NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1
.
Organization and Business Activities
Principal Business
EchoStar Corporation (which, together with its subsidiaries, is referred to as “EchoStar,” the “Company,” “we,” “us” and/or “our”) is a holding company that was organized in October 2007 as a corporation under the laws of the State of Nevada. We are
a global provider of satellite service operations, video delivery solutions, broadband satellite technologies and broadband services for home and small office customers. We deliver innovative network technologies, managed services, and various communications solutions for enterprise and government customers.
Our Class A common stock is publicly traded on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “SATS.”
In February 2014, EchoStar Corporation entered into agreements with certain subsidiaries of DISH Network Corporation (“DISH”) pursuant to which, effective March 1, 2014, (i) EchoStar Corporation and our subsidiary Hughes Satellite Systems Corporation (“HSS”) issued the Tracking Stock (as defined below) to subsidiaries of DISH 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 and certain of its subsidiaries began receiving certain satellite services on these
five
satellites from us (the “Satellite and Tracking Stock Transaction”). The Tracking Stock tracked the economic performance of the residential retail satellite broadband business of our Hughes segment, including certain operations, assets and liabilities attributed to such business (collectively, the “Hughes Retail Group” or “HRG”), and represented an aggregate
80.0%
economic interest in HRG (the Hughes Retail Preferred Tracking Stock issued by EchoStar Corporation (the “EchoStar Tracking Stock”) represented a
51.89%
economic interest in HRG and the Hughes Retail Preferred Tracking Stock issued by HSS (the “HSS Tracking Stock”, together with the EchoStar Tracking Stock, the “Tracking Stock”) represented a
28.11%
economic interest in the Hughes Retail Group). In addition to the remaining
20.0%
economic interest in HRG, EchoStar retained all economic interest in the wholesale satellite broadband business and other businesses of EchoStar.
On January 31, 2017, EchoStar Corporation and certain of its subsidiaries entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with DISH and certain of its subsidiaries.
Pursuant to the Share Exchange Agreement, on February 28, 2017, among other things, EchoStar Corporation and certain of its subsidiaries received all of the shares of the Tracking Stock in exchange for
100%
of the equity interests of certain EchoStar subsidiaries that held substantially all of our EchoStar Technologies businesses and certain other assets
(collectively, the “Share Exchange”).
Following consummation of the Share Exchange, we no longer operate the EchoStar Technologies business segment and
the EchoStar Tracking Stock and HSS Tracking Stock were retired and are no longer outstanding and all agreements, arrangements and policy statements with respect to such tracking stock terminated and are of no further effect.
As a result of the Share Exchange, the condensed consolidated financial statements of the EchoStar Technologies businesses have been presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented.
See
Note 3
for further discussion of our discontinued operations.
We currently operate in the following
two
business segments:
|
|
•
|
Hughes
— which provides broadband satellite technologies and broadband services to home and small office customers and network technologies, managed services, equipment, hardware, satellite services and communication solutions to domestic and international consumers and aeronautical, enterprise and government customers. The Hughes segment also designs, provides and installs gateway and terminal equipment to customers for other satellite systems. In addition, our Hughes segment provides satellite ground segment systems and terminals to mobile system operators.
|
|
|
•
|
EchoStar Satellite Services (“ESS”)
— which uses certain of our owned and leased in-orbit satellites and related licenses to provide satellite service operations and video delivery solutions on a full-time and occasional-use basis primarily to DISH Network
Corporation and its subsidiaries (“DISH Network”),
Dish Mexico, S. de R.L. de C.V., a joint venture we entered into in 2008 (“Dish Mexico”), United States (“U.S.”)
government service providers, internet service providers, broadcast news organizations, programmers, and private enterprise customers. We also manage satellite operations for certain satellites owned by DISH Network.
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Our operations also include various corporate departments (primarily Executive, Strategic Development, Human Resources, IT, Finance, Real Estate and Legal) as well as other activities that have not been assigned to our operating segments, including costs incurred in certain satellite development programs and other business development activities, our centralized treasury operations, and gains (losses) from certain of our investments.
These activities, costs and income are accounted for in “Corporate and Other.”
In 2008, DISH Network completed its distribution to us of its digital set-top box business, certain infrastructure, and other assets and related liabilities, including certain of its satellites, uplink and satellite transmission assets, and real estate (the “Spin-off”). Since the Spin-off,
EchoStar and DISH have operated as separate publicly-traded companies.
Prior to the consummation of the Share Exchange on February 28, 2017, DISH Network held the Tracking Stock discussed above.
A substantial majority of the voting power of the shares of each of EchoStar and DISH is owned beneficially by Charles W. Ergen, our Chairman, and by certain trusts established by Mr. Ergen for the benefit of his family.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited
condensed consolidated financial statements
have been prepared in conformity with accounting principles generally accepted in the U.S. (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these financial statements do not include all of the information and notes required for complete financial statements prepared in conformity with GAAP. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in our Form 10-K for the year ended
December 31, 2016
.
Principles of Consolidation
We consolidate all entities in which we have a controlling financial interest. We are deemed to have a controlling financial interest in variable interest entities where we are the primary beneficiary. We are deemed to have a controlling financial interest in other entities when we own more than 50 percent of the outstanding voting shares and other shareholders do not have substantive rights to participate in management. For entities we control but do not wholly own, we record a noncontrolling interest within
stockholders’
equity for the portion of the entity’s equity attributed to the noncontrolling ownership interests.
As of
December 31, 2016
, noncontrolling interests consisted primarily of HSS Tracking Stock previously owned by DISH Network. As a result of the Share Exchange, the noncontrolling interest in HSS Tracking Stock was extinguished as of February 28, 2017.
All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheets, the reported amounts of revenue and expense for each reporting period, and certain information disclosed in the notes to our
condensed consolidated financial statements
.
Estimates are used in accounting for, among other things, amortization periods for deferred subscriber acquisition costs, revenue recognition using the percentage-of-completion method, allowances for doubtful accounts, allowances for sales returns and rebates, warranty obligations, self-insurance obligations, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, fair value of financial instruments, fair value of
stock-based compensation awards, fair value of assets and liabilities acquired in business combinations, lease classifications, asset impairment testing, useful lives and methods for depreciation and amortization of long-lived assets, and certain royalty obligations. We base our estimates and assumptions on historical experience, observable market inputs and on various other factors that we believe to be relevant under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results may differ from previously estimated amounts, and such differences may be material to our
condensed consolidated financial statements
.
Changing economic conditions may increase the inherent uncertainty in the estimates and assumptions indicated above. We review our estimates and assumptions periodically and the effects of revisions are reflected in the period they occur or prospectively if the revised estimate affects future periods.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
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 characteristics of the asset or liability that would be considered by market participants in a transaction to purchase or sell the asset or liability.
|
Transfers between levels in the fair value hierarchy are considered to occur at the beginning of the quarterly accounting period.
There were
no
transfers between levels for each of the
nine
months ended
September 30, 2017
or
2016
.
As of
September 30, 2017
and
December 31, 2016
,
the carrying amounts of our cash and cash equivalents, trade accounts receivable, net of allowance for doubtful accounts, accounts payable and accrued liabilities were equal to or approximated fair value due to their short-term nature or proximity to current market rates.
Fair values of our marketable investment securities are based on a variety of observable market inputs. For our investments in publicly traded equity securities and U.S. government securities, fair value ordinarily is determined based on a Level 1 measurement that reflects quoted prices for identical securities in active markets. Fair values of our investments in other marketable debt securities generally are based on Level 2 measurements, as the markets for such debt securities are less active. Trades of identical debt securities on or near the measurement date are considered a strong indication of fair value. Matrix pricing techniques that consider par value, coupon rate, credit quality, maturity and other relevant features also may be used to determine fair value of our investments in marketable debt securities.
Fair values for HSS’
6 1/2% Senior Secured Notes due 2019 (the “2019 Senior Secured Notes”), 7 5/8% Senior Unsecured Notes due 2021 (the “2021 Senior Unsecured Notes”), 5.250% Senior Secured Notes due 2026 (the “2026 Senior Secured Notes”) and 6.625% Senior Unsecured Notes due 2026 (the “2026 Senior Unsecured Notes” and together with the 2026 Senior Secured Notes, the “2026 Notes”) (see
Note 11
) are based on quoted market prices in less active markets and are categorized as Level 2 measurements. The fair values of our other debt are Level 2 measurements and are estimated to approximate their carrying amounts based on the proximity of their interest rates to current market rates.
As of
September 30, 2017
and
December 31, 2016
,
the fair values of our in-orbit incentive obligations, based on measurements categorized within Level 2 of the fair value hierarchy, approximated their carrying amounts of
$113.5 million
and
$74.1 million
, respectively.
We use fair value measurements from time to time in connection with asset impairment testing and the assignment of purchase consideration to assets and liabilities of acquired companies. Those fair value measurements typically include significant unobservable inputs and are categorized within Level 3 of the fair value hierarchy.
Research and Development
Costs incurred in research and development activities generally are expensed as incurred. A significant portion of our research and development costs are incurred in connection with the specific requirements of a customer’s order. In such instances, the amounts for these customer funded development efforts are included in cost of sales.
Cost of sales includes research and development costs incurred in connection with customers’ orders of approximately
$7.0 million
and
$11.1 million
for the three months ended
September 30, 2017
and
2016
, respectively, and
$20.7 million
and
$17.2 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively.
In addition, we incurred other research and development expenses of approximately
$8.3 million
and
$9.0 million
for the three months ended
September 30, 2017
and
2016
, respectively, and
$23.4 million
and
$23.5 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Capitalized Software Costs
Costs related to the procurement and development of software for internal-use and externally marketed software are capitalized and amortized using the straight-line method over the estimated useful life of the software, not in excess of
five years
.
Capitalized costs of internal-use software are included in “Property and equipment, net” and capitalized costs of externally marketed software are included in “Other noncurrent assets, net” in
our condensed consolidated balance sheets
.
Externally marketed software generally is installed in the equipment we sell to customers. We conduct software program reviews for externally marketed capitalized software costs at least annually, or as events and circumstances warrant such a review, to determine if capitalized software development costs are recoverable and to ensure that costs associated with programs that are no longer generating revenue are expensed.
As of
September 30, 2017
and
December 31, 2016
, the net carrying amount of externally marketed software was
$87.7 million
and
$76.3 million
, respectively, of which
$16.7 million
and
$50.1 million
, respectively, was under development and not yet placed in service. We capitalized costs related to the development of externally marketed software of
$8.3 million
and
$6.2 million
for the three months ended
September 30, 2017
and
2016
, respectively, and
$25.4 million
and
$18.5 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively. We recorded
amortization expense relating to the development of externally marketed software
of
$5.5 million
and
$2.5 million
for the three months ended
September 30, 2017
and
2016
, respectively, and
$14.1 million
and
$7.2 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively. The weighted average useful life of our externally marketed software was approximately
four years
as of
September 30, 2017
.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) and has modified the standard thereafter. It outlines a single comprehensive model, codified in Topic 606 of the FASB Accounting Standards Codification, for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” Public entities are required to adopt the new revenue standard in fiscal years beginning after December 15, 2017 and in interim periods within those fiscal years. The standard may be applied either retrospectively to prior periods or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted, but not before fiscal years beginning after December 15, 2016. We plan to adopt the new revenue standard as of January 1, 2018 using the “modified retrospective method.” Under this method, we will apply the rules only to contracts that are not substantially completed as of January 1, 2018, recognizing in retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous accounting standards.
Upon initial evaluation, we do not expect the adoption of ASU 2014-09 to have a material impact on the timing or amount of revenue recognition. However, we do believe the new standard will impact our financial statements as it relates to the deferral of sales commissions. We generally expense sales commissions as incurred under the current standard with the exception of the consumer business in our Hughes segment. The requirement to defer incremental contract acquisition costs and recognize them over the contract period or expected customer life will result in the recognition of a deferred charge on our consolidated balance sheets and corresponding impact to the consolidated statement of operations and comprehensive income (loss). In addition, we currently amortize our sales acquisition costs related to our consumer business in our Hughes segment over the contract term. We believe, under the new guidance, the amortization period for these contract acquisition costs will be over the estimated customer life which is a longer period of time.
We continue to evaluate the impact of the new standard on our consolidated financial statements and related disclosures. We are not able to reasonably estimate the impact of the new standard on our consolidated financial statements at this time.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This update substantially revises standards for the recognition, measurement and presentation of financial instruments, including requiring all equity investments, except for investments in consolidated subsidiaries and investments accounted for using the equity method, to be measured at fair value with changes in the fair value recognized through net income. The update permits an entity to elect to measure an equity security without a readily determinable fair value at its cost, adjusted for changes resulting from impairments and observable price changes in orderly transactions for identical or similar securities of the same issuer. It also amends certain disclosure requirements associated with
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
equity investments and the fair value of financial instruments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted for certain requirements. We plan to adopt all applicable requirements of this update as of January 1, 2018. Upon adoption, we will adjust accumulated earnings to include unrealized gains or losses on any marketable equity securities then designated as available for sale, which historically have been recorded in accumulated other comprehensive loss except when an other-than-temporary impairment has occurred. Following adoption, all periodic changes in fair value of such securities will be recognized in net income or loss. As of September 30, 2017, we had recognized
$13.6 million
in net unrealized gains on such securities in accumulated other comprehensive loss. For our equity investments without a readily determinable fair value that we now account for using the cost method, we expect to elect to measure such securities at cost, adjusted for impairments and observable price changes. We expect our future net income or loss to be more volatile as a result of these changes in accounting for our investments in available-for-sale and cost method equity securities. We continue to assess the impact on our consolidated financial statements of certain requirements of ASU 2016-01 related to measurement of fair value of financial instruments, deferred tax assets related to available-for-sale debt securities, and financial statement presentation and disclosure.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (“ASU 2016-02”). This standard requires lessees to recognize assets and liabilities for all leases with lease terms more than 12 months, including leases classified as operating leases. The standard also modifies the definition of a lease and the criteria for classifying leases as operating leases or financing leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. We are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplifies the accounting for share-based payment awards. This update requires all excess tax benefits and deficiencies to be recognized as income tax expense or benefit and permits an entity to make an entity-wide policy election to either estimate forfeitures or recognize forfeitures as they occur. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The update specifies requirements for retrospective, modified retrospective or prospective application for the various amendments contained in the update. Upon adoption of this standard as of January 1, 2017, we recorded a
$14.5 million
deferred tax asset and a corresponding credit to accumulated earnings for excess tax benefits that had not previously been recognized because the related tax deductions had not reduced taxes payable. We did not change our accounting policy to estimate forfeitures in determining compensation cost. We prospectively adopted amendments requiring presentation of excess tax benefits in operating activities in the statement of cash flows and dealing with the treatment of excess tax benefits in the calculation of diluted earnings per share. The inclusion of excess tax benefits in our income tax provision for the three and nine months ended September 30, 2017 resulted in increases in net income from continuing operations of
$0.2 million
and
$1.6 million
, respectively and increases in net income of
$0.2 million
and
$4.8 million
, respectively.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments rather than incurred losses. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. We are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. We early adopted ASU 2016-16 as of January 1, 2017. Our adoption of this update did not have a material impact on our condensed consolidated financial statements and related disclosures.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). This standard requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents in the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted and the standard must be applied retrospectively to all periods presented. We expect to adopt ASU 2016-18 as of January 1, 2018. Following our adoption of this standard, the beginning and ending balances of cash and cash equivalents presented in our consolidated statements of cash
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
flows will include amounts for restricted cash and cash equivalents, which currently are not included in such balances. Changes in restricted cash and cash equivalents, which we have historically reported in cash flows from investing activities, will not be reported in our consolidated statements of cash flows.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). This standard simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying amount, including goodwill, exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and is to be applied on a prospective basis. We early adopted ASU 2017-04 as of January 1, 2017. Our adoption of this update did not have a material impact on our condensed consolidated financial statements and related disclosures, but it may impact the recognition and measurement of a goodwill impairment loss in future periods if we determine that the carrying amount of any reporting units including goodwill exceeds fair value of the reporting unit.
In March 2017, the FASB issued Accounting Standards Update No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”). This update shortens the amortization period of premiums on certain purchased callable debt securities to the earliest call date, effectively reducing interest income on such securities prior to the earliest call date. ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. We are assessing the impact of adopting this new accounting standard on our consolidated financial statements and related disclosures.
Note 3
. Discontinued Operations
On January 31, 2017, EchoStar Corporation and certain of its subsidiaries entered into the Share Exchange Agreement. Pursuant to the Share Exchange Agreement, on February 28, 2017, among other things, EchoStar Corporation and certain of its subsidiaries received all of the shares of the Tracking Stock in exchange for
100%
of the equity interests of certain EchoStar subsidiaries that held substantially all of our EchoStar Technologies businesses and certain other assets
.
Following consummation of the Share Exchange, we no longer operate the EchoStar Technologies business segment and
the EchoStar Tracking Stock and HSS Tracking Stock were retired and are no longer outstanding and all agreements, arrangements and policy statements with respect to such tracking stock terminated and are of no further effect.
As a result of the Share Exchange, the historical financial results of our EchoStar Technologies segment prior to the closing of the Share Exchange are reflected in our condensed consolidated financial statements as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. The noncontrolling interest in HSS Tracking Stock, as reflected in our stockholders equity, was extinguished as of February 28, 2017 as a result of the Share Exchange.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The following table presents the operating results of our discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Revenue:
|
|
|
|
|
|
|
|
|
Equipment, services and other revenue - DISH Network
|
|
$
|
—
|
|
|
$
|
260,829
|
|
|
$
|
143,063
|
|
|
$
|
892,333
|
|
Equipment, services and other revenue - other
|
|
(45
|
)
|
|
21,474
|
|
|
10,344
|
|
|
89,326
|
|
Total revenue
|
|
(45
|
)
|
|
282,303
|
|
|
153,407
|
|
|
981,659
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
Cost of equipment, services and other
|
|
19
|
|
|
229,414
|
|
|
121,973
|
|
|
800,801
|
|
Selling, general and administrative expenses
|
|
(590
|
)
|
|
20,869
|
|
|
5,502
|
|
|
55,923
|
|
Research and development expenses
|
|
—
|
|
|
11,556
|
|
|
4,635
|
|
|
38,237
|
|
Depreciation and amortization
|
|
—
|
|
|
15,085
|
|
|
11,659
|
|
|
46,129
|
|
Total costs and expenses
|
|
(571
|
)
|
|
276,924
|
|
|
143,769
|
|
|
941,090
|
|
Operating income
|
|
526
|
|
|
5,379
|
|
|
9,638
|
|
|
40,569
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
—
|
|
|
(41
|
)
|
|
(15
|
)
|
|
(116
|
)
|
Equity in earnings (losses) of unconsolidated affiliates, net
|
|
—
|
|
|
998
|
|
|
(1,159
|
)
|
|
2,197
|
|
Other, net
|
|
2
|
|
|
281
|
|
|
(61
|
)
|
|
369
|
|
Total income (expense), net
|
|
2
|
|
|
1,238
|
|
|
(1,235
|
)
|
|
2,450
|
|
Income from discontinued operations before income taxes
|
|
528
|
|
|
6,617
|
|
|
8,403
|
|
|
43,019
|
|
Income tax provision
|
|
(1,182
|
)
|
|
(2,118
|
)
|
|
(1,949
|
)
|
|
(13,806
|
)
|
Net income (loss) from discontinued operations
|
|
$
|
(654
|
)
|
|
$
|
4,499
|
|
|
$
|
6,454
|
|
|
$
|
29,213
|
|
Expenditures for property and equipment of our discontinued operations totaled
zero
and
$17.2 million
for the three months ended
September 30, 2017
and
2016
, respectively, and
$12.5 million
and
$31.8 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The following table presents the aggregate carrying amounts of assets and liabilities of our discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
(In thousands)
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
778
|
|
Trade accounts receivable, net
|
|
5
|
|
|
27,261
|
|
Trade accounts receivable - DISH Network
|
|
140
|
|
|
259,198
|
|
Inventory
|
|
—
|
|
|
9,824
|
|
Prepaids and deposits
|
|
—
|
|
|
14,463
|
|
Current assets of discontinued operations
|
|
145
|
|
|
311,524
|
|
Property and equipment, net
|
|
—
|
|
|
271,108
|
|
Goodwill
|
|
—
|
|
|
6,457
|
|
Other intangible assets, net
|
|
—
|
|
|
7,720
|
|
Investments in unconsolidated entities
|
|
—
|
|
|
26,203
|
|
Other noncurrent assets, net
|
|
—
|
|
|
5,436
|
|
Noncurrent assets of discontinued operations
|
|
—
|
|
|
316,924
|
|
Total assets of discontinued operations
|
|
$
|
145
|
|
|
$
|
628,448
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Trade accounts payable
|
|
$
|
278
|
|
|
$
|
19,518
|
|
Trade accounts payable - DISH Network
|
|
—
|
|
|
3,960
|
|
Current portion of capital lease obligations
|
|
—
|
|
|
4,323
|
|
Deferred revenue and prepayments
|
|
—
|
|
|
2,967
|
|
Accrued compensation
|
|
—
|
|
|
4,652
|
|
Accrued royalties
|
|
—
|
|
|
23,199
|
|
Accrued expenses and other
|
|
264
|
|
|
12,810
|
|
Current liabilities of discontinued operations
|
|
542
|
|
|
71,429
|
|
Capital lease obligations
|
|
—
|
|
|
416
|
|
Deferred tax liabilities, net
|
|
—
|
|
|
7,353
|
|
Other noncurrent liabilities
|
|
—
|
|
|
2,932
|
|
Noncurrent liabilities of discontinued operations
|
|
—
|
|
|
10,701
|
|
Total liabilities of discontinued operations
|
|
$
|
542
|
|
|
$
|
82,130
|
|
Note 4.
Earnings per Share
We present basic earnings per share (“EPS”) and diluted EPS for our Class A and Class B common stock. Basic EPS for our Class A and Class B common stock excludes potential dilution and is computed by dividing “
Net income attributable to EchoStar common stock
” by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if shares of common stock were issued pursuant to our stock-based compensation awards. The potential dilution from common stock awards was computed using the treasury stock method based on the average market value of our Class A common stock during the period. The calculation of our diluted weighted-average common shares outstanding excluded options to purchase shares of our Class A common stock, whose effect would be anti-dilutive, of
1.0 million
shares for the three and
nine
months ended
September 30, 2017
and
3.6 million
shares for the three and
nine
months ended
September 30, 2016
.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Prior to the Share Exchange, the EchoStar Tracking Stock was a participating security that shared in our consolidated earnings and therefore, we applied the two-class method to calculate EPS for periods prior to March 1, 2017. Under the two-class method, we allocated net income or loss attributable to EchoStar between common stock and the EchoStar Tracking Stock considering both dividends declared on each class of stock and the participation rights of each class of stock in undistributed earnings. Based on the
51.89%
economic interest in the Hughes Retail Group represented by the EchoStar Tracking Stock, we allocated undistributed earnings to the EchoStar Tracking Stock based on
51.89%
of the attributed net income or loss of the Hughes Retail Group. Moreover, because the reported amount of “
Net income attributable to EchoStar
” in
our condensed consolidated statements of operations
excluded 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 excluded an aggregate
80.0%
of the attributed net loss of the Hughes Retail Group.
The following table presents basic and diluted EPS amounts for all periods and the corresponding weighted-average shares outstanding used in the calculations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(In thousands, except per share amounts)
|
Amounts attributable to EchoStar common stock:
|
|
|
|
|
|
|
|
|
Net income attributable to EchoStar
|
|
$
|
34,669
|
|
|
$
|
36,801
|
|
|
$
|
79,324
|
|
|
$
|
141,742
|
|
Less: Net income (loss) attributable to EchoStar Tracking Stock
|
|
—
|
|
|
157
|
|
|
(1,209
|
)
|
|
(1,709
|
)
|
Net income attributable to EchoStar common stock
|
|
$
|
34,669
|
|
|
$
|
36,644
|
|
|
$
|
80,533
|
|
|
$
|
143,451
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
35,323
|
|
|
$
|
32,145
|
|
|
$
|
74,079
|
|
|
$
|
114,238
|
|
Net income (loss) from discontinued operations
|
|
(654
|
)
|
|
4,499
|
|
|
6,454
|
|
|
29,213
|
|
Net income attributable to EchoStar common stock
|
|
$
|
34,669
|
|
|
$
|
36,644
|
|
|
$
|
80,533
|
|
|
$
|
143,451
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding :
|
|
|
|
|
|
|
|
|
Class A and B common stock:
|
|
|
|
|
|
|
|
|
Basic
|
|
95,656
|
|
|
93,898
|
|
|
95,316
|
|
|
93,661
|
|
Dilutive impact of stock awards outstanding
|
|
1,234
|
|
|
503
|
|
|
1,310
|
|
|
528
|
|
Diluted
|
|
96,890
|
|
|
94,401
|
|
|
96,626
|
|
|
94,189
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Class A and B common stock:
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.37
|
|
|
$
|
0.34
|
|
|
$
|
0.78
|
|
|
$
|
1.22
|
|
Discontinued operations
|
|
(0.01
|
)
|
|
0.05
|
|
|
0.06
|
|
|
0.31
|
|
Total basic earnings per share
|
|
$
|
0.36
|
|
|
$
|
0.39
|
|
|
$
|
0.84
|
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.36
|
|
|
$
|
0.34
|
|
|
$
|
0.77
|
|
|
$
|
1.21
|
|
Discontinued operations
|
|
—
|
|
|
0.05
|
|
|
0.06
|
|
|
0.31
|
|
Total diluted earnings per share
|
|
$
|
0.36
|
|
|
$
|
0.39
|
|
|
$
|
0.83
|
|
|
$
|
1.52
|
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 5. Other Comprehensive Income (Loss) and Related Tax Effects
Except in unusual circumstances, we do not recognize 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 unrealized capital losses for which the related deferred tax asset has been fully offset by a valuation allowance.
Accumulated other comprehensive loss includes net cumulative foreign currency translation losses of
$102.3 million
and
$135.4 million
as of
September 30, 2017
and
December 31, 2016
, respectively. Other comprehensive income includes deferred tax benefits for foreign currency translation losses related to assets that were transferred from a foreign subsidiary to a domestic subsidiary of
zero
and
$7.3 million
for the three and
nine
months ended
September 30, 2017
, respectively.
Reclassifications out of accumulated other comprehensive loss for the three and
nine
months ended
September 30, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive
Loss Components
|
|
Affected Line Item in our Condensed Consolidated Statements of Operations
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
(In thousands)
|
Recognition of realized gains on available-for-sale securities in net income (1)
|
|
Gains on investments, net
|
|
$
|
—
|
|
|
$
|
(10
|
)
|
|
$
|
(2,758
|
)
|
|
$
|
(5,584
|
)
|
Recognition of other-than-temporary impairment loss on available-for-sale securities in net income (2)
|
|
Other-than-temporary impairment loss on available-for-sale securities
|
|
—
|
|
|
—
|
|
|
3,298
|
|
|
—
|
|
Total reclassifications, net of tax and noncontrolling interests
|
|
|
|
$
|
—
|
|
|
$
|
(10
|
)
|
|
$
|
540
|
|
|
$
|
(5,584
|
)
|
|
|
(1)
|
When available-for-sale securities are sold, the related unrealized gains and losses that were previously recognized in other comprehensive income (loss) are reclassified and recognized as “
Gains on investments, net
” in our condensed consolidated statements of operations.
|
|
|
(2)
|
We recorded an other-than-temporary impairment loss on shares of certain common stock included in our strategic equity securities.
|
Note 6
. Investment Securities
Our marketable investment securities and restricted cash and cash equivalents consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
(In thousands)
|
Marketable investment securities—current, at fair value:
|
|
|
|
|
Corporate bonds
|
|
$
|
245,419
|
|
|
$
|
402,670
|
|
Strategic equity securities
|
|
139,373
|
|
|
94,816
|
|
Other
|
|
100,243
|
|
|
25,030
|
|
Total marketable investment securities—current
|
|
485,035
|
|
|
522,516
|
|
Restricted marketable investment securities (1)
|
|
12,961
|
|
|
12,203
|
|
Total
|
|
$
|
497,996
|
|
|
$
|
534,719
|
|
|
|
|
|
|
Restricted cash and cash equivalents (1)
|
|
$
|
775
|
|
|
$
|
723
|
|
|
|
(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.
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Marketable Investment Securities
Our marketable investment securities portfolio consists of various debt and equity instruments, which generally are classified as available-for-sale or trading securities depending on our investment strategy for those securities. The value of our investment portfolio depends on the value of such securities and other instruments comprising the portfolio.
Corporate Bonds
Our corporate bond portfolio includes debt instruments issued by individual corporations, primarily in the industrial and financial services industries.
Strategic Equity Securities
Our strategic investment portfolio consists of investments in shares of common stock of public companies, which are highly speculative and have experienced and continue to experience volatility. We received dividend income of
$2.3 million
and
$5.8 million
for the three and
nine
months ended
September 30, 2017
, respectively, and de minimis dividend income for the three and
nine
months ended
September 30, 2016
. We recognized a
$3.3 million
other-than-temporary impairment for the
nine
months ended
September 30, 2017
on one of our investments. This investment had been in a continuous loss position for more than 12 months and experienced a decline in market value as a result of adverse developments during the three months ended March 31, 2017.
Prior to September 2017, we had an investment in the preferred stock of a privately-held company which had a carrying amount of
$4.1 million
and was accounted for using the cost method. In connection with the company’s initial public offering of its Class A common stock in September 2017, our shares of preferred stock were converted into the company’s Class B common stock. We have the right to convert such shares of Class B common stock to shares of Class A common stock and to sell such shares following the expiration of a lock-up period. For periods following the initial public offering, we account for this investment as a trading security at fair value in our strategic equity security portfolio.
For the three months ended
September 30, 2017
and
2016
, “
Gains on investments, net
” included gains of
$19.9 million
and
zero
, respectively, related to trading securities that we held as of
September 30, 2017
and
2016
, respectively. For the
nine
months ended
September 30, 2017
and
2016
, “
Gains on investments, net
” included gains of
$19.9 million
and losses of
$1.0 million
, respectively, related to trading securities that we held as of
September 30, 2017
and
2016
, respectively. The fair values of our trading securities were
$23.9 million
and
$7.2 million
as of
September 30, 2017
and December 31, 2016, respectively.
Other
Our other current marketable investment securities portfolio includes investments in various debt instruments, including U.S. government bonds
, commercial paper and mutual funds.
Restricted Cash and Marketable Investment Securities
As of
September 30, 2017
and
December 31, 2016
, our restricted marketable investment securities, together with our restricted cash, included amounts required as collateral for our letters of credit or surety bonds.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Unrealized Gains (Losses) on Available-for-Sale Securities
The components of our available-for-sale securities are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Estimated
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
|
(In thousands)
|
As of September 30, 2017
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
245,426
|
|
|
$
|
38
|
|
|
$
|
(45
|
)
|
|
$
|
245,419
|
|
Other (including restricted)
|
|
107,823
|
|
|
1
|
|
|
(30
|
)
|
|
107,794
|
|
Equity securities - strategic
|
|
101,808
|
|
|
14,439
|
|
|
(802
|
)
|
|
115,445
|
|
Total available-for-sale securities
|
|
$
|
455,057
|
|
|
$
|
14,478
|
|
|
$
|
(877
|
)
|
|
$
|
468,658
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
402,472
|
|
|
$
|
285
|
|
|
$
|
(87
|
)
|
|
$
|
402,670
|
|
Other (including restricted)
|
|
32,488
|
|
|
3
|
|
|
(23
|
)
|
|
32,468
|
|
Equity securities - strategic
|
|
77,149
|
|
|
13,120
|
|
|
(2,652
|
)
|
|
87,617
|
|
Total available-for-sale securities
|
|
$
|
512,109
|
|
|
$
|
13,408
|
|
|
$
|
(2,762
|
)
|
|
$
|
522,755
|
|
As of
September 30, 2017
, restricted and non-restricted available-for-sale securities included debt securities of
$350.6 million
with contractual maturities of one year or less and
$2.6 million
with contractual maturities greater than one year.
We may realize proceeds from certain investments prior to their contractual maturity as a result of our ability to sell these securities prior to their contractual maturity.
Available-for-Sale Securities in a Loss Position
The following table reflects the length of time that our available-for-sale securities have been in an unrealized loss position. We do not intend to sell these securities before they recover or mature, and it is more likely than not that we will hold these securities until they recover or mature. We believe that changes in the estimated fair values of these securities are primarily related to temporary market conditions
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
|
(In thousands)
|
Less than 12 months
|
|
$
|
225,437
|
|
|
$
|
(871
|
)
|
|
$
|
154,826
|
|
|
$
|
(2,760
|
)
|
12 months or more
|
|
23,233
|
|
|
(6
|
)
|
|
1,571
|
|
|
(2
|
)
|
Total
|
|
$
|
248,670
|
|
|
$
|
(877
|
)
|
|
$
|
156,397
|
|
|
$
|
(2,762
|
)
|
Sales of Available-for-Sale Securities
We recognized de minimis gains from the sales of our available-for-sale securities for each of the three months ended
September 30, 2017
and
2016
. We recognized gains from the sales of our available-for-sale securities of
$2.8 million
and
$5.6 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively. We recognized de minimis losses from the sales of our available-for-sale securities for each of the three and
nine
months ended
September 30, 2017
and
2016
.
Proceeds from sales of our available-for-sale securities totaled
zero
and
$4.0 million
for the three months ended
September 30, 2017
and
2016
, respectively, and
$31.0 million
and
$35.8 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Fair Value Measurements
Our current marketable investment securities are measured at fair value on a recurring basis as summarized in the table below.
As of
September 30, 2017
and
December 31, 2016
,
we did not have investments that were categorized within Level 3 of the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
|
(In thousands)
|
Cash equivalents (including restricted)
|
|
$
|
2,736,932
|
|
|
$
|
17,355
|
|
|
$
|
2,719,577
|
|
|
$
|
2,490,168
|
|
|
$
|
62,332
|
|
|
$
|
2,427,836
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
245,419
|
|
|
$
|
—
|
|
|
$
|
245,419
|
|
|
$
|
402,670
|
|
|
$
|
—
|
|
|
$
|
402,670
|
|
Other (including restricted)
|
|
113,204
|
|
|
13,298
|
|
|
99,906
|
|
|
37,233
|
|
|
13,517
|
|
|
23,716
|
|
Equity securities - strategic
|
|
139,373
|
|
|
139,373
|
|
|
—
|
|
|
94,816
|
|
|
94,816
|
|
|
—
|
|
Total marketable investment securities
|
|
$
|
497,996
|
|
|
$
|
152,671
|
|
|
$
|
345,325
|
|
|
$
|
534,719
|
|
|
$
|
108,333
|
|
|
$
|
426,386
|
|
Investments in Unconsolidated Entities
—
Noncurrent
We have
strategic investments in certain non-publicly traded equity securities that are accounted for using either the equity or the cost method of accounting. Our ability to realize value from our strategic investments in companies that are not publicly traded depends on the success of those companies’ businesses and their ability to obtain sufficient capital to execute their business plans. Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell these investments, or that when we desire to sell them we will not be able to obtain fair value for them.
Our investments in unconsolidated entities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
(In thousands)
|
Investments in unconsolidated entities—noncurrent:
|
|
|
|
|
Cost method
|
|
$
|
65,438
|
|
|
$
|
80,052
|
|
Equity method
|
|
99,852
|
|
|
90,964
|
|
Total investments in unconsolidated entities—noncurrent
|
|
$
|
165,290
|
|
|
$
|
171,016
|
|
We recorded cash distributions from our investments accounted for using the equity method of
$7.5 million
and
$5.0 million
for the three months ended
September 30, 2017
and
2016
, respectively. For each of the
nine
months ended
September 30, 2017
and
2016
, we recorded cash distributions from one of these investments accounted for using the equity method of
$15.0 million
. These cash distributions were determined to be a return on investment and reported in cash flows from operating activities in our condensed consolidated statements of cash flows.
In January 2017, we sold our investment in Invidi Technologies Corporation to an entity owned in part by DISH Network. Our investment was accounted for using the cost method and had a carrying amount of
$10.5 million
on the date of sale. We recognized a gain of
$8.9 million
and received cash proceeds of
$17.8 million
in connection with this transaction for the
nine
months ended
September 30, 2017
. See Note 16 for additional information about this transaction.
In connection with the Share Exchange, our equity interests in NagraStar L.L.C. and SmarDTV SA, which we accounted for using the equity method, and our equity interest in Sling TV Holding L.L.C., which we accounted for using the cost method, were transferred to DISH Network as of February 28, 2017. See Notes 3 and 16 for additional information about the Share Exchange and related party transactions with these companies in which we held equity interests.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 7. Trade Accounts Receivable
Our trade accounts receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
(In thousands)
|
Trade accounts receivable
|
|
$
|
181,555
|
|
|
$
|
159,313
|
|
Contracts in process, net
|
|
24,043
|
|
|
36,170
|
|
Total trade accounts receivable
|
|
205,598
|
|
|
195,483
|
|
Allowance for doubtful accounts
|
|
(13,211
|
)
|
|
(12,956
|
)
|
Trade accounts receivable - DISH Network
|
|
52,512
|
|
|
19,417
|
|
Total trade accounts receivable, net
|
|
$
|
244,899
|
|
|
$
|
201,944
|
|
As of
September 30, 2017
and
December 31, 2016
, progress billings offset against contracts in process amounted to
$17.4 million
and
$14.6 million
, respectively.
Note 8. Inventory
Our inventory consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
(In thousands)
|
Finished goods
|
|
$
|
74,693
|
|
|
$
|
49,755
|
|
Raw materials
|
|
6,901
|
|
|
6,678
|
|
Work-in-process
|
|
9,638
|
|
|
6,187
|
|
Total inventory
|
|
$
|
91,232
|
|
|
$
|
62,620
|
|
Note 9. Property and Equipment
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable Life (In Years)
|
|
As of
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
|
|
(In thousands)
|
Land
|
|
—
|
|
$
|
33,682
|
|
|
$
|
35,815
|
|
Buildings and improvements
|
|
1-40
|
|
184,511
|
|
|
175,593
|
|
Furniture, fixtures, equipment and other
|
|
1-12
|
|
680,428
|
|
|
514,056
|
|
Customer rental equipment
|
|
2-4
|
|
859,596
|
|
|
689,579
|
|
Satellites - owned
|
|
2-15
|
|
2,764,153
|
|
|
2,381,120
|
|
Satellites acquired under capital leases
|
|
10-15
|
|
794,705
|
|
|
781,761
|
|
Construction in progress
|
|
—
|
|
765,062
|
|
|
1,418,763
|
|
Total property and equipment
|
|
|
|
6,082,137
|
|
|
5,996,687
|
|
Accumulated depreciation
|
|
|
|
(2,551,678
|
)
|
|
(2,598,492
|
)
|
Property and equipment, net
|
|
|
|
$
|
3,530,459
|
|
|
$
|
3,398,195
|
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Construction in progress consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
(In thousands)
|
Progress amounts for satellite construction, including prepayments under capital leases and launch services costs
|
|
$
|
661,250
|
|
|
$
|
1,235,577
|
|
Satellite related equipment
|
|
83,907
|
|
|
152,737
|
|
Other
|
|
19,905
|
|
|
30,449
|
|
Construction in progress
|
|
$
|
765,062
|
|
|
$
|
1,418,763
|
|
Construction in progress included the following owned and leased satellites under construction or undergoing in-orbit testing as of
September 30, 2017
.
|
|
|
|
|
|
Satellites
|
|
Segment
|
|
Expected Launch Date
|
EchoStar XXI
|
|
Corporate and Other
|
|
June 2017 (1)
|
EchoStar 105/SES-11
|
|
ESS
|
|
October 2017 (2)
|
Telesat T19V (“63 West”) (3)
|
|
Hughes
|
|
Second quarter of 2018
|
EchoStar XXIV
|
|
Corporate and Other
|
|
2021
|
|
|
(1)
|
This satellite was launched in June 2017 and is expected to be placed in service during the fourth quarter of 2017.
|
|
|
(2)
|
This satellite was launched in October 2017 and is expected to be placed in service during the fourth quarter of 2017.
|
|
|
(3)
|
We entered into a satellite services agreement for certain capacity on this satellite once launched, but are not party to the construction contract.
|
Depreciation expense associated with our property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Satellites
|
|
$
|
61,078
|
|
|
$
|
46,965
|
|
|
$
|
173,293
|
|
|
$
|
140,895
|
|
Furniture, fixtures, equipment and other
|
|
22,423
|
|
|
18,443
|
|
|
61,178
|
|
|
50,198
|
|
Customer rental equipment
|
|
39,104
|
|
|
28,652
|
|
|
103,781
|
|
|
86,789
|
|
Buildings and improvements
|
|
1,729
|
|
|
1,721
|
|
|
5,287
|
|
|
5,198
|
|
Total depreciation expense
|
|
$
|
124,334
|
|
|
$
|
95,781
|
|
|
$
|
343,539
|
|
|
$
|
283,080
|
|
Satellites
As of
September 30, 2017
, our satellite fleet consisted of
18
of our owned and leased satellites in geosynchronous orbit, approximately
22,300
miles above the equator. We have not included the EchoStar XXI and EchoStar 105/SES-11 satellites in our satellite fleet as of September 30, 2017 since they had not been placed into service as of this date. We depreciate our owned satellites on a straight-line basis over the estimated useful life of each satellite. As of
September 30, 2017
,
three
of our satellites are accounted for as capital leases and are depreciated on a straight-line basis over their respective lease terms. We accounted for
one
satellite as an operating lease that is not included in property and equipment as of
September 30, 2017
.
Recent Developments
EchoStar III.
In July 2017, the EchoStar III satellite experienced an anomaly that caused communications with the satellite to be interrupted resulting in a loss of control. We regained communications with and control of the EchoStar III satellite and retired it in August 2017. The EchoStar III satellite was a fully depreciated, non-revenue generating asset.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
EchoStar VIII.
During the second quarter of 2017, the EchoStar VIII satellite was removed from its orbital location and retired from commercial service. This retirement has not had, and is not expected to have, a material impact on our results of operations or financial position.
EchoStar XIX
. The EchoStar XIX satellite was launched in December 2016 and was placed into service in March 2017 at the 97.1 degree west longitude orbital location. The EchoStar XIX satellite provides additional capacity for the Hughes broadband services to our customers in North America and added capacity in certain Central and South American countries and has added capability for aeronautical, enterprise and international broadband services.
We contributed the EchoStar XIX satellite to our Hughes segment
in February 2017.
EchoStar XXI
. The EchoStar XXI satellite was launched in June 2017 and is anticipated to be placed into service in the fourth quarter of 2017 at the 10.25 degree east longitude orbital location. The EchoStar XXI satellite is expected to provide space segment capacity to EchoStar Mobile Limited in Europe.
EchoStar 105/SES-11.
The EchoStar 105/SES-11 satellite was launched in October 2017 and is anticipated to be placed into service in the fourth quarter of 2017 at the 105 degree west longitude orbital location. Our Ku-band payload on the EchoStar 105/SES-11 satellite will replace our current capacity on the AMC-15 satellite.
EchoStar XXIII.
The EchoStar XXIII satellite, a Ku-band broadcast satellite services satellite, was launched in March 2017 and placed into service at the 45 degree west longitude orbital location in the second quarter of 2017.
Satellite Anomalies
Our satellites may experience anomalies from time to time, some of which may have a significant adverse impact on their remaining useful lives, the commercial operation of the satellites or our operating results or financial position. We are not aware of any anomalies with respect to our owned or leased satellites that have had any such material adverse effect
during the
nine
months ended
September 30, 2017
.
There can be no assurance, however, that anomalies will not have any such adverse impacts in the future. In addition, there can be no assurance that we can recover critical transmission capacity in the event one or more of our in-orbit satellites were to fail.
We historically have not carried in-orbit insurance on our satellites because we assessed that the cost of insurance was uneconomical relative to the risk of failures. Therefore, we generally bear the risk of any 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 in-orbit insurance for our SPACEWAY 3, EchoStar XVI, and EchoStar XVII satellites. Based on economic analysis of the current insurance market we obtained launch plus one year in-orbit insurance, subject to certain limitations, for the EchoStar XIX, EchoStar XXI and EchoStar XXIII satellites. Additionally, we obtained certain launch and in-orbit insurance for our interest in the EchoStar 105/SES-11 satellite. All other satellites, either in orbit or under construction, are not covered by launch or in-orbit insurance. We will continue to assess circumstances going forward and make insurance decisions on a case by case basis.
Note 10. Goodwill, Regulatory Authorizations and Other Intangible Assets
Goodwill
The excess of the cost of an acquired business over the fair values of net tangible and identifiable intangible assets at the time of the acquisition is recorded as goodwill. Goodwill is assigned to the reporting units within our operating segments and is subject to impairment testing annually, or more frequently when events or changes in circumstances indicate the fair value of a reporting unit is more likely than not less than its carrying amount.
As of
September 30, 2017
and
December 31, 2016
, all goodwill related to our continuing operations
was assigned to reporting units of our Hughes segment. We test this goodwill for impairment annually in the second quarter. Based on our qualitative assessment of impairment in the second quarter of 2017, we determined that it was not more likely than not that the fair values of the Hughes segment reporting units were less than the corresponding carrying amounts.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Regulatory Authorizations
Regulatory authorizations included amounts with finite and indefinite useful lives, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Additions
|
|
Currency
Translation
Adjustment
|
|
As of
September 30, 2017
|
|
|
(In thousands)
|
Finite useful lives:
|
|
|
|
|
|
|
|
|
Cost
|
|
$
|
87,959
|
|
|
$
|
—
|
|
|
$
|
6,086
|
|
|
$
|
94,045
|
|
Accumulated amortization
|
|
(14,983
|
)
|
|
(3,751
|
)
|
|
(1,411
|
)
|
|
(20,145
|
)
|
Net
|
|
72,976
|
|
|
(3,751
|
)
|
|
4,675
|
|
|
73,900
|
|
Indefinite lives
|
|
471,657
|
|
|
—
|
|
|
—
|
|
|
471,657
|
|
Total regulatory authorizations, net
|
|
$
|
544,633
|
|
|
$
|
(3,751
|
)
|
|
$
|
4,675
|
|
|
$
|
545,557
|
|
Regulatory authorizations with finite lives include our Brazilian license, which had a carrying amount of
$38.4 million
and
$38.6 million
as of
September 30, 2017
and December 31, 2016, respectively. We had regulatory obligations to meet certain in-service milestones by the second quarter of 2017 for our Brazilian license at the 45 degree west longitude orbital location for the Ka-, Ku- and S-band frequency bands. We have met our regulatory milestone for the Ku-band. On October 5, 2017, ANATEL, the Brazilian regulatory authority, declined our request to extend our milestone deadlines for the S-band and Ka-band and, as a result, we no longer have the right to use such frequency bands. We may be subject to penalties as a result of our failure to meet these milestones. The loss of our right to use the S- and Ka-bands in October 2017 is an event that may affect the recoverability of the carrying value of our Brazilian license and related assets. Accordingly, we expect to test our Brazilian license and related assets for recoverability in the fourth quarter of 2017. We may be required to record an impairment loss if we determine that the carrying value of such license or its related assets are not recoverable and their fair values are lower than such carrying amounts.
Other Intangible Assets
Our other intangible assets, which are subject to amortization, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Useful Life (in Years)
|
|
As of
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
Carrying
Amount
|
|
Cost
|
|
Accumulated
Amortization
|
|
Carrying
Amount
|
|
|
|
|
(In thousands)
|
Customer relationships
|
|
8
|
|
$
|
270,300
|
|
|
$
|
(228,355
|
)
|
|
$
|
41,945
|
|
|
$
|
270,300
|
|
|
$
|
(214,544
|
)
|
|
$
|
55,756
|
|
Technology-based
|
|
6
|
|
61,300
|
|
|
(60,905
|
)
|
|
395
|
|
|
60,835
|
|
|
(57,266
|
)
|
|
3,569
|
|
Trademark portfolio
|
|
20
|
|
29,700
|
|
|
(9,405
|
)
|
|
20,295
|
|
|
29,700
|
|
|
(8,291
|
)
|
|
21,409
|
|
Total other intangible assets
|
|
|
|
$
|
361,300
|
|
|
$
|
(298,665
|
)
|
|
$
|
62,635
|
|
|
$
|
360,835
|
|
|
$
|
(280,101
|
)
|
|
$
|
80,734
|
|
Customer relationships are amortized predominantly in relation to the expected contribution of cash flow to the business over the life of the intangible asset. Other intangible assets are amortized on a straight-line basis over the periods the assets are expected to contribute to our cash flows. Intangible asset amortization expense, including amortization of
regulatory authorizations with finite lives and externally marketed capitalized software, was
$10.5 million
and
$12.8 million
for the three months ended
September 30, 2017
and
2016
, respectively, and
$36.4 million
and
$41.7 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 11
. Debt and Capital Lease Obligations
The following table summarizes the carrying amounts and fair values of our debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Interest Rate
|
|
As of
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
|
|
|
(In thousands)
|
Senior Secured Notes:
|
|
|
|
|
|
|
|
|
|
|
6 1/2% Senior Secured Notes due 2019
|
|
6.959%
|
|
$
|
990,000
|
|
|
$
|
1,056,825
|
|
|
$
|
990,000
|
|
|
$
|
1,084,050
|
|
5 1/4% Senior Secured Notes due 2026
|
|
5.320%
|
|
750,000
|
|
|
783,038
|
|
|
750,000
|
|
|
739,688
|
|
Senior Unsecured Notes:
|
|
|
|
|
|
|
|
|
|
|
7 5/8% Senior Unsecured Notes due 2021
|
|
8.062%
|
|
900,000
|
|
|
1,023,408
|
|
|
900,000
|
|
|
990,189
|
|
6 5/8% Senior Unsecured Notes due 2026
|
|
6.688%
|
|
750,000
|
|
|
806,910
|
|
|
750,000
|
|
|
760,245
|
|
Less: Unamortized debt issuance costs
|
|
|
|
(26,756
|
)
|
|
—
|
|
|
(31,821
|
)
|
|
—
|
|
Subtotal
|
|
|
|
3,363,244
|
|
|
$
|
3,670,181
|
|
|
3,358,179
|
|
|
$
|
3,574,172
|
|
Capital lease obligations
|
|
|
|
280,878
|
|
|
|
|
297,268
|
|
|
|
Total debt and capital lease obligations
|
|
|
|
3,644,122
|
|
|
|
|
3,655,447
|
|
|
|
Less: Current portion
|
|
|
|
(38,407
|
)
|
|
|
|
(32,984
|
)
|
|
|
Long-term debt and capital lease obligations, net of unamortized debt issuance costs
|
|
|
|
$
|
3,605,715
|
|
|
|
|
$
|
3,622,463
|
|
|
|
The fair values of our debt are estimates categorized within Level 2 of the fair value hierarchy.
Pursuant to the terms of a registration rights agreement, HSS registered notes having substantially identical terms as the 2026 Notes with the SEC as part of an offer to exchange registered notes for the 2026 Notes. This exchange offer expired May 11, 2017 with 99.98% of the 2026 Notes being tendered for exchange.
Note 12. Income Taxes
Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, is subject to significant volatility due to several factors, including income and losses from investments for which we have a full valuation allowance, changes in tax laws and relative changes in unrecognized tax benefits. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.
Income tax expense was
$6.1 million
for the three months ended
September 30, 2017
compared to an income tax expense of approximately
$17.4 million
for the three months ended
September 30, 2016
. Our estimated effective income tax rate was
14.5%
and
34.6%
for the three months ended
September 30, 2017
and
2016
, respectively.
The variations in our current year effective tax rate from the U.S. federal statutory rate for the three months ended
September 30, 2017
was primarily due to various permanent tax differences, the increase in our valuation allowance associated with unrealized gains that are capital in nature, and a change in the amount of unrecognized tax benefit from uncertain tax positions. The variations in our effective tax rate from the U.S. federal statutory rate for the three months ended
September 30, 2016
was primarily due to research and experimentation credits, partially offset by state and local taxes.
Income tax expense was approximately
$9.1 million
for the
nine
months ended
September 30, 2017
compared to an income tax expense of approximately
$61.3 million
for the
nine
months ended
September 30, 2016
. Our estimated effective income tax rate was
11.0%
and
35.2%
for the
nine
months ended
September 30, 2017
and
2016
, respectively. The variations in our
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
effective tax rate from the U.S. federal statutory rate for the
nine
months ended
September 30, 2017
was primarily due to
the recognition of a one-time tax benefit for the revaluation of our deferred tax assets and liabilities due to a change in our state effective tax rate as a result of the Share Exchange, the increase in our valuation allowance associated with unrealized gains that are capital in nature, and change in the amount of unrecognized tax benefit from uncertain tax positions. The tax benefit recognized from the change in our effective tax rate was partially offset by the increase in our valuation allowance associated with certain state and foreign losses. The variations in our effective tax rate from the U.S. federal statutory rate for the
nine
months ended
September 30, 2016
were primarily due to research and experimentation credits, partially offset by state and local taxes.
Note 13. Stock-Based Compensation
We maintain stock incentive plans to attract and retain officers, directors and key employees. Stock awards under these plans include both performance based and non-performance based stock incentives. We granted stock options and other incentive awards to our employees and nonemployee directors to acquire
62,600
shares and
137,470
shares of our Class A common stock during the three months ended
September 30, 2017
and
2016
, respectively, and
1,263,350
shares and
722,350
shares of our Class A common stock for the
nine
months ended
September 30, 2017
and
2016
, respectively. On April 24, 2017, Mr. Ergen, our Chairman, voluntarily forfeited options to purchase
600,000
shares of Class A common stock that were granted to him on April 1, 2017, and we canceled such forfeited options.
Total non-cash, stock-based compensation expense is shown in the following table for the three and
nine
months ended
September 30, 2017
and
2016
and was assigned to the same expense categories as the base compensation for such employees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Research and development expenses
|
|
$
|
297
|
|
|
$
|
297
|
|
|
$
|
774
|
|
|
$
|
827
|
|
Selling, general and administrative expenses
|
|
2,965
|
|
|
2,311
|
|
|
7,932
|
|
|
7,627
|
|
Total stock-based compensation
|
|
$
|
3,262
|
|
|
$
|
2,608
|
|
|
$
|
8,706
|
|
|
$
|
8,454
|
|
As of
September 30, 2017
, total unrecognized stock-based compensation cost, net of estimated forfeitures, related to our unvested stock awards was
$22.8 million
.
Note 14
. Commitments and Contingencies
Commitments
As of
September 30, 2017
, our satellite-related obligations were approximately
$1.01 billion
.
Our satellite-related obligations primarily include payments pursuant to agreements for the construction of the EchoStar XXIV satellite; payments pursuant to launch services contracts and regulatory authorizations; executory costs for our capital lease satellites; costs under satellite service agreements; and in-orbit incentives relating to certain satellites; as well as commitments for long-term satellite operating leases and satellite service arrangements.
Contingencies
Patents and Intellectual Property
Many entities, including some of our competitors, have or may in the future obtain patents and other intellectual property rights that cover or affect products or services directly or indirectly related to those that we offer. We may not be aware of all patents and other intellectual property rights that our products and services may potentially infringe. Damages in patent infringement cases can be substantial, and in certain circumstances can be trebled. Further, we cannot estimate the extent to which we may be required in the future to obtain licenses with respect to intellectual property rights held by others and the availability and cost of any such licenses. Various parties have asserted patent and other intellectual property rights with respect to our products and services. We cannot be certain that these persons do not own the rights they claim, that these rights are not valid or that our products and services do not infringe on these rights. Further, we cannot be certain that we would be able to obtain licenses
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
from these persons on commercially reasonable terms or, if we were unable to obtain such licenses, that we would be able to redesign our products and services to avoid infringement.
Separation Agreement; Share Exchange
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 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. Additionally, in connection with the Share Exchange, we entered into the Share Exchange Agreement and other agreements which provide, among other things, for the division of certain liabilities, including liabilities relating to taxes, intellectual property and employees and liabilities resulting from litigation and the assumption of certain liabilities that relate to the transferred businesses and assets. These agreements also contain additional indemnification provisions between us and DISH Network for certain pre-existing liabilities and legal proceedings.
Litigation
We are involved in a number of legal proceedings (including those described below) concerning matters arising in connection with the conduct of our business activities. Many of these proceedings are at preliminary stages and/or seek an indeterminate amount of damages. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss or an additional loss may have been incurred and to determine if accruals are appropriate. We record an accrual for litigation and other loss contingencies when we determine that a loss is probable and the amount of the loss can be reasonably estimated. If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made. There can be no assurance that legal proceedings against us will be resolved in amounts that will not differ from the amounts of our recorded accruals. Legal fees and other costs of defending litigation are charged to expense as incurred.
For certain cases described below, management is unable to predict with any degree of certainty the outcome or provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons, (i) the proceedings are in various stages; (ii) damages have not been sought or specified; (iii) damages are unsupported, indeterminate and/or exaggerated in management’s opinion; (iv) there is uncertainty as to the outcome of pending trials, appeals or motions; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties are involved (as with many patent-related cases). Except as described below, for these cases, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material effect on our financial condition, operating results or cash flows, though there is no assurance that the resolution and outcomes of these proceedings, individually or in the aggregate, will not be material to our financial condition, operating results or cash flows for any particular period, depending, in part, upon the operating results for such period.
We intend to vigorously defend the proceedings against us. In the event that a court or jury ultimately rules against us, we may be subject to adverse consequences, including, without limitation, substantial damages, which may include treble damages, fines, penalties, compensatory damages and/or other equitable or injunctive relief that could require us to materially modify our business operations or certain products or services that we offer to our consumers.
Elbit
On January 23, 2015, Elbit Systems Land and C4I LTD and Elbit Systems of America Ltd. (together referred to as “Elbit”) filed a complaint against our subsidiary Hughes Network Systems, L.L.C. (“HNS”), as well as against Black Elk Energy Offshore Operations, LLC, Bluetide Communications, Inc. and Helm Hotels Group, in the United States District Court for the Eastern District of Texas, alleging infringement of United States Patent Nos. 6,240,073 (the “073 patent”) and 7,245,874 (“874 patent”). The 073 patent is entitled “Reverse Link for a Satellite Communication Network” and the 874 patent is entitled “Infrastructure for Telephony Network.” Elbit alleges that the 073 patent is infringed by broadband satellite systems that practice the Internet Protocol Over Satellite standard. Elbit alleges that the 874 patent is infringed by the manufacture and sale of broadband satellite systems that provide cellular backhaul service via connections to E1 or T1 interfaces at cellular backhaul base stations. On April 2, 2015, Elbit filed an amended complaint removing Helm Hotels Group as a defendant, but making similar
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
allegations against a new defendant, Country Home Investments, Inc. On November 3 and 4, 2015, and January 22, 2016, the defendants filed petitions before the United States Patent and Trademark Office challenging the validity of the patents in suit, which the Patent and Trademark Office subsequently declined to institute. On April 13, 2016, the defendants answered Elbit’s complaint. At Elbit’s request, on June 26, 2017, the court dismissed Elbit’s claims of infringement against all parties other than HNS. Trial commenced on July 31, 2017. On August 7, 2017, the jury returned a verdict that the 073 patent was valid and infringed, and awarded Elbit approximately $21.1 million. As a result of interest, costs and unit sales through the 073 patent’s expiration in November 2017, we estimate the jury verdict could result in a judgment of approximately $27 million if not overturned or modified by post-trial motions or appeals. The jury also found that such infringement of the 073 patent was not willful and that the 874 patent was not infringed. HNS intends to vigorously pursue its post-trial rights, including appeals. We cannot predict with certainty the outcome of any post-trial motions or appeals. For the nine months ended September 30, 2017, we have recorded a charge of $2.5 million with respect to this matter. Any eventual payments made with respect to the ultimate outcome of this matter may be different from our accruals and such differences could be significant.
Michael Heskiaoff, Marc Langenohl, and Rafael Mann
On July 10, 2015, Messrs. Michael Heskiaoff and Marc Langenohl, purportedly on behalf of themselves and all others similarly situated, filed suit against our now former subsidiary Sling Media, Inc. in the United States District Court for the Southern District of New York. The complaint alleges that Sling Media Inc.’s display of advertising to its customers violates a number of state statutes dealing with consumer deception. On September 25, 2015, the plaintiffs filed an amended complaint, and Mr. Rafael Mann, purportedly on behalf of himself and all others similarly situated, filed an additional complaint alleging similar causes of action. On November 16, 2015, the cases were consolidated. On August 12, 2016, the Court dismissed the consolidated case due to plaintiffs’ failure to state a claim. On September 12, 2016, the plaintiffs moved the Court for leave to file an amended complaint, which the Court denied on March 22, 2017. On April 17, 2017, the plaintiffs filed a notice of appeal to the United States Court of Appeals for the Second Circuit.
Realtime Data LLC
On May 8, 2015, Realtime Data LLC (“Realtime”) filed suit against EchoStar Corporation and our subsidiary HNS in the United States District Court for the Eastern District of Texas alleging infringement of United States Patent Nos. 7,378,992 (the “992 patent”), entitled “Content Independent Data Compression Method and System”; 7,415,530 (the “530 patent”), entitled “System and Methods for Accelerated Data Storage and Retrieval”; and 8,643,513 (the “513 patent”), entitled “Data Compression System and Methods.” On September 14, 2015, Realtime amended its complaint, additionally alleging infringement of United States Patent No. 9,116,908 (the “908 patent”), entitled “System and Methods for Accelerated Data Storage and Retrieval.” Realtime generally alleges that the asserted patents are infringed by certain HNS data compression products and services. Over April 29, 2016 and May 5, 2016, the defendants filed petitions before the United States Patent and Trademark Office (“USPTO”) challenging the validity of the asserted patents. The USPTO instituted proceedings on each of those petitions. The USPTO invalidated the asserted claims of the 513 patent, but Realtime is still asserting this patent against us and may appeal this ruling. Realtime is no longer asserting the 992 patent against us and additionally the USPTO invalidated the claims of the 992 patent that had been asserted against us. The USPTO is still reviewing the 530 patent; however, two of the four claims asserted against us were invalidated in a separate litigation between Realtime and a third party, which Realtime may appeal. The USPTO did not invalidate the asserted claims of the 908 patent, but a third party has challenged these claims in a separate proceeding before the USPTO. On February 14, 2017, Realtime filed a second suit against EchoStar Corporation and our subsidiary HNS in the same District Court, alleging infringement of four additional United States Patents, Nos. 7,358,867, entitled “Content Independent Data Compression Method and System;” 8,502,707, entitled “Data Compression Systems and Methods;” 8,717,204, entitled “Methods for Encoding and Decoding Data;” and 9,054,728, entitled “Data Compression System and Methods.” On June 6, 2017, Realtime filed an amended complaint, adding claims of infringement against EchoStar Technologies, L.L.C., a wholly-owned subsidiary of DISH, DISH, DISH Network L.L.C., Sling TV L.L.C., Sling Media L.L.C., and Arris Group, Inc., as well as additionally alleging infringement of United States Patent No. 8,553,759 (the “759 patent”), entitled “Bandwidth Sensitive Data Compression and Decompression.” The cases were consolidated and no trial date has been set. On July 20, 2017, the claims against the newly added parties, with the exception of EchoStar Technologies, L.L.C., were severed into a separate case. On September 1, 2017, EchoStar Technologies, L.L.C. was dismissed from the case. On October 10, 2017, Realtime informed us that it is not pursuing the 759 patent against us. Trial is scheduled for January 21, 2019. Realtime is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Shareholder Derivative Litigation
On December 5, 2012, Greg Jacobi, purporting to sue derivatively on behalf of EchoStar Corporation, filed suit (the “Jacobi Litigation”) against Charles W. Ergen, Michael T. Dugan, R. Stanton Dodge, Tom A. Ortolf, C. Michael Schroeder, Joseph P. Clayton, David K. Moskowitz, and EchoStar Corporation in the United States District Court for the District of Nevada. The complaint alleges that a March 2011 attempted grant of
1.5 million
stock options to Charles Ergen breached defendants’ fiduciary duties, resulted in unjust enrichment, and constituted a waste of corporate assets.
On December 18, 2012, Chester County Employees’ Retirement Fund, derivatively on behalf of EchoStar Corporation, filed a suit (the “Chester County Litigation”) against Charles W. Ergen, Michael T. Dugan, R. Stanton Dodge, Tom A. Ortolf, C. Michael Schroeder, Anthony M. Federico, Pradman P. Kaul, Joseph P. Clayton, and EchoStar Corporation in the United States District Court for the District of Colorado. The complaint similarly alleges that the March 2011 attempted grant of
1.5 million
stock options to Charles Ergen breached defendants’ fiduciary duties, resulted in unjust enrichment, and constituted a waste of corporate assets.
On February 22, 2013, the Chester County Litigation was transferred to the District of Nevada, and on April 3, 2013, the Chester County Litigation was consolidated into the Jacobi Litigation. Oral argument on a motion to dismiss the Jacobi Litigation was held February 21, 2014. On March 30, 2015, the Court dismissed the Jacobi Litigation, with leave for Jacobi to amend his complaint by April 20, 2015. On April 20, 2015, Jacobi filed an amended complaint, which on June 12, 2015, we moved to dismiss. On March 17, 2016, the Court dismissed the amended complaint. On July 31, 2017, a motion from the Chester County Employee’s Retirement Fund seeking attorneys’ fees and expenses was denied. Jacobi appealed the amended complaint’s dismissal to the United States Court of Appeals for the Ninth Circuit. On October 9, 2017, Jacobi agreed to dismiss its appeal, with each party bearing its own costs. Accordingly, on October 10, 2017 the Court of Appeals granted a stipulated motion to voluntarily dismiss Jacobi’s appeal, and on October 17, 2017, the District Court entered the Court of Appeal’s mandate. The Chester County and Jacobi matters are now concluded.
Other
In addition to the above actions, we are subject to various other legal proceedings and claims, which arise in the ordinary course of our business. As part of our ongoing operations, the Company is subject to various inspections, audits, inquiries, investigations and similar actions by third parties, as well as by governmental/regulatory authorities responsible for enforcing the laws and regulations to which the Company may be subject. Further, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against companies that submit false claims for payments to, or improperly retain overpayments from, the federal government. Some states have adopted similar state whistleblower and false claims provisions. In addition, the Company from time to time receives inquiries from federal, state and foreign agencies regarding compliance with various laws and regulations.
In our opinion, the amount of ultimate liability with respect to any of these other actions is unlikely to materially affect our financial position, results of operations or cash flows, though the resolutions and outcomes, individually or in the aggregate, could be material to our financial position, operating results or cash flows for any particular period, depending, in part, upon the operating results for such period.
The Company indemnifies its directors, officers and employees for certain liabilities that might arise from the performance of their responsibilities for the Company. Additionally, in the normal course of its business, the Company enters into contracts pursuant to which the Company may make a variety of representations and warranties and indemnify the counterparty for certain losses. The Company’s possible exposure under these arrangements cannot be reasonably estimated as this involves the resolution of claims made, or future claims that may be made, against the Company or its officers, directors or employees, the outcomes of which are unknown and not currently predictable or estimable.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 15
. Segment Reporting
Operating segments are business components of an enterprise for which separate financial information is available and regularly evaluated by the chief operating decision maker (“CODM”), who for
EchoStar is the Company’s Chief Executive Officer.
Prior to March 2017, we operated in three primary business segments, Hughes, EchoStar Technologies and ESS.
Following consummation of the Share Exchange described in
Note 3
of these condensed consolidated financial statements, we no longer operate the EchoStar Technologies business segment.
The primary measure of segment profitability that is reported regularly to our CODM is earnings before interest, taxes, depreciation and amortization, or EBITDA.
Effective in March 2017, we also changed our overhead allocation methodology to reflect how the CODM evaluates our segments. Historically, the costs of all corporate functions were included on an allocated basis in each of the business segments’ EBITDA. Under the revised allocation methodology, these costs are now reported and analyzed as part of “Corporate and Other” (previously “All Other and Eliminations”). Our prior period segment EBITDA disclosures have been restated to reflect this change.
As of March 2017, our
two
primary business segments are Hughes and ESS, as described in
Note 1
of these condensed consolidated financial statements.
Our operations also include various corporate departments (primarily Executive, Strategic Development, Human Resources, IT, Finance, Real Estate and Legal) as well as other activities that have not been assigned to our operating segments, including costs incurred in certain satellite development programs and other business development activities, our centralized treasury operations, and gains (losses) from certain of our investments.
Costs and income associated with these departments and activities are accounted for in the
“
Corporate and Other
”
column in the table below or in the reconciliation of EBITDA below.
Transactions between segments were not significant for the three and
nine
months ended
September 30, 2017
or
2016
, respectively.
Total assets by segment have not been reported herein because the information is not provided to our CODM on a regular basis.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The following table presents revenue, EBITDA, and capital expenditures for each of our operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hughes
|
|
EchoStar
Satellite
Services
|
|
Corporate and Other
|
|
Consolidated
Total
|
|
|
(In thousands)
|
For the Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
379,702
|
|
|
$
|
96,743
|
|
|
$
|
4,788
|
|
|
$
|
481,233
|
|
Intersegment revenue
|
|
$
|
359
|
|
|
$
|
350
|
|
|
$
|
(709
|
)
|
|
$
|
—
|
|
Total revenue
|
|
$
|
380,061
|
|
|
$
|
97,093
|
|
|
$
|
4,079
|
|
|
$
|
481,233
|
|
EBITDA
|
|
$
|
131,817
|
|
|
$
|
78,345
|
|
|
$
|
9,699
|
|
|
$
|
219,861
|
|
Capital expenditures
|
|
$
|
108,428
|
|
|
$
|
8,203
|
|
|
$
|
75,500
|
|
|
$
|
192,131
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
355,090
|
|
|
$
|
101,308
|
|
|
$
|
3,648
|
|
|
$
|
460,046
|
|
Intersegment revenue
|
|
$
|
786
|
|
|
$
|
172
|
|
|
$
|
(958
|
)
|
|
$
|
—
|
|
Total revenue
|
|
$
|
355,876
|
|
|
$
|
101,480
|
|
|
$
|
2,690
|
|
|
$
|
460,046
|
|
EBITDA
|
|
$
|
125,522
|
|
|
$
|
84,257
|
|
|
$
|
(20,477
|
)
|
|
$
|
189,302
|
|
Capital expenditures
|
|
$
|
75,682
|
|
|
$
|
15,730
|
|
|
$
|
48,162
|
|
|
$
|
139,574
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
1,070,715
|
|
|
$
|
294,839
|
|
|
$
|
13,906
|
|
|
$
|
1,379,460
|
|
Intersegment revenue
|
|
$
|
1,428
|
|
|
$
|
946
|
|
|
$
|
(2,374
|
)
|
|
$
|
—
|
|
Total revenue
|
|
$
|
1,072,143
|
|
|
$
|
295,785
|
|
|
$
|
11,532
|
|
|
$
|
1,379,460
|
|
EBITDA
|
|
$
|
342,693
|
|
|
$
|
241,873
|
|
|
$
|
3,472
|
|
|
$
|
588,038
|
|
Capital expenditures
|
|
$
|
270,624
|
|
|
$
|
21,351
|
|
|
$
|
118,170
|
|
|
$
|
410,145
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
1,019,203
|
|
|
$
|
305,401
|
|
|
$
|
10,074
|
|
|
$
|
1,334,678
|
|
Intersegment revenue
|
|
$
|
2,248
|
|
|
$
|
518
|
|
|
$
|
(2,766
|
)
|
|
$
|
—
|
|
Total revenue
|
|
$
|
1,021,451
|
|
|
$
|
305,919
|
|
|
$
|
7,308
|
|
|
$
|
1,334,678
|
|
EBITDA
|
|
$
|
353,505
|
|
|
$
|
257,181
|
|
|
$
|
(45,506
|
)
|
|
$
|
565,180
|
|
Capital expenditures
|
|
$
|
261,241
|
|
|
$
|
50,762
|
|
|
$
|
165,815
|
|
|
$
|
477,818
|
|
The following table reconciles total consolidated EBITDA to reported “
Income from continuing operations before income taxes
” in
our condensed consolidated statements of operations
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
EBITDA
|
|
$
|
219,861
|
|
|
$
|
189,302
|
|
|
$
|
588,038
|
|
|
$
|
565,180
|
|
Interest income and expense, net
|
|
(43,634
|
)
|
|
(31,057
|
)
|
|
(126,156
|
)
|
|
(66,650
|
)
|
Depreciation and amortization
|
|
(134,822
|
)
|
|
(108,549
|
)
|
|
(379,939
|
)
|
|
(324,743
|
)
|
Net income attributable to noncontrolling interest in HSS Tracking Stock and other noncontrolling interests
|
|
532
|
|
|
609
|
|
|
351
|
|
|
20
|
|
Income from continuing operations before income taxes
|
|
$
|
41,937
|
|
|
$
|
50,305
|
|
|
$
|
82,294
|
|
|
$
|
173,807
|
|
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Note 16
. Related Party Transactions
DISH Network
Following the Spin-off, we and DISH have operated as separate publicly-traded companies. However, prior to the consummation of the Share Exchange on February 28, 2017, DISH Network owned the Tracking Stock representing an aggregate
80.0%
economic interest in the residential retail satellite broadband business of our Hughes segment. Following the consummation of the Share Exchange, the Tracking Stock was retired. In addition, a substantial majority of the voting power of the shares of each of EchoStar and DISH is owned beneficially by Charles W. Ergen, our Chairman, and by certain trusts established by Mr. Ergen for the benefit of his family.
In connection with and following both the Spin-off and the Share Exchange, we and DISH Network entered into certain agreements pursuant to which we obtain certain products, services and rights from DISH Network; DISH Network obtains certain products, services and rights from us; and we and DISH Network indemnify each other against certain liabilities arising from our respective businesses. We also may enter into additional agreements with DISH Network in the future. Generally, the amounts we or DISH Network pay for products and services provided under the agreements are based on cost plus a fixed margin (unless noted differently below or in our most recent Annual Report on Form 10-K), which varies depending on the nature of the products and services provided.
The following is a summary of the terms of our principal agreements with DISH Network that may have an impact on our financial condition and results of operations.
Equipment revenue — DISH Network
Receiver Agreement
. Effective January 2012, one of our subsidiaries and DISH Network entered into a receiver agreement (the “2012 Receiver Agreement”), pursuant to which DISH Network had the right, but not the obligation, to purchase digital set-top boxes, related accessories, and other equipment from us for the period from January 2012 through December 2014. The 2012 Receiver Agreement replaced the receiver agreement one of our subsidiaries entered into with DISH Network in connection with the Spin-off. The 2012 Receiver Agreement allowed DISH Network to purchase digital set-top boxes, related accessories, and other equipment from us either: (i) at cost (decreasing as we reduced costs and increasing as costs increased) plus a dollar mark-up which depended upon the cost of the product subject to a collar on our mark-up; or (ii) at cost plus a fixed margin, which depended on the nature of the equipment purchased. Under the 2012 Receiver Agreement, our margins would have increased if we were able to reduce the costs of our digital set-top boxes and our margins would have reduced if these costs increased. One of our subsidiaries provided DISH Network with standard manufacturer warranties for the goods sold under the 2012 Receiver Agreement. Additionally, the 2012 Receiver Agreement included an indemnification provision, whereby the parties agreed to indemnify each other for certain intellectual property matters. In November 2016, one of our subsidiaries and DISH Network amended this agreement to extend its term for
one year
through December 2017.
This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
Services and other revenue — DISH Network
Broadcast Agreement
. Effective January 2012, one of our subsidiaries and DISH Network entered into a broadcast agreement (the “2012 Broadcast Agreement”), pursuant to which we provided certain broadcast services to DISH Network, including teleport services such as transmission and downlinking, channel origination services, and channel management services, for the period from January 2012 through December 2016. In November 2016, one of our subsidiaries and DISH Network amended the 2012 Broadcast Agreement to extend the term for
one year
through December 2017. The fees for the services provided under the 2012 Broadcast Agreement were calculated at either: (a) our cost of providing the relevant service plus a fixed dollar fee, which was subject to certain adjustments; or (b) our cost of providing the relevant service plus a fixed margin, depending on the nature of the services provided.
This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Broadcast Agreement for Certain Sports Related Programming
. In May 2010, one of our subsidiaries and DISH Network entered into a broadcast agreement pursuant to which we provided certain broadcast services to DISH Network in connection with its carriage of certain sports related programming. The term of this agreement was
ten years
. The fees for the broadcast services provided under this agreement depended, among other things, upon the cost to develop and provide such services.
This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
RUS Implementation Agreement
. In September 2010, DISH Broadband L.L.C. (“DISH Broadband”), DISH’s indirect, wholly-owned subsidiary, was selected by the Rural Utilities Service (“RUS”) of the United States Department of Agriculture to receive up to approximately
$14.1 million
in broadband stimulus grant funds (the “Grant Funds”). Effective November 2011, HNS and DISH Broadband entered into a RUS Implementation Agreement (the “RUS Agreement”) pursuant to which HNS provided certain portions of the equipment and broadband service used to implement DISH Broadband’s RUS program. While the RUS Agreement expired in June 2013 when the Grant Funds were exhausted, HNS is required to continue providing services to DISH Broadband’s customers activated prior to the expiration of the RUS Agreement in accordance with the terms and conditions of the RUS Agreement.
Satellite Services Provided to DISH Network
. Since the Spin-off, we have entered into certain satellite service agreements pursuant to which DISH Network receives satellite services on certain satellites owned or leased by us. The fees for the services provided under these satellite service agreements depend, among other things, upon the orbital location of the applicable satellite, the number of transponders that are providing services on the applicable satellite, and the length of the service arrangements. The terms of each service arrangement is set forth below:
EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV.
As part of the Satellite and Tracking Stock Transaction, described below, in March 2014, we began providing certain satellite services to DISH Network on the EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV satellites. The term of each satellite services agreement generally terminates upon the earlier of: (i) the end of life of the satellite; (ii) the date the satellite fails; or (iii) a certain date, which depends upon, among other things, the estimated useful life of the satellite. DISH Network generally has the option to renew each satellite service agreement on a year-to-year basis through the end of the respective satellite’s life. There can be no assurance that any options to renew such agreements will be exercised. In December 2016, DISH Network renewed the satellite services agreement relative to the EchoStar VII satellite for
one year
to June 2018.
EchoStar IX
. Effective January 2008, DISH Network began receiving satellite services from us on the EchoStar IX satellite. Subject to availability, DISH Network generally has the right to continue to receive satellite services from us on the EchoStar IX satellite on a month-to-month basis.
EchoStar XII
. DISH Network received satellite services from us on the EchoStar XII satellite. The term of the satellite services agreement terminated at the end of September 2017.
EchoStar XVI
.
In December 2009, we entered into an initial
ten
-year
transponder service agreement with DISH Network, pursuant to which DISH Network has received satellite services from us on the EchoStar XVI satellite since January 2013. Effective December 2012, we and DISH Network amended the transponder service agreement to, among other things, change the initial term to generally expire upon the earlier of: (i) the end-of-life or replacement of the satellite; (ii) the date the satellite fails; (iii) the date the transponder(s) on which service is being provided under the agreement fails; or (iv)
four years
following the actual service commencement date. In July 2016, we and DISH Network further amended the transponder service agreement to, among other things, extend the initial term by
one
additional year through January 2018 and to reduce the term of the first renewal option by
one year
.
In May 2017, DISH Network renewed the satellite services agreement relative to the EchoStar XVI satellite for
five
-years to January 2023.
DISH Network has the option to renew for an additional
five
-year period
prior to expiration of the term. There can be no assurance that such option to renew this agreement will be exercised. In the event that
DISH Network does not exercise its
five
-year
renewal option, DISH Network has the option to purchase the EchoStar XVI satellite for a certain price. If DISH Network does not elect to purchase the EchoStar XVI satellite at that time, we may sell the EchoStar XVI satellite to a third party and DISH Network is required to pay us a certain amount in the event we are not able to sell the EchoStar XVI satellite for more than a certain amount.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Nimiq 5 Agreement
.
In September 2009, we entered into a
fifteen
-year
satellite service agreement with Telesat Canada (“Telesat”) to receive service on all
32
DBS transponders on the Nimiq 5 satellite at the 72.7 degree west longitude orbital location (the “Telesat Transponder Agreement”). In September 2009, we also entered into a satellite service agreement (the “DISH Nimiq 5 Agreement”) with DISH Network, pursuant to which DISH Network receives satellite services from us on all
32
of the DBS transponders covered by the Telesat Transponder Agreement.
Under the terms of the DISH Nimiq 5 Agreement, DISH Network makes certain monthly payments to us that commenced in September 2009, when the Nimiq 5 satellite was placed into service, and continue through the service term. Unless earlier terminated under the terms and conditions of the DISH Nimiq 5 Agreement, the service term will expire in October 2019.
Upon expiration of the initial term, DISH Network has the option to renew the DISH Nimiq 5 Agreement on a year-to-year basis through the end of life of the Nimiq 5 satellite. Upon in-orbit failure or end of life of the Nimiq 5 satellite, and in certain other circumstances, DISH Network has certain rights to receive service from us on a replacement satellite. There can be no assurance that any options to renew the DISH Nimiq 5 Agreement will be exercised or that DISH Network will exercise its option to receive service on a replacement satellite.
QuetzSat-1 Agreement
.
In November 2008, we entered into a
ten
-year
satellite service agreement with SES Latin America, which provides, among other things, for the provision by SES Latin America to us of service on
32
DBS transponders on the QuetzSat-1 satellite. Concurrently, in 2008, we entered into a transponder service agreement with DISH Network, pursuant to which DISH Network receives satellite services on
24
of the DBS transponders on the QuetzSat-1 satellite. The QuetzSat-1 satellite was launched in September 2011 and was placed into service in November 2011 at the 67.1 degree west longitude orbital location. In February 2013,
we
and DISH Network entered into an agreement pursuant to which we receive certain satellite services from DISH Network on
five
DBS transponders on the QuetzSat-1 satellite. In January 2013, the QuetzSat-1 satellite was moved to the 77 degree west longitude orbital location and DISH Network commenced commercial operations at such location in February 2013.
Under the terms of our contractual arrangements with DISH Network, we began to provide service to DISH Network on the QuetzSat-1 satellite in February 2013 and will continue to provide service through the remainder of the service term. Unless extended or earlier terminated under the terms and conditions of our agreement with DISH Network for the QuetzSat-1 satellite, the initial service term will expire in November 2021. Upon expiration of the initial service term, DISH Network has the option to renew the agreement for the QuetzSat-1 satellite on a year-to-year basis through the end of life of the QuetzSat-1 satellite. Upon an in-orbit failure or end of life of the QuetzSat-1 satellite, and in certain other circumstances, DISH Network has certain rights to receive service from us on a replacement satellite. There can be no assurance that any options to renew this agreement will be exercised or that DISH Network will exercise its option to receive service on a replacement satellite.
103 Degree Orbital Location/SES-3.
In May 2012, we entered into a spectrum development agreement (the “103 Spectrum Development Agreement”) with Ciel Satellite Holdings Inc. (“Ciel”) to develop certain spectrum rights at the 103 degree west longitude orbital location (the “103 Spectrum Rights”). In June 2013, we and DISH Network entered into a spectrum development agreement (the “DISH 103 Spectrum Development Agreement”) pursuant to which DISH Network may use and develop the 103 Spectrum Rights. Unless earlier terminated under the terms and conditions of the DISH 103 Spectrum Development Agreement, the term generally will continue for the duration of the 103 Spectrum Rights.
In connection with the 103 Spectrum Development Agreement, in May 2012, we also entered into a
ten
-
year service agreement with Ciel pursuant to which we receive certain satellite services from Ciel on the SES-3 satellite at the 103 degree orbital location. In June 2013, we and DISH Network entered into an agreement pursuant to which DISH Network receives certain satellite services from us on the SES-3 satellite (the “DISH 103 Service Agreement”). Under the terms of the DISH 103 Service Agreement, DISH Network makes certain monthly payments to us through the service term. Unless earlier terminated under the terms and conditions of the DISH 103 Service Agreement, the initial service term will expire on the earlier of: (i) the date the SES-3 satellite fails; (ii) the date the transponder(s) on which service was being provided under the agreement fails; or (iii) June 2023. Upon in-orbit failure or end of life of the SES-3 satellite, and in certain other circumstances, DISH Network has certain rights to receive service from us on a replacement satellite. There can be no assurance that DISH Network will exercise its option to receive service on a replacement satellite.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
TT&C Agreement
.
Effective January 2012, we entered into a telemetry, tracking and control (“TT&C”) agreement pursuant to which we provide TT&C services to DISH Network for a period ending in December 2016 (the “2012 TT&C Agreement”). In November 2016, we and DISH Network amended the 2012 TT&C Agreement to extend the term for
one year
through December 2017. The 2012 TT&C Agreement replaced the TT&C agreement we entered into with DISH Network in connection with the Spin-off. The fees for services provided under the 2012 TT&C Agreement are calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which will vary depending on the nature of the services provided. DISH Network is able to terminate the 2012 TT&C Agreement for any reason upon
60 days
’
notice
.
In connection with the Satellite and Tracking Stock Transaction, in February 2014, we amended the TT&C Agreement to cease the provision of TT&C services to DISH Network for the EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV satellites. Effective March 2014, we provide TT&C services for the D-1 and EchoStar XV satellites; however, for the period that we received satellite services on the EchoStar XV satellite from DISH Network, we waived the fees for the TT&C services on the EchoStar XV satellite. Effective August 2016, we provide TT&C services to DISH Network for the EchoStar XVIII satellite.
Real Estate Leases to DISH Network
. We have entered into lease agreements pursuant to which DISH Network leases certain real estate from us. The rent on a per square foot basis for each of the leases is comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the lease, and DISH Network is responsible for its portion of the taxes, insurance, utilities and maintenance of the premises. The term of each of the leases is set forth below:
100 Inverness Lease Agreement
. In connection with the Share Exchange, effective March 2017, DISH Network leases from us certain space at 100 Inverness Circle East, Englewood, Colorado for a period ending in December 2020. This agreement may be terminated by either party upon
180 days
’ prior notice. This agreement may be extended by mutual consent, in which case this agreement will be converted to a month-to-month lease agreement. Upon extension, either party has the right to terminate this agreement upon
30 days
’ notice.
90 Inverness Lease Agreement
. The lease for certain space at 90 Inverness Circle East, Englewood, Colorado was for a period ending in December 2016. In February 2016, DISH Network terminated this lease effective in August 2016.
Meridian Lease Agreement
. The lease for all of 9601 S. Meridian Blvd., Englewood, Colorado was for a period ending in December 2016. Effective December 2016, we and DISH Network amended this lease to, among other things, extend the term for
one year
through December 2017. This agreement may be extended by mutual consent, in which case this agreement will be converted to a month-to-month lease agreement. Upon extension, either party has the right to terminate this agreement upon
30 days
’ notice.
Santa Fe Lease Agreement
. The lease for all of 5701 S. Santa Fe Dr., Littleton, Colorado was for a period ending in December 2016. Effective December 2016, we and DISH Network amended this lease to, among other things, extend the term for
one year
through December 2017. This agreement may be extended by mutual consent, in which case this agreement will be converted to a month-to-month lease agreement. Upon extension, either party has the right to terminate this agreement upon
30 days
’ notice.
Atlanta Sublease Agreement
. The sublease for certain space at 211 Perimeter Center, Atlanta, Georgia terminated in October 2016.
Gilbert Lease Agreement
. The lease for certain space at 801 N. DISH Drive, Gilbert, Arizona was for a period ending July 2016. Effective November 2016, we and DISH Network amended this lease to extend the term for
one year
through July 2017.
This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
Cheyenne Lease Agreement
. Prior to the Share Exchange, we leased to DISH Network certain space at 530 EchoStar Drive, Cheyenne, Wyoming. In connection with the Share Exchange, we transferred ownership of a portion of this property to DISH Network and we and DISH Network amended this agreement to (i) terminate the lease for the transferred space and (ii) provide for a continued lease to DISH Network of the portion of the property we retained for a period ending in December 2031. This agreement may be extended by mutual consent, in which case this agreement will be converted to
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
a month-to-month lease agreement. Upon extension, either party has the right to terminate this agreement upon
30 days
’ notice.
Product Support Agreement
. In connection with the Spin-off, one of our subsidiaries entered into a product support agreement pursuant to which DISH Network had the right, but not the obligation, to receive product support from us (including certain engineering and technical support services) for all set-top boxes and related accessories that we had previously sold to DISH Network. The fees for the services provided under the product support agreement were calculated at cost plus a fixed margin, which varied depending on the nature of the services provided. The term of the product support agreement was the economic life of such set-top boxes and related accessories, unless terminated earlier.
This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
DISHOnline.com Services Agreement
. Effective January 2010, DISH Network entered into a
two
-year agreement with one of our subsidiaries pursuant to which DISH Network received certain services associated with an online video portal. The fees for the services provided under this services agreement depended, among other things, upon the cost to develop and operate such services. In November 2016, one of our subsidiaries and DISH Network amended this agreement to, among other things, extend the term for
one year
through December 2017.
This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
DISH Remote Access Services Agreement
. Effective February 2010, one of our subsidiaries entered into an agreement with DISH Network pursuant to which DISH Network received, among other things, certain remote digital video recorder (“DVR”) management services. The fees for the services provided under this services agreement depended, among other things, upon the cost to develop and operate such services. This agreement automatically renewed in February 2017 for an additional
one
-year period until February 2018.
This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
SlingService Services Agreement
. Effective February 2010, one of our subsidiaries entered into an agreement with DISH Network pursuant to which DISH Network received certain services related to placeshifting. The fees for the services provided under this services agreement depended, among other things, upon the cost to develop and operate such services. This agreement automatically renewed in February 2017 for an additional
one
-year period until February 2018.
This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
TerreStar Agreement
. In March 2012, DISH Network completed its acquisition of substantially all the assets of TerreStar Networks Inc. (“TerreStar”). Prior to DISH Network’s acquisition of substantially all the assets of TerreStar and our completion of the Hughes Acquisition, TerreStar and HNS entered into various agreements pursuant to which our Hughes segment provides, among other things, warranty, operations and maintenance and hosting services for TerreStar’s ground-based communications equipment. TerreStar generally has the right to continue to receive warranty services from us for one of our products on a month-to-month basis. The provision of warranty services for our other product will continue until March 2018 and will automatically renew in March 2018 for an additional
one
-
year period, unless terminated by TerreStar upon at least
60 days
’
written notice to us prior to the end of the term. The provision of operations and maintenance services will continue until April 2018 and will automatically renew in April 2018 for an additional
one
-year period, unless terminated by TerreStar or us upon at least
90 days
’
written notice prior to the end of the term. The provision of hosting services will continue until May 2022 and will not renew beyond May 2022 unless the parties enter into a new agreement or amend the existing agreement. In addition, TerreStar generally may terminate such services for convenience subject to providing us with prior notice and/or payment of termination charges.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Hughes Broadband Distribution Agreement
. Effective October 2012, HNS and dishNET Satellite Broadband L.L.C. (“dishNET”), a wholly-owned subsidiary of DISH, entered into a distribution agreement (the “Distribution Agreement”) pursuant to which dishNET has the right, but not the obligation, to market, sell and distribute the Hughes satellite internet service (the “Hughes service”). dishNET pays HNS a monthly per subscriber wholesale service fee for the Hughes service based upon a subscriber’s service level, and based upon certain volume subscription thresholds. The Distribution Agreement also provides that dishNET has the right, but not the obligation, to purchase certain broadband equipment from us to support the sale of the Hughes service.
The Distribution Agreement had an initial term of
five years
with automatic renewal for successive
one year
terms unless terminated by either party with a written notice at least
180 days
before the expiration of the then-current term.
In February 2014, HNS and dishNET entered into an amendment to the Distribution Agreement which, among other things, extended the initial term of the Distribution Agreement until March 2024. Upon expiration or termination of the Distribution Agreement, the parties will continue to provide the Hughes service to the then-current dishNET subscribers pursuant to the terms and conditions of the Distribution Agreement.
Set-Top Box Application Development Agreement.
In November 2012, one of our subsidiaries and DISH Network entered into a set-top box application development agreement (the “Application Development Agreement”) pursuant to which we provided DISH Network with certain services relating to the development of web-based applications for set-top boxes. The fees for services provided under the Application Development Agreement were calculated at our cost of providing the relevant service plus a fixed margin, which depended on the nature of the services provided. The Application Development Agreement automatically renewed in February 2017 for a
one
-year period ending in February 2018.
This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
XiP Encryption Agreement
. In July 2012, we entered into an encryption agreement with DISH Network for our whole-home HD DVR line of set-top boxes (the “XiP Encryption Agreement”) pursuant to which we provided certain security measures on our whole-home HD DVR line of set-top boxes to encrypt the content delivered to the set-top box via a smart card and secure the content between set-top boxes. The XiP Encryption Agreement’s term ended on the same day as the 2012 Receiver Agreement and therefore was automatically extended through December 2017 when we and DISH Network extended the 2012 Receiver Agreement. The fees for the services provided under the XiP Encryption Agreement were calculated on a monthly basis based on the number of receivers utilizing such security measures each month. Effective March 2017 in connection with the Share Exchange, we and DISH Network terminated the XiP Encryption Agreement and EchoStar has no further obligations and will earn no additional revenue under these agreements after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
DBSD North America Agreement
. In March 2012, DISH Network completed its acquisition of
100%
of the equity of reorganized DBSD North America, Inc. (“DBSD North America”).
Prior to DISH Network’s acquisition of DBSD North America and completion of the Hughes Acquisition, DBSD North America and HNS entered into various agreements pursuant to which our Hughes segment provides, among other things, warranty, operations and maintenance and hosting services of DBSD North America’s gateway and ground-based communications equipment. DBSD North America generally has the right to continue to receive warranty services from us on a month-to-month basis until February 2019. The provision of operations and maintenance services will continue until April 2018 and will automatically renew in April 2018 for an additional
one
-year
period, unless terminated by DBSD North America upon at least
120 days
’
written notice to us prior to the end of the term. The provision of hosting services will continue until February 2022 and will automatically renew for an additional
five
-year period until February 2027 unless terminated by DBSD North America upon at least
180 days
’
written notice to us prior to the end of the term. In addition, DBSD North America generally may terminate such services for convenience, subject to providing us with prior notice and/or payment of termination charges.
Sling TV Holding L.L.C. (“Sling TV Holding”).
Effective July 2012, we and DISH Network formed Sling TV Holding, which was owned two-thirds by DISH Network and one-third by us. Sling TV Holding was formed to develop and commercialize certain advanced technologies. At that time, we, DISH Network and Sling TV Holding entered into the following agreements with respect to Sling TV Holding: (i) a contribution agreement pursuant to which we and DISH Network contributed certain assets in exchange for our respective ownership interests in Sling TV Holding; (ii) a limited liability company operating agreement (“Operating Agreement”), which provided for the governance of Sling TV Holding; and (iii) a commercial agreement (“Commercial Agreement”) pursuant to which, among other things, Sling TV Holding had: (a) certain rights and corresponding obligations with respect to its business; and (b) the right, but not the obligation, to receive certain services from
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
us and DISH Network, respectively. Additionally, the spouse of Mr. Vivek Khemka, who was the President - EchoStar Technologies L.L.C. during portions of 2016 and through February 2017, was employed during 2016 as Vice President of Business Development and Operations of Sling TV Holding.
Effective August 2014, we and Sling TV Holding entered into an exchange agreement (“Exchange Agreement”) pursuant to which, among other things, Sling TV Holding distributed certain assets to us and we reduced our interest in Sling TV Holding to a
10.0%
non-voting interest. As a result, DISH Network had a
90.0%
equity interest and a
100%
voting interest in Sling TV Holding. In addition, we, DISH Network and Sling TV Holding amended and restated the Operating Agreement, primarily to reflect the changes implemented by the Exchange Agreement. Finally, we, DISH Network and Sling TV Holding amended and restated the Commercial Agreement, pursuant to which, among other things, Sling TV Holding: (1) had certain rights and corresponding obligations with respect to its business; (2) had the right, but not the obligation, to receive certain services from us and DISH Network; and (3) had a license from us to use certain of the assets distributed to us as part of the Exchange Agreement. Effective March 2017 following the consummation of the Share Exchange, we no longer hold our investment in Sling TV Holding. Effective March 2017 in connection with the Share Exchange, we and DISH Network terminated the Exchange Agreement and the Commercial Agreement and EchoStar has no further obligations and will earn no additional revenue under these agreements after February 2017. Historical transactions under these agreements are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
Cost of sales — equipment and services and other — DISH Network
Remanufactured Receiver and Services Agreement
. In connection with the Spin-off, one of our subsidiaries entered into a remanufactured receiver and services agreement with DISH Network pursuant to which we had the right, but not the obligation, to purchase remanufactured receivers and related components from DISH Network at cost plus a fixed margin, which varied depending on the nature of the equipment purchased. In November 2016, one of our subsidiaries and DISH Network amended this agreement to extend its term for
one year
through December 2017.
This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will incur no additional expenses under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
General and administrative expenses — DISH Network
Amended and Restated Professional Services Agreement
. In connection with the Spin-off, we entered into various agreements with DISH including the Transition Services Agreement, Satellite Procurement Agreement and Services Agreement, which all expired in January 2010 and were replaced by a Professional Services Agreement. In January 2010, we and DISH agreed that we shall continue to have the right, but not the obligation, to receive the following services from DISH Network, among others, certain of which were previously provided under the Transition Services Agreement: information technology, travel and event coordination, internal audit, legal, accounting and tax, benefits administration, program acquisition services and other support services. Mr. Vivek Khemka, who remained employed as DISH Network’s Executive Vice President and Chief Technology Officer, provided services to us during portions of 2016 and through February 2017 pursuant to the Professional Services Agreement as President -- EchoStar Technologies L.L.C. Additionally, we and DISH agreed that DISH Network would continue to have the right, but not the obligation, to engage us to manage the process of procuring new satellite capacity for DISH Network (previously provided under the Satellite Procurement Agreement), receive logistics, procurement and quality assurance services from us (previously provided under the Services Agreement) and other support services. In connection with the consummation of the Share Exchange, we and DISH amended and restated the Professional Services Agreement to provide that we and DISH Network shall have the right to receive additional services that either we or DISH Network may require as a result of the Share Exchange. The term of the Amended and Restated Professional Services Agreement is through January 2019 and renews automatically for successive
one
-year periods thereafter, unless the agreement is terminated earlier by either party upon at least
60 days
’ notice. However, either party may generally terminate the Amended and Restated Professional Services Agreement in part with respect to any particular service it receives for any reason upon at least
30 days
’ notice.
Real Estate Leases from DISH Network
. We have entered into lease agreements pursuant to which we lease certain real estate from DISH Network. The rent on a per square foot basis is comparable to per square foot rental rates of similar commercial property in the same geographic area at the time of the leases, and for certain properties, we are responsible for our portion of the taxes, insurance, utilities and maintenance of the premises.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
El Paso Lease Agreement
. The lease for certain space at 1285 Joe Battle Blvd., El Paso, Texas, was for an initial period ending in August 2015, and provided us with renewal options for
four
consecutive
three
-year terms. Effective August 2015, we exercised our first renewal option for a period ending in August 2018.
90 Inverness Lease Agreement
. In connection with the Share Exchange, effective March 2017 we lease from DISH Network certain space at 90 Inverness Circle East in Englewood, Colorado for a period ending in December 2022. EchoStar has the option to renew this lease for
four
three
-year periods.
Cheyenne Lease Agreement
. In connection with the Share Exchange, effective March 2017 we lease from DISH Network certain space at 530 EchoStar Drive in Cheyenne, Wyoming for a period ending in March 2019. EchoStar has the option to renew this lease for
thirteen
one
-year periods.
Gilbert Lease Agreement
. In connection with the Share Exchange, effective March 2017 we lease from DISH Network certain space at 801 N. DISH Dr. in Gilbert, Arizona for a period ending in March 2019. EchoStar has the option to renew this lease for
thirteen
one
-year periods.
American Fork Occupancy License Agreement
. In connection with the Share Exchange, effective March 2017, we sublease from DISH Network certain space at 796 East Utah Valley Drive in American Fork, Utah for a period ending in August 2017. We have exercised our option to renew this sublease for a
five
-year period ending in August 2022.
Employee Matters Agreement
. Effective March 2017 in connection with the Share Exchange, we and DISH Network entered into an Employee Matters Agreement that addresses the transfer of employees from EchoStar to DISH Network, including certain benefit and compensation matters and the allocation of responsibility for employee related liabilities relating to current and past employees of the transferred businesses. DISH Network assumed employee-related liabilities relating to the transferred businesses as part of the Share Exchange, except that we are responsible for certain existing employee related litigation as well as certain pre-Share Exchange compensation and benefits for employees transferring to DISH Network in connection with the Share Exchange.
Collocation and Antenna Space Agreements
. In connection with the Share Exchange, effective March 2017, we entered into certain agreements pursuant to which DISH Network will provide collocation and antenna space to EchoStar through March 2022 at the following locations: Cheyenne, Wyoming; Gilbert, Arizona; New Braunfels, Texas; Monee, Illinois; Spokane, Washington; and Englewood, Colorado. In August 2017, we and DISH Network entered into certain other agreements pursuant to which DISH Network will provide additional collocation and antenna space to EchoStar in Monee, Illinois and Spokane, Washington through August 2022. EchoStar may renew each of these agreements for
four
three
-year periods by providing DISH Network with prior written notice no more than
120 days
but no less than
90 days
prior to the end of the then-current term. EchoStar
may terminate certain of these agreements with
180 days
’
prior written notice. The fees for the services provided under these agreements depend on the number of racks leased at the location.
Other agreements — DISH Network
Satellite and Tracking Stock Transaction
. In February 2014, we
entered into agreements with DISH Network to implement a transaction pursuant to which, among other things: (i) in March 2014, EchoStar and HSS issued shares of the Tracking Stock to DISH Network in exchange for
five
satellites owned by DISH Network (EchoStar I, EchoStar VII, EchoStar X, EchoStar XI and EchoStar XIV) (including assumption of related in-orbit incentive obligations) and approximately
$11.4 million
in cash; and (ii) in March 2014, DISH Network began receiving certain satellite services as discussed above on these
five
satellites from us (collectively, the “Satellite and Tracking Stock Transaction.”) The Tracking Stock was retired in March 2017 and is no longer outstanding and all agreements, arrangements and policy statements with respect to such Tracking Stock terminated and are of no further effect. See
Note 3
for further information.
Share Exchange Agreement
. On January 31, 2017, EchoStar Corporation and certain of its subsidiaries entered into the Share Exchange Agreement with DISH and certain of its subsidiaries, pursuant to which on February 28, 2017, EchoStar Corporation and its subsidiaries received all of the shares of the Tracking Stock in exchange for 100% of the equity interests of certain EchoStar subsidiaries that held substantially all of our
EchoStar Technologies businesses and certain other assets. Following consummation of the Share Exchange on February 28, 2017, EchoStar no longer operates the transferred EchoStar Technologies businesses and the Tracking Stock was retired and is no longer outstanding and all agreements, arrangements and policy statements with respect to such Tracking Stock terminated and are of no further effect. Pursuant to the Share Exchange
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Agreement, EchoStar transferred certain assets, investments in joint ventures, spectrum licenses and real estate properties and DISH Network assumed certain liabilities relating to the transferred assets and businesses. The Share Exchange Agreement contains customary representations and warranties by the parties, including representations by EchoStar related to the transferred assets, assumed liabilities and the financial condition of the transferred businesses. EchoStar and DISH Network have also agreed to customary indemnification provisions whereby each party indemnifies the other against certain losses with respect to breaches of representations, warranties or covenants and certain liabilities and if certain actions undertaken by it causes the transaction to be taxable to the other party after closing.
See
Note 3
for further information.
Hughes Broadband Master Services Agreement
. In March 2017, HNS and DISH Network L.L.C. (“DNLLC”), a wholly-owned subsidiary of DISH, entered into a master service agreement (the “MSA”) pursuant to which DNLLC, among other things: (i) has the right, but not the obligation, to market, promote and solicit orders and upgrades for the Hughes service and related equipment and other telecommunication services and (ii) installs Hughes service equipment with respect to activations generated by DNLLC. Under the MSA, HNS and DNLLC will make certain payments to each other relating to sales, upgrades, purchases and installation services. The MSA has an initial term of
five years
until March 2022 with automatic renewal for successive
one
-year terms.
After the first anniversary, either party has the ability to terminate the MSA, in whole or in part, for any reason upon at least
90 days
’ notice to the other party.
Upon expiration or termination of the MSA, HNS will continue to provide the Hughes service to subscribers and make certain payments to DNLLC pursuant to the terms and conditions of the MSA.
Intellectual Property Matters Agreement
. We entered into an Intellectual Property Matters Agreement with DISH Network in connection with the Spin-off. The Intellectual Property Matters Agreement governed our relationship with DISH Network with respect to patents, trademarks and other intellectual property. Pursuant to the Intellectual Property Matters Agreement, DISH Network irrevocably assigned to us all right, title and interest in certain patents, trademarks and other intellectual property necessary for the operation of our set-top box business. In addition, the agreement permitted us to use, in the operation of our set-top box business, certain other intellectual property currently owned or licensed by DISH Network. In addition, DISH Network was prohibited from using the “EchoStar” name as a trademark, except in certain limited circumstances. Similarly, the Intellectual Property Matters Agreement provided that we would not make any use of the name or trademark “DISH Network” or any other trademark owned by DISH Network, except in certain circumstances. Effective March 2017 in connection with the Share Exchange, we and DISH Network terminated this agreement and EchoStar has no further obligations and will earn no additional revenue nor incur additional expenses under this agreement after February 2017.
Intellectual Property and Technology License Agreement
. Effective March 2017 in connection with the Share Exchange, we and DISH Network entered into an Intellectual Property and Technology License Agreement (“IPTLA”) pursuant to which we and DISH and their respective subsidiaries license to each other certain intellectual property and technology. The IPTLA will continue in perpetuity, unless mutually terminated by the parties. Pursuant to the IPTLA, we granted to DISH Network a license to our intellectual property and technology for use by DISH Network, among other things, in connection with its continued operation of the businesses acquired pursuant to the Share Exchange, including a limited license to use the “ECHOSTAR” trademark during a transition period. EchoStar retains full ownership of the “ECHOSTAR” trademark. In addition, DISH Network granted a license back to us, among other things, for the continued use of all intellectual property and technology that is used in our retained businesses but the ownership of which was transferred to DISH Network pursuant to the Share Exchange.
Tax Sharing Agreement
. Effective December 2007, we and DISH Network entered into a tax sharing agreement (the “Tax Sharing Agreement”) in connection with the Spin-off. This agreement governs our respective rights, responsibilities and obligations after the Spin-off with respect to taxes for the periods ending on or before the Spin-off. Generally, all pre-Spin-off taxes, including any taxes that are incurred as a result of restructuring activities undertaken to implement the Spin-off, are borne by DISH Network, and DISH Network indemnifies us for such taxes. However, DISH Network is not liable for and does not indemnify us for any taxes that are incurred as a result of the Spin-off or certain related transactions failing to qualify as tax-free distributions pursuant to any provision of Section 355 or Section 361 of the Internal Revenue Code of 1986, as amended, because of: (i) a direct or indirect acquisition of any of our stock, stock options or assets; (ii) any action that we take or fail to take; or (iii) any action that we take that is inconsistent with the information and representations furnished to the IRS in connection with the request for the private letter ruling, or to counsel in connection with any opinion being delivered by counsel with respect to the Spin-off or certain related transactions. In such case, we will be solely liable for, and will indemnify DISH Network for, any resulting taxes, as well as any losses, claims and expenses. The Tax Sharing Agreement will terminate after the later of the full period of all applicable statutes of limitations, including extensions, or once all rights and obligations are fully effectuated or performed.
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
In light of the Tax Sharing Agreement, among other things, and in connection with our consolidated federal income tax returns for certain tax years prior to and for the year of the Spin-off, in September 2013, we and DISH Network agreed upon a supplemental allocation of the tax benefits arising from certain tax items resolved in the course of the IRS’s examination of our consolidated tax returns. Prior to the agreement with DISH Network in 2013, the federal tax benefits were reflected as a deferred tax asset for depreciation and amortization, which was netted in our noncurrent deferred tax liabilities. The agreement with DISH Network in 2013 requires DISH Network to pay us the federal tax benefit it receives at such time as we would have otherwise been able to realize such tax benefit. We recorded a noncurrent receivable from DISH Network in “Other receivable — DISH Network” and a corresponding increase in our net noncurrent deferred tax liabilities to reflect the effects of this agreement in September 2013. In addition, in September 2013, we and DISH Network agreed upon a tax sharing arrangement for filing certain combined state income tax returns and a method of allocating the respective tax liabilities between us and DISH Network for such combined returns, through the taxable period ending on December 31, 2017 (the “State Tax Arrangement”).
We and DISH Network file combined income tax returns in certain states. In 2016, we earned and recognized a tax benefit for certain state income tax credits that we would be unable to utilize currently if we had filed separately from DISH Network. DISH Network expects to utilize these tax credits to reduce its state income tax payable. We expect to increase additional paid-in capital upon receipt of any consideration paid to us by DISH Network in exchange for these tax credits.
Tax Matters Agreement
. Effective March 2017, in connection with the Share Exchange, we and DISH entered into a tax matters agreement. This agreement governs certain of our rights, responsibilities and obligations with respect to taxes of the transferred businesses pursuant to the Share Exchange. Generally, we are responsible for all tax returns and tax liabilities for the transferred businesses and assets for periods prior to the Share Exchange and DISH Network is responsible for all tax returns and tax liabilities for the transferred businesses and assets from and after the Share Exchange. Both we and DISH Network have made certain tax-related representations and are subject to various tax-related covenants after the consummation of the Share Exchange. Both we and DISH Network have agreed to indemnify each other if there is a breach of any such tax representation or violation of any such tax covenant and that breach or violation results in the Share Exchange not qualifying for tax free treatment for the other party. In addition, DISH Network has agreed to indemnify us if the transferred businesses are acquired, either directly or indirectly (e.g., via an acquisition of DISH Network), by one or more persons and such acquisition results in the Share Exchange not qualifying for tax free treatment. The tax matters agreement supplements the Tax Sharing Agreement outlined above, which continues in full force and effect.
TiVo
. In April 2011, we and DISH Network entered into a settlement agreement with TiVo, Inc. (“TiVo”). The settlement resolved all pending litigation between us and DISH Network, on the one hand, and TiVo, on the other hand, including litigation relating to alleged patent infringement involving certain DISH Network DVRs. Under the settlement agreement, all pending litigation was dismissed with prejudice and all injunctions that permanently restrain, enjoin or compel any action by us or DISH Network were dissolved. We and DISH Network were jointly responsible for making payments to TiVo in the aggregate amount of
$500.0 million
, including an initial payment of
$300.0 million
and the remaining
$200.0 million
in
six
equal annual installments between 2012 and 2017. Pursuant to the terms and conditions of the agreements entered into in connection with the Spin-off, DISH Network made the initial payment to TiVo in May 2011, except for the contribution from us totaling approximately
$10.0 million
, representing an allocation of liability relating to our sales of DVR-enabled receivers to an international customer. Subsequent payments were allocated between us and DISH Network based on historical sales of certain licensed products, with EchoStar being responsible for
5%
of each annual payment. Effective March 2017, in connection with the Share Exchange, EchoStar has no further obligations and will incur no additional costs under this settlement agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
Sling Trademark License Agreement
. In December 2014, Sling TV Holding entered into an agreement with Sling Media, Inc., our subsidiary, pursuant to which Sling TV Holding had the right, for a fixed fee, to use certain trademarks, domain names and other intellectual property related to the “Sling” trademark. In December 2016, Sling TV Holding and Sling Media, Inc. amended this agreement to extend the term thereof on a month-to-month basis.
This agreement was transferred to DISH Network as part of the Share Exchange and EchoStar has no further obligations and will earn no additional revenue under this agreement after February 2017. Historical transactions under this agreement are reported in “Net income (loss) from discontinued operations” in our condensed consolidated statements of operations (see Note 3).
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
gTLD Bidding Agreement
. In April 2015, we and DISH Network entered into a gTLD Bidding Agreement whereby, among other things: (i) DISH Network obtained rights from us to participate in a generic top level domain (“gTLD”) auction, assuming all rights and obligations from us related to our application with the Internet Corporation for Assigned Names and Numbers (“ICANN”) for a particular gTLD; (ii) DISH Network agreed to reimburse us for our ICANN application fee and certain out-of-pocket expenses related to the application and the auction; and (iii) we and DISH Network agreed to split equally the net proceeds obtained by DISH Network as the losing bidder in the auction, less such fee reimbursement and out-of-pocket expenses.
Patent Cross-License Agreements
. In December 2011, we and DISH Network entered into separate patent cross-license agreements with the same third party whereby: (i) we and such third party licensed our respective patents to each other subject to certain conditions; and (ii) DISH Network and such third party licensed their respective patents to each other subject to certain conditions (each, a “Cross-License Agreement”). Each Cross-License Agreement covers patents acquired by the respective party prior to January 2017 and aggregate payments under both Cross-License Agreements total less than
$10.0 million
. Each Cross-License Agreement contained an option to extend each Cross-License Agreement to include patents acquired by the respective party prior to January 2022. In December 2016, both we and DISH Network exercised our renewal options, resulting in aggregate additional payments to such third party totaling less than
$3.0 million
. Since the aggregate payments under both Cross-License Agreements were based on the combined annual revenue of us and DISH Network, we and DISH Network agreed to allocate our respective payments to such third party based on our respective percentage of combined total revenue.
Caltech
.
On October 1, 2013, Caltech Institute of Technology (“Caltech”) filed complaints against
two
of our subsidiaries, Hughes Communications, Inc. and HNS, as well as against DISH and certain of its subsidiaries, in the United States District Court for the Central District of California alleging infringement of United States Patent Nos. 7,116,710; 7,421,032; 7,916,781; and 8,284,833, each of which is entitled “Serial Concatenation of Interleaved Convolutional Codes forming Turbo-Like Codes.” Caltech asserted that encoding data as specified by the DVB-S2 standard infringed each of the asserted patents. Caltech claimed that certain of our Hughes segment’s satellite broadband products and services, infringed the asserted patents by implementing the DVB-S2 standard. Pursuant to a settlement agreement among us, DISH and Caltech, in May 2016, Caltech dismissed with prejudice all of its claims in these actions.
Orange, NJ
. In October 2016, we and DISH Network sold
two
parcels of real estate owned separately by us and DISH Network in Orange, NJ to a third party pursuant to a purchase and sale agreement. Pursuant to the agreement, we and DISH Network separately received our respective payments from the buyer.
Invidi
. In November 2010 and April 2011, we made investments in Invidi Technologies Corporation (“Invidi”) in exchange for shares of Invidi’s Series D Preferred Stock. In November 2016, DIRECTV, LLC, a wholly owned indirect subsidiary of AT&T Inc., DISH Network and Cavendish Square Holding B.V., an affiliate of WPP plc, entered into a series of agreements to acquire Invidi. As a result of the transaction, we sold our ownership interest in Invidi on the same terms offered to the other shareholders of Invidi. The transaction closed in January 2017.
Other Agreements
Hughes Systique Corporation (“Hughes Systique”)
We contract with Hughes Systique for software development services. In 2008, Hughes Communications, Inc. loaned
$1.5 million
to Hughes Systique pursuant to a term loan facility. The initial interest rate on the outstanding loans was
6%
, payable annually, and the accrued and unpaid interest was added to the principal amount outstanding under the loan facility in certain circumstances. The loans were convertible into shares of Hughes Systique upon non-payment or an event of default. In May 2014, we amended the term loan facility to increase the interest rate from
6%
to
8%
, payable annually, to reflect then-current market conditions and extend the maturity date of the loans to May 1, 2015, and in April 2015, we extended the maturity date of the loans to May 1, 2016 on the same terms. In 2015, Hughes Systique repaid
$1.5 million
of the outstanding principal of the loan facility. In 2016, Hughes Systique repaid
$0.6 million
of the outstanding principal of the loan facility. As of
September 30, 2017
, the principal amount outstanding of the loan facility was
zero
. In addition to our
43.7%
ownership in Hughes Systique, Mr. Pradman Kaul, the President of Hughes Communications, Inc. and a member of our board of directors, and his brother, who is the CEO and President of Hughes Systique, in the aggregate, own approximately
25.7%
, on an undiluted basis, of Hughes Systique’s outstanding shares as of
September 30, 2017
. Furthermore, Mr. Pradman Kaul serves on the board of directors of Hughes Systique. Hughes Systique is a variable interest entity and we are considered the primary beneficiary of
ECHOSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Hughes Systique due to, among other factors, our ability to direct the activities that most significantly impact the economic performance of Hughes Systique. As a result, we consolidate Hughes Systique’s financial statements in our
condensed consolidated financial statements
.
NagraStar L.L.C.
Prior to March 2017, we owned
50.0%
of NagraStar L.L.C. (“NagraStar”), a joint venture that was the primary provider of encryption and related security technology used in the set-top boxes produced by our former EchoStar Technologies segment. We accounted for our investment in NagraStar using the equity method. Following the consummation of the Share Exchange, we no longer hold this investment in NagraStar.
Dish Mexico
We own
49.0%
of an entity that provides direct-to-home satellite services in Mexico known as Dish Mexico. We provide certain satellite services to Dish Mexico and prior to the Share Exchange we also provided certain broadcast services and sold hardware such as digital set-top boxes and related equipment to Dish Mexico. We recognized revenue from sales of services we provided to Dish Mexico in continuing operations of approximately
$5.8 million
for each of the three months ended
September 30, 2017
and
2016
and
$17.5 million
for each of the
nine
months ended
September 30, 2017
and
2016
. As of
September 30, 2017
and
December 31, 2016
, we had trade accounts receivable from continuing operations from Dish Mexico of approximately
$7.6 million
and
$10.7 million
, respectively.
Deluxe/EchoStar LLC
We own
50.0%
of
Deluxe/EchoStar LLC (“Deluxe”), a joint venture that we entered into in 2010 to build an advanced digital cinema satellite distribution network targeting delivery to digitally equipped theaters in the U.S. and Canada. We account for our investment in Deluxe using the equity method.
We recognized revenue from Deluxe for transponder services and the sale of broadband equipment of approximately
$1.3 million
and
$0.7 million
for the three months ended
September 30, 2017
and
2016
, respectively, and
$3.6 million
and
$2.1 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively. As of
September 30, 2017
and
December 31, 2016
, we had trade accounts receivable from Deluxe of approximately
$1.3 million
and
$0.7 million
, respectively.
SmarDTV
In May 2015, we acquired a
22.5%
interest in SmarDTV, which we accounted for using the equity method. Pursuant to our agreements with SmarDTV and its subsidiaries, our former EchoStar Technologies segment purchased engineering services from and paid royalties to SmarDTV and its subsidiaries. Following the consummation of the Share Exchange, we no longer own our interest in the equity and subordinated debt of SmarDTV and no longer purchase engineering services from SmarDTV.
AsiaSat
We contract with AsiaSat Telecommunications Inc. (“AsiaSat”) for the use of transponder capacity on one of AsiaSat's satellites. Mr. William David Wade, a member of our board of directors, served as the Chief Executive Officer of AsiaSat in 2016 and as a senior advisor to the CEO of AsiaSat through March 2017. We incurred expenses payable to AsiaSat under this agreement of approximately
zero
and
$0.4 million
for the three months ended
September 30, 2017
and
2016
, respectively, and
$0.1 million
and
$1.1 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively.