Act of 1933, subject to certain terms and conditions (including our right, upon the receipt of a demand for registration, to offer to repurchase all of the Tracking Stock).  In connection with any demand for registration, DISH Network may require any outstanding shares of HSS Tracking Stock to be exchanged for shares of EchoStar Tracking Stock with an equivalent economic interest in the Hughes Retail Group.  In the event that a registration of shares of Tracking Stock is effected, EchoStar is required to use its reasonable best efforts to amend the terms of the Tracking Stock so that the Tracking Stock will be convertible or exchangeable for shares of EchoStar Class A Common Stock with equivalent market value.

 

Initial Recording of the Satellite and Tracking Stock Transaction

 

EchoStar and DISH Network are entities under common control.  In accordance with accounting principles that apply to transfers of assets between entities under common control, EchoStar and HSS recorded the net assets received from DISH Network in the Satellite and Tracking Stock Transaction at their historical carrying amounts as reflected in DISH Network’s consolidated financial statements as of February 28, 2014 the day prior to the effective date of the Satellite and Tracking Stock Transaction.  DISH Network transferred the EchoStar I, EchoStar VII, and EchoStar X satellites to HSS and the EchoStar XI and EchoStar XIV satellites to EchoStar.  The historical carrying amounts of net assets transferred to EchoStar and HSS were as follows:

 

 

 

EchoStar(1)

 

HSS

 

Total

 

 

 

(In thousands)

 

Cash

 

$

 

$

11,404

 

$

11,404

 

Property and equipment, net

 

349,243

 

82,837

 

432,080

 

Current liabilities

 

(3,479

)

(3,076

)

(6,555

)

Noncurrent liabilities

 

(30,121

)

(8,713

)

(38,834

)

Transferred net assets

 

$

315,643

 

$

82,452

 

$

398,095

 

 


(1)         All of the net assets received by EchoStar as part of the Satellite and Tracking Stock Transaction were immediately transferred to HSS and are being used by our EchoStar Satellite Services segment.

 

The transferred net assets increased EchoStar stockholders’ equity and HSS stockholders’ equity by amounts that reflect the carrying amounts of net assets that would be distributed to holders of the Tracking Stock and common stock in a hypothetical liquidation, which would be in proportion to the relative market values (as defined in applicable agreements) of each class of stock.  The amounts credited to equity were reduced by direct costs of the Tracking Stock issuance and deferred income tax liabilities arising from differences between the financial reporting carrying amounts and the tax bases of the transferred satellites.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

The net amounts credited to EchoStar stockholders’ equity for EchoStar Tracking Stock (primarily additional paid-in capital) and the noncontrolling interest in HSS Tracking Stock were as follows:

 

 

 

EchoStar

 

Noncontrolling

 

 

 

 

 

Stockholders

 

Interest

 

Total

 

 

 

(In thousands)

 

Transferred net assets

 

$

315,643

 

$

82,452

 

$

398,095

 

Offering costs, net of tax

 

(2,302

)

(610

)

(2,912

)

Deferred income taxes

 

(114,525

)

(29,971

)

(144,496

)

Reallocation based on relative liquidation values

 

(35,300

)

35,300

 

 

Net increase in stockholders’ equity

 

$

163,516

 

$

87,171

 

$

250,687

 

 

Note 3.                     Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information.  Accordingly, these financial statements do not include all of the information and notes required for complete financial statements prepared in accordance with GAAP.  In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.  For further information, refer to the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Principles of Consolidation

 

We consolidate all majority owned subsidiaries, investments in entities in which we have controlling interest and variable interest entities where we are the primary beneficiary.  For entities we control but do not wholly-own, we record a noncontrolling interest within stockholders’ equity for the portion of the entity’s equity attributed to the noncontrolling ownership interests.  For the noncontrolling interest in the HSS Tracking Stock, we periodically attribute a portion of HSS net income or loss to the noncontrolling interest in HSS Tracking Stock with such portion equal to the economic interest (currently 28.11%) in the Hughes Retail Group represented by the HSS Tracking Stock, as determined in accordance with the Policy Statements and other documents governing the Tracking Stock. Investments in entities that we do not control but have the ability to significantly influence the operating decisions of the investee we account for using the equity method.  When we do not have the ability to significantly influence the operating decisions of the investee, the cost method is used.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in accordance with GAAP requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheets, the reported amounts of revenue and expense for each reporting period, and certain information disclosed in the notes to the Condensed Consolidated Financial Statements.  Estimates are used in accounting for, among other things, amortization periods of deferred revenue and deferred subscriber acquisition costs, percentage-of-completion related to revenue recognition, allowances for doubtful accounts, allowances for sales returns and rebates, warranty obligations, self-insurance obligations, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, fair value of financial instruments, fair value of our stock-based compensation plans, fair value of assets and liabilities acquired in business combinations, lease classifications, asset impairments, useful lives and amortization methods of property, equipment and intangible assets, royalty obligations, and allocations to HRG that affect the periodic determination of net income or loss attributable to the noncontrolling interest in the HSS Tracking Stock.  We base our estimates and assumptions on historical experience and on various other factors that we believe to be relevant under the circumstances. Weakened economic conditions may increase the inherent uncertainty in the estimates and assumptions indicated above.  Due to the inherent uncertainty involved in making estimates, actual results

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

may differ from previously estimated amounts, and such differences may be material to our Condensed Consolidated Financial Statements.  Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period they occur or prospectively if the revised estimate affects future periods.

 

Fair Value Measurements

 

We determine fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  Market or observable inputs are the preferred source of values, followed by unobservable inputs or assumptions based on hypothetical transactions in the absence of market inputs.  We utilize the highest level of inputs available according to the following hierarchy in determining fair value:

 

·                  Level 1, defined as observable inputs being quoted prices in active markets for identical assets;

 

·                  Level 2, defined as observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

 

·                  Level 3, defined as unobservable inputs for which little or no market data exists, consistent with reasonably available assumptions made by other participants, therefore requiring assumptions based on the best information available.

 

Transfers between levels in the fair value hierarchy are considered to occur at the beginning of the quarterly accounting period.  There were no transfers between levels for the three months ended March 31, 2014 or 2013.

 

As of March 31, 2014 and December 31, 2013, the carrying amount of our cash and cash equivalents, trade accounts receivable, net of allowance for doubtful accounts, accounts payable and accrued liabilities were equal to or approximated fair value due to their short-term nature or proximity to current market rates.

 

Fair values of our current marketable investment securities are based on a variety of observable market inputs.  For our investments in publicly traded equity securities, fair value ordinarily is determined based on a Level 1 measurement that reflects quoted prices for identical securities in active markets.  Fair values of our investments in marketable debt securities generally are based on Level 2 measurements, as the markets for debt securities are less active.  Trades of identical debt securities on or near the measurement date are considered a strong indication of fair value.  Matrix pricing techniques that consider par value, coupon rate, credit quality, maturity and other relevant features also may be used to determine fair value of our investments in marketable debt securities.

 

Fair values for our publicly traded long-term debt are based on quoted market prices in less active markets and are categorized as Level 2 measurements.  The fair values of our privately held debt are Level 2 measurements and are estimated to approximate their carrying amounts based on the proximity of their interest rates to current market rates.  See Note 11 for the fair value of our long-term debt.  As of March 31, 2014 and December 31, 2013, the fair values of our orbital incentive obligations, based on measurements categorized within Level 2 of the fair value hierarchy, approximated their carrying amounts of $91.5 million and $48.4 million, respectively.  We use fair value measurements from time-to-time in connection with impairment testing and the assignment of purchase consideration to assets and liabilities of acquired companies that typically include significant unobservable inputs and are categorized within Level 3 of the fair value hierarchy.

 

Note 4.                     Earnings per Share

 

We present basic earnings per share (“EPS”) and diluted EPS for our Class A and Class B common stock.  The EchoStar Tracking Stock is a participating security that shares in our consolidated earnings and therefore, effective March 1, 2014, the issuance date of the EchoStar Tracking Stock, we apply the two-class method to calculate EPS.  Under the two-class method, we allocate net income or loss attributable to EchoStar between common stock and EchoStar Tracking Stock considering both dividends declared on each class of stock and the participation rights of each class of stock in undistributed earnings.  Based on the terms of the EchoStar Tracking Stock that generally provide for an economic

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

interest (currently 51.89%) in the Hughes Retail Group, we allocate undistributed earnings to the EchoStar Tracking Stock based on 51.89% of the attributed net income or loss of the Hughes Retail Group.  For the three months ended March 31, 2014, we allocated a net loss of $0.6 million to the EchoStar Tracking Stock, reflecting DISH Network’s 51.89% economic interest (represented by the EchoStar Tracking Stock) in the net loss of the Hughes Retail Group for the period from the issuance of the EchoStar Tracking Stock on March 1, 2014 to March 31, 2014.  Moreover, because the reported amount of “Net income attributable to EchoStar” in our Consolidated Statements of Operations excludes DISH Network’s 28.11% economic interest (represented by the HSS Tracking Stock) in the net loss of the Hughes Retail Group (reported as a noncontrolling interest), the amount of consolidated net income or loss allocated to holders of Class A and Class B common stock effectively excludes an aggregate 80.0% interest in the attributed net loss of the Hughes Retail Group.

 

Basic EPS for our Class A and Class B common stock excludes potential dilution and is computed by dividing “Net income attributable to EchoStar” by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if our common stock awards were exercised.  The potential dilution from common stock awards was computed using the treasury stock method based on the average market value of our Class A common stock during the period.  The calculation of our diluted weighted-average common shares outstanding excluded (i) underlying options to purchase shares of our Class A common stock, as their effect is anti-dilutive, of 0.7 million and 2.1 million shares for the three months ended March 31, 2014 and 2013, respectively, and (ii) shares of our Class A common stock that are contingently issuable based upon meeting a company-specific performance measure by March 31, 2015 pursuant to our performance based stock incentive plan, which was not probable of being achieved as of March 31, 2014 of 0.7 million and 0.7 million shares for the three months ended March 31, 2014 and 2013, respectively.

 

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

 

 

 

For the Three Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

(In thousands, except per share amounts)

 

Net income attributable to EchoStar common stock

 

$

12,653

 

$

3,458

 

Net income (loss) attributable to EchoStar Tracking Stock

 

(598

)

 

Net income attributable to EchoStar

 

$

12,055

 

$

3,458

 

 

 

 

 

 

 

Weighted-average common shares outstanding :

 

 

 

 

 

Class A and B common stock:

 

 

 

 

 

Basic

 

90,689

 

88,178

 

Dilutive impact of stock awards outstanding

 

1,647

 

1,422

 

Diluted

 

92,336

 

89,600

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Class A and B common stock:

 

 

 

 

 

Basic

 

$

0.14

 

$

0.04

 

Diluted

 

$

0.14

 

$

0.04

 

 

Note 5.                     Other Comprehensive Income (Loss) and Related Tax Effects

 

We have not recognized any tax effects on foreign currency translation adjustments because they are not expected to result in future taxable income or deductions.  We have not recognized any tax effects on unrealized gains or losses on available-for-sale securities because such gains or losses would affect the amount of existing capital loss carryforwards for which the related deferred tax asset has been fully offset by a valuation allowance.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Accumulated other comprehensive loss includes cumulative foreign currency translation losses of $27.8 million and $32.1 million as of March 31, 2014 and December 31, 2013, respectively.

 

Note 6.                     Investment Securities

 

Our marketable investment securities, restricted cash and cash equivalents, and other investments consisted of the following:

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Marketable investment securities—current:

 

 

 

 

 

Corporate bonds

 

$

900,148

 

$

833,791

 

VRDNs

 

31,110

 

34,705

 

Strategic equity securities

 

33,247

 

33,613

 

Other

 

41,753

 

84,424

 

Total marketable investment securities—current

 

1,006,258

 

986,533

 

Restricted marketable investment securities (1)

 

7,666

 

7,965

 

Total

 

1,013,924

 

994,498

 

 

 

 

 

 

 

Restricted cash and cash equivalents (1)

 

11,438

 

8,172

 

 

 

 

 

 

 

Other investments—noncurrent:

 

 

 

 

 

Cost method

 

25,977

 

25,977

 

Equity method

 

139,546

 

143,794

 

Total other investments—noncurrent

 

165,523

 

169,771

 

Total marketable investment securities, restricted cash and cash equivalents, and other investments

 

$

1,190,885

 

$

1,172,441

 

 


(1)         Restricted marketable investment securities and restricted cash and cash equivalents are included in “Restricted cash and marketable investment securities” in our Condensed Consolidated Balance Sheets.

 

Marketable Investment Securities

 

Our marketable investment securities portfolio consists of various debt and equity instruments, all of which are classified as available-for-sale.

 

Corporate Bonds

 

Our corporate bond portfolio includes debt instruments issued by individual corporations, primarily in the industrial and financial services industries.

 

Variable Rate Demand Notes (“VRDNs”)

 

VRDNs are long-term floating rate bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest.  All of the put options are secured by a pledged liquidity source.  Our VRDN portfolio is comprised of investments in municipalities and corporations, which are backed by financial institutions or other highly rated companies that serve as the pledged liquidity source.  While they are classified as marketable investment securities, the put option allows VRDNs to be liquidated generally on a same day or on a five business day settlement basis.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Strategic Equity Securities

 

Our strategic investment portfolio consists of investments in shares of common stock of public companies, which are highly speculative and have experienced and continue to experience volatility.  The value of our investment portfolio depends on the value of such shares of common stock.

 

Other

 

Our other current marketable investment securities portfolio includes investments in various debt instruments, including government bonds.

 

Restricted Cash and Marketable Investment Securities

 

As of March 31, 2014 and December 31, 2013, our restricted marketable investment securities, together with our restricted cash, included amounts required as collateral for our letters of credit or surety bonds.

 

Other Investments - Noncurrent

 

We have several strategic investments in certain equity securities that are accounted for using either the equity or the cost method of accounting.  Our ability to realize value from our strategic investments in companies that are not publicly traded depends on the success of those companies’ businesses and their ability to obtain sufficient capital to execute their business plans.  Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell these investments, or that when we desire to sell them we will not be able to obtain fair value for them.

 

Unrealized Gains (Losses) on Marketable Investment Securities

 

The components of our available-for-sale investments are summarized in the table below.

 

 

 

Amortized

 

Unrealized

 

Estimated

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

(In thousands)

 

As of March 31, 2014

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

900,002

 

$

451

 

$

(305

)

$

900,148

 

VRDNs

 

31,110

 

 

 

31,110

 

Other (including restricted)

 

49,385

 

35

 

(1

)

49,419

 

Equity securities - strategic

 

15,272

 

17,975

 

 

33,247

 

Total marketable investment securities

 

$

995,769

 

$

18,461

 

$

(306

)

$

1,013,924

 

As of December 31, 2013

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

833,888

 

$

227

 

$

(324

)

$

833,791

 

VRDNs

 

34,705

 

 

 

34,705

 

Other (including restricted)

 

92,876

 

14

 

(501

)

92,389

 

Equity securities - strategic

 

15,272

 

18,341

 

 

33,613

 

Total marketable investment securities

 

$

976,741

 

$

18,582

 

$

(825

)

$

994,498

 

 

As of March 31, 2014, restricted and non-restricted marketable investment securities included debt securities of $840.0 million with contractual maturities of one year or less and $140.7 million with contractual maturities greater than one year.  We may realize proceeds from certain investments prior to their contractual maturity as a result of our ability to sell these securities prior to their contractual maturity.

 

Marketable Investment Securities in a Loss Position

 

The following table reflects the length of time that our available-for-sale securities have been in an unrealized loss position.  We do not intend to sell these securities before they recover or mature, and it is more likely than not that

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

we will hold these securities until they recover or mature.  In addition, we are not aware of any specific factors indicating that the underlying issuers of these securities would not be able to pay interest as it becomes due or repay the principal at maturity.  Therefore, we believe that these changes in the estimated fair values of these securities are primarily related to temporary market fluctuations.

 

 

 

As of

 

 

 

March 31, 2014

 

December 31, 2013

 

 

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

 

 

(In thousands)

 

Less than 12 months

 

$

346,835

 

$

(306

)

$

571,592

 

$

(825

)

12 months or more

 

3,987

 

 

 

 

Total

 

$

350,822

 

$

(306

)

$

571,592

 

$

(825

)

 

Realized Gains (Losses) on Marketable Investment Securities

 

We recognized minimal gains from the sales of our available-for-sale marketable investment securities for the three months ended March 31, 2014 and $19.1 million for the three months ended March 31, 2013.  We recognized zero and minimal losses from the sales of our available-for-sale marketable investment securities for the three months ended March 31, 2014 and 2013, respectively.

 

Proceeds from sales of our available-for-sale marketable investment securities totaled $0.5 million and $41.5 million for the three months ended March 31, 2014 and 2013, respectively.

 

Fair Value Measurements

 

Our current marketable investment securities are measured at fair value on a recurring basis as summarized in the table below.  As of March 31, 2014 and December 31, 2013, we did not have investments that were categorized within Level 3 of the fair value hierarchy.

 

 

 

As of

 

 

 

March 31, 2014

 

December 31, 2013

 

 

 

Total

 

Level 1

 

Level 2

 

Total

 

Level 1

 

Level 2

 

 

 

(In thousands)

 

Cash equivalents (including restricted)

 

$

616,316

 

$

7,906

 

$

608,410

 

$

548,714

 

$

49,338

 

$

499,376

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

900,148

 

$

 

$

900,148

 

$

833,791

 

$

 

$

833,791

 

VRDNs

 

31,110

 

 

31,110

 

34,705

 

 

34,705

 

Other (including restricted)

 

49,419

 

 

49,419

 

92,389

 

 

92,389

 

Equity securities - strategic

 

33,247

 

33,247

 

 

33,613

 

33,613

 

 

Total marketable investment securities

 

$

1,013,924

 

$

33,247

 

$

980,677

 

$

994,498

 

$

33,613

 

$

960,885

 

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Note 7.                     Trade Accounts Receivable

 

Our trade accounts receivable consisted of the following:

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Trade accounts receivable

 

$

161,476

 

$

164,900

 

Contracts in process, net

 

8,610

 

7,629

 

Total trade accounts receivable

 

170,086

 

172,529

 

Allowance for doubtful accounts

 

(14,368

)

(13,237

)

Trade accounts receivable - DISH Network

 

379,470

 

355,135

 

Total trade accounts receivable, net

 

$

535,188

 

$

514,427

 

 

As of March 31, 2014 and December 31, 2013, progress billings offset against contracts in process amounted to $7.0 million and $2.6 million, respectively.

 

Note 8.                     Inventory

 

Our inventory consisted of the following:

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Finished goods

 

$

50,629

 

$

50,357

 

Raw materials

 

8,440

 

8,658

 

Work-in-process

 

5,553

 

7,069

 

Total inventory

 

$

64,622

 

$

66,084

 

 

Note 9.                     Property and Equipment

 

Property and equipment consisted of the following:

 

 

 

Depreciable

 

As of

 

 

 

Life

 

March 31,

 

December 31,

 

 

 

(In Years)

 

2014

 

2013

 

 

 

 

 

(In thousands)

 

Land

 

 

$

42,573

 

$

42,850

 

Buildings and improvements

 

3-40

 

379,784

 

377,208

 

Furniture, fixtures, equipment and other

 

1-12

 

1,174,244

 

1,157,325

 

Customer rental equipment

 

2-4

 

407,492

 

374,688

 

Satellites - owned

 

2-15

 

2,381,120

 

1,949,040

 

Satellites acquired under capital leases

 

10-15

 

935,104

 

935,104

 

Construction in progress

 

 

282,457

 

210,051

 

Total property and equipment

 

 

 

5,602,774

 

5,046,266

 

Accumulated depreciation

 

 

 

(2,598,240

)

(2,499,889

)

Property and equipment, net

 

 

 

$

3,004,534

 

$

2,546,377

 

 

As of March 31, 2014, our owned satellites included $432.1 million for the five satellites we received from DISH Network as part of the Satellite and Tracking Stock Transaction discussed in Note 2.  This amount represents the net carrying amount of those satellites in DISH Network’s consolidated financial statements as of February 28, 2014, the day prior to the effective date of the Satellite and Tracking Stock Transaction.  Accumulated depreciation for those satellites as of March 31, 2014 was $4.0 million, representing

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

depreciation expense recognized in our consolidated financial statements for the period subsequent to the transfer date.

 

Construction in progress consisted of the following:

 

 

 

 

 

As of

 

 

 

 

 

March 31,

 

December 31,

 

 

 

Segment

 

2014

 

2013

 

 

 

 

 

(In thousands)

 

Progress amounts for satellite construction, including certain amounts prepaid under satellite service agreements and launch costs:

 

 

 

 

 

 

 

EchoStar XIX

 

Other

 

$

180,912

 

$

122,070

 

TerreStar-2

 

Other

 

34,708

 

16,433

 

Other

 

Other/ESS

 

20,815

 

24,160

 

Uplinking equipment

 

ETC/Hughes

 

20,627

 

20,793

 

Other

 

ETC/Hughes/ESS

 

25,395

 

26,595

 

Construction in progress

 

 

 

$

282,457

 

$

210,051

 

 

Depreciation expense associated with our property and equipment consisted of the following:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Satellites

 

$

47,563

 

$

46,544

 

Furniture, fixtures, equipment and other

 

29,891

 

31,965

 

Customer rental equipment

 

27,892

 

23,287

 

Buildings and improvements

 

3,530

 

3,316

 

Total depreciation expense

 

$

108,876

 

$

105,112

 

 

Satellites

 

As of March 31, 2014, we utilized 17 of our owned and leased satellites in geostationary orbit approximately 22,300 miles above the equator.  Four of our satellites are accounted for as capital leases and are depreciated on a straight-line basis over the terms of the satellite service agreements.  We depreciate our owned satellites on a straight-line basis over the estimated useful life of each satellite.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Information for our satellite fleet is presented below.

 

 

 

 

 

 

 

Nominal Degree

 

Depreciable

 

 

 

 

 

Launch

 

Orbital Location

 

Life

 

Satellites 

 

Segment

 

Date

 

(West Longitude)

 

(In Years)

 

Owned:

 

 

 

 

 

 

 

 

 

SPACEWAY 3 (5)

 

Hughes

 

August 2007

 

95

 

12

 

EchoStar XVII

 

Hughes

 

July 2012

 

107

 

15

 

EchoStar I (1)(2)(3)

 

ESS

 

December 1995

 

77

 

 

EchoStar III (3)

 

ESS

 

October 1997

 

61.5

 

12

 

EchoStar VI

 

ESS

 

July 2000

 

96.2

 

12

 

EchoStar VII (1)(2)

 

ESS

 

February 2002

 

119

 

3

 

EchoStar VIII (1)

 

ESS

 

August 2002

 

77

 

12

 

EchoStar XII (1)(6)

 

ESS

 

July 2003

 

61.5

 

2

 

EchoStar IX (1)

 

ESS

 

August 2003

 

121

 

12

 

EchoStar X (1)(2)

 

ESS

 

February 2006

 

110

 

7

 

EchoStar XI (1)(2)

 

ESS

 

July 2008

 

110

 

9

 

EchoStar XIV (1)(2)

 

ESS

 

March 2010

 

119

 

11

 

EchoStar XVI (1)

 

ESS

 

November 2012

 

61.5

 

15

 

 

 

 

 

 

 

 

 

 

 

Leased from Third Parties (4):

 

 

 

 

 

 

 

 

 

AMC-15

 

ESS

 

October 2004

 

105

 

10

 

AMC-16

 

ESS

 

December 2004

 

85

 

10

 

Nimiq 5 (1)

 

ESS

 

September 2009

 

72.7

 

15

 

QuetzSat-1 (1)

 

ESS

 

September 2011

 

77

 

10

 

 


(1)         See Note 16 for further discussion of our transactions with DISH Network.

(2)         Depreciable life represents the remaining useful life as of March 1, 2014, the date we received the satellites from DISH Network as part of the Satellite and Tracking Stock Transaction (See Note 2).

(3)         Fully depreciated assets.

(4)         These satellites are accounted for as capital leases and their launch dates represent dates that the satellites were placed into service.

(5)         Depreciable life represents the remaining useful life as of the date of the Hughes Acquisition (as defined below).

(6)         Depreciable life represents the remaining useful life as of June 30, 2013, the date EchoStar XII was impaired.

 

Recent Developments

 

CMBStar and EchoStar XXIII.  In 2008, we suspended construction of the CMBStar satellite.  In April 2014, we entered into an agreement with Space Systems/Loral, LLC (“SS/L”) for the construction of the EchoStar XXIII satellite, as a high powered Broadcast Satellite Service (“BSS”) satellite which will use some of the components from the CMBStar satellite.  This agreement superseded and replaced the current CMBStar construction contract.  EchoStar XXIII is expected to launch in 2016.

 

EUTELSAT 65 West A.  In April 2014, we entered into a satellite services agreement pursuant to which Eutelsat do Brasil will provide to Hughes Telecomunicaҫões do Brasil Ltda., our indirect wholly-owned subsidiary, the service on the entire Ka-band capacity into Brazil on the EUTELSAT 65 West A satellite for a 15-year term.  The satellite is scheduled to be placed in service in the second quarter of 2016.

 

EchoStar XIXIn February 2012 and September 2013, ViaSat and its subsidiary ViaSat Communications filed lawsuits in the U.S. District Court for the Southern District of California against SS/L, the manufacturer of EchoStar XVII and EchoStar XIX.  In the first-filed case, ViaSat alleged, among other things, that SS/L infringed three patents and breached its contractual obligations through the use of such patented technology to manufacture EchoStar XVII.  A jury trial was held in that case in March and April 2014, and the jury found that in connection with EchoStar XVII, SS/L directly infringed the asserted patents and that SS/L breached certain agreements with ViaSat.  While we are not a party to this matter, the adverse decision against SS/L may have an impact on our ability to make use of EchoStar XIX or other satellites from SS/L and may adversely affect our business operations and results of operations .  Until there are further developments in the case, including post-trial motions and appeals, we cannot determine whether there will be an adverse impact and, if so, the extent of any such impact.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

EchoStar I, EchoStar VII, EchoStar X, EchoStar XI, and EchoStar XIV.  As discussed in Note 2, we received five satellites (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV) from DISH Network as part of the Satellite and Tracking Stock Transaction.  These satellites are BSS communications satellites operating in Ku-band frequencies and DISH Network is receiving certain services from us on these satellites as of March 1, 2014.

 

EchoStar VIII.  In May 2013, DISH Network began receiving satellite services from us on EchoStar VIII as an in-orbit spare.  Effective March 1, 2014, this service arrangement was converted to a month-to-month service agreement.  Both parties have the right to terminate this agreement upon 30 days’ notice.

 

EchoStar XV.  In May 2013, we began receiving satellite services from DISH Network on EchoStar XV (classified as an operating lease) and relocated the satellite to the 45 degree west longitude orbital location.  Effective March 1, 2014, this service arrangement was converted to a month-to-month service agreement.  Both parties have the right to terminate this agreement upon 30 days’ notice.  We are required to maintain in-orbit insurance pursuant to our service agreement with DISH Network.

 

Satellite Anomalies

 

Certain of our satellites have experienced anomalies, some of which have had a significant adverse impact on their remaining useful lives and/or commercial operation of the satellites.  There can be no assurance that existing and future anomalies will not further impact the remaining useful life and/or the commercial operation of any of the satellites in our fleet.  In addition, there can be no assurance that we can recover critical transmission capacity in the event one or more of our in-orbit satellites were to fail.  We generally do not carry in-orbit insurance on our satellites; therefore, we generally bear the risk of any uninsured in-orbit failures.  Pursuant to the terms of the agreements governing certain portions of our indebtedness, we are required, subject to certain limitations on coverage, to maintain launch and in-orbit insurance for SPACEWAY 3, EchoStar XVI, and EchoStar XVII.

 

We have previously disclosed in our financial statements as of and for the year ended December 31, 2013, anomalies in prior years that affect our in-service owned and leased satellites, including EchoStar III, EchoStar VI, EchoStar VIII, EchoStar XII, and AMC-16.  We are not aware of any additional anomalies that have occurred on any of our owned or leased satellites in 2014 as of the date of this report, that affected the commercial operation of these satellites.  EchoStar III and EchoStar VI are fully depreciated and EchoStar III is being used as an in-orbit spare; accordingly, the prior anomalies affecting these satellites have not had a significant effect on our operating results and cash flows.  EchoStar XII has experienced several anomalies, which have resulted in a loss of electrical power.  Those anomalies have not had a significant adverse impact on service under the related satellite services agreement with DISH Network for EchoStar XII; however, the anomalies have increased the risk of future transponder failures that could result in reductions in our revenue and require recognition of a satellite impairment loss.  See Satellite Impairments below.

 

The five satellites received from DISH Network pursuant to the Satellite and Tracking Stock Transaction have experienced certain anomalies prior to March 1, 2014, the effective date of the Satellite and Tracking Stock Transaction as described below.

 

EchoStar I.  During the first quarter 2012, DISH Network determined that EchoStar I experienced a communications receiver anomaly.  The communications receivers process signals sent from the uplink center for transmission by the satellite to customers.  While this anomaly did not impact commercial operation of the satellite, there can be no assurance that future anomalies will not impact its future commercial operation.  EchoStar I is fully depreciated.

 

EchoStar VII.  Prior to 2012, EchoStar VII experienced certain thruster failures.  During the fourth quarter 2012, DISH Network determined that EchoStar VII experienced an additional thruster failure.  Thrusters control the satellite’s location and orientation.  While this anomaly did not impact commercial operation of the satellite, there can be no assurance that future anomalies will not reduce its useful life or impact its commercial operation.

 

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ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

EchoStar X.  During the second and third quarters of 2010, EchoStar X experienced anomalies which affected seven solar array circuits reducing the number of functional solar array circuits to 17. While these anomalies did not impact commercial operation of the satellite, there can be no assurance that future anomalies will not reduce its useful life or impact its commercial operation.

 

EchoStar XI.  During the first quarter 2012, DISH Network determined that EchoStar XI experienced solar array anomalies that reduced the total power available for use by the satellite.  While these anomalies did not impact commercial operation of the satellite, there can be no assurance that future anomalies will not reduce its useful life or impact its commercial operation.

 

EchoStar XIV.  During the third quarter 2011 and the first quarter 2012, DISH Network determined that EchoStar XIV experienced solar array anomalies that reduced the total power available for use by the satellite.  While these anomalies did not impact commercial operation of the satellite, there can be no assurance that future anomalies will not reduce its useful life or impact its commercial operation.

 

Satellite Impairments

 

We evaluate our satellites for impairment and test for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.  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.  However, based on the redundancy designed within each satellite, certain of these anomalies are not necessarily considered to be significant events that would require a test of recoverability.  There have been no satellite impairments in 2014 as of the date of this report.

 

EchoStar XII.  Prior to 2010, EchoStar XII experienced anomalies resulting in the loss of electrical power available from its solar arrays.  In September 2012, November 2012, and January 2013, EchoStar XII experienced additional solar array anomalies, which further reduced the electrical power available to operate EchoStar XII.  An engineering analysis completed in the second quarter of 2013 indicated further loss of available electrical power and resulting capacity loss was likely.  As a result, we recognized a $34.7 million impairment loss in the second quarter of 2013.  Additional solar array anomalies are likely, and if they occur, they will continue to degrade the operational capability of EchoStar XII and could lead to additional impairment charges in the future.  EchoStar XII has experienced no additional electrical power loss to date in 2014.

 

Note 10.              Goodwill and Other Intangible Assets

 

Goodwill

 

The excess of the cost of an acquired business over the fair values of net tangible and identifiable intangible assets at the time of the acquisition is recorded as goodwill.  Goodwill is assigned to our reporting units of our operating segments and is subject to our annual impairment testing, or more frequently when events or changes in circumstances indicate the fair value of a reporting unit is more likely than not less than its carrying amount.

 

As of March 31, 2014, all of our goodwill was assigned to reporting units of the Hughes segment.  Based on our qualitative assessment of impairment of such goodwill in the second quarter of 2013, we determined that no further testing of goodwill for impairment as of that date was necessary as it was not more likely than not that the fair values of the Hughes segment reporting units were less than the corresponding carrying amounts.

 

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Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Regulatory Authorizations

 

Regulatory authorizations with finite and indefinite useful lives are as follows:

 

 

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Finite useful lives:

 

 

 

 

 

Cost

 

$

116,085

 

$

113,764

 

Accumulated amortization

 

(3,101

)

(1,521

)

Net

 

112,984

 

112,243

 

Indefinite lives

 

471,657

 

471,657

 

Total regulatory authorizations, net

 

$

584,641

 

$

583,900

 

 

Amortization expense for the regulatory authorizations with finite useful lives was $1.5 million and zero for the three months ended March 31, 2014 and 2013, respectively.

 

Other Intangible Assets

 

Our other intangible assets, which are subject to amortization, consisted of the following:

 

 

 

Weighted

 

As of

 

 

 

Average

 

March 31, 2014

 

December 31, 2013

 

 

 

Useful life

 

 

 

Accumulated

 

Carrying

 

 

 

Accumulated

 

Carrying

 

 

 

(in Years)

 

Cost

 

Amortization

 

Amount

 

Cost

 

Amortization

 

Amount

 

 

 

 

 

(In thousands)

 

Customer relationships

 

8

 

$

293,932

 

$

(160,833

)

$

133,099

 

$

293,932

 

$

(152,647

)

$

141,285

 

Contract-based

 

10

 

255,366

 

(213,805

)

41,561

 

255,366

 

(204,835

)

50,531

 

Technology-based

 

7

 

126,272

 

(87,918

)

38,354

 

126,272

 

(83,580

)

42,692

 

Trademark portfolio

 

20

 

29,700

 

(4,208

)

25,492

 

29,700

 

(3,836

)

25,864

 

Favorable leases

 

4

 

4,707

 

(3,334

)

1,373

 

4,707

 

(3,040

)

1,667

 

Total other intangible assets

 

 

 

$

709,977

 

$

(470,098

)

$

239,879

 

$

709,977

 

$

(447,938

)

$

262,039

 

 

Customer relationships are amortized predominantly in relation to the expected contribution of cash flow to the business over the life of the intangible asset.  Other intangible assets are amortized on a straight-line basis over the periods the assets are expected to contribute to our cash flows.  Amortization expense was $24.3 million and $21.6 million for the three months ended March 31, 2014 and 2013, respectively, including amortization of regulatory authorizations with finite lives.

 

20



Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Note 11.              Debt

 

The following table summarizes the carrying amounts and fair values of our debt:

 

 

 

As of

 

 

 

March 31, 2014

 

December 31, 2013

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

 

Amount

 

Value

 

Amount

 

Value

 

 

 

(In thousands)

 

6 1/2% Senior Secured Notes due 2019

 

$

1,100,000

 

$

1,212,750

 

$

1,100,000

 

$

1,193,500

 

7 5/8% Senior Notes due 2021

 

900,000

 

1,017,000

 

900,000

 

1,001,250

 

Other

 

1,618

 

1,618

 

1,588

 

1,588

 

Subtotal

 

2,001,618

 

$

2,231,368

 

2,001,588

 

$

2,196,338

 

Capital lease obligations (1)

 

404,985

 

 

 

420,800

 

 

 

Total debt and capital lease obligations

 

2,406,603

 

 

 

2,422,388

 

 

 

Less: Current portion

 

(61,404

)

 

 

(69,791

)

 

 

Long-term portion of debt and capital lease obligations

 

$

2,345,199

 

 

 

$

2,352,597

 

 

 

 


(1)         Disclosure regarding the fair value of capital lease obligations is not required.

 

We estimated the fair value of our publicly traded long-term debt using market prices in less active markets (Level 2).

 

Note 12.             Income Taxes

 

Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period.  Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.

 

Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, is subject to significant volatility due to several factors, including variability in accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, income and losses from investments, changes in tax laws and relative changes of expenses or losses for which tax benefits are not recognized.  Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income.  For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.

 

Income tax expense was approximately $3.2 million for the three months ended March 31, 2014 compared to an income tax benefit of $5.6 million for the three months ended March 31, 2013.  Our effective income tax rate was 20.8% for the three months ended March 31, 2014 compared to 262.8% for the same period in 2013.  The variation in our current year effective tax rate from a U.S. federal statutory rate for the current period was primarily due to the increase of our valuation allowance associated with realized and unrealized losses that are capital in nature for tax purposes and a lower state effective tax rate.  For the same period in 2013, the variation in our effective tax rate from a U.S. federal statutory rate was primarily due to the decrease of our valuation allowance associated with realized and unrealized losses that are capital in nature for tax purposes, current year research and experimentation credits, and reinstatement of the tax credit for 2012, as provided by the American Taxpayer Relief Act enacted on January 2, 2013.

 

Note 13.              Stock-Based Compensation

 

We maintain stock incentive plans to attract and retain officers, directors and key employees.  Stock awards under these plans include both performance based and non-performance based stock incentives.  We granted 190,000 stock options to our employees for the three months ended March 31, 2014 and zero stock options for the three months ended March 31, 2013.

 

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Table of Contents

 

ECHOSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Unaudited)

 

Our stock-based compensation expense was recorded in the Condensed Consolidated Statements of Operations as follows:

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Research and development expenses

 

$

592

 

$

928

 

Selling, general and administrative expenses

 

2,965

 

4,056

 

Total stock-based compensation

 

$

3,557

 

$

4,984

 

 

As of March 31, 2014, total unrecognized stock-based compensation cost, net of estimated forfeiture, related to our non-performance based unvested stock awards was $33.2 million.

 

Note 14.              Commitments and Contingencies

 

Commitments

 

As of March 31, 2014, our satellite-related obligations were approximately $1.16 billion.  Our satellite-related obligations primarily include, among other things, payments pursuant to agreements for the construction of the EchoStar XIX and TerreStar-2 satellites, payments pursuant to launch services contracts, executory costs for our capital lease satellites, costs under transponder agreements and in-orbit incentives relating to certain satellites, including certain satellites received from DISH Network as a result of the Satellite and Tracking Stock Transaction.

 

As discussed in Note 17, in April 2014 we entered into certain agreements that increased our satellite-related contractual obligations by approximately $234.7 million.

 

Contingencies

 

Separation Agreement

 

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

 

Litigation

 

We are involved in a number of legal proceedings (including those described below) concerning matters arising in connection with the conduct of our business activities.  Many of these proceedings are at preliminary stages, and many of these proceedings seek an indeterminate amount of damages.  We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss or an additional loss may have been incurred and to determine if accruals are appropriate.  If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of the possible loss or range of possible loss can be made.  We record an accrual for litigation and other loss contingencies when we determine that a loss is probable and the amount of the loss can be reasonably estimated.  Legal fees and other costs of defending litigation are charged to expense as incurred.

 

For certain cases described below, management is unable to provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons, (i) the proceedings are in various stages; (ii) damages have not been sought; (iii) damages are unsupported and/or exaggerated; (iv) there is uncertainty as to the outcome of pending appeals or motions;

 

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(v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties are involved (as with many patent-related cases).  For these cases, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material adverse effect on our financial condition, though the outcomes could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.

 

California Institute of Technology

 

On October 1, 2013, the California Institute of Technology (“Caltech”) filed suit against two of our indirect wholly-owned subsidiaries, Hughes Communications, Inc. and Hughes Network Systems, LLC, as well as against DISH Network, DISH Network L.L.C., and dishNET Satellite Broadband L.L.C., in the United States District Court for the Central District of California alleging infringement of United States Patent Nos. 7,116,710; 7,421,032; 7,916,781; and 8,284,833, each of which is entitled “Serial Concatenation of Interleaved Convolutional Codes forming Turbo-Like Codes.”  Caltech appears to assert that encoding data as specified by the DVB-S2 standard infringes each of the asserted patents.  In the operative Amended Complaint, served on March 6, 2014, Caltech claims that the Hopper set-top box, as well as certain of our Hughes subsidiaries’ satellite broadband products and services, infringe the asserted patents by implementing the DVB-S2 standard.

 

We intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to our consumers.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

ClearPlay, Inc.

 

On March 13, 2014, ClearPlay, Inc. (“ClearPlay”) filed a complaint against DISH Network Corporation, DISH Network L.L.C., us, and our wholly-owned subsidiary EchoStar Technologies L.L.C., in the United States District Court for the District of Utah.  The complaint alleges infringement of United States Patent Nos. 6,898,799, entitled “Multimedia Content Navigation and Playback” (the “799 patent”); 7,526,784, entitled “Delivery of Navigation Data for Playback of Audio and Video Content” (the “784 patent”); 7,543,318, entitled “Delivery of Navigation Data for Playback of Audio and Video Content” (the “318 patent”); 7,577,970, entitled “Multimedia Content Navigation and Playback” (the “970 patent”); and 8,117,282, entitled “Media Player Configured to Receive Playback Filters From Alternative Storage Mediums” (the “282 patent”).  ClearPlay alleges that the AutoHop™ feature in the Hopper set-top box infringes the asserted patents.

 

We intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

CRFD Research, Inc. (a subsidiary of Marathon Patent Group, Inc.)

 

On January 17, 2014, CRFD Research, Inc. (“CRFD”) filed a complaint against us and our wholly-owned subsidiary, EchoStar Technologies L.L.C., as well as against DISH Network, DISH DBS and DISH Network L.L.C., in United States District Court for the District of Delaware, alleging infringement of United States Patent No. 7,191,233 (the “233 patent”).  The 233 patent is entitled “System for Automated, Mid-Session, User-Directed, Device-to-Device Session Transfer System,” and relates to transferring an ongoing software session from one device to another.  CRFD alleges that certain of our set-top boxes infringe the 233 patent.  On the same day, CRFD filed patent infringement complaints against AT&T Inc.; Comcast Corp.; DirecTV; Time Warner Cable Inc.; Cox Communications, Inc.; Level 3 Communications, Inc.; Akamai Technologies, Inc.; Cablevision Systems Corp. and Limelight Networks, Inc.  CRFD is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.

 

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We intend to vigorously defend this case.  In the event that a court ultimately determines that we infringe the asserted 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 features that we currently offer to consumers.  We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.

 

The Hopper Litigation

 

On May 24, 2012, DISH Network L.L.C., filed suit in the United States District Court for the Southern District of New York against American Broadcasting Companies, Inc. (“ABC”), CBS Corporation (“CBS”), Fox Entertainment Group, Inc., Fox Television Holdings, Inc., Fox Cable Network Services, L.L.C. (collectively, “Fox”) and NBCUniversal Media, LLC (“NBC”).  The lawsuit seeks a declaratory judgment that DISH Network L.L.C is not infringing any defendant’s copyright, or breaching any defendant’s retransmission consent agreement, by virtue of the PrimeTime Anytime™ and AutoHop™ features in the Hopper™ set-top boxes we design and sell to DISH Network.  A consumer can use the PrimeTime Anytime feature at his or her option, to record certain primetime programs airing on ABC, CBS, Fox, and/or NBC up to every night, and to store those recordings for up to eight days.  A consumer can use the AutoHop feature at his or her option, to watch certain recordings the subscriber made with our PrimeTime Anytime feature, commercial-free, if played back at a certain point after the show’s original airing.

 

Later on May 24, 2012, (i) Fox Broadcasting Company, Twentieth Century Fox Film Corp. and Fox Television Holdings, Inc. filed a lawsuit against DISH Network and DISH Network L.L.C. (collectively, “DISH”) in the United States District Court for the Central District of California, alleging that the PrimeTime Anytime feature, the AutoHop feature, as well as DISH’s use of Sling placeshifting functionality infringe their copyrights and breach their retransmission consent agreements, (ii) NBC Studios LLC, Universal Network Television, LLC, Open 4 Business Productions LLC and NBCUniversal Media, LLC filed a lawsuit against DISH in the United States District Court for the Central District of California, alleging that the PrimeTime Anytime feature and the AutoHop feature infringe their copyrights, and (iii) CBS Broadcasting Inc., CBS Studios Inc. and Survivor Productions LLC filed a lawsuit against DISH in the United States District Court for the Central District of California, alleging that the PrimeTime Anytime feature and the AutoHop feature infringe their copyrights.

 

As a result of certain parties’ competing counterclaims and venue-related motions brought in both the New York and California actions, and certain networks filing various amended complaints, the claims have proceeded in the following venues:  (1) the copyright and contract claims regarding the ABC and CBS parties in New York; and (2) the copyright and contract claims regarding the Fox parties and NBC parties in California.

 

California Actions.  On August 17, 2012, the NBC plaintiffs filed a first amended complaint in their California action adding us and our wholly-owned subsidiary EchoStar Technologies L.L.C. to the NBC litigation, alleging various claims of copyright infringement.  We and our subsidiary answered on September 18, 2012.

 

On September 21, 2012, the United States District Court for the Central District of California heard the Fox plaintiffs’ motion for a preliminary injunction to enjoin the Hopper set-top box’s PrimeTime Anytime and AutoHop features and, on November 7, 2012, entered an order denying the motion.  The Fox plaintiffs appealed and on July 24, 2013, the United States Court of Appeals for the Ninth Circuit affirmed the denial of the Fox plaintiffs’ motion for a preliminary injunction as to the PrimeTime Anytime and AutoHop features.  On August 7, 2013, the Fox plaintiffs filed a petition for rehearing and rehearing en banc, which was denied on January 24, 2014.  The United States Supreme Court has granted the Fox plaintiffs an extension until May 23, 2014 to file a petition for writ of certiorari.

 

In addition, on February 21, 2013, the Fox plaintiffs filed a second motion for preliminary injunction against: (i) DISH, seeking to enjoin the Hopper Transfers™ feature in the second-generation Hopper set-top box, alleging breach of a retransmission consent agreement; and (ii) EchoStar Technologies L.L.C. and DISH, seeking to enjoin the Sling placeshifting functionality in the second-generation Hopper set-top box, alleging copyright infringement by both defendants, and breach of the earlier-mentioned retransmission consent agreement by DISH.  The Fox plaintiffs’ motion was denied on September 23, 2013.  The Fox plaintiffs appealed, and the United States Court of Appeals for the Ninth Circuit will hear oral argument on July 7, 2014.  The Fox claims are set for trial on January 13, 2015.

 

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

 

On November 23, 2012, the ABC plaintiffs filed a motion for a preliminary injunction to enjoin the Hopper set-top box’s PrimeTime Anytime and AutoHop features.  On September 18, 2013, the New York court denied that motion.  The ABC plaintiffs appealed, and oral argument on the appeal was heard on February 20, 2014 before the United States Court of Appeals for the Second Circuit.  Pursuant to a settlement between us and the ABC parties, on March 4, 2014, the ABC parties withdrew their appeal to the United States Court of Appeals for the Second Circuit, and, on March 6, 2014, we and the ABC parties dismissed without prejudice all of our respective claims pending in the United States District Court for the Southern District of New York.  The CBS claims in the New York action are set to be trial-ready on April 17, 2015.

 

We intend to vigorously prosecute and defend our position in these cases.  In the event that a court ultimately determines that we infringe the asserted copyrights, we may be subject to substantial damage